GSI Technology, Inc. — FY2016 Form 10-K
Reporting period: Fiscal year ended March 31, 2016. The filing also reports the quarter ended March 31, 2016; this is an annual report, not a standalone calendar-quarter filing.
Business context
GSI is a fabless semiconductor company focused on Very Fast SRAM and low-latency DRAM used mainly in networking and telecommunications equipment, with additional military, industrial, automotive, test and medical markets. In November 2015, it acquired MikaMonu to develop in-place associative-computing products for big data, computer vision and cybersecurity. The company said substantial development work would be needed and did not expect initial products before late calendar 2017.
Financial performance and liquidity
| Metric | FY2016 | FY2015 |
|---|---|---|
| Revenue | $52.7 million | $53.5 million |
| Gross profit / gross margin | $26.7 million / 50.7% | $25.1 million / 47.0% |
| Operating loss | $3.0 million | $6.0 million |
| Net loss | $2.2 million | $5.0 million |
| Net loss per diluted share | $0.10 | $0.20 |
| Cash from operations | $0.5 million | $1.1 million |
FY2016 revenue declined 1.4%, reflecting continued weakness in networking and telecommunications, particularly in Asia. Gross margin improved on more favorable product and customer mix and lower variable manufacturing costs. Sales to Alcatel-Lucent rose to $17.1 million (about 32% of revenue), while sales to Cisco fell to $4.5 million (about 9%).
At March 31, 2016, cash, cash equivalents and short-term investments were $55.1 million; including long-term investments, cash and investments totaled $66.3 million. Working capital was $62.7 million, total assets $106.5 million, and stockholders’ equity $89.9 million. The company reported no debt. Operating cash flow was positive but modest; cash declined by $4.8 million during the year. Cash used for share repurchases was $7.0 million, and the company repurchased 1.6 million shares.
For the March 2016 quarter, revenue was $12.2 million, gross profit $6.1 million and net loss $87,000. The filing gives no clear standalone quarterly cash-flow figure.
Changes, outlook and notable items
- Results improved year over year, but the company remained unprofitable; revenue had also declined from $58.6 million in FY2014.
- Management expected overall average selling prices to rise over the next several quarters as product mix shifted toward higher-priced, higher-density products, even though prices for individual products typically decline over time.
- Management expected research and development spending to increase, particularly for MikaMonu-related development. It believed existing liquidity and expected operating cash flow would meet working-capital and capital-expenditure needs for at least 12 months.
- The MikaMonu acquisition included $4.4 million of initial cash consideration, up to $2.5 million of employment-conditioned retention payments and milestone/revenue-based earnouts. Maximum contingent payments could reach approximately $38.8 million; the recorded contingent-consideration liability was $5.9 million at year-end. The acquisition added $8.0 million of goodwill and $3.5 million of patents. Goodwill testing found no impairment, though management noted a sustained share-price decline could prompt reassessment.
- A full valuation allowance was recorded against $6.4 million of net deferred tax assets. The reported income-tax benefit was $641,000.
- The Cypress patent and antitrust litigation was settled in May 2015, with both parties dismissing claims and denying liability. The filing also identifies customer concentration, distributor dependence, semiconductor cyclicality, falling product prices and reliance on single-source Asian foundries as significant risks.
- The company had $3.1 million of wafer, test and mask purchase obligations and $447,000 of operating lease commitments at year-end. The board authorized up to an additional $10 million of repurchases in May 2016.
Most important facts for investors to verify
- Whether revenue stabilizes and the improved gross margin persists amid weak end markets and ongoing customer concentration.
- Whether Alcatel-Lucent and Cisco demand, and major distributor activity, remain sustainable; orders can be rescheduled or canceled on short notice.
- Whether MikaMonu products meet development milestones and generate revenue sufficient to justify acquisition costs and potential earnouts.
- Whether cash generation can support operating needs, product development and repurchases without materially reducing liquidity.
- Whether TSMC, Powerchip and other suppliers can provide adequate capacity, given the lack of long-term supply commitments.
- Whether the full deferred-tax-asset valuation allowance and MikaMonu goodwill remain appropriate as results and market conditions evolve.