GSI Technology, Inc. — Form 10-Q Summary
Reporting period: Three months ended June 30, 2015, the company’s fiscal first quarter of fiscal 2016. Unless otherwise stated, financial amounts below are in U.S. dollars; statement amounts are in millions.
Business context
GSI is a fabless semiconductor company that designs and sells Very Fast SRAMs and low-latency DRAM, primarily for networking and telecommunications markets. Manufacturing is outsourced, with key wafer suppliers TSMC and Powerchip. The company describes the semiconductor and networking markets as cyclical and quarterly customer orders as variable.
Financial performance
| Metric | Q1 FY2016 | Q1 FY2015 |
|---|---|---|
| Net revenue | $14.025 million | $12.945 million |
| Gross profit / margin | $7.295 million / 52.0% | $5.939 million / 45.9% |
| Operating expenses | $8.303 million | $7.408 million |
| Operating loss | $1.008 million | $1.469 million |
| Net loss | $0.917 million | $1.446 million |
| Basic and diluted loss per share | $0.04 | $0.05 |
| Cash used in operating activities | $2.457 million | $1.899 million |
Revenue increased 8.3% year over year. Gross margin improvement was attributed primarily to product and customer mix. SG&A rose 22.4% to $5.305 million, mainly due to legal fees, including Cypress litigation and other pending litigation. R&D was $2.998 million, compared with $3.073 million.
Alcatel-Lucent represented approximately 32% of quarterly revenue and Cisco Systems approximately 9%. Avnet Logistics, a distributor, accounted for 26.5% of revenue. Revenue shipped outside the United States was 57.6%.
Financial position and liquidity
- At June 30, 2015, cash and cash equivalents were $39.176 million; short-term investments were $19.299 million and long-term investments were $17.545 million. Cash, cash equivalents and short-term investments totaled $58.5 million; including long-term investments, cash and investments totaled approximately $76.0 million.
- Total assets were $106.2 million and total liabilities were $12.389 million. The filing reports no debt.
- Operating cash outflow was $2.457 million. Investing activities provided $6.994 million, primarily from investment maturities; financing activities used $2.137 million, principally for $2.453 million of share repurchases, partly offset by employee-plan stock proceeds.
- Inventory was $8.674 million, up from $8.412 million at March 31. Accounts receivable increased to $9.423 million from $8.257 million.
- Management believes existing liquidity and expected operating cash flow will cover working capital and capital expenditure needs for at least 12 months, while noting additional funding could be required or elected.
Changes, outlook and material items
- Alcatel-Lucent sales increased by $1.3 million year over year; Cisco sales fell by $0.5 million. Management cited ongoing weakness in networking and telecommunications, particularly in Asia, and said prior uncertainty related to Cypress litigation had also affected revenue. Some design-in losses from the litigation period may continue to affect sales.
- On May 6, 2015, GSI and Cypress settled their patent-infringement and antitrust lawsuits. Both parties agreed to dismiss their claims with prejudice and release related claims; each denied liability. GSI said it expected Cypress-related legal expense to end after this quarter, but expected substantial legal expense over the next two quarters in separate litigation in which GSI is plaintiff; trial was scheduled for October 2015.
- No numerical revenue or earnings guidance is provided. Management expects overall average selling prices to rise over the next several quarters due to a mix shift toward higher-priced, higher-density products, while warning that individual product prices generally decline over time. It expects continued significant R&D investment and said R&D expenses may increase in future periods.
- GSI repurchased 457,630 shares during the quarter for approximately $2.453 million, at an average price of $5.36. Approximately $6.0 million remained authorized under its repurchase program at June 30.
- Contractual obligations totaled $2.844 million, mainly wafer, test and mask purchase obligations. Long-term unrecognized tax benefits were $790,000; management said up to $729,000, including interest and penalties, could be reduced within 12 months, but timing was uncertain.
- Management identified key risks including dependence on a small number of customers and distributors, cyclicality, order cancellations, price erosion, outsourced and concentrated supply, and litigation costs. It reported disclosure controls were effective and no material change in internal control during the quarter.
The filing states the risk factors were not materially changed from the prior annual report. It also says the quarter’s results are not necessarily indicative of full-year results. A sentence in the MD&A describing the net-loss improvement refers to a “decrease in gross profit,” although the reported figures show gross profit increased; investors should consult the filed statements and MD&A for that apparent inconsistency.
Important facts for investors to verify
- Whether revenue growth and improved gross margin persist, given market weakness and the changing product mix.
- Future quarterly orders and revenue concentration, particularly Alcatel-Lucent, Cisco, and Avnet Logistics.
- Cash burn, working-capital movements, share repurchases, and the adequacy of liquidity if operating losses continue.
- Costs and outcome of the separate pending litigation, and whether the scheduled October 2015 trial affected expenses or operations.
- Exposure to single-source suppliers and the timing or resolution of uncertain tax benefits.