GSI Technology, Inc. — Form 10-Q Summary
Business context and reporting period. GSI is a fabless semiconductor company designing and selling Very Fast SRAMs and low-latency DRAMs, primarily for networking and telecommunications markets. This quarterly report covers the three and six months ended September 30, 2011, the second quarter and first half of fiscal 2012. Comparisons below are with the same periods in 2010 unless otherwise indicated. Amounts are in millions of dollars except per-share data.
Key financial results
| Metric | Three months ended Sept. 30, 2011 | Year-over-year change | Six months ended Sept. 30, 2011 | Year-over-year change |
|---|---|---|---|---|
| Revenue | $20.8 | Down 22.3% | $43.8 | Down 11.7% |
| Gross profit / margin | $9.1 / 43.6% | Down from $12.2 / 45.5% | $19.2 / 43.9% | Down from $23.0 / 46.3% |
| Operating income | $1.9 | Down from $6.7 | $6.1 | Down from $12.1 |
| Net income | $1.7 | Down 68.3% | $4.9 | Down 48.7% |
| Diluted EPS | $0.06 | Down from $0.18 | $0.16 | Down from $0.33 |
| Operating cash flow | Not separately reported for the quarter | $5.3 | Down from $6.0 |
Quarterly SG&A rose 68.9% to $4.4 million; first-half SG&A rose 43.7% to $7.8 million, principally due to $1.9 million and $2.7 million, respectively, of increased Cypress-litigation legal fees. The six-month tax provision was $1.4 million; the estimated annual effective tax rate was approximately 21.6%.
At September 30, 2011, cash and cash equivalents were $25.5 million, short-term investments $31.0 million, and long-term investments $31.5 million. Cash plus short-term investments totaled $56.6 million, compared with $52.0 million at March 31, 2011; cash, cash equivalents, and all investments totaled $88.1 million. Total assets were $148.5 million, total liabilities $16.7 million, and stockholders’ equity $131.8 million. Management stated the company had no debt. The filing reports $5.3 million of operating cash flow and $6.8 million of net investing cash outflow for the six months; financing provided $1.1 million. Cash declined $0.4 million to $25.5 million.
Material changes and management commentary
- Revenue and earnings weakened year over year. Management said the prior-year September quarter was unusually strong because delayed first-quarter backlog shipped and a major customer’s contract manufacturers drew down $1.2 million of inventory earlier than expected.
- Direct and indirect Cisco sales fell to $7.9 million for the quarter and $17.5 million for the six months, from $10.4 million and $19.6 million. Cisco represented approximately 40% of first-half revenue.
- Gross margin declined, which management primarily attributed to higher manufacturing overhead as it prepared for expected production increases, including low-latency DRAM. Inventory rose to $23.0 million from $21.4 million, reflecting a planned build to meet current and forecast demand.
- Management expects product average selling prices overall to increase over the next several quarters as product mix shifts toward higher-priced, higher-density products, despite expected price erosion on individual products. It expects continued investment in R&D and growth in sales, marketing, and administrative expenses. No numerical revenue or earnings guidance was provided.
- Management believes cash, cash equivalents, short-term investments, and expected operating cash flows will cover working capital and capital expenditure needs for at least 12 months. Contractual obligations totaled $5.9 million, primarily wafer, test, and mask purchase commitments.
Risks, contingencies, and unusual items
- Cypress litigation: Cypress alleges patent infringement and seeks damages and orders that could block U.S. sales of affected products. The ITC instituted an investigation; the related district court case is stayed. GSI separately sued Cypress alleging antitrust violations and seeks treble damages and injunctive relief. Cypress moved to dismiss that complaint. GSI recorded no loss contingency because the outcomes and potential losses could not be estimated; it expects substantial legal costs and management distraction.
- Customer and channel concentration: Cisco accounted for approximately 40% of first-half revenue. Distributor Avnet Logistics accounted for 18.7%. Purchases are generally not protected by long-term customer commitments and can fluctuate or be deferred.
- Supply and industry exposure: The company relies on outside foundries and suppliers, including TSMC for Fast SRAM wafers and Powerchip for LLDRAM wafers, without long-term supply agreements. Semiconductor cyclicality, price erosion, capacity constraints, and international or supplier disruptions could affect results.
- Tax uncertainty: Unrecognized tax benefits totaled $2.6 million, including $1.8 million classified as long-term; California tax examinations were ongoing. Management did not expect a material change in these benefits in the next 12 months.
- Other stated risks include product defects, technology transitions, foreign-exchange exposure, and economic weakness. Management reported disclosure controls were effective at quarter-end and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether sales recover and customer inventory patterns normalize, particularly given Cisco’s approximately 40% share of first-half revenue and the unusual prior-year comparison.
- Whether the company can maintain gross margins as overhead rises and product mix, selling prices, and outsourced manufacturing costs change.
- Developments, costs, and potential commercial consequences of the Cypress ITC, patent, and antitrust proceedings; no loss estimate or accrual was recorded.
- Whether planned inventory growth and supplier capacity support demand without creating excess or obsolete inventory.
- The composition, maturity, and liquidity of the investment portfolio and the effect of lower interest rates on investment income.