- · The majority of revenue—approximately 83 percent—continued to be to customers located in Asia. China represented approximately $32 million, or 43% of net revenue for the third quarter. This leaves the Company vulnerable to any political typhoons blowing through this part of the world.
· For the three-months ended December 31, 2005, Genesis derived 25% of net revenues from just two customers. Sales to its largest five customers accounted for 49% of its revenues. Corporate, expects that a small number of customers will continue to account for a large amount of its revenues. The decision by any large customer to decrease or cease using Genesis’ products by bringing R&D in-house to internally develop its own solutions could harm Genesis’ business going forward.
o In the third quarter, one of the Company’s largest South Korean customer decided to stop manufacturing LCD monitors for their OEM customers and instead will focus on producing monitors only under their own brand name.
· Interest income of $1.4m contributed 4 cents to the Company’s bottom-line. Genesis is entangled in a licensing/royalty battle with Silicon Image, Inc. An amended final judgment stated that Genesis had received a license from Silicon Image, Inc. for certain of their DVI and HDMI patents, and must pay Silicon Image royalties on all of its DVI and HDMI products. This amended final judgment, if not overturned on appeal, could hinder the Company’s ability to compete with unlicensed competitors that are not required to pay royalties on competing products. [ed. note. The Company has not made provisions—set aside reserves—to meet this possible future obligation.
Management is confident that current market and product trends are temporary, and that the product mix shift will largely be complete by the end of the current fiscal fourth quarter. Corporate believes, too, that its design wins portfolio and customer penetration will allow the Company to resume its growth in the following quarter(s). If this proves to be true, a forward 12-to-24 month EPS growth rate of 20% could prove to be conservative. If so—Cramer is right—think flat-screens—buy Genesis Microchip.
Nonetheless, the 10Q Detective believes that management has another shoe to drop. We believe that management has not come totally clean on potential inventory logjams, which would dampen top-line growth. We also need to be shown that the transition to the new design wins/contracts will lift margins and the bottom-line, too. SELL.