Business context and reporting period
GSI Technology, Inc. designs and markets high-performance SRAM and low-latency DRAM (LLDRAM), primarily for networking and telecommunications equipment, using a fabless manufacturing model. This Form 10-K covers the fiscal year ended March 31, 2014; fiscal fourth-quarter figures are for the three months ended that date. Amounts below are in U.S. dollars.
Financial performance and liquidity
| Metric | FY2014 | FY2013 |
|---|---|---|
| Revenue | $58.6 million | $66.0 million |
| Gross profit / margin | $26.1 million / 44.6% | $28.6 million / 43.3% |
| Operating income (loss) | ($5.8 million) | $3.4 million |
| Net income (loss) | ($6.2 million); ($0.23) per share | $3.8 million; $0.14 per share |
| Cash provided by operating activities | $8.4 million | $14.7 million |
| Cash, cash equivalents and short-term investments | $80.9 million | $67.3 million |
| Working capital | $90.7 million | $86.6 million |
- At March 31, 2014, the company also held $28.8 million of long-term investments; cash, cash equivalents and total short- and long-term investments were approximately $109.8 million. The company reported no debt.
- FY2014 investing activities used $8.2 million; financing activities provided $0.2 million. The company repurchased $2.9 million of stock during the year.
- Fourth-quarter revenue was $12.8 million, gross profit $5.9 million, and net loss $5.4 million, or $0.20 per share. The filing identifies a fourth-quarter operating loss of $3.6 million.
Material changes versus the prior comparable period
- Revenue fell 11.3% year over year, following a 20.0% decline in FY2013. Management attributed FY2014 weakness to continued softness in global networking and telecommunications markets, particularly Asia, and lower Cisco-related sales.
- Estimated direct and indirect Cisco sales declined to $11.0 million from $19.3 million; Alcatel-Lucent sales rose to $11.2 million from $8.1 million and made it the largest customer in FY2014.
- Gross margin improved to 44.6% from 43.3%, despite lower revenue, reflecting product/customer mix and lower variable manufacturing costs, partly offset by inventory write-downs.
- Operating expenses increased 26.8% to $31.9 million. R&D rose 14.3% to $13.1 million, including higher pre-production mask costs; SG&A rose 37.4% to $18.8 million, principally due to a $5.6 million increase in legal fees.
- Operating cash flow declined to $8.4 million from $14.7 million. Inventory decreased by $3.5 million and receivables by $2.0 million, supporting cash generation despite the net loss.
- FY2014 inventory write-downs were $2.1 million, versus $0.8 million in FY2013. An additional $985,000 adjustment in the December 2013 quarter followed errors in the inventory reserve calculation.
Outlook, commentary, risks and unusual items
- No formal revenue or earnings guidance is provided. Management expected overall average selling prices to rise over the next several quarters as product mix shifted toward higher-priced, higher-density products, while individual product prices were expected to decline over time.
- Management expected R&D spending to increase and said existing liquidity and anticipated operating cash flows should cover working capital and capital expenditure needs for at least 12 months.
- Products planned for later in 2014 included faster SRAM and LLDRAM versions, including 288-megabit SRAM and 1.125-gigabit LLDRAM; these were forward-looking expectations, not reported achievements.
- Major risks include customer and channel concentration, cyclical end markets, price erosion, and reliance on single-source wafer suppliers TSMC (SRAM) and Powerchip (LLDRAM), without long-term supply contracts. Avnet Logistics represented 30.3% of revenue; estimated Cisco and Alcatel-Lucent sales were each about 19%.
- Cypress Semiconductor patent and antitrust litigation remained ongoing. The ITC had ruled favorably for GSI in June 2013, but district-court patent claims and GSI’s antitrust case continued. The company recorded no litigation loss contingency because the outcome and potential loss could not be reasonably estimated; an adverse result could lead to damages, injunctions or royalties.
- The company recorded a full valuation allowance against $3.7 million of deferred tax assets after cumulative U.S. tax losses, contributing to a $713,000 FY2014 tax provision despite a pretax loss.
- Management reported remediation of a material weakness in inventory-reserve controls identified in the third quarter. Management and the auditor concluded internal control over financial reporting was effective at March 31, 2014.
Important facts for investors to verify
- Whether revenue and customer demand recover, particularly for Cisco and in Asia, and whether customer concentration remains high.
- Progress, cost and commercial timing of planned SRAM and LLDRAM products, including the expected 40-nanometer process transition.
- Subsequent developments in Cypress litigation, potential costs, and whether litigation-related customer uncertainty continues to affect sales.
- Whether inventory reserves and control remediation prove adequate, and whether further inventory charges are required.
- Availability and pricing of wafer capacity from TSMC and Powerchip, given the absence of long-term supply agreements.
- Cash generation and investment liquidity relative to ongoing operating losses, planned R&D spending and repurchases; verify the company’s no-debt position and stated 12-month liquidity outlook.