GSI Technology, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and first six months ended September 30, 2014. The company designs and sells Very Fast SRAM and low-latency DRAM integrated circuits, principally for networking and telecommunications markets. Unless noted, amounts below are in U.S. dollars.
Financial results
| Metric | Three months ended Sept. 30, 2014 | Prior-year quarter | Six months ended Sept. 30, 2014 | Prior-year six months |
|---|---|---|---|---|
| Revenue | $13.3 million | $15.5 million | $26.2 million | $32.0 million |
| Gross profit / margin | $6.1 million / 45.7% | $7.4 million / 47.6% | $12.0 million / 45.8% | $14.9 million / 46.5% |
| Operating income (loss) | $(1.0) million | $0.2 million | $(2.5) million | $(0.3) million |
| Net income (loss) | $(1.0) million | $0.4 million | $(2.4) million | $(0.1) million |
| Diluted loss per share | $(0.04) | Income per share of $0.01 | $(0.09) | Reported as zero |
- Cash flow: Six-month operating cash use was $1.7 million, versus cash provided of $5.0 million in the prior-year period. Investing activities provided $20.7 million, primarily from investment maturities and sales. Financing activities used $25.8 million, chiefly for share repurchases. Cash and cash equivalents declined $6.8 million to $34.8 million.
- Liquidity and debt: At September 30, cash, cash equivalents and short-term investments totaled $62.7 million; long-term investments were another $19.0 million. Total assets were $113.9 million, total liabilities $12.6 million, and stockholders’ equity $101.3 million. Management reported no debt. Current liabilities were $11.1 million.
- Other metrics: Inventory was $9.2 million, up from $8.2 million at March 31. Six-month research and development expense was $6.0 million; selling, general and administrative expense was $8.5 million. The filing reports one operating segment.
Material changes versus prior periods
- Revenue fell 14.7% in the quarter and 18.0% for the six-month period. Management attributed weakness chiefly to soft networking and telecommunications demand, particularly in Asia, and lower Cisco sales. Cisco sales were $1.9 million in the quarter versus $3.4 million, and $3.7 million for six months versus $6.2 million. Alcatel-Lucent sales were unchanged at $3.2 million for the quarter and $6.4 million for six months.
- Gross margin declined 1.9 percentage points year over year for the quarter and 0.7 points for six months, reflecting revenue and product/customer mix changes.
- The company moved from quarterly profit to a loss. Lower revenue and gross profit drove the deterioration; operating expenses were nearly flat for the quarter and declined 4.3% for six months, including lower litigation-related legal fees.
- The company repurchased 3.85 million shares in its August Dutch auction tender offer at $6.50 per share, spending approximately $25 million, excluding fees. Total six-month repurchases were $26.4 million. Shares outstanding were approximately 23.7 million at September 30.
Outlook, risks and unusual items
- No specific revenue or earnings guidance was provided. Management expects existing cash, cash equivalents, short-term investments and anticipated operating cash flows to cover working capital and capital expenditures for at least 12 months.
- Management expects research and development spending to increase over time and anticipates substantial, variable legal expenses in the coming quarters. Revenue and margins remain exposed to semiconductor cyclicality, product pricing and mix, and variable customer orders.
- Customer concentration is significant: Alcatel-Lucent represented about 24% and Cisco about 14% of six-month revenue. Avnet Logistics accounted for 34.9% of revenue. Management noted that customer demand and purchases can fluctuate substantially and that there are no long-term purchase commitments.
- Cypress patent litigation remains pending in federal court. A favorable 2013 ITC decision found no infringement in that proceeding, but it did not resolve the remaining court cases. In October 2014, the California court stayed claims involving four patents under PTAB review; proceedings continue on three patents. GSI’s antitrust lawsuit against Cypress was scheduled for trial in February–March 2015. Outcomes, damages and potential royalties or injunctions are uncertain; no loss contingency was recorded.
- The filing says management believes the company has sufficient liquidity, but identifies risks from revenue weakness, reliance on key customers and suppliers, outsourced manufacturing, litigation, and possible further cash use for repurchases. The board had authorized up to $12.1 million of additional repurchases as of September 30.
- Management reported disclosure controls effective at September 30 and no material control changes during the quarter. The filing also describes a material weakness identified in the prior fiscal year related to inventory-reserve calculations; management said it implemented a remediation plan it believes fully addressed the weakness.
- Unrecognized tax benefits were $1.492 million in long-term liabilities; management said a reduction of up to $775,000, including interest and penalties, was reasonably possible within 12 months. Net deferred tax assets were subject to a full valuation allowance.
Investor verification points
- Track whether revenue stabilizes and whether customer concentration, especially Alcatel-Lucent, Cisco and Avnet, changes.
- Monitor gross margin, inventory levels and operating cash flow as sales fluctuate.
- Review developments in Cypress patent and antitrust litigation, including PTAB proceedings, trial timing, legal costs and any potential financial exposure.
- Assess liquidity after the substantial share repurchases and any additional buybacks; confirm the distinction between short-term liquidity and total cash plus investments.
- Follow evidence that the inventory-reserve control remediation is sustained and review any subsequent changes in tax uncertainty or valuation allowances.