Pixelworks' CEO Discusses Q2 2013 Results - Earnings Call Transcript

Aug. 6.13 | About: Pixelworks, Inc. (PXLW)

Pixelworks, Inc. (NASDAQ:PXLW)

Q2 2013 Earnings Conference Call

August 6, 2013 5:00 PM ET

Executives

Steven L. Moore –Vice President and Chief Financial Officer

Bruce A. Walicek – President and Chief Executive Officer

Analysts

Krishna Shankar – ROTH Capital Partners LLC

Operator

Good day, ladies and gentlemen, and welcome to the Second Quarter 2013 Pixelworks Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. (Operator Instructions)

I would now like to turn the conference over to your host for today, Mr. Steve Moore. Please proceed sir.

Steven L. 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 second quarter ended June 30, 2013.

Before I begin, I would like to remind you that various remarks that 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 beliefs as of today, Tuesday, August 6, 2013, and we undertake no obligation to update any such statements to reflect 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 subsequent SEC filings for descriptions of factors that could cause forward-looking statements to differ materially from actual results. Additionally, the company’s press release and the 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 measures exclude stock-based compensation expense and additional amortization of the pre-paid royalty. We use these non-GAAP measures internally to assess our operating performance.

The company believes these non-GAAP, GAAP measures provide a meaningful perspective on our core operating results and underlying 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 adjusted EBITDA, which provide additional details.

Bruce will begin today’s call with a strategic update of the business. Afterwards, I will review our 2Q financial results and discuss our outlook for the third quarter of 2013.

Bruce A. Walicek

Thanks, Steve. Good afternoon, everyone, and thank you for taking the time to join us today. Q2 2013 revenues of $9.6 million were up 16% over Q1, slightly below the range of guidance provided on our Q1 2013 conference call, as the slow environment experienced in Q1 extended into Q2, as customers finished working through their inventory overhang. While the quarter started on a sluggish note, overall, book-to-bill is greater than one, reflecting a steadily improving environment and customers beginning to ramp the PA168, our next generation video processor into volume production.

All other non-GAAP metrics came in within the range of guidance and we made significant progress on our previously noted co-development project that will result in market share gains in 2014. Based on an improving environment, ramp of the 168, and success with our licensing initiatives, we expect Q3 revenues to be up more than 50% and see non-GAAP profitability for the balance of 2013.

As mentioned last quarter, we continued to experience strong demand for our technology as we exited Q2 with a robust licensing pipeline, which points to the growing importance of our portfolio of advanced video processing technologies. To that point, in the current quarter, we captured a significant license for our advanced video technology as noted in our 8-K release today, which is a major validation of our technology and expertise and reinforces our thesis regarding the growing importance and need for video processing to improve the visual experience across all screens.

In our PA Series product line, for large screen display applications, in Q2, we began mass production shipments of the PA168 Video Display Processor, which is targeted for Ultra HD applications and expect volume production to build during the balance of 2013. The PA168 is designed to meet the performance requirements of new ultra high resolution screens by handling the most demanding and difficult video quality problems, and it includes our patented halo-free technology, to create the best video quality in the industry.

Pixelworks has a robust portfolio of over a 120 issued patents and we continue to focus on developing and advancing our intellectual property around key areas of next-generation video processing. As noted in last quarter’s conference call, at the Computex show in Taiwan in June, we performed technology demonstrations to key industry partnering customers of our next-generation technology to improve the video quality of Tablets and Ultrabooks running Windows 8.

With the increase of resolutions and media consumption across all screens, users are demanding the best visual experience for their content. Traditionally, this type of video display processing has been applied to large screens, but by utilizing an innovated new approach in 2014, Pixelworks will bring the highest display quality to all screens mobile and stationary alike. Pixelworks has always been about video quality and we believe the highest resolution Tablets and Ultrabooks are ideal platforms for the very best video processing technology.

We are seeing strong demand for our technology driven by powerful trends as we entered the third wave of video processing requirements. This shift is much broader and more pervasive than the last major transition, from standard resolution for AVI CRT analog displays to high-definition flat panel digital displays. It will impact all aspects of the video capture, creation and delivery ecosystem, as the industry enters a period of massive change and innovation, remaking the concept and used model of TVs, PCs and phones, as these platforms converge.

In this third wave of requirements, we see several key trends that play to our strength. First, resolutions are increasing across all displays and we are at the beginning of an explosive transition to high resolutions driven by the capability of display manufacturing technology to pack an increasing number of pixels into less space. Displays with over 300 pixels per square inch are currently coming to market, enabling a wave of products such as tablets, phones and ultrabooks that are just now moving to Full HD 1080p, creating a growing number of high volume products with increasing resolutions.

Secondly, video consumption is increasing across all screens as content consumption, used models change, and TV Everywhere becomes a reality. Industry research all points to the same thing, across all these screens, video content consumption is going up and is being consumed on a wide variety of new platforms. A good example of this trend is observed in our recent DisplaySearch study, netting at eight and 10 global smartphone and tablet owners, the multiple screens while watching TV. At ADI Research notes primarily one-third of U.S. telco and cable TV households are expected to access multiscreen or TV Everywhere services by the end of 2013.

Also Cisco notes in their 2012 Visual Networking report, that by 2017, video will be 80% to 90% of all types of global consumer Internet traffic. In this new era, video [digital] application and with more screens delivering high resolution and network, the number of pixels to be processed will continue growing exponentially. And finally, as the three megatrends of high resolutions, more video content and more opportunities to view that content collide, the quality of the visual user experience is becoming a key element in product quality and brand differentiation. Higher resolution implies that video quality problems such as halo and judder become more noticeable with the user.

Removing these video quality issues requires considerable processing performance. Even as designers are seeking more computer power, just to continue the race to ever-smarter products. To stay within the balance of size and power consumption, while not becoming a drag on overall system performance, innovative approaches to high efficiency video processing are required. Pixelworks has a 15-year legacy of solving the most difficult video quality problems for large screens and will focus on applying our technology, IP and expertise, to solving the video quality challenges of all screens, and we are in the best position to deliver the innovative solutions customers need.

In our projected product line, during the quarter, we announced our VueMagic Mobile Presenter app with our partner Sony, who is a leader in the projection display market. Our VueMagic app is designed to offer wireless connectivity to projectors based on our Topaz platform to mobile devices such as tablets, mobile phones and ultrabooks. With the explosive growth of tablets and smartphones, mobile connectivity is becoming a key feature for next-generation projectors. Sony is a valued customer and partner for our Mobile Presenter development effort, and together, we are enabling mobile connectivity with the projection display market.

All these new solutions and value added capabilities have been introduced to drive market share gains across the projector market and demonstrate Pixelworks’ commitment to innovative leadership.

In closing, while future growth is muted, we see revenues up more than 50% in Q3 and non-GAAP profitability for the balance of 2013, driven by an improving environment, ramp of the PA168 and success in our licensing business. We demonstrated our next-generation technology at Computex to bring the highest quality video to Windows 8 Tablets and Ultrabooks, and will bring innovative solutions to market in 2014.

We are at the beginning of a massive trend with high resolutions and video consumption across a growing number of displays exponentially increased the amount of pixels to be handled and driving the need for innovative approaches to high efficiency video processing. And as the technology leader and independent company in the industry solely focused on creating the highest quality visual user experience, we believe these trends are increasing the value proposition of our video display processing technology and we intend to focus our efforts to take advantage of it.

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

Steven L. Moore

Thank you, Bruce. Revenue for the second quarter 2013 was $9.6 million, compared with $8.3 million in the first quarter of 2013, and $15.5 million in the year ago quarter. As Bruce mentioned, the sequential increase in revenue was due to increased sales of chips for both projectors and TVs. Revenue declined compared to the prior year quarter primarily as the result of lower licensing revenue during the second quarter.

The split of our second quarter revenue by marketwise; 70% digital projection, 17% TV and panel, 13% embedded video display. Licensing revenue was negligible for the quarter. Revenue from digital projection was up over $1.2 million sequentially to approximately $6.7 million in Q2 as our customers’ demand began to improve in spite of continued macroeconomic challenges and as customers continued to balance their inventories.

Revenue from TV and panel was up nearly $300,000 sequentially to $1.6 million in Q2, primarily due to the beginning of the production ramp of our PA168 for Ultra High Definition televisions. Embedded video display revenue in Q2 was approximately $1.2 million. Non-GAAP profit margin was 49.7% in the second quarter, essentially flat compared to 49.7% in the previous quarter and 50.6% in the second quarter of 2012.

Non-GAAP operating expenses were $8.7 million in the second quarter of 2013, compared to $8.8 million in the prior quarter and $8.1 million in Q2 of 2012. Second quarter 2013 research and development expenses included costs for writing down reimbursement credits for the previously disclosed co-development agreement, which resulted in higher operating expenses year-over-year.

We expect that we will complete milestones related to this co-development agreement and realize $2.5 million of reimbursement at credits during the remainder of 2013, which should reduce operating expenses in the second half of the year, which was created as a part of the co-development agreement is expected to result in significant revenues beginning in 2014.

Adjusted EBITDA was a negative $2.9 million in Q2 2013, compared to a negative $3.7 million in the first quarter of 2013 and positive $1 million in Q2 2012. The reconciliation of adjusted EBITDA to GAAP net loss maybe found in today’s press release.

On a non-GAAP basis, we’ve recorded a net loss of $4.2 million or $0.23 loss per share in the second quarter of 2013. This compares with the net loss of $4.7 million or $0.25 loss per share in Q1 and a net loss of $300,000 or $0.02 loss per share in the second quarter of 2012.

Moving to the balance sheet, cash and marketable securities ended the quarter at approximately $11.2 million compared to $12.6 million at the end of the previous quarter. The company had a balance of $3.5 million on its preexisting line of credit at the end of Q2. Other than, our balance sheet metrics include days sales outstanding of 25 days at June 30, compared with 26 days at the end of the prior quarter and inventory turns of 8.8 times in Q2 compared to 6.5 times for the first quarter of 2013 guidance.

Looking at Q3, we currently expect revenue to be in the range of $14 million to $16 million. We expect gross margins for the quarter to range between 59% to 63% on a non-GAAP basis and 58% to 62% on a GAAP basis. We expect operating expenses in the third quarter to range between $6.5 million and $7.5 million on a non-GAAP basis and $7 million to $8 million on a GAAP basis.

And finally, we expect to record a non-GAAP net profit of between $0.02 and $0.17 per share. And on a GAAP basis, we expect a net loss per share of between $0.01 and a net profit of $0.14 per share. This concludes my comments. We’ll now open the call for your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Krishna Shankar from ROTH Capital. Please proceed.

Krishna Shankar – ROTH Capital Partners, LLC

Yes. Bruce and Steve, congratulations on the good outlook, with your guidance for the September quarter, does that imply a sequential growth in the projector, TV, licensing and embedded business. Can you talk about the constituents for growth in the September quarter?

Bruce A. Walicek

Yes, Krishna. The expectation for Q3 would include growth in projector, television and license.

Krishna Shankar – ROTH Capital Partners LLC

Okay. and then can you give us a little more details on the 8-K that you filed with respect to the licensing arrangement. how much can you talk about that?

Bruce A. Walicek

Krishna, as you know, we have a policy of not discussing our customers and partners in turn. So the information we provided on the 8-K is the granularity we’ll be providing about this license deal.

Krishna Shankar – ROTH Capital Partners LLC

Okay. and then with respect to the previous co-development agreement, you’re still targeting revenues from that co-development agreement is that in first half 2014 or second half 2014?

Bruce A. Walicek

We would see the mass production commencing in the first of 2014, Q2 and then ramping very heavily through the balance of the year.

Krishna Shankar – ROTH Capital Partners LLC

Okay. and with respect to your comments, Bruce, on the application of your technology to the mobile market, do you envision sort of a variety of potential deals in terms of revenues, be it licensing, joint development product, I mean can you talk about the revenue opportunities in the mobile market going forward?

Bruce A. Walicek

Well, on the call, I noted that we will be bringing solutions to market in 2014. and just to put it in context, our Computex announcement, which was a significant demonstration of our technology as we develop products. we wouldn’t see releasing products in the first part of 2014 that would go into production in 2014, so that’s sort of the time horizon now. I’ve talked about our general strategy across all markets, licensing, we lead with Silicon, but licensing is a component of our go-to-market strategy. and as it makes the opportunity makes sense and if it’s our strategic framework for engagement with our major customers.

Krishna Shankar – ROTH Capital Partners LLC

Okay. and then in projectors, you had a relatively good June quarter, despite the macro, do you see the macro improving and the up tick of your new projector platforms leading to good growth there for the foreseeable future?

Bruce A. Walicek

We do see the conditions improving in the market. Projectors are largely driven by education spending, and the growth areas in that market had been in the emerging markets. So the emerging markets slowed down at the latter part of 2012, especially China, sort of slowed the projector market down, but we do see it’s improving and we’re seeing an improving trend going into Q3.

Krishna Shankar – ROTH Capital Partners LLC

Great. And my final question on the PA168, will that be kind of the main platform for all the Ultra High Def TVs or it appears that there is going to be a fair number of lower price kind of mass market Ultra High Def TVs, so do you anticipate variations of your product for different price segments of the Ultra High Def market?

Bruce A. Walicek

Yes. we can approach the 60 hertz 4Kx2K market, which is the low-end market that you’re referring to and it largely is seeing a lot of traction and up tick in China, and we’re approaching that market with the PA168. so in the case of the 120 hertz implementation today, you would use two PA168s, we have single chip for the 60 hertz low-end market.

Krishna Shankar – ROTH Capital Partners LLC

Great, thank you and congratulation for the outlook.

Bruce A. Walicek

Thank you, Krishna.

Operator

There are no further questions in queue. I would now like to turn the call back over to management for closing remarks.

Bruce A. Walicek

Thank you for joining us today, and we’ll look forward to updating you on our Q3 2013 conference call. Thank you.

Operator

That concludes today’s conference. Thank you for your participation. You may now disconnect. have a great day.

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