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Executives

Bruce Walicek – President and CEO

Steven Moore – VP and CFO

Pixelworks, Inc. (PXLW) Q3 2011 Earnings Conference Call October 20, 2011 5:00 PM ET

Operator

Good day ladies and gentlemen, and welcome to the third quarter 2011 Pixelworks Inc earnings conference call. My name is Caris, and I will be your operator for today’s call. At this time, all participants are in a listen-only mode. Following management’s prepared remarks, we will conduct a question-and-answer session. This conference call is being recorded for replay purposes. I would now like to turn the call 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 third quarter ended September 30, 2011.

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, October 20, 2011, 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, 2010, and subsequent SEC filings for a description 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 discussions of certain measures and financial information in GAAP and non-GAAP terms, including gross margin, operating expenses, net income loss, and net income loss per share. These non-GAAP measures exclude restructuring charges, amortization of acquired developed technology, stock-based compensation expense, gain on sale of patents, gain on sale of marketable securities, and additional amortization of a prepaid 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, after which I will review our Q3 financial results and discuss our outlook for the fourth quarter of 2011.

Bruce Walicek

Thanks Steve. Good afternoon everyone and thank you for taking the time to join us today. Let me start out by making a few comments and observations about our third quarter 2011, and then Steve will follow with more details on our financial results.

The third quarter was a solid quarter of growth as revenues increased 11% sequentially, and came in at the midpoint of guidance. This increase was primarily driven by a rebound in our Advanced TV/Panel product line, as new customers ramped into volume production. TV/Panel products were 17% of revenue and were up 84% sequentially and 102% year over year. While overall book-to-bill was less than one reflecting customers providing less lead time on orders, the book-to-bill in TV/Panel products was 1.2 to 1, as we continued to have success with our PA series devices. Overall our new products continued their growth, rising 33% year over year, and up 21% sequentially. New products accounted for 56% of revenue during the quarter, up from 40% in the 3rd quarter of 2010, reflecting continued adoption and success across our product lines. Gross margin came in above the range of guidance and combined with topline growth and low end of the range operating expenses, resulted in positive EBITDA and positive cash flow from operations for the second quarter in a row.

On the Product front, we introduced and ramped into production, several new devices across our product lines. In our TV/Panel Product Line: We ramped our 5th generation Advanced Video Processor, the PA136, into high-volume production. The PA136 provides industry leading video quality, and incorporates a number of advanced features, such as real-time static and motion based 2D-to-3D conversion and Pixelworks’ innovative n2m technology which ensures smooth playback of low frame-rate Internet video. In the third quarter, we sampled the PA138, which includes all the improvements and features of the 136, but is targeted for advanced high end systems and support for the latest generation high speed panel interface. Our momentum in the Tier 1 segment of the Advanced TV market continued in the third quarter, as we penetrated another Top 5/Tier 1 TV OEM for our PA series products and these programs will begin shipping in production in the fourth quarter. Our penetration of the Top Tier customer base, confirms Pixelworks’ leading position in providing innovative solutions in video processing to this market. These customers are selecting Pixelwork’s products because, we provide superior video quality and innovative value added features at a competitive price/performance point, combined with the ability to deliver product in high volume to the highest quality standards.

In our Digital Projection product line: We delivered production devices of the PW878, the first member of the Topaz family, which are the most advanced and highly integrated devices for the digital projection market. The PW878 is the Industry’s first cost-effective 3D display processor that is designed for the business, education and mainstream home theatre projector markets. The Topaz family of products will cover the full range of the projector market, from entry level 2D education and business projectors, to high end 3D home theatre systems. This quarter we will sample our second device in the Topaz family, the PWC868 which is the non 3D/networked version of the Topaz family and offers the latest video processing technology, combined with extensive connectivity capabilities. Design win momentum continues to be strong for this product and in the third quarter we received key design commitments from Tier 1 customers for the PW878 and the PWC868, and we will be shipping volume production later this quarter.

Regarding what we are seeing in the Advanced TV market: The combined forces of sluggish demand, strained profitability, and decreasing time to market requirements, are driving brands to accelerate innovation and the introduction of new features and capabilities. This is driving the need for more high performance video processing, as new requirements such as, 4Kx2K resolutions, glasses free 3D, and passive 3D panel technology are becoming mandatory for next generation systems. These trends, combined with the move to outsourcing is continuing to drive the need for separate video processors and creating opportunity for Pixelworks. A notable and pronounced trend over the last few years that accelerated in the last quarter was the consolidation of competitors in the market segments we serve. Over the last several years, we have seen many competitors focused on our niche of the market either be acquired or exit. This trend accelerated in the last quarter as Zoran was acquired by CSR, IDTI video products were acquired by Qualcomm, eliminating a competitor in the separate Advanced TV video processor and projector chip market, and in the last few weeks, Broadcom and Intel have exited the market. This leaves Pixelworks as one of the last pure play companies focusing on this important market segment, and pursuing an innovative separate high end video processor strategy.

In closing, the third quarter was a solid quarter of growth driven by our TV/Panel products, and we generated positive EBITDA and overall cash flow. We achieved a number of key new product milestones with the launch of our next generation Advanced Video Processor, PA138, and the introduction of the PWC868 which is the second device in our Topaz family. And we continued our success with the Top Tier customer base, as we penetrated an additional Tier 1/Top 5 TV OEM manufacturer for our PA series products and received design commitments from Tier 1 customers for our Topaz family of projector products.

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

Steve Moore

Thank you, Bruce.

Revenue in the third quarter 2011 was $17.4 million, up 11% from the previous quarter, driven by record revenue for our new products. Revenue in the third quarter was down 4% compared to the same quarter a year ago as the digital projection market continued to rebound from an inventory correction earlier in the year.

The split of our third quarter revenue by market was: 73% digital projection, 17% TV and panel, 10% embedded video display. The revenue split between new and current products during the quarter was 56% new and 44% current.

Revenue from digital projection, which includes sales of our chips targeted at the advanced digital projection market, was approximately $12.7 million in the third quarter, up 3% sequentially and driven by increased sales at a number of key customers.

Revenue from TV and panel, which includes sales of our chips targeted at large screen flat panel display market, was approximately $3.0 million in the third quarter, up 84% from the prior quarter and up 102% from the year-ago quarter. This growth in quarterly revenue in our advanced TV product line was primarily the result of the continued ramp of previous design wins for our PA series chips at tier-one manufacturers.

Embedded video display revenue in the third quarter was $1.7 million, or approximately flat compared to the second quarter.

For the fourth quarter of 2011, we expect revenue to be in the range of $17 million to $18 million.

Non-GAAP gross profit margin was 49.4% in the third quarter, compared to 48.3% in the previous quarter and 46.1% in the third quarter of 2010. Increased overhead absorption and a continued focus on product cost improvement drove the increase in gross margin during the quarter.

We expect gross profit margin in the fourth quarter of 2011 to range between 47% to 49% on a non-GAAP basis and 46% to 48% on a GAAP basis. Pixelworks' gross margin is subject to variability based on changes in revenue levels, product mix, startup costs, and the timing and execution of manufacturing ramps as well as other factors.

Non-GAAP operating expenses were $9.1 million in the third quarter which is at the low end of our guidance of $9.0 million to $10.0 million due to the timing of expected development expenses. Our operating expense levels continue to reflect our ongoing commitment to investing in new product development and will continue to vary based on the timing of future development activities. For the fourth quarter of 2011, we expect operating expenses to range between $9 million and $10 million on a non-GAAP basis, and $9.5 million to $10.5 million on a GAAP basis.

Adjusted EBITDA was a positive $734,000 in the third quarter, compared to $101,000 in the second quarter of 2011. A reconciliation of adjusted EBITDA to GAAP net income may be found in today's press release.

On a non-GAAP basis we recorded a net loss of $470,000, or a $0.03 loss per share, in the third quarter. This compares with net loss in the prior quarter of $1.4 million, or a $0.09 loss per share and non-GAAP net income of $172,000, or $0.01 per share in the third quarter of 2010.

Looking forward to the fourth quarter of 2011, we expect non-GAAP results of between net loss of $0.02 and $0.14 per share. On a GAAP basis we expect a net loss per share of between $0.05 and $0.18.

Moving to the balance sheet, cash and marketable securities increased during the quarter to $17.0 million, from $16.8 million at June 30, 2011. At quarter-end the Company had no long-term debt and a zero balance on its short-term line of credit.

Other balance sheet metrics include day sales outstanding of 23 days at September 30, compared with 27 days at June 30, and inventory turns of 7.5 times in the third quarter compared to 6.9 times at the end of the second quarter.

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

Question-and-Answer Session

[Q&A]

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Source: Pixelworks CEO Discusses Q3 2011 Results - Earnings Call Transcript (Prepared Remarks)
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