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Pixelworks, Inc. (NASDAQ:PXLW)

Q1 2013 Earnings Call

April 25, 2013, 5:00 p.m. ET

Executives

Steve Moore - VP & CFO

Bruce Walicek - President & CEO

Analysts

Krishna Shankar - ROTH Capital Partners

Operator

Welcome to Pixelworks Incorporated’s first quarter 2013 financial results conference call. At this time, all participants are in listen-only mode. At the conclusion of today’s conference call, instructions will be given for the question-and-answer session. (Operator Instructions).

As a reminder, this conference is being recorded, today, Thursday, April 25th, 2013. I would now like to turn the conference over to Mr. Steve Moore.

Steve Moore

Good afternoon, and thank you for joining us. This is Steve Moore, Chief Financial Officer of Pixelworks. With me today is Bruce Walicek, President and CEO.

The purpose of today’s conference call is to supplement the information provided in our press release issued earlier today announcing the company’s financial results for the first quarter ended March 31, 2013.

Before we begin, I would like to remind you that various remarks we make on this call, including those about our projected future financial results, economic and market trends and our competitive position constitute forward-looking statements. These forward-looking statements and all other statements made on this call that are not historical facts are subject to a number of risks and uncertainties that may cause actual results to differ materially. All forward-looking statements are based on the company’s state as of today, Thursday, April 25th, 2013 and we undertake no obligation to update any such statements in respect to events or circumstances occurring after today.

Please refer to today’s press release, our annual report on form 10-K for the year ended December 31, 2012, and please see SEC files for descriptions of factors that could cause forward-looking statements to differ materially from actual results.

Additionally, the company’s press release and management’s statements during this conference call will include discussion of certain measures and financial information in GAAP and non-GAAP terms including gross margin, operating expenses, net loss and net loss per share. These non-GAAP measure include – exclude stock-based compensation expense and additional amortization of the pre-paid royalty. We use these non-GAAP measures internally to sense our operating performance. The company believes these non-GAAP measures provide a meaningful prospective on our core operating results and underlining cash flow dynamics, but we caution investors to consider these measures in addition to, not as a substitute for, nor superior to the company’s consolidated financial results as presented in accordance with GAAP.

Included in the company’s press release are definitions and reconciliations of GAAP to non-GAAP net loss and GAAP net loss to projected EBITDA which provide additional details.

Bruce will begin today’s call with a strategic update on the business. Afterwards, I will review our Q1 financial results and discuss our outlook for the second quarter of 2013.

Bruce Walicek

Thanks, Steve. Good afternoon, everyone, and thank you for taking the time to join us today.

Q1 2013 was clearly a disappointing quarter as revenues of 8.3 million came in below the range of guidance provided in our Q4 2012 conference call. The quarter was impacted by worse-than-normal seasonality due to a difficult demand environment, prolonging a severe inventory correction centered predominately in Japan, combined with an IP deal pushing out to Q2.

All other non-GAAP metrics came in within the range of guidance with OpEx below the range as we continue to focus on tight expense control and cash preservation measures; although all book-to-bills is great than one, reflecting an improving environment as customers recover and work through their inventory overhang.

During the quarter, we made significant progress with our co-development project to develop a high-integrated next-generation chip that will result in significant revenue and market share gain\ in 2014 and we are on track to execute and deliver our next crucial milestone in Q2.

Additionally, regarding our IP licensing business, we exited the quarter with the most robust licensing pipeline that we have seen to date for Pixelworks’ technology, which now validates the growing importance of our portfolio, advanced video display processing techniques.

In our PA Series product line, the large screen display applications, in Q1, we entered into the PA168 Video Display Processor, which is targeted for Ultra HD 4Kx2K applications. And after successful demonstrations, customers are in development for the new 4Kx2K models for 2013 and we will begin mass production shipments to Tier 1 OEMs this quarter and expect volume production to build during the second half of 2013.

The PA168 is designed to meet the performance environments of new high-resolution 4Kx2K screens and handle the most demanding and difficult video processing problems to create the best video quality in the industry.

As the leader in video quality, the PA168 raises the bar for immersive realism, and patented halo-free performance. And at the upcoming Computex show in Taiwan this quarter we will be demonstrating our next-generation video processing technology to improve the video quality of all screens to key industry partners and customers.

Pixelworks has a robust patent portfolio and we continue to focus on developing our intellectual property around the key areas of video processing for all displays.

We are seeing strong demand for our technology, driven by powerful secular trends as we enter the beginning of a massive shift to high resolutions. This shift is analogous to the nature -0 transition from standard resolution CRT analog displays to high-definition flat panel digital displays but much broader.

Resolutions are increasing across stationary and mobile displays alike, driven by the capability of new technology to packing an increasing number of pixels into less space. For example, more and more tablets, phones and ultrabooks are moving to full HD, 1080p displays with 400 pixels per inch, creating a wave of products with increasing resolutions and consumers are using these products to watch video, which is clearly the new killer application. As the influence of the three megatrans of higher resolution, more video content and more opportunities to view that content intersect, the quality of the visual user experience will increasingly become a key element in product quality and brand differentiation as higher resolution implies, any problems become more noticeable and consumers will prefer an experience of similar quality and fidelity to the high-resolution screen they’re used to watching.

All of these issues point to the need for new innovative approaches for video processing that will tackle these critical problems while also taking into account the issues of size, heat and power consumption.

In our projection product line, our Topaz series continued it’s market penetration in Q1 with new design wins for our PWC858, targeted for DLP projectors. And during the quarter, we’ve launched our View Magic Solution, designed to offer wireless connectivity to projectors for mobile devices such as tablets, mobile phones and ultrabooks. We introduced our Officeviewer solution in partnership with Access that allow projectors to directly open documents from a USB stick or network locations. And we demonstrated Topaz with [inaudible] capabilities to enable multiple projectors to seamlessly join together to create a very large viewing area for applications such as visual signage, media walls and education.

All these new solutions and value-added capabilities have been introduced to demonstrate Pixelworks’ commitment to innovative leadership in the projector market and ultimately grow our market share.

In closing, Q1 2013 was a difficult quarter, impacted by a continuing inventory correction driven by a weak macroeconomic environment and the push out of an IT deal into Q2. Despite a challenging Q1 with a robust IT licensing and pipeline, strong design win activity and new products ramping, we see topline growth resuming for the balance of 2013. We are the beginning of a massive trend to high resolutions and video consumption across all screens and as the technology leader and lastly becoming an industry, solely focused on creating the highest quality, visual user experience, we believe these trends are increasing the value proposition at our video display processing technology and we intend to focus our efforts to take advantage of them to maximize shareholder value.

Now, I’d like to turn the call over to Steve to review the financial details of the quarter.

Steve Moore

Thank you, Bruce. Revenue from the first quarter 2013 was 8.3 million compared to 13.69 in the fourth quarter of 2012 and 14.3 million in the year-ago quarter.

As Bruce mentioned, revenue declined in the quarter due to worse-than typical seasonality as a result of weaker-than-expected demand at Japanese customers. Revenue was further impacted by a push out in licensing revenue that we expected to be recognized in the first quarter.

What screwed up our first quarter revenue by market was 66% [inaudible] projection, 16% TV and panel and 18% embedded video display.

Licensing revenue was negligible during the quarter compared to approximately 2.1 million in the year-ago quarter.

Revenues from digital projection was down 4 million sequentially to approximately 5.5 million in Q1 as key customers, specifically in Japan, continued to eject inventories to low levels to meet the demand.

Revenue from TV and panel was down approximately 900,000 sequentially to 1.3 million in Q1 primarily due to seasonality’s impact on end-market demand and product transition to Ultra High Definition Televisions.

Embedded video display revenue in Q1 was approximately 1.5 million.

Non-GAAP gross profit margin was 49.7% in the first quarter compared to 49.9% in the previous quarter and 55.7% in the first quarter of 2012. The decline in gross profit margin from the previous quarter was largely due to reduced fixed cost absorption offset by favorable product mix during the first quarter of 2013.

Gross profit in the first quarter of 2012 was positively effective by the recognition of approximately 2.1 million in [inaudible]. Non-GAAP operating expenses were 8.9 million in the first quarter as we continued to be committed to strict expense management. This compares to 9.2 million in the prior quarter and 8.6 million in Q1 2012.

We continue to expect that we will complete all the milestones related to a previously-announced co-development agreement and realize the remaining 2.5 million of reimbursement credits during the course of 2013, which will reduce the operating expenses over the rest of the year.

[Inaudible] as a part of its co-development agree is expected to resolve in significant revenues beginning in 2014.

Adjusted EBITDA was negative 3.7 million in Q1 compared to negative 1.3 million in the fourth quarter of 2012. A reconciliation of adjusted EBITDA to GAAP net loss may be found in today’s press release.

On a non-GAAP basis we recorded a net loss of 4.7 million or $0.25 loss per share in the first quarter. This compares with a net loss of 2.8 million or $0.15 loss per share in Q4 and that loss of 148,000 or $0.01 loss per share in the first quarter of 2012.

Moving to the balance sheet, cash and marketable securities ended the quarter at approximately 12.6 million compared to 13.4 million for the quarter ended December 31, 2012. The company drew down 2.3 million on a pre-existing line of credit in Q1, demonstrating our access to liquid working capital for operations.

Other balance sheet metrics include day sales outstanding of 26 days at March 31 compared to 25 days at the end of the prior quarter and inventory churns of 6.5 times in Q1 compared to 7.3 times for the fourth quarter of 2012.

For the guidance, looking at Q2, we currently expect revenue to be in the range of 10 to 12 million. We expect Q1 to be the trough in revenue as our customers have turned to more normal ordering patterns during the second quarter and the sales of the TA168 in our Topaz family ramp in the second half of 2013.

We also believe that we will achieve profit from operations in the second half of 2013.

We expect gross profit margin in the quarter to range from 48% to 52% on a non-GAAP basis and 46 to 50% on a GAAP basis. We expect operating expense in the second quarter to range between 8 million and 9 million on a non-GAAP basis and 8.5 million and 9.5 million on a GAAP basis.

And finally, we expect to record a non-GAAP net loss of between $0.11 and $0.25 per share and on a GAAP basis, we expect a new loss per share of between $0.15 and $0.28.

That concludes my comments, we will now open the call for your questions.

Question-and-Answer Session

Operator

(Operator instructions). And your first question today is from the line of Krishna Shankar with ROTH Capital Partners.

Krishna Shankar - ROTH Capital Partners

Yes, on the revenue outlook for Q2, the sequential growth, is that driven by, you know, an entity in inventory correction in Japan? Can you talk about the relative trajectory of growth in the projector versus the TV business going into Q2?

Steve Moore

We do expect our projector companies to return to a more normal pattern in Q2. They’ve driven down inventories pretty dramatically over the last couple of quarters and we do expect to see, and are seeing the pattern of purchase orders coming in in a more normal sense.

On the television side, the larger ramp for 168, we expect to be in the second half of the year.

Krishna Shankar - ROTH Capital Partners

Okay. And then you expect the IP licensing deal that got pushed out, that will likely close in Q2 you think?

Steve Moore

We certainly do expect it to close in Q2.

Krishna Shankar - ROTH Capital Partners

Okay. And then you announced you had a number of design wins for the 4Kx2K TV platforms. Will that be driving the bulk of the revenues in the TV business in the second half of this year or can you give us a sense for what – how the TV business might shape up going into the second half?

Bruce Walicek

The 168, Kris, this is Bruce. The 168 will be a big component of that, although we’re continuing to see good demand for our 136 series of video processors as well.

Krishna Shankar - ROTH Capital Partners

Okay. And then, Bruce, you talked about some upcoming, I guess highlights in the announcements at Computex. Can you elaborate a little more on the technology platform that you were showing at Computex for addressing display technology in various screens?

Bruce Walicek

Yes. We’re planning for key customers and partners on demoing our technology for improving the displays of all screens and we showed a little bit of that at CES, at least some early results at CES and I think we’ll show robust results and demos at Computex here in June.

Krishna Shankar - ROTH Capital Partners

Great. Thank you and good luck.

Bruce Walicek

Thanks Krishna.

Operator

And ladies and gentlemen, this concludes the question-and-answer portion as there are no further calls in the queue. I’d like to turn the call back over to management for any closing remarks they’d like to make.

Bruce Walicek

Thank you for joining us today and we’ll look forward to talking to you on our Q2 2013 conference call. Thank you.

Operator

Ladies and gentlemen, thank you so much for your participation today. This does conclude our presentation and you may now disconnect. Have a great day.

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