GSI Technology, Inc. — FY2013 Form 10-K Summary
Reporting period: Fiscal year ended March 31, 2013. The filing also reports fourth-quarter results for the three months ended March 31, 2013; this is not a calendar-year 2012 quarterly filing.
Business context
GSI Technology designs and markets high-performance SRAM and low-latency DRAM (LLDRAM), primarily for networking and telecommunications equipment, with additional sales into defense, industrial, test-equipment, medical and other markets. It operates a fabless model and relies on third parties, principally TSMC for SRAM wafers and Powerchip for LLDRAM wafers. Networking and telecommunications customers generated approximately 75%–80% of revenue over the last three fiscal years.
Financial performance and liquidity
| Metric | FY2013 | FY2012 | Change |
|---|---|---|---|
| Revenue | $66.0 million | $82.5 million | Down 20.0% |
| Gross profit / margin | $28.6 million / 43.3% | $36.6 million / 44.4% | Margin down 1.1 percentage points |
| Operating income / margin | $3.4 million / 5.2% | $6.7 million / 8.0% | Down 48.6% |
| Net income / diluted EPS | $3.8 million / $0.14 | $6.8 million / $0.23 | Net income down 43.1% |
| Operating cash flow | $14.7 million | $17.0 million | Down $2.2 million |
Fourth-quarter FY2013 revenue was $15.7 million, gross profit was $7.3 million, and net income was $950,000; diluted EPS was $0.03. In the prior-year fourth quarter, revenue was $18.7 million, gross profit was $8.6 million, and net income was $829,000.
At March 31, 2013, cash and cash equivalents were $41.1 million, short-term investments $26.1 million and long-term investments $35.5 million. Cash, cash equivalents and short-term investments totaled $67.3 million, compared with $58.7 million a year earlier. Working capital was $86.6 million; total assets were $145.8 million and total liabilities $13.7 million. The company reported no debt. Capital expenditures were $385,000; cash used in investing activities was $2.5 million, largely reflecting investment purchases and maturities. Management said existing liquidity and expected operating cash flow should cover working capital and capital expenditures for at least 12 months.
Changes versus comparable periods
- FY2013 revenue declined from FY2012 amid weaker orders from major customers, customer inventory reductions, and softness in European network-equipment spending. Cisco-related sales fell $14.1 million, from $33.4 million to $19.3 million; Cisco represented approximately 29% of FY2013 revenue, versus 41% in FY2012.
- Gross margin declined as product and customer mix changed and lower revenue reduced absorption of fixed manufacturing costs.
- R&D expense rose 7.8% to $11.5 million. SG&A fell 29.2% to $13.7 million, primarily because litigation-related legal fees decreased by $6.3 million from FY2012.
- Cash and short-term investments increased $8.6 million year over year. Inventory fell by $2.9 million on the balance sheet as the company responded to slower business.
Outlook, risks and unusual items
- No quantified revenue or earnings guidance is provided. Management expected individual product selling prices to decline over time, but anticipated that overall average selling prices could rise over the next several quarters as product mix shifted toward higher-priced, higher-density products. Management also expected continued significant R&D investment and future increases in operating expenses.
- Cypress Semiconductor patent litigation remained a material uncertainty. An ITC administrative law judge issued a favorable initial non-infringement determination in October 2012, but full Commission review was pending, and two federal patent cases—including a new California case filed May 1, 2013—also remained unresolved. GSI reported that litigation uncertainty had reduced some customer purchases and could continue to affect revenue. The company had recorded no loss contingency because the outcome and potential loss could not be estimated.
- GSI’s antitrust lawsuit against Cypress was proceeding; the court denied Cypress’s motion to dismiss, and discovery was underway. The company expected further legal costs.
- Customer and channel concentration is high: Cisco was the largest OEM customer; Avnet Logistics represented 26.5% of revenue, and the top ten customers collectively accounted for approximately 91% of revenue.
- Supply is concentrated in foundries and manufacturing partners, with no long-term wafer-supply agreements. Other stated risks include semiconductor cyclicality, price erosion, customer order cancellations, foreign and Taiwan-related exposure, and technology-transition and inventory risks.
- The FY2013 tax provision was only $38,000, and unrecognized tax benefits were $2.76 million. The company repurchased 811,170 shares for $3.6 million during FY2013 at an average $4.47 per share.
The independent auditor issued an unqualified opinion on the financial statements and internal control over financial reporting; management and the auditor concluded internal controls were effective at March 31, 2013.
Important facts for investors to verify
- Final outcomes of the ITC review and Cypress patent and antitrust cases, including potential damages, injunctions, royalties and ongoing legal expense.
- Whether revenue and customer demand stabilize after inventory corrections, particularly Cisco-related sales and European network-equipment spending.
- Customer and distributor concentration, distributor inventory and sell-through, and the effect of order cancellations or deferrals.
- Availability, pricing and yield of wafer supply from TSMC and Powerchip, and progress on 40-nanometer SRAM and LLDRAM development.
- Inventory valuation and demand assumptions, the unusually low FY2013 tax provision, and the timing or resolution of the $2.76 million unrecognized tax benefits.