Pixelworks, Inc. (NASDAQ:PXLW)
Q3 2013 Earnings Conference Call
November 7, 2013 17:00 PM ET
Steven L. Moore – Chief Financial Officer and Vice President
Bruce A. Walicek – President and Chief Executive Officer
Good afternoon and welcome to Pixelworks Incorporated Third Quarter 2013 financial results conference call. At this time, all participants are in a 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 call is being recorded today, Thursday, November 7, 2013. I would now like to turn the conference over to Mr. Steve Moore.
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 third quarter ended September 30, 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 beliefs as of today Thursday, November 7, 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 subsequent SEC filing 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 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 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 income loss and GAAP net income loss to adjusted EBITDA, which provide additional details.
Bruce will begin today’s call with a strategic update on the business. Afterwards, I will review our Q3 financial results and discuss our outlook for the fourth quarter of 2013.
Bruce A. Walicek
Thanks Steve. Good afternoon, everyone and thank you for taking the time to join us today. Q3 2013 revenues of $15.3 were up 60% of Q2, driven growth in our product business as well as success in our licensing initiative. We returned to profitability as all other non-GAAP metrics came within the range of guidance and we generated positive EBITDA cash flow and delivered EPS of $0.10.
Overall book-to-bill was greater than $0.01, reflecting success in our licensing business and an improving environment as customers ramps the PA168 our next-generation video processor into volume production. Q3 was an important quarter on a number of fronts, as we achieved several major milestones with significantly improved our business and financial position.
During the quarter, we closed $10.3 million license and services engagement for our advanced video technology. This is significant milestone and validation of our technology and expertise, and reinforces our thesis regarding the growing important and need for video processing.
We also completed $10 million equity offering to further strengthen our balance sheet and significantly improve the financial position of the Company, and we delivered initial samples of the advance chip we are developing under our co-development partnership. This is an important milestone of this project and we are on track for volume production and the first half of next year, which we believe our result and significant market share gains in 2014.
As mentioned last quarter we continue to see strong demand for our technology, which tends for the growing importance of our portfolio of advance video display processing techniques and we continue to experience a robust licensing pipeline. Pixelworks had a 15 year legacy of innovation in video with the portfolio of over a 120 issued patents and we continue to focus on developing and advancing our intellectual property around the key areas of next-generation video processing.
Our sixth generation technology that powers the PA168 video processor, handle the most demanding and difficult video quality problems and includes our patented halo-free technology. The PA168 is a mass production and is target for large screen Ultra HD applications to help made most of this new revolution standard by delivering the best video quality in the industry and TVs based on the PA168 are doing great reviews.
Traditionally, this type of video processing has typically then applied to large screens, but in 2014 Pixelworks will bring our industry leading video expertise and innovation to all screen and we are on track to deliver products in the first half of 2015.
At CES in January, we will demonstrate our seventh generation technology designed to improve the video display quality of mobile applications with these industry partners and customers. With the increase of resolution to immediate consumption rising across all streams, users are demanding the best visual experience for their content regardless of the screen they are watching it on.
As manufactures buy for market share, resolution is the key product feature in brand differentiation and the superior video picture quality Pixelworks technology will provide will be a powerful advantage. Resolutions are rising for every stream and the devices with the highest resolutions are setting the bar for every other device.
Today, large screens are just starting to move to 4kx2k ultra HD resolutions with mobile screens just now moving to HD. As an indication of things to come, LG display recently announced a quad HD mobile display of 5.5 inches with 2kx1k resolution and 538 pixels per range, four times the resolution of a mobile HD display. And this Japan Display announced a 12.1 inch display with 4k resolution and 365 pixels per square inch.
These are just a few of the data points confirming that we are just the beginning of a massive wave of resolution increases across all screens. Video is a key element driving the transformation of these devices as more and more video is created and distributed, more devices are capable of displaying video and more people are consuming video on an expanding variety of strengths are viewers are now watching multiple streams at the same time as well.
With more streams delivering high resolution than ever, the number of pixel to be processed will continue to grow exponentially. The one contributing factor is the steady increase in camera solutions with some cell phone cameras now at 41-megapixels, thus guaranteeing users will be creating more and more high resolution images and video.
As mobile devices become more intelligent to stay within the balance of sight and power consumption constraints, innovative approaches to high efficiency video processing are needed so they are creating compelling video quality is not the kind of drag on overall system performance.
Pixelworks has a track record of solving the most difficult video quality problems for large screens and because this is all we do and because we do it better than anyone, we are in the best position to deliver the innovative solutions customers need to solve the video processing challenges at all screens.
In our projection product line, last quarter, we announced our VueMagic Mobile Presenter initiative with our partner Sony, who is the leader in the projection display market. Mobile connectivity is becoming a key feature for next generation projectors, especially for the SKC market and our VueMagic app is designed to offer wireless connectivity to mobile devices, associate tablets, smartphones and ultrabooks, to projectors based on dual priced platform. Design and momentum continues to be robust and if you imagine you got additional value add to our customers to base their products on forecast.
During the quarter, five new tailwind projector customers committed to using VueMagic and will be rolling off in coming quarters, continuing the momentum in our VueMagic.
Pixelworks is committed to innovative leadership in the projector market and all of these new solutions and value added capabilities that have introduced to continue to please our customers and drive market share.
In closing, Q3 2013 was a significant quarter as we return to growth and profitability and it seem major milestones to significantly improve our business and financial position as we capture a significant licensing engagement, delivered initial samples at our co-development shift and we completed a $10 million equity offering with significantly strengthened our balance sheet.
AT CES in January next year, we will demonstrate our seventh generation technology for mobile applications and we are on track to deliver price in the first half of 2014. And we’re at the beginning of a massive trends as high-resolutions and video consumption across the growing number of displays, exponential increased the amount of pixels to the – and driving the need for innovative approaches to high-efficiency video processing.
Increasing the value proposition of our technology and expertise, with the recent achievement at our number of key milestones, a robust pipeline of customer engagements and licensing opportunities and mobile products on the horizon, we are excited about the potential for Pixelworks and well positioned for the future.
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 third quarter 2013 was $15.3 million compared to $9.69 million in the second quarter of 2013 and $16.3 million in the year ago quarter. As Bruce mentioned, the sequential increase in revenue was due to the recognition of notable licensing revenue during the quarter as well as further ramping of our PA168 for the advanced TV market.
Third quarter revenue was down compared to a year ago quarter primarily as a results of lower chip sales. The split of our third quarter chip revenue by market was 63% digital projection, 27% TV and panel and 10% embedded video display. Licensing revenue was $4.8 million in the third quarter compared to effectively no licensing revenue during the previous quarter.
Revenue for digital projection in Q3 was approximately flat quarter-over-quarter at $6.6 million. Revenue from TV and panel grew for the second consecutive quarter increasing $1.2 million sequentially to $2.8 million in the third quarter. As previously mentioned, the strength was largely driven by the continued ramp of our PA168 for Ultra High Definition Televisions. Embedded video display revenue in Q3 was approximately $1 million.
Non-GAAP gross profit margin was 61.6% in the third quarter compared to 49.7% in the previous quarter and 49% in the third quarter of 2012. The increase in gross margin during the quarter was primarily driven by this higher margin licensing revenue recognizing the quarter.
Non-GAAP operating expenses were $7 million in the third quarter of 2013 compared to $8.7 million in the prior quarter and $7.7 million in Q3 2012. Operating expenses for the third quarter of 2013 as well as the year ago quarter include a reimbursement to research and development expense that’s a result of achieving certain milestones related to our perviously announced co-development agreement.
As we discussed last quarter, the chip created as a part of this co-development agreement is expected to result in revenue beginning in the first half of 2014. Adjusted EBITDA was $3.5 million in Q3, 2013 compared to a negative $2.9 million in the second quarter of 2013 and a positive $1.4 million in the third quarter of 2012.
A reconciliation of adjusted EBITDA to GAAP net income loss will be found in today’s press release. On a non-GAAP basis, we recorded net income of $2.1 million or $0.10 per diluted share in the third quarter 2013. This compares with a net loss of $4.2 million or $0.23 loss per share in Q2 and non-GAAP net income of $300,000 or $0.2 per diluted share in the third quarter of 2012.
Moving to the balance sheet, during the quarter Pixelworks successfully completed an equity offering totaling approximately 3 million shares at a price of $3.50 per, which generated net proceeds of approximately $9.6 million. Cash and marketable securities ended the quarter at approximately $21.5 million compared to a $11.2 million at the end of the previous quarter. The Company had no debt and zero balance on its preexisting line of credit at the end of Q3, compared with the balance $3.5 million at the end of the previous quarter.
Other balance sheet metrics include days sales outstanding of 15 days at September 30, compared to 25 days at the end of the prior quarter and inventory turns of 11.2 times in Q3, compared with 8.8 times in the second quarter of 2013. The recognition of higher licensing revenue positively impacted both DSO and inventory turns during the September quarter.
Guidance, looking ahead to Q4, we currently expects revenue to be in the range of $14 million to $15 million. We expect gross profit margin in the quarter to range between 55% to 58% on a non-GAAP basis and 54% to 57% on a GAAP basis.
In terms of operating expenses, we expect to complete the final milestone related to our co-development agreement and realized approximately $1.8 million of reimbursement credits during the fourth quarter of 2013, which will again reduce quarterly operating expenses. As such we expect operating expenses in the fourth quarter to a range between $7 million and $8 million on a non-GAAP basis and $7.5 million and $8.5 on a GAAP basis.
And finally, we expect to record a non-GAAP net profit of between break-even in $0.07 per share and we expect our GAAP results team a range between $0.04 of loss per share and $0.04 profit per share.
That concludes my comments. We will now open the call for your questions.
Bruce A. Walicek
Yeah, I’m here. Can you hear me?
Bruce A. Walicek
Yes, we can hear you.
Yes, congratulations on the good results. Could you give me again, I missed the revenue mix by product line for the third quarter? Could you just give the revenue mix again by projectors TV panel embedded in licensing?
Steven L. Moore
Sure, for the chip revenue 63% projection, 27% TV and panel and 10% embedded video. The licensing revenue was $4.8 million projection was $6.6 million, TV was $2.8 million and embedded video was $1 million.
Okay, all right. And then with respect to guidance for the quarter you said revenues $14 million to $16 million, will the fourth quarter also see I guess continuing you’ll recognizing that licensing deals that you got last quarter, there will be one more incremental that recognized in the fourth quarter?
Steven L. Moore
Yes, as I said last quarter, we expected higher license for most all of the license and services to be recognized over six to nine months. We do expect to recognize the rest of the license and services over the next six months.
Okay. And then Bruce you talked about a healthy pipeline of customer engagement and you said you capture significant licensing engagement. Is that an additional new licensing engagement this third quarter or where you just referring to the one that you had last quarter. Can you talk about the pipeline and the licensing engagement?
Bruce A. Walicek
No, I’m referring to the one that we actually booked in Q3.
Oh, I see.
Bruce A. Walicek
We 8-K-ed that that was actually captured in the third quarter.
I see, okay. All right, so and then you already captured at in the third quarter and then you recognized one-third of those revenues in the third quarter, right?
Steven L. Moore
Well, we had only – we’ve based on the – what we said in the 8-K was to be recognized over the next six to nine months. So that was first piece of it.
Okay. And then can you talk a little bit about the pipeline, what types of customer engagements and applications and how that looks?
Bruce A. Walicek
Sure, I don’t give a whole lot of granularly into who is in the pipeline and what these look like. I would say though we’ve been continuing to see opportunities for licensing our video technology on a number of fronts, continued to be very healthy and we’re seeing a healthy pipeline going forward as well.
Okay. And then given that your co-developed custom chip that you finished development here in Q4 and revenues in the first half of 2014; could a new product ramp like that half year seasonality or you would still expect some seasonal impact in the first quarter?
Bruce A. Walicek
Yes, we do expect normal seasonality in the first quarter. We haven’t given any guidance to that, but we don’t know of anything that this is going to change the normal patterns within the projector market or the TD market. The co-development will start to ramp in the first half of that – the sales of that chip begin to ramp in the first half of 2014 and have a larger impact in the second half of 2014.
Okay. And then, Bruce, can you talk about the ultra-high-def TV customer, new product introductions, I’m sure we’ll see a lot more of this product to CES and what customers and designments that you have in that area?
Bruce A. Walicek
Yes, I think, you are correct. We’ll see a lot of 4K/2K at CES this year. I think it’s certainly at the beginning of the market, and a lot of attentions being paid to it. I think, we only - I think – we’ve actually talk about was LG. The other ones we sort of haven’t discussed their names. Typically most customers are okay with us, making a press release and talking about it, we honored their confidentiality and say to what is. But if we step back a couple of quarters, I think we made a press release nothing – we pointed to that in previous conference calls before.
Okay. Thank you, and then finally I had just one final question. Can you talk about you chip development process for the tablet and mobility market; you said you will have new chip? Revenues also targeting that segment where you stand in that development and then you…
Bruce A. Wallace
Yes, so I think what I said was really you would see product from us in the first half of 2014, and we are on track to execute to that. If we were, we’re well down that path. It is a stage and we’re anticipating a demonstrations at a very D technical level coming up to CES and like I said, we’ve introduced products in the first half of 2014.
Great, thank you.
Bruce A. Walicek
All right. Thank you, Krishna. Okay, I’d like to thank everyone for joining us today and we’ll look forward to discussing the results of our Q4 2013 with you early next year. Thank you.
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