Pixelworks' (PXLW) Interim CEO Steve Domenik, on Q4 2015 Results - Earnings Call Transcript

| About: Pixelworks, Inc. (PXLW)

Pixelworks, Inc. (NASDAQ:PXLW)

Q4 2015 Earnings Conference Call

February 4, 2016 17:00 ET

Executives

Steve Domenik - Interim CEO

Steve Moore - CFO, VP

Todd DeBonis - COO

Analysts

Krishna Shankar - ROTH Capital

Jaeson Schmidt - Lake Street Capital

Charlie Anderson - Dougherty & Co.

Jorge Rivas - Craig-Hallum

Operator

Good day, ladies and gentlemen and welcome to the Pixelworks, Inc., Fourth Quarter 2015 Earnings Conference Call. I'll 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'd 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 Stephen Domenik, Interim CEO and Todd DeBonis, COO.

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 fourth quarter and fiscal year ended December 31, 2015.

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, February 4, 2016, 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, 2014 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 loss and net loss per share. These non-GAAP measures exclude stock-based compensation expense and an 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 loss and GAAP net loss to adjusted EBITDA, which provide additional details.

Let me now turn the call over to Pixelworks Interim CEO, Steve Domenik. Steve, please go ahead.

Steve Domenik

Thank you, Steve. Good afternoon everyone and thanks for joining us on today's call.

Let me first begin with the news released earlier this week in which Pixelworks announced the resignation of Bruce Walicek as President and CEO. Bruce has been with Pixelworks for the past eight years and served as a Board Member since 2005. Over that time, Bruce has worked tirelessly to reposition Pixelworks into a leading provider of video display processing technology. I want to thank Bruce -- I want to personally thank Bruce for his dedication and commitment to the company throughout his tenure as CEO and also as a Board Member. I'd like to thank him to be understood as sincere and not as the usual mandatory perfunctory comment.

As mentioned in Monday's release, Bruce will remain as consultant to the company for up to six months and will be available to assist in the transition once a permanent CEO has been named.

Also mentioned in Monday's press release, the Board has already started to search process for identifying and selecting a new CEO, until that time I will assume the duties and serve as Interim CEO. As many of you know, I've been Director -- I've been a Director on Pixelworks' Board since August 2010. And act as a strategic consultant to the company in 2013. I'm very familiar with the business and industry and have a vested interest in Pixelworks success.

One thing that I want to reiterate to our shareholders today is that the CEO transition is in no way an indication of a lack of belief or confidence in the future of Pixelworks. The Board as well as the entire management team remain fully committed to executing on our growth and profitability initiatives. In fact, we are focused more than ever on successfully executing our mobile product strategy and bringing audition to fruition.

I also want to reiterate that these actions do not represent a shift away from our existing strategy. If anything, we are intensifying our efforts to capture the full potential of our technology and products. Our continuing interest is to create value for shareholders. We are taking this opportunity to expand our leadership talent with the appointment of Todd DeBonis as Chief Operating Officer.

Todd joined Pixelworks after a very successful career as Vice President of Global Sales and Strategic Development at TriQuint Semiconductor where he was a key contributor to the company's rapid growth from $300 million to $1.1 billion in sales. Todd has close to 30 years of experience. He is a seasoned executive with expertise spanning strategy, sales and operations across global organization. I will let Todd speak more about his background and why he joined Pixelworks in a moment. But let me first expand on some of the other actions we are taking to strengthen our sales initiatives.

I'm placing a strong emphasis on increasing our professional sales capabilities. Pixelworks has always been a company driven by innovation and is always remained on the leading edge with this technology. As a result, we have a very successful talented technical team in place including the industries top video engineers to design and develop products that will continue to keep Pixelworks at the front of the technology curve.

Selling into the mobile space is a complicated process and requires a different expertise and professional sales capabilities to secure the business and close deals. Todd would be a key part of leading that change from both the sales and operational perspective.

In an effort to grow our sales capabilities, we are working to add a dedicated sales team in China to support Todd and the larger sales process. This is a very important region for our mobile strategy and it is critical important to have people on the ground locally to work with customers and become closely hang on to their product roadmaps and design teams.

Additionally, David Tupman has agreed to Chair, a newly formed mobile product strategy committee. This committee's primary purpose will be to provide strategic alignment to the team. As many of you may recall, David has served as a Director of Pixelworks since April of 2014 and as a consultant since July 2012. For 10 years of his career, he led the hardware engineering and technology teams at Apple for multiple mobile devices including the iPhone and iPod. His highly relevant experience is invaluable to Pixelworks since we further execute on our mobile strategy.

I believe Pixelworks has tremendous opportunities ahead of us. We have the right technology and products in place to be successful in mobile market. We have a management team and Board that is fully committed to push forward and do whatever is necessary to realize the company's growth potential and achieve our goal of being the leading provider of video processing technology for the mobile market.

With that, let me turn the call over to Todd to say a few words. Todd?

Todd DeBonis

Thank you, Steve, and good afternoon everyone.

As Steve mentioned, I recently joined Pixelworks following a long career spanning numerous sales, marketing and business development roles at a number of leading -- industry leading semiconductor companies. Most recently, I held a position of Vice President of Global Sales and Strategic Development at TriQuint, which many of you may know merged with RF Micro Device last year to become Qorvo, a leader in RF solutions.

During my tenure at TriQuint, the company's mobile RF effort increased its market share from 5% to12% and the overall business grew almost four-fold to over a $1 billion. After being approached by Pixelworks and gaining a better understanding of the company's technology, I quickly concluded that Pixelworks had a unique portfolio of video processing, technology and IT.

Moreover, I recognized that the Pixelworks team is addressing a previously untapped opportunity for its technology in the mobile market. Pixelworks had already made meaningful investment as well as early progress toward penetrating our target market, giving the company a significant first mover advantage. It goes without saying that the market for mobile devices and related components is a large consolidating and extremely competitive space. So a decision to enter that market should not be taken lightly.

I've had my first few weeks here at Pixelworks spending time with the company's engineers as well as several of the current and perspective mobile customers for its Iris family of chips and what has become clear to me, is that the value proportion of Iris' videotape -- video processing capability is compelling. I believe as does the rest of the Pixelworks team that the mobile market represents an enormous opportunity for the company.

With that, I will turn the call back to Steve Domenik for a more detailed update on the company's recent progress and business outlook.

Steve Domenik

Great. Thank you, Todd.

Let me now provide more specific updates on the first quarter. First, revenue in all other metrics from within the range of guidance and Steve Moore will review the numbers in more detail here shortly.

Our digital projection business was down sequentially due to weaker -- due to the weaker macroeconomic environment especially in emerging markets, which is having a negative impact on near term results. Despite these recent headwinds, it is worth highlighting that Pixelworks grew projector revenue over 15% year-over-year in 2015 reflecting our strong market share gains throughout the year. Although weaker customers sell-through has extended into the beginning of 2016, we remain well positioned in our projection market as the global macro and end market demand improve.

Turning to the mobile market. As many of you are aware in the second half of 2015, we successfully ramped and shipped volume production of Pixelworks Iris family of mobile video processors in support of Asus' launch of its flagship ZenPad tablet. Both the Asus tablet as well as Pixelworks Iris chip received favorable reviews and successfully represented the mobile industry's first ever production device to include a TV grade quality video display processor.

As a result of this success, our engagement with Asus continues to grow. And we fully expect to be designed-in on additional Asus devices and platforms during the course of 2016. Separately, as part of last quarter's earnings call, we announced a milestone design win for a major U.S. wireless carrier and we expect Iris enabled tablets could begin filling the carriers channel as soon as mid-2016. As of today, all indications are that this design win and program remain on track.

Last quarter, we also introduced and highlighted True Cut a software solution that can be implemented at the server level to pre-process streaming data and improve compression efficiency while boosting the streaming quality on mobile devices that incorporate Pixelworks Iris chip. We successfully demonstrated True Cut with a major China-based carrier over the last couple of months and it began trials. We continue to make solid progress on this industry first solution.

Now, looking forward to the first quarter in 2016, the impact of the weaker macro environment on the projector market has extended in the first quarter resulting in a greater than seasonal decline at first quarter revenue forecasted to be between $10 million and $11 million. That said, we've begun to see the early signs of improvement and have growing confidence that the first quarter will represent a trough in revenue for the year.

Also worth mentioning, I do not believe that we've last a single design or platform during this period, and in fact, we fully expect to gain additional market share year-over-year in 2016. We continue to have strong confidence in the company's ability to achieve meaningful success in the mobile market.

I will turn the call over to Steve Moore for a detailed review of Pixelworks fourth quarter financial results and guidance for the first quarter of 2016.

Steve Moore

Thank you, Steve.

Revenue for the fourth quarter of 2015 was $13.5 million compared to $16.6 million in the prior quarter. The split of our fourth quarter revenue by market was 93% digital projector; 5% TV and panel; and 2% mobile.

Digital projector revenue was $12.6 million compared to $15.2 million in the third quarter and revenue from TV and panel totaled $640,000 in the fourth quarter compared to $1.1 million in the prior quarter.

The sequential declines in revenue were driven -- were primarily driven by a weaker demand environment in China and emerging markets for the company's chip sold into the digital projector and TV panel markets. Mobile device revenue was approximately $260,000 in the fourth quarter, a modest increase compared to $250,000 in the prior quarter.

Non-GAAP gross profit margin was 50.9% in the fourth quarter compared to 50.2% in the third quarter. Pixelworks' gross margin is subject to variability based on changes in revenue levels, recognition of license revenue, product mix, start-up costs and the timing and execution of manufacturing ramps as well as other factors.

Non-GAAP operating expenses were $8.8 million in the fourth quarter compared to $8.5 million in the prior quarter. Adjusted EBITDA was a negative $941,000 for the fourth quarter compared to a positive $890,000 in the third quarter. 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 $2.2 million or a loss of $0.08 per share in the fourth quarter of 2015 that's compared to a net loss of $173,000 or loss of $0.01 per share in the prior quarter.

Moving to the balance sheet, we ended the fourth quarter with cash and cash equivalents of approximately $26.6 million compared to $29 million at the end of the third quarter. The company has no long-term debt and similar to previous quarters, the company had a balance of $3 million on its working capital line of credit at quarter-end.

Other balance sheet metrics include days sales outstanding of 40 days at quarter end compared to 26 at the end of the third quarter and inventory turns decreased to just under 8x from approximately 10x in the prior quarter.

Now, turning to guidance. As previously mentioned and indicated as part of our press release earlier this week, the challenging macro environment particularly in emerging markets is expected to continue impacting revenue from our digital projection business during the first quarter of 2016 resulting in greater than normal seasonality. Specifically, we expect revenue to be in a range of between $10 million and $11 million. However, we are seeing signs of normalization beginning in the second quarter, and therefore, we expect that the first quarter will represent a trough in revenue for the year.

We expect gross profit margin for the first quarter to range between 48% to 50% on a GAAP and non-GAAP basis. For operating expenses, we expect the first quarter to range between $9 million and $10 million on a non-GAAP basis and $10 million and $11 million on a GAAP basis.

And finally, we expect a non-GAAP first quarter net loss of between $0.13 and $0.20 per share and we expect a GAAP net loss between $0.16 to $0.23 per share.

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

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Krishna Shankar with ROTH Capital. Your line is now open.

Krishna Shankar

Yes. Steve, as you look at the business, it sounds like Q1 could be the trough, what kind of signs are you seeing that growth resume in Q2 and beyond both in the projector business and the mobile business and specifically in the mobile business, could you perhaps talk about the pipeline of design wins which may translate to revenue near term?

Steve Moore

Okay. Well, starting with the projection business, we certainly are seeing order patterns that would reflect Q1 being a trough. Additionally, customer forecasts will give us some indication. And lastly, we do have some insight into the manufacturing inventory levels that our customers carry and that too would indicate that we are seeing a trough in Q1.

We do expect mobile revenues to continue to be modest in Q1 beyond that I'm really not giving any guidance, speaking of the pipeline we have a solid pipeline that's being worked very hard.

Krishna Shankar

Okay. And Todd, welcome to your new role of COO and given your experience in the mobile industry, what things do you see that need to happen with respect to both Iris on the product side in terms of price performance, power foot print and all that and in terms of customer needs, in terms of video processing, what things need to happen to really make revenues ramp quickly in this new segment?

Todd DeBonis

So I would suggest that it's probably a little too early for me to answer those questions. I do appreciate them. And I hope to be at a point to answer those questions shortly, but right now I'm not in a position to answer it. I will say it from a market perspective and where I see this consolidating reasonable growth smartphone market going, the need for solutions like Iris is there. And from what I can tell so far of investigating the product capability and its engagement with the customers, product is in good shape.

Krishna Shankar

Okay. Thank you.

Steve Moore

Thanks Krishna.

Operator

Our next question comes from the line of Jaeson Schmidt of Lake Street Capital. Your line is now open.

Jaeson Schmidt

Hey, guys. Thanks for taking my question. Just wondering if you could share what your current market share is in the projector market and do you still expect that to grow throughout 2016?

Steve Moore

Okay. We are in probably the high 40 is approaching 50. And we do expect the market share to continue to grow in 2016. It won't grow at the level or at the steepness that it grew from 2014 to 2015 or from 2013 to 2014. At the beginning of 2014, we're probably at 35%. So but we do expect to see more models with our chips in them and we do -- to the -- we expect to see better than market growth for the projection business.

Jaeson Schmidt

Okay. And then with the decision to do that again in sales team in China, should we assume OpEx continues to ramp throughout this year? Or what sort of ramp should we be thinking about there?

Steve Moore

No. I would not expect that OpEx is going to ramp. We think we can accommodate a higher or more focused level of mobile sales organization through redeployments and realignment of expenses. So we are not forecasting higher expenses.

Jaeson Schmidt

Okay. And last one for me, I will jump back in queue. How is the reception of True Cut in so far and you guys don't expect to use that as a source of revenue, correct?

Steve Moore

Well, the current program is with the large mobile carrier in China. And we would expect them or I mean, if that all goes the way we'd like, they would be broadcasting a True Cut enabled channel that would allow a Iris enables or a provision rather device to translate that True Cut streams and get a dramatically improved video experience. So the model -- the revenue model if you will is for the Iris chip in the devices being needed to get the use out of the -- what the carrier would be providing or provisioning. We are still early in that process, but very encouraged with the trials that are going on. But, the revenue would be from selling Iris chips.

Jaeson Schmidt

Okay. Thanks a lot guys.

Operator

[Operator Instructions] Our next question comes from the line of Charlie Anderson with Dougherty & Co. Your line is now open.

Charlie Anderson

Yes. Good afternoon. Thanks for taking my questions. And welcome Todd. I maybe want to start with a question for your Todd on, you visited customers, you probably got some feedback both current customers and perspective. I wonder for those that are perspective, is [your sense then] [ph] there has been an awareness issue of the product, if that's been any issue? And then also, beyond that for those that haven't taken it was been -- maybe the single biggest reason they haven't taken it yet?

Todd DeBonis

So first part of your question, I would say that with the customers I visited and there were numerous. There was not an awareness problem at all. They were clearly aware of Pixelworks, the technology we have and how we are trying to deploy the mobile market. It is a sophisticated so as you can imagine this doesn't really exist in many of these solutions. There maybe elements of what we are bringing to the market, as features somewhere else in their solution, but there is nothing like Pixelworks is bringing to the market today.

So what that means is, it is an evangelistic cell and it's a architectural cell. And there is good and bad in that. I think the bad it takes a while. The good is when you do get a customer are committed, they are fully committed.

Charlie Anderson

Great. And then, I want to ask you about the formation of the mobile product strategy committee led my David Tupman, I wonder sort of tangibly what the difference is there, is it fundamentally just more hours from David, anything else you can put your finger on in terms of what we will see as a result of the formation of that committee?

SteveMoore

I think it's more formalizing and focusing it. The truth is David has quietly behind the scenes put a lot of energy into the existing product definition and all of our efforts on along the mobile launch. So I think that - it's just going to be a -- I don't know almost a management mechanism to make sure that we are being more rigorous and being sure to get David's really valuable inputs from all his experience at Apple and around the industry.

Charlie Anderson

Great. And then, Steve one more question for you, just updated thoughts on the projector market for the full year in terms of -- is this market still going to be flat up down and I wonder if your customers have identified any secular challenges or is this just feels like it's a macro issue?

Steve Moore

It feels like a macro issue. No secular issues identified. The current forecasts from the -- the one firm that that does follow projection still show a higher 2016 to 2015, but the projection business is a -- definitely affected by any macro events. And that's what we are seeing now, how long that lasts is really depending on what happens in the world economy.

Charlie Anderson

Great. Thanks so much.

Operator

Our next question comes from the line of Richard Shannon from Craig-Hallum. Your line is now open.

Jorge Rivas

Good afternoon. This is Jorge sitting in for Richard today. I want to ask what you expect the cash burn to be for the first quarter of 2016.

Steve Moore

Well, we don't forecast or give guidance on cash burn. Clearly, if you run our numbers either at the high end or the low end of guidance, it would imply that some cash will be used. But we are not going to give a specific number to that.

Jorge Rivas

Okay. Fair enough. And then, one last question, related to a question that was asked previously on the True Cut, first I understand, this is a -- itself or that resides in the servers of the carrier, right? So, I want to understand how -- so you are not receiving revenues from there, so you are suspecting that to drive Iris adoption, right? So the carrier is not really going to compensate you for having -- having you deploy yourself or into their servers?

Steve Moore

Well, I don't want to preclude any negotiation for revenue there. But, the thought is that, the carrier is providing something to their customers which will encourage the customers to use more bandwidth within, so therefore, the carrier is seasoned to the benefit to the carrier. Where we benefit then is that -- in order for the carriers' customer to benefit they have to have a device that has an Iris chip in it.

You are correct the True Cut itself is a plug-in software module that provide some data into the streams that it has decoded or in-coded rather. And it requires the Iris chip to decode it. So there is a win-win -- actually triple win here that consumer gets the better video stream, the carrier gets a more bandwidth used and we get a chip sold.

Jorge Rivas

Okay. All right. Understood. Thanks very much.

Steve Moore

You're welcome. Thank you.

Operator

This does conclude our question-and-answer session. I would now like to turn the conference back over to management for any closing remarks.

Steve Moore

Okay. Thank you for joining us on the call. And we look forward to speaking with you next quarter.

Operator

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program. You may now disconnect. Everyone have a great day.

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