GSI Technology, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended December 31, 2016. This is the company’s fiscal third quarter of fiscal 2017 (fiscal year ending March 31, 2017). Unaudited results are in U.S. dollars.
Business context
GSI designs and sells integrated circuits, principally Very Fast SRAM and low-latency DRAM, with exposure mainly to networking and telecommunications. The company also invests in associative-computing products developed using technology acquired with MikaMonu in 2015.
Financial performance and liquidity
- Quarter revenue: $11.5 million, down 11.1% from $12.9 million a year earlier. Gross profit was $6.5 million and gross margin 56.6%, versus $6.4 million and 49.4%.
- Quarter earnings: Operating income was $0.2 million, compared with an operating loss of $1.6 million. Net income was $0.35 million, or $0.02 per diluted share, versus a net loss of $0.82 million, or $0.04 per share.
- Nine-month results: Revenue was $37.8 million, down 6.7%. Gross profit was $20.6 million and margin 54.4%, versus $20.6 million and 50.8%. Operating income was $1.0 million and net income $1.2 million, compared with operating and net losses of $2.9 million and $2.1 million, respectively.
- Cash flow: Nine-month operating cash flow was $1.3 million, versus cash use of $3.2 million. Investing activities provided $3.3 million; financing activities used $6.1 million, primarily for $7.1 million of share repurchases. Cash and cash equivalents declined $1.5 million to $30.5 million.
- Liquidity and debt: Cash, cash equivalents and short-term investments totaled approximately $47.0 million; including long-term investments, cash and investments totaled $61.1 million. Management reported no debt and believes available liquidity and expected operating cash flow are sufficient for at least 12 months. Current assets were $66.5 million and current liabilities $10.7 million.
- Balance sheet: Total assets were $102.3 million and total liabilities $16.1 million at December 31, 2016. Inventory rose to $9.2 million from $7.2 million at March 31, 2016.
Material changes and management commentary
- Quarter revenue fell mainly with weaker China sales and a Nokia/Alcatel-Lucent inventory correction. Nokia sales declined year over year in the quarter but increased for the nine-month period; Cisco sales were approximately flat in the quarter.
- Gross-margin improvement was attributed primarily to a favorable product and customer mix.
- Research and development expense rose 37% in the quarter and 33% for nine months, principally due to payroll and other costs for associative-processor development. Management expects substantial R&D spending to continue and says it may contribute to operating losses in some periods.
- Selling, general and administrative expense declined substantially year over year, primarily because of lower litigation costs following prior settlements and the conclusion of a trial.
- Inventory growth was primarily to support anticipated LLDRAM shipments over the next six to nine months while qualifying a new assembly vendor.
- GSI repurchased $7.1 million of shares during the nine-month period at an average $4.33 per share. Approximately $4.4 million remained authorized at December 31, 2016.
Outlook, risks and contingencies
- The filing provides no specific revenue or earnings guidance. Management expects average selling prices of individual products to decline over time, but anticipated a higher overall average selling price over the next several quarters from product mix shifts.
- Results are exposed to semiconductor and networking-market cyclicality, customer order timing and cancellations, and significant customer and channel concentration. Nokia represented approximately 42% and Cisco 9% of revenue for the nine months; distributor Avnet Logistics represented 23.4%.
- GSI relies on key suppliers, including TSMC for Very Fast SRAM wafers and Powerchip for LLDRAM wafers, without long-term supply agreements. Supplier capacity, qualification and disruption risks could affect deliveries and costs.
- MikaMonu-related contingent consideration accrued at approximately $6.0 million. Additional payments depend on employee retention, development milestones and revenue targets; the filing describes potential payments up to approximately $38.8 million under specified terms.
- Management reported effective disclosure controls as of December 31, 2016 and no material changes in internal control over financial reporting during the quarter. The filing says risk factors were not materially changed from the prior annual report.
- Management identified no material expected interest-rate sensitivity from a hypothetical 100-basis-point rate change, while noting that lower rates could reduce future investment income. The company does not currently hedge foreign-currency exposure.
Important facts for investors to verify
- Whether the Nokia inventory correction and weakness in China persist, and how concentrated customer and distributor sales remain.
- Whether improved gross margins are sustainable as product mix, selling prices and outsourced manufacturing costs change.
- Progress, spending and commercial milestones for associative-computing products, including the related contingent consideration.
- LLDRAM inventory levels, shipment conversion and qualification of the new assembly vendor.
- Cash generation and the effect of further share repurchases on liquidity and the remaining share count.