GSI Technology, Inc. — Form 10-Q Summary
Business context and reporting period. The filing covers the fiscal quarter and six months ended September 30, 2013 (quarter ended September 30; fiscal Q2), compared with the same periods in 2012. GSI designs and sells Very Fast SRAM and low-latency DRAM integrated circuits, primarily to networking and telecommunications equipment manufacturers. It is a fabless semiconductor company and reports one business segment.
Financial performance
| Metric | Quarter ended Sept. 30, 2013 | Six months ended Sept. 30, 2013 |
|---|---|---|
| Revenue | $15.5 million; down 2.9% year over year | $32.0 million; down 2.6% |
| Gross profit / margin | $7.4 million / 47.6%, versus $7.2 million / 45.0% | $14.9 million / 46.5%, versus $14.0 million / 42.6% |
| Operating expenses | $7.2 million, up from $5.7 million | $15.2 million, up from $11.6 million |
| Operating income (loss) | $0.2 million, versus $1.5 million | $(0.3) million, versus $2.4 million |
| Net income (loss) | $0.4 million, versus $1.1 million | $(0.1) million, versus $2.1 million |
| EPS | $0.01 basic and diluted | Approximately zero per share |
Cash flow and liquidity. For the six months, operating cash flow was $5.0 million, versus $4.5 million a year earlier; investing cash flow was $0.3 million and financing cash flow was $2.4 million. Cash and cash equivalents rose to $48.8 million from $41.1 million at March 31, 2013. Short-term investments were $26.1 million; cash, cash equivalents and short-term investments totaled $75.0 million. Including long-term investments, cash and investments totaled $109.6 million. Management reported no debt and said existing liquidity and expected operating cash flow should cover working capital and capital expenditure needs for at least 12 months.
Total assets were $148.6 million and stockholders’ equity was $135.6 million at September 30, 2013. Current liabilities were $10.2 million. Inventory declined to $11.2 million from $13.8 million at fiscal year-end. Capital expenditure purchases were $0.1 million over the six months.
Changes versus prior comparable periods
- Revenue decreased modestly, which management attributed to continued weakness in global networking and telecommunications markets. Cisco-related sales fell $1.5 million for the quarter and $2.8 million for the six-month period year over year; Alcatel-Lucent sales increased.
- Gross margin improved, primarily because of product and customer mix and lower variable manufacturing expenses. SigmaQuad accounted for 41.9% of shipments in the six-month period, versus 36.0% a year earlier.
- SG&A rose 49% for the quarter and 57% for the six months, mainly due to Cypress-related and other litigation costs, which increased $1.3 million and $3.3 million, respectively. These costs more than offset gross-profit improvement and contributed to the six-month operating loss.
- Six-month net results moved from profit to a small loss; the September quarter remained profitable but earnings were substantially lower year over year.
- Operating cash flow increased year over year. Inventory reduction generated $2.1 million of operating cash in the current six-month period.
Outlook, risks, and unusual items
- Management expects overall average selling prices to rise over the next several quarters as product mix shifts toward higher-priced, higher-density products, although individual product prices generally decline over their life cycles. It expects R&D and SG&A to increase in absolute dollars; no numerical revenue or earnings guidance is provided.
- Management said the favorable June 2013 ITC ruling against Cypress reduced customer uncertainty, but litigation may continue to affect sales as customers reassess SRAM sourcing. Cypress’s remaining patent claims are proceeding in consolidated California litigation; GSI’s antitrust case against Cypress is also proceeding. GSI has not accrued a litigation loss because the outcome and potential loss cannot be estimated. An adverse result could lead to damages, an injunction, or royalties.
- Customer and channel concentration remains significant: Cisco represented about 20% of revenue in the six months, while distributor Avnet Logistics represented 28%. Sales are exposed to customer order volatility, short-notice cancellations or deferrals, and distributor inventory movements.
- GSI relies on single-source suppliers for key manufacturing: TSMC for Very Fast SRAM wafers, Powerchip for LLDRAM wafers, and ASE for most product packaging. Capacity, pricing, or disruption risks could affect production and margins.
- The company reported $2.895 million of unrecognized tax benefits; management said up to $0.637 million, including interest and penalties, could be reduced within 12 months, though timing is uncertain. Six-month tax benefit included a negative estimated annual effective tax rate of approximately 3.6%.
- Contractual obligations totaled $4.2 million, primarily wafer, test, and mask purchase obligations. The filing reports no off-balance-sheet arrangements. Management said disclosure controls were effective and there were no material changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether revenue stabilizes and customer mix, particularly Cisco and Alcatel-Lucent, develops as management anticipates.
- Whether improved gross margins persist as product mix, selling prices, and outsourced manufacturing costs change.
- The amount and trajectory of Cypress-related legal spending, case developments, and any potential financial or commercial consequences.
- Continued dependence on major customers, Avnet, and single-source foundry and assembly suppliers.
- Cash generation, inventory levels, and the availability and maturity profile of the investment portfolio; the portfolio included $60.7 million of available-for-sale investments.
- Tax-reserve resolution and the potential effect of unrecognized tax benefits on the effective tax rate.