GSI Technology, Inc. — Form 10-Q Summary
Reporting period: Three months ended June 30, 2016 (first quarter of fiscal 2017). Unless otherwise stated, financial amounts below are in U.S. dollars; statement figures are in thousands.
Business context and reporting period
GSI designs, develops and sells integrated circuits, principally Very Fast SRAMs and low-latency DRAMs, serving networking and telecommunications and other markets. It operates as a fabless semiconductor company and relies on third-party manufacturers. Results are exposed to semiconductor cyclicality and substantial fluctuations in orders from major customers. Alcatel-Lucent represented approximately 42% of quarterly revenue and Cisco Systems 12%.
Financial performance and liquidity
| Metric | Q1 FY2017 | Prior-year quarter |
|---|---|---|
| Revenue | $12.946 million | $14.025 million |
| Gross profit / margin | $6.722 million / 51.9% | $7.295 million / 52.0% |
| Operating expenses | $6.333 million | $8.303 million |
| Operating income (loss) | $389,000 | $(1.008) million |
| Net income (loss) | $260,000 | $(917,000) |
| Diluted earnings (loss) per share | $0.01 | $(0.04) |
| Cash used in operating activities | $(3.106) million | $(2.457) million |
Cash and cash equivalents were $28.237 million at June 30, 2016, and short-term investments were $21.727 million; together these principal near-term liquidity sources totaled approximately $50.0 million, versus $55.1 million at March 31, 2016. Including $9.404 million of long-term investments, cash and investments totaled approximately $59.4 million. The company reported no debt. Current assets were $69.119 million and current liabilities $8.454 million; total assets were $101.807 million and total liabilities $14.861 million.
Operating cash outflow reflected, among other items, a $1.703 million increase in accounts receivable and a $999,000 reduction in accrued expenses and other liabilities. Investing activities provided $3.013 million, mainly from investment maturities; financing activities used $3.633 million, principally for share repurchases. The company repurchased 963,738 shares for approximately $3.9 million during the quarter. Management said existing liquidity and expected operating cash flows should meet working-capital and capital-expenditure needs for at least 12 months.
Material changes versus the prior-year quarter
- Revenue declined 7.7%, while gross margin was essentially flat. Management attributed lower revenue in part to a $1.4 million decline in European customer revenue; sales to Alcatel-Lucent and Cisco increased.
- Research and development expense rose 16.7% to $3.499 million, primarily from higher payroll related to associative processor development.
- Selling, general and administrative expense fell 46.6% to $2.834 million, largely because legal expenses declined after the Cypress Semiconductor litigation settlement.
- Net income improved to $260,000 from a $917,000 loss, reflecting lower operating expenses despite reduced revenue and gross profit.
- Quarter-end cash and cash equivalents fell by $3.726 million from March 31, 2016. Common shares issued and outstanding were 20.838 million at June 30, versus 21.716 million at March 31, reflecting repurchases and other share activity.
Outlook, commentary, risks and unusual items
- No numerical revenue or earnings guidance was provided. Management expects research and development spending to increase as it develops in-place associative computing products based on MikaMonu technology; it also expects product-mix shifts toward higher-priced, higher-density products to support overall average selling prices over coming quarters.
- Management cautioned that quarterly results are not necessarily indicative of full-year results. Customer orders are generally purchase-order based and may be delayed or canceled. Customer concentration is significant, and Alcatel-Lucent and Cisco sales may fluctuate materially.
- Supply-chain risks include dependence on single-source wafer suppliers TSMC and Powerchip and reliance on outsourced manufacturing and assembly. Semiconductor cyclicality, price erosion, technology transitions and competition may pressure revenue and margins.
- The MikaMonu acquisition includes contingent consideration recorded at a fair value of approximately $5.9 million. Additional conditional payments could be substantial, with potential contingent consideration described as approximately $38.8 million; actual payments depend on employee retention and achievement of development and revenue milestones.
- The quarter included a $271,000 income-tax provision. The filing describes a $636,000 prepaid tax asset recorded in connection with the transfer of acquired intangible assets out of Israel and a $71,000 tax benefit from the lapse of statutes of limitations. Net deferred tax assets of $7.6 million remained subject to a full valuation allowance.
- Goodwill was $8.030 million. The company reported no triggering event after its fiscal 2016 impairment assessment, but said a sustained share-price decline could require reassessment. It reported no material warranty costs or off-balance-sheet arrangements.
- Disclosure controls and procedures were assessed as effective at quarter-end, with no material changes in internal control over financial reporting reported. The filing said risk factors were not materially changed from the prior Form 10-K.
Important facts for investors to verify
- Whether revenue trends and customer demand—especially from Alcatel-Lucent, Cisco and Europe—remain volatile, and how customer concentration affects subsequent quarters.
- Whether the cash operating burn and share-repurchase pace are sustainable alongside planned investment in MikaMonu product development.
- Progress, timing and commercialization prospects for associative computing products, including milestone achievement and potential contingent consideration payments.
- Exposure to single-source suppliers, wafer capacity, outsourced manufacturing costs and product pricing or gross-margin pressure.
- Developments in tax positions and uncertain tax benefits, and any events that could trigger goodwill impairment testing.