GSI Technology, Inc. — Q3 FY2012 Form 10-Q
Reporting period: Quarter and nine months ended December 31, 2011; comparisons are to the corresponding periods ended December 31, 2010. GSI designs and sells Very Fast SRAMs and low-latency DRAMs, primarily for networking and telecommunications markets.
Financial performance
| Metric | Three months ended Dec. 31, 2011 | Three months ended Dec. 31, 2010 | Nine months ended Dec. 31, 2011 | Nine months ended Dec. 31, 2010 |
|---|---|---|---|---|
| Revenue | $20.0 million | $26.2 million | $63.8 million | $75.9 million |
| Gross profit / margin | $8.8 million / 43.9% | $12.1 million / 46.2% | $28.0 million / 43.9% | $35.1 million / 46.3% |
| Operating income | $0.7 million | $6.7 million | $6.7 million | $18.8 million |
| Net income | $1.0 million | $5.8 million | $5.9 million | $15.5 million |
| Diluted earnings per share | $0.03 | $0.20 | $0.20 | $0.53 |
- Quarterly revenue fell 23.9% and nine-month revenue fell 15.9%. Management attributed the decline principally to customers drawing down excess inventory acquired in prior periods; the prior-year quarter also benefited from a major customer’s earlier-than-expected inventory drawdown.
- Nine-month gross margin declined to 43.9% from 46.3%, primarily due to higher manufacturing overhead. Nine-month SG&A rose to $13.3 million from $8.3 million, driven mainly by $5.6 million in additional Cypress-related legal fees.
- Operating cash flow was $11.3 million for the nine months, versus $10.9 million a year earlier. Investing used $4.9 million and financing used $2.9 million, including $4.5 million of share repurchases. Cash and cash equivalents increased to $29.4 million from $26.0 million at March 31, 2011.
- At December 31, cash, cash equivalents and short-term investments totaled approximately $52.0 million; including long-term investments, cash and investments totaled $89.5 million. Total liabilities were $12.8 million and stockholders’ equity was $129.2 million. The company reported no debt.
Changes, outlook and notable matters
- Sales to Cisco, GSI’s largest customer, were 43% of nine-month revenue. Cisco sales were $27.4 million for the nine months, down $1.9 million year over year; quarterly sales were approximately $9.9 million, nearly unchanged year over year. GSI said third-quarter Cisco shipments increased partly because of a production problem at another supplier.
- Management said uncertainty related to Cypress litigation negatively affected third-quarter revenue and could continue to affect revenue. It expects average selling prices overall to increase over coming quarters as product mix shifts toward higher-priced, higher-density products, while individual product prices generally decline. It expects R&D, sales and marketing, and general and administrative spending to rise; no specific revenue or earnings guidance was provided.
- GSI expects existing liquidity and cash generated from operations to cover working capital and capital expenditure needs for at least 12 months. Future needs depend on revenue, inventory, receivables, product development, sales expansion and possible acquisitions; additional financing is not assured.
- Cypress alleges patent infringement and seeks damages and restrictions on sales; the ITC evidentiary hearing was scheduled to begin March 12, 2012, and the related district-court case was stayed. GSI is also pursuing antitrust claims against Cypress; Cypress’s motion to dismiss was pending. GSI recorded no loss contingency because it could not estimate the likelihood or amount of an adverse outcome. An adverse outcome could restrict U.S. sales, require damages or royalties, and materially harm results.
- GSI repurchased 890,826 shares during the quarter at an average $4.77 per share. On January 25, 2012, the board authorized an additional $10 million in repurchases, bringing aggregate remaining authority to $11.38 million.
- Other disclosed exposures include significant reliance on Cisco and distributors, semiconductor-market cyclicality, declining product prices, and dependence on external wafer and assembly suppliers, including TSMC and Powerchip. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether customer inventory drawdowns and the revenue decline persist, and how concentrated sales remain in Cisco and distributors.
- Developments and potential financial or product-sales impact of both Cypress proceedings, including whether a loss becomes estimable or a contingency is recorded.
- Whether gross margins recover as manufacturing overhead and product mix change, and whether elevated legal and other operating expenses continue.
- Cash generation, investment liquidity and the effect of ongoing share repurchases on available capital.
- Supply availability and cost at key foundries and other outsourced manufacturers, particularly if demand increases.