Mark Gomes'  Instablog

To anyone interested in Pixelworks (PXLW):

Since my SeekingAlpha piece went public, there's been a lot of up and down action in the stock. For the record, I have no expertise in trading. Accordingly, I have no comment on the trading action. Investors are entitled to buy or short as they will. I'm not going to get involved in day-trader wars. That's their domain and I respect their skill.

I expect no less in return. Ultimately, a stock will go where it deserves to go. Thus, I caution investors against listening to anyone who1) tries to "pump" the stock or 2) calls the stock a pump without providing specifics.

From what I've been able to ascertain, there are no known "pumpers" involved with this stock - just my articles on SeekingAlpha / PoisedToTriple. I know my catch-phrase sounds like something a pumper would use, but that's why I chose the name. It's my way of saying, "There are real companies with a real shot at tripling. But usually, it requires a real analyst to distinguish them from the pumps."

In that regard, I've been involved with stocks since the mid-80s. I've been a technology analyst since the mid-90s. I've been a very public figure throughout -- you can find out a lot about my professional life on my web site and my life as a track athlete, coach, and author via Google.

Now, to be clear, that doesn't mean that I'm perfect. Despite what actual pumpers want you to believe, no analyst is. A fair number of my picks fail (some, in epic fashion). However, and perhaps by sheer luck, a much larger number succeed. My history of wins and losses is easy to find and see.

For the record, I have selected PXLW as a stock that could be poised to triple for several reasons. Investors who have been focusing on the iTV opportunity are missing the point. Getting into iTV is a possibility and would represent a home run of major proportions. However, at this stage, it is just possibility…and therefore not why I selected the company.

The most tangible merits of PXLW revolve around the following:

1. Their IP business seems to have bottomed and is now ramping back up. The market seems to be moving in this direction because it creates cost efficiencies.

2. The projector business is expected to gain substantial market share next year, thanks to a major customer win / project in process.

3. A successful activist shareholder (Becker Drapkin - look them up) has been providing guidance to the company. They have a great track record for unlocking shareholder value. Most recently, they oversaw the sale of Hot Topic (another stock that many thought was a dog, until they were bought for $600 million).

The company, its earnings transcripts, and SEC documents will confirm each of these points (I've provided much of the heavy lifting on the PoisedToTriple website). In other words, nobody is claiming that they've discovered how to mine gold on the moon. This is a real company with a real history…and it's working on a building a strong future.

This is the key difference between a pump and a speculative stock.

Will PXLW succeed? As with all of my picks, only time will tell if this will be a home run or a dog. I can never predict which until after the fact (if I could, I'd never be wrong!). For now, if you ask my opinion, I'll offer my opinion that the stock doesn't adequately reflect the odds of success.

I won't offer more than that, along with updates as event unfold. Why? Because, until the next event unfolds, there's nothing new to be said. I'm not here to support (a.k.a. pump) the stock. I'm here to lay out the merits and let you decide for yourselves.

Thus, I urge anyone interested in PXLW to read my research, do your own homework, and then decide for yourselves. If you do and conclude that the company will fail, I respect that. Divergent views are what make markets. Just be sure that you have a well-researched view of your own to offer…

…and be careful who you listen to. There are many (too many) pumpers in this world. You don't want to listen to them. Nor do you want their existence stop you from discovering the real analysts that exist out there.

Kindest Regards,

Mark G.

p.s. Keep in mind that pumps work both ways (long and short). Personally, I will never accuse anyone of being a pumper or a "reverse pumper", but they're out there. All the more reason to do your homework choose sides carefully.

Disclosure: I am long PXLW.

Here are a couple additional PXLW / LG data points:

• LG is currently the only vendor making a TV with Google TV built in. The company clearly has its wagons hitched to both Apple and Google.

  It is also upping its ante when it comes to picture quality. FYI, LG's 84" 9600 Ultra LED HDTV incorporated two Pixelworks imaging processors to handle the 4K upscaling. Shortly after its release, CNET did review providing super close-up screen shots comparing LG's picture quality to Sony's 84" Bravia LED. You can decide for yourself which was better.

  As you do, keep this in mind - the Sony model costs 50% more than LG's. It seems to me that PXLW's latest technology is providing more competitive value than it has in the past.

• LG has a long history with PXLW.

• In the mid-2000s (during the last TV upgrade cycle), PWLX revenue topped $170 million, with upwards of $100 million of that coming from the TV market. Now, as we sit at the cusp of a smart TV upgrade cycle, PXLW is doing less than $50 million in revenue.

  In addition, it should be noted that the high-end TV market amounted to just 50 million units back then. At present, the smart TV / Ultra TV market is expected to approach 100 million units over the next 12 months.

Disclosure: I am long PXLW.

It's 1AM, so I'm jumping right into this one...

Revenue rose 5.4% year over year to $175.7 million, beating the consensus of $173.8 million. EPS of $0.09 per share beat the consensus of $0.07. Guidance calls for Q2 revenue to increase 17%-20% Q/Q, and for Q2 EPS of $0.11-$0.12. That beats the consensus 15% growth estimate and EPS estimate of $0.10.

In other words, it was a great quarter. Here are the key quotes and notes (in italics):

• While our large panel driver IC will continue to remain a major part of our sales, it accounted for just 34.2% of our total revenues for the first quarter compared to 42.8% a year ago and 40.7% in the fourth quarter of 2012. The significant sequential decrease was the result of slow monitor demands, high customer inventory, seasonal slowdowns that reduced sales through our related party customers. Among all our large size panel maker regions, China continued to show impressive growth year-over-year.

  In other words, our biggest business shrunk and we're still growing faster than Wall Street expects.

• Same-store small and medium size drivers came in at $91.3 million up slightly 6.1% from the same period last year and up 6.9% sequentially. As a segment, driver IC both small and medium size applications accounted for 51.9% of total revenues for the first quarter as compared to 33.4% a year ago and 34.8% in the previous quarter.

  In other words, this is our biggest business now and it's growing nicely.

• Our small and medium size driver sales…managed to achieve a sequential growth mainly because of the strong sales to first tier international smartphone brands. With strong year-over-year growth as a result of the robust sales of smartphone, tablet and automotive display applications.

  Well positioned in hot markets. FYI, non-driver products revenues were down sequentially due to weaker CMOS image sensor sales. Higher resolution units are expected to experience "strong growth momentum during Q2 and throughout the rest of the year."

• Revenues from related parties continue to decline for the first quarter of 2013 were down 30.4% from the first quarter of 2012 and down 27.4% from the same period last year. Related party sales accounted for 25% of total sales in the first quarter compared to 37.9% a year ago and 31.8% in the previous quarter.

  Innolux continues to diversify away from HIMX. This has held growth in check. Innolux could also serve as a headwind for the stock in the coming months, because it filed to sell somewhere around 25 million shares of HIMX that it owns (and now has a nice profit on).

• Our GAAP gross margin for the first quarter of 2013 was 24.6% a 170 basis points expansion from 22.9% a year earlier and 130 basis points improvement from 23.3% in the previous quarter. This is the six conservative quarter of gross margin improvement and the highest gross margin level since the third quarter of 2008….Gross margin improvement will continue to be one of our key business goals going forward.

  Speaks for itself.

• Our cash, cash equivalents and marketable were $158.9 million at the end of March 2013, a significant increase from $102.1 million for the same time last year and $138.9 million last quarter.

• Inventories of March 31, 2013 were $138.3 million up from $118.5 million a year ago and up from $116.7 million a quarter ago…to accommodate for the expected increase of shipments during the second quarter

• Accounts receivable at the end of March were $189.9 million as compared to $189 million a year ago and $209 million last quarter.

  All nice improvements.

• Capital expenditures were 4.7 million in the first quarter versus $1.6 million a year ago and $2.2 million last quarter. The capital expenditure was mainly for purchase of some in-house driver IC testers to cope with higher demand anticipated due to strong smartphone and tablet driver sales.

  Speaks for itself.

• We paid an annual dividend of $6.3 cents in July 2012, which equals to 100% of our net income for the year ended December 31, 2012. The board will decide on our 2013 dividend soon.

• With regard to our $25million share buyback program...no ADS was purchased in the first quarter of 2013 because our share price appreciated significantly in the quarter.

  Between this and the Innolux comments above, we're a little concerned that the stock may need to take a breather.

• Out of the total share repurchase plan of 25 million announced in June 2011 $11.6 million remains unused. We will continue to execute the remaining share repurchase program in accordance with Rule 10b-18 and in compliance with any other applicable legal, regulatory and contractual restrictions.

• We are confident we have maintained a competitive position in the large panel segment and have contributed to new growth opportunities presented by China continuing the expansion of their panel production capacity and potential new business from Korea.

  Korea...a.k.a. Samsung

• The prospects of our small and medium-sized panel driver business remains a focal point of our business in 2013. We are in a strong position in the smartphone sector with leading technologies, competitive products, and good customer lineup. We will further expand our smartphone customer base which has already covered first tier international and Chinese brands as well as the fast-growing Chinese white-box market. Smartphone application has been the largest revenue contributor to our non-panel applications.

• CMOS sales should "rebound strongly in Q2 with sales expected to triple from the previous quarter to become our single largest non-driver segment.

  a.k.a. cell phone cameras. This time next year, LCOS (displays for Google Glass and Xbox Goggles) could be the biggest non-driver segment.

• Typically we highlighted our collaboration with several top tier customers from the new head-mounted display application. I would be remiss if I try to ignore the attention lately on our rumors with certain customers on head-mounted display products.

  As a general disclosure, we do not disclose or comment on specific customer information unless it is required by the SEC reporting guidelines or the customers themselves publicly identifies us as a supplier…Our focus remain to continue to work with our customers who try to bring new technology display product to the market as soon as we can. All first development project is under strict disclosure agreements.

  As we mentioned in early earnings calls head-mounted display is a new and exciting product area with a great deal of potential in many applications where we believe our technology is superior to other competing technologies.

• Now I would like to spend a few minutes to talk about the share registration statement which we filed on April 30, 2013. The filing was mainly due to the request of Innolux Corporation…The share registration statement allows Himax and Innolux to offer a sale of shares from time to time before the registrations expires. In one or more topping offers but up to 75 million of 472 and 473 million ADS and 25,299,753 ADS respectively. For more details regarding our share repurchase program you may also refer to our press release on April 30th…We decided to file for all primary shares because share registration statements was clearly effected by the SEC who will mainly trade through all period of three years during which time we may offer new shares and anytime we are going through the registration and SEC re process.

  In other words, there could be some new supply of shares hitting the market soon. Plus the cat is out of the bag regarding Google Glass and other wins, so the stock could take a breather during the summer months.

• Regarding microdisplays (i.e. Google Glass) "we're going to see the strength in Q2 and the then again in Q3, and then again in Q4, in other words, we're expecting very significant quarterly growth throughout this year and hopefully next year as well, but that again is coming from a small place."

  Also, "we have actually a very good number of customers lined up...we are very careful in choosing our customers…we are not prepared enough (to ramp production versus all the potential demand) so we are in a very strong position… I believe that the technology is superior by far and is for the foreseeable future."

  NICE !

• The smartphone for the first quarter about close to 70% are sold to the Chinese customers and tablets about over 45%.

• We are going for our 8 megapixel product…for July. 5 meg product has been around since last year nationwide.

• Are you seeing a tight capacity at Chipmos in Japan?

  Yes, on the high end in particular. Or we call high IC power testers. They are applied only for high-end smartphone and tablet product.

  Do you intend on buying more testers as the quarters go on?

  Yes.

• …how you make a 4K TV set a convincing product for the consumer (to make them) willing to pay the premium? I think the industry still has a (ways) to go.

  All random stuff with not too much bearing overall.

Disclosure: I am long HIMX.