GSI Technology, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter ended December 31, 2014; comparisons are with the quarter and nine months ended December 31, 2013, unless noted. GSI designs and sells Very Fast SRAM and low-latency DRAM, primarily for networking and telecommunications. The company operates as a fabless semiconductor business.
Financial performance
| Metric | Three months ended Dec. 31, 2014 | Three months ended Dec. 31, 2013 | Nine months ended Dec. 31, 2014 | Nine months ended Dec. 31, 2013 |
|---|---|---|---|---|
| Revenue | $14.2 million | $13.8 million | $40.4 million | $45.7 million |
| Gross profit / margin | $6.7 million / 46.7% | $5.4 million / 39.0% | $18.7 million / 46.1% | $20.2 million / 44.2% |
| Operating income (loss) | ($0.7 million) | ($1.9 million) | ($3.2 million) | ($2.2 million) |
| Net income (loss) | $0.1 million | ($0.7 million) | ($2.2 million) | ($0.8 million) |
| Net income (loss) per diluted share | $0.01 | ($0.03) | ($0.09) | ($0.03) |
| Cash from operating activities | Not separately presented for the quarter | $1.9 million | $6.7 million |
Quarterly revenue rose 3.3%, while nine-month revenue fell 11.6%, which management attributed largely to continued weakness in global networking and telecommunications markets, particularly in Asia. Quarterly gross margin improved mainly with product/customer mix and lower inventory write-downs. The nine-month operating loss widened despite lower revenue-related costs and reduced legal expenses. The quarter’s small net profit included a $0.7 million income tax benefit, primarily from the lapse of statutes of limitations on uncertain tax positions.
Liquidity, balance sheet and capital allocation
- At December 31, 2014, cash and cash equivalents were $40.9 million, short-term investments $25.0 million, and long-term investments $18.7 million; combined cash and investments were approximately $84.5 million. Cash plus short-term investments totaled $65.8 million, down from $80.9 million at March 31, 2014.
- Total assets were $111.9 million and total liabilities $10.6 million. The company reported no debt and stated that its liquidity and expected operating cash flows should cover working capital and capital expenditures for at least 12 months.
- Nine-month operating cash flow was positive $1.9 million, versus $6.7 million a year earlier. Investing activities provided $23.6 million, mainly reflecting investment maturities and sales. Financing activities used $26.2 million, primarily for $27.1 million of share repurchases.
- The August 2014 tender offer repurchased 3.85 million shares for approximately $25 million at $6.50 per share. The company reported $11.4 million remaining under its repurchase authorization at December 31, 2014.
Management commentary, outlook and risks
- No specific revenue or earnings guidance was provided. Management expected overall average selling prices to increase over the next several quarters from a richer mix of higher-priced, higher-density products, while acknowledging that individual product prices generally decline over time.
- Management expected continued significant investment in product development and anticipated R&D expense to increase in future periods. Legal costs related to Cypress litigation were expected to remain substantial and volatile over the next one to two years.
- Customer concentration remains material: Alcatel-Lucent represented approximately 24% and Cisco approximately 14% of nine-month revenue. Avnet Logistics accounted for 37.2% of revenue as a distributor. Sales are exposed to customer order volatility, semiconductor cyclicality, and the networking and telecommunications markets.
- Cypress patent litigation remained pending. The ITC had ruled favorably for GSI in 2013; by this filing, proceedings on four patents were stayed pending Patent Trial and Appeal Board reviews, and the district court case was proceeding on three patents, with trial scheduled for January 2016. GSI’s antitrust suit against Cypress continued; on January 27, 2015, the court denied Cypress’s summary-judgment motion and postponed the trial without setting a new date. Outcomes and potential damages or royalties were not estimable.
- GSI identified a material weakness in its inventory-reserve controls after an additional $985,000 write-down was recorded in the prior-year quarter. Management said it implemented a remediation plan it believed fully remediated the weakness. Separately, management concluded disclosure controls were effective at December 31, 2014 and reported no material changes in internal control during the quarter.
- Key operating risks include reliance on single-source wafer suppliers TSMC and Powerchip, lack of long-term supply contracts, and litigation-related customer uncertainty. The filing reported no off-balance-sheet arrangements and contractual obligations of $3.6 million, chiefly wafer, test and mask commitments.
Important facts for investors to verify
- Whether the revenue recovery in the quarter can continue, given the nine-month decline and reliance on a few customers and distributors.
- Whether gross-margin improvement persists as inventory write-downs, product mix, selling prices and outsourced manufacturing costs change.
- Cash generation and liquidity after substantial repurchases, and whether the remaining buyback authorization is used.
- Developments and potential financial exposure in the Cypress patent and antitrust cases, including PTAB reviews and trial scheduling.
- Whether inventory-reserve control remediation is sustained and independently validated.
- Supply continuity and capacity terms with TSMC, Powerchip and other outsourced manufacturing partners.