Pixelworks' (PXLW) CEO Todd DeBonis on Q1 2016 Results - Earnings Call Transcript

| About: Pixelworks, Inc. (PXLW)

Call Start: 17:00

Call End: 17:24

Pixelworks, Inc. (NASDAQ:PXLW)

Q1 2016 Earnings Conference Call

April 28, 2016, 17:00 ET

Executives

Steve Moore - CFO

Todd DeBonis - CEO

Steve Domenik - Director

Analysts

Charlie Anderson - Dougherty

Krishna Shankar - ROTH Capital

Operator

Welcome to the Pixelworks, Inc., First Quarter 2016 Earnings Conference Call. I'll be your operator for today's call. [Operator Instructions]. I'd now like to turn the call over to management and your host, Chief Financial Officer of Pixelworks, Mr. Steve Moore.

Steve Moore

Good afternoon and thank you for joining us. With me today on today's call is Todd DeBonis, Pixelworks' CEO and also Steve Domenik, Director of Pixelworks' Board who has recently served as Interim 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, 2016.

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, April 28, 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, 2015 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.

We will start today's call with a few opening remarks from Steve Domenik, a member of the Board and recent Interim CEO who will then turn the call over to Todd DeBonis who we announced as part of today's press release has now assumed the permanent CEO role. Todd will provide additional comments on the business and quarter after which I will review our first quarter financial results in more detail and then provide our outlook for the second quarter of 2016.

Steve Domenik

Thank you, Steve. Good afternoon everyone and thanks for joining us on today's call as most of you are aware. I have been serving as Pixelworks Interim CEO since early February. The Board has concluded a formal search process to identify a permanent CEO. I could not be any more pleased to announce the Board's decision to promote Todd DeBonis to President and CEO. Just prior to Pixelworks Todd was a Vice President of Global Sales and Strategic Development at TriQuint Semiconductor where he was a key contributors to company's rapid growth and from having a few hundred million dollars mobile business to one that generated over a $1 billion in sales.

He has nearly 30 years of experience as a seasoned executive with expertise spending strategy, sales and operations across a global organization. And since coming to Pixelworks earlier this year Todd has demonstrated in depth knowledge of the industry, a strong understanding of Pixelworks technology as well as required sales and operational capabilities required to lead the organization going forward. Put simply I'm confident he's the right CEO to capitalize on the intrinsic value of Pixelworks technology and available market opportunities.

With all that said I would like to make a few brief remarks before turning the call over to Todd. As announced on April 7th we implemented a restructuring plan with the goal of achieving two objectives. The first was to streamline the organization and our product offerings in order to concentrate the company's resources and market opportunities with the largest potential impact. The second objective was to right size the organization by better aligning expenses with current revenue levels. I will let Steve Moore speak to the numbers in more detail but I want to highlight that we have been diligently focused on implementing this plan over the last several weeks and both management and the Board remain fully committed to realize as expected $5 million in annualized cost savings as well as the achievement of cash flow breakeven. I look forward to continuing to serve as Director on Pixelworks Board supporting Todd as he leads the company's efforts to capitalize on growth opportunities and realize Pixelworks full potential. It is now my pleasure to turn the call over to Todd.

Todd DeBonis

Thank you, Steve and good afternoon to those joining us on today's call. I would like to first start by thanking Steve Domenik for the kind words and the Board for the vote of confidence and opportunity to lead Pixelworks as CEO. I'm very enthusiastic about taking on this role and also the future of the company. However before talking about the future I believe it is constructive to first take stock of where we are today. As most of you know I joined Pixelworks earlier this year and was pointed COO in February. During the last few months the majority of my time has been spent meeting with fellow employees to gain a deeper understanding of Pixelworks technology and capabilities and also meeting with our current projector customers as well as current and prospective mobile customers.

My takeaway from these interactions has been positive and providing further validation of the value of Pixelworks Technology. While at the highest level Pixelworks consist of two very different businesses and end markets. They share the key enabling technology of video processing. Pixelworks is a long heritage and deep expertise in this field which the company has consistently invested in and continue to advance over the last 20 years. Innovation rarely happens overnight and it would be difficult for any company to quickly replicate Pixelworks' combined expertise in motion estimation motion compensation or MEMC, frame rate conversion and in picture quality.

Before talking about the mobile market an opportunity let me first address our digital projection business. As part of the recently announced restructuring we are prudently working to streamline our projector business and respective product portfolio. This means serving the same customer base but doing so with a smaller and more targeted product portfolio allowing Pixelworks to continue to deliver world class support with a smaller but highly skilled team.

As Steve Domenik discussed on last quarter's call Pixelworks gained significant market share in 2015. We continue to target incremental market share gains in 2016. Once again the highest priority in our projector business is to focus on customer satisfaction and requirements for next generation products.

While our digital projection business will always be subject to both the up and down forces of the macroeconomic environment. There is no reason why Pixelworks shouldn’t maintain and potentially improve its already favorable position in this market.

Now let's talk about where we are today with our mobile initiatives. It goes without saying that mobile market continues represent an enormous opportunity for Pixelworks. The company has made meaningful investment over the last three years as well as demonstrated some early progress toward establishing the market. As a result we currently have a first mover advantage but with this advantage also comes challenges most notably having to evangelize the benefits that new technology can provide to prospective customers.

This can often be a painstaking process especially for a smaller resource limited company but we've already done a lot of work in this regard. In fact I continue to be impressed by the awareness of Pixelworks and its technology in both device OEMs and across the video streaming ecosystem.

Much of the company's early efforts were validated last year by the well-publicized win with Asus for it's flagship tablet and we need to ship ships in support of that program, although only in modest volume.

The task in hand today is to achieve broader adoption across multiple customers and a variety of mobile devices. Well potentially counterintuitive I believe that it is critical for us to narrow our focus as opposed to using a wider net approach especially given the limited resources of the company. In line with this belief and as part of our restructuring plan going forward our sales efforts will largely be focused on tablets and handsets and not include laptop and ultrabook like applications. Additionally we have taken steps to straighten the capabilities of our sales and marketing organization to more effectively target the mobile market. And to encompass both chip sales as well as the potential licensing software opportunities that exist. Coming back where we’re today. We continue to have a very constructive engagement with Asus which includes the potential for our mobile chip Iris to be incorporated in additional future end platforms.

Asus has been an excellent partner and an early adopter for Pixelworks. As they look to more fully embrace video quality and enhanced displays as a key differentiator. Separately our previously disposed design win for a new tablet to be offered by a major U.S. mobile wireless carrier continues to be on track and we have the backlog to support this program's anticipated launch.

So now pouring all this together and with the acknowledgement that I’ve only been in the role a short while. I want to briefly outline the key focus items going forward.

One, finalize restructuring, complete all of the action items required before we implement our restructuring plan at the operational level. Two, projector product transition. Begin transitioning certain projector customers from their dependency on legacy chips to our newer generation SOCs. Three, exit the TV panel products. Take the next steps to formally end of life several legacy products that are still being sold into the TV panel and embedded markets. Four, strengthen our mobile still capability. We recently hired a new VP of Sales and Business Development in China and we will be adding additional resources over the next quarter. Five, a comprehensive review of our mobile go to market strategy. We have launched a review of our mobile products including both Iris and [indiscernible] video streaming capabilities with the goal of optimizing our go to market strategy.

To conclude my comments as a more streamlined organization, Pixelworks has positioned to deliver both top line growth and profitability in the coming quarters. Even without the immediate step up in revenue contribution from our mobile business. We continue to make forward progress on the company's mobile initiative and we have existing and new design wins that are transitioning to volume production during the course of 2016.

Simultaneously we will continue to serve our projector customers with the goal of not only maintaining but incrementally growing our current market share year-over-year. With that I'll turn the call over to Steve Moore to review our first quarter financials and guidance for the second quarter. Steve?

Steve Moore

Thank you, Todd. Revenue for the first quarter of 2016 was 11.2 million which compares to 13.5 million in the prior quarter. The sequential decline in Q1 total revenue was slightly better than our original forecast but ultimately reflected the expected impact of a challenging macro environment in emerging markets on our digital projection business. Revenue from chips sold into the TV panel market was higher compared to the fourth quarter however as previously mentioned we expected contribution from this legacy business to decline in future quarters saw an anticipated end of life orders from existing customers. We also recorded a nominal amount of mobile revenue in the first quarter as part of follow on orders from our initial customer, however mobile was not a meaningful contributor to the sequential Q1 decline in total revenue. Non-GAAP gross profit margin was 48% in the first quarter compared to 50.9% in the fourth quarter. Non-GAAP operating expenses were 9.2 million in the first quarter compared with 8.8 million in the fourth quarter of 2015. Adjusted EBITDA was a negative 2.9 million for the first quarter of 2016 compared to a negative 941,000 in the fourth quarter. The reconciliation of adjusted EBITDA to GAAP net loss maybe found in today's press release.

On a non-GAAP basis we recorded a net loss of 4 million or loss of $0.14 per share in the first quarter of 2016 as compared to a non-GAAP net loss of 2.2 million or a loss of $0.08 per share in the prior quarter. The first quarter net loss excludes stock based compensation expenses as well as 4.3 million or $0.15 per share in charges related to the restructuring.

Moving to the balance sheet. We ended the first quarter with cash and cash equivalents of approximately 22.9 million compared to 26.6 million at the end of the fourth quarter. The company has no long term debt and similar to the previous quarter the company had a balance of 3 million on its working capital line of credit. Other balance sheet metrics include day sales outstanding of 46 days at the quarter end compared to 40 days at the end of the first quarter and inventory turns were approximately 8.5 times compared to around 8 times in the prior quarter.

Guidance, for the second quarter of 2016 we expect revenue to be in the range of between 11.5 million and 12.5 million. This range reflects improving but not yet normalized order patterns across our digital projection customers following the largely macro driven inventory correction during the fourth quarter.

We expect gross profit margin for the quarter to range between 48% to 50% on a non-GAAP and GAAP basis. In terms of operating expenses we expect the second quarter to range between 7.5 million and 8.5 million on a non-GAAP basis and 8.5 million and 9.5 million on a GAAP basis. And finally we expect non-GAAP second quarter net loss of between $0.05 and $0.12 per share and we expect a GAAP net loss of between $0.09 and $0.15 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 is from Charlie Anderson with Dougherty. You may begin.

Charlie Anderson

I wanted to start with -- you talked narrowing focus for Iris you mentioned focusing on smartphones and tablets but I think maybe a little beyond that, it sounded like you wanted to narrow maybe even more on the technology. I recall the first Iris was a of a swiss army knife, so I wonder as you’ve talked to customers what are they specifically asking you in terms of problem to solve with that technology versus how the product has been positioned in the past?

Todd DeBonis

I'm not sure they're asking us to change the value proposition what we're offering. I think what they're looking for is an easier implementation, they're certainly looking for lower cost. They're challenged with that fact that it is an architectural change form, right. And so I think -- I don’t want to go too much into the product plans and the devices but this is really -- we're going to review the whole go to market strategy and semiconductors will definitely a part of it but I think we need to broaden our horizons on how we position video processing technology to the mobile market place.

Charlie Anderson

Todd, I wonder are there IP ways to monetize either through licensing the technology or licensing the technology or licensing which I think the company has done a few times in the past and I'm just curious how you are reviewing those options?

Todd DeBonis

We have incoming. Interests, I would say fairly continually on licensing our technology for four different markets and including mobile, I think we entertain those incoming requests on a semi normal basis, it depends who's bringing it in and how they serious they are because it is a little bit disruptive. I would suggest that as we go forward, I would hope that licensing be a more integral part of our go forward business but I think it's too early to say right now. And I certainly wouldn't model anything in regards to licensing today.

Operator

[Operator Instructions]. Our next question comes from Krishna Shankar with ROTH Capital. You may begin.

Krishna Shankar

I’ve questions as you look at the projector business, I think your folks mentioned that you see kind of inventories down and a little bit of stability in the emerging market especially with respect to the projector business, talk about your visibility in the projector business through the rest of this year and you know what you see both in terms of existing customers, moving your platform for production and continued market share gains.

Todd DeBonis

I mean I will let Steve sort of talk about his feelings on where we are through the inventory curve, I will give you my perspective, my perspective is we’re now through the inventory correction, the order pattern for the Q2, has come back and we anticipate the back half of the year to be more of an normal pattern for Pixelworks on a year over year basis.

Steve Moore

Our visibility into manufacturing inventories and the order patterns that would seem more normal seasonal projector business in the second half of the year. It always is based on what the macro environment is doing but that too seems firming up if not strengthening.

Krishna Shankar

And then on the in the mobility business, Todd you talked Asus having I guess modest volume requirement, so far can you talk about the additional design wins within other Asus platforms and then the put ramp for this U.S. wireless carrier tablet, what is the timing of that and want is the potential outlook for the U.S. tablet design win that you’ve.

Todd DeBonis

For the one that had been previously mentioned, the design wins that we previously mentioned we have backlog. I mean I don't have complete insight into Asus plans with the carrier. But I know they are preproduction and they're taking shipments in preparation for the launch. So I will assume it's fairly soon.

Krishna Shankar

Okay. And then any comments on other types of customers you’re working on in terms of design wins, are they Asian, Chinese? Can you talk about the types of customers tablets and smartphones that you’re engaging with now?

Todd DeBonis

We’re fairly focused on the mid to high end smartphone market in Greater China. We've probably visited 20 customers of relevance in that target market in the last three weeks. Is that enough of a scope for you?

Krishna Shankar

So kind of the mid to high end smartphone customers in China and do you’ve a focus on tablets in China also or just smartphones?

Todd DeBonis

Some of those companies do have programs in the tablet arena and certainly we would entertain those programs, our focus is to try to hit the higher volume mid to high end smartphone segment an area that high resolution screens are becoming more common. Tie-ins with quality video services are being sought after and the need for something like our Iris solution where our overall video processing solution is of interest.

Operator

Thank you. I'm showing no further questions at this time. I would like to turn the call back over to management for any closing remarks.

Steve Moore

Okay. Well thank you for joining us today. We look forward to speaking with you on the Q2 call.

Operator

Ladies and gentlemen this concludes today's conference. Thanks for your participation and have a wonderful day.

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