GSI Technology, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended December 31, 2012 (fiscal 2013); filed February 6, 2013. Unaudited results. GSI designs and sells Very Fast SRAM and low-latency DRAM, primarily to networking and telecommunications equipment manufacturers.
Financial results
| Metric | Three months ended Dec. 31, 2012 | Prior-year quarter | Nine months ended Dec. 31, 2012 | Prior-year nine months |
|---|---|---|---|---|
| Revenue | $17.5 million | $20.0 million | $50.3 million | $63.8 million |
| Gross profit / margin | $7.3 million / 41.9% | $8.8 million / 43.9% | $21.3 million / 42.4% | $28.0 million / 43.9% |
| Operating income | $0.6 million | $0.7 million | $3.0 million | $6.7 million |
| Net income | $0.8 million | $1.0 million | $2.9 million | $5.9 million |
| Diluted earnings per share | $0.03 | $0.03 | $0.10 | $0.20 |
- Revenue declined 12.3% for the quarter and 21.2% for the nine-month period; net income declined 14.8% and 51.1%, respectively. Lower sales and gross profit drove the declines.
- Gross margin fell year over year in both periods, reflecting product/customer mix and lower revenue relative to fixed manufacturing costs. Quarterly operating expenses fell 16.5%, mainly because of lower litigation legal fees; nine-month expenses fell 13.8%.
- Operating cash flow was $9.2 million for the nine months, versus $11.3 million a year earlier. Investing activities used $5.3 million and financing activities used $3.0 million, including $3.6 million of share repurchases. Cash and equivalents increased $1.0 million to $32.6 million.
- At December 31, cash and equivalents were $32.6 million, short-term investments $33.1 million and long-term investments $31.6 million. Current assets were $97.3 million versus current liabilities of $9.6 million. Total liabilities were $11.7 million; management stated it had no debt.
- Total assets were $142.1 million, compared with $143.1 million at March 31, 2012. The company repurchased 97,438 shares during the quarter at an average $4.84 per share; approximately $5.9 million remained authorized.
Material changes and management commentary
- Management attributed weaker sales to softer orders from its three largest customers, European economic weakness affecting network-equipment spending, customer inventory reductions, and uncertainty related to Cypress litigation. Cisco-related sales fell from $9.9 million to $6.5 million in the quarter and from $27.4 million to $15.4 million for the nine months. Cisco represented approximately 31% of nine-month revenue.
- Management said a favorable initial ITC determination reduced litigation-related market uncertainty, but review remained pending and could continue to affect sales. The filing does not provide numerical revenue or earnings guidance.
- Management expected its existing liquidity and anticipated operating cash flow to cover working capital and capital expenditures for at least 12 months. It expected continued significant R&D investment and indicated that litigation costs could remain substantial in some quarters. It also expected overall average selling prices to rise over the next several quarters as product mix shifted toward higher-priced, higher-density products, despite typical price erosion for individual products.
Risks, contingencies and unusual items
- Cypress litigation: In an ITC proceeding, an administrative law judge’s October 2012 initial determination found no infringement of the four asserted patents. The ITC elected to review the determination and remanded issues concerning patent validity and enforceability; the target date for completing the ITC investigation was June 25, 2013. A related district-court patent case was stayed. An adverse outcome could restrict U.S. sales, require damages or royalties, and materially harm results. GSI’s separate antitrust case against Cypress was proceeding after a motion to dismiss was denied. No loss contingency was recorded because the outcome and potential loss could not be estimated.
- Other principal risks include semiconductor and end-market cyclicality, customer and distributor concentration, cancellable purchase orders, declining product prices, and reliance on key wafer and manufacturing suppliers, including TSMC and Powerchip.
- The nine-month tax provision included a $168,000 benefit from settlement of a California tax examination. A retroactive federal R&D tax-credit extension was expected to produce a $480,000 benefit in the quarter ending March 31, 2013. Unrecognized tax benefits totaled $2.589 million; management said up to $582,000 could be reduced within 12 months.
- Disclosure controls were assessed as effective at December 31, 2012; the filing reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether revenue and margins stabilize, particularly as customer inventories normalize and European network-equipment demand evolves.
- Subsequent ITC and court developments, potential litigation costs, and any effect on customer orders or U.S. product sales.
- Continuing exposure to Cisco and major distributors, and the ability to maintain supply from key outsourced manufacturers.
- Operating cash generation, investment liquidity, share repurchases, and realization of the expected tax-credit benefit.