Pixelworks Q3 Reveals Why Its Shares Should Triple

| About: Pixelworks, Inc. (PXLW)
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On November 7, Pixelworks (NASDAQ:PXLW) announced that revenue for the third quarter of 2013 was $15.3 million, up 60% from the $9.6 million reported in the second quarter. The sequential growth was "driven by licensing revenue recognized during the third quarter and further ramping of the PA168 for the advanced TV market".

The earnings call provided valuable insight into the company's progress on several fronts. In this article, I present the key quotes, along with my commentary (in italics) from the call.

Bruce A. Walicek (Pixelworks CEO) -- "Overall book-to-bill was greater than 1, reflecting success in our licensing business and an improving environment as customers ramped the PA168, our next-generation video processor, into volume production."

Book-to-bill indicates how many orders were booked in the quarter versus the amount of business on which they collected revenue. A book-to-bill over 1 indicates that there was more business in the quarter than the revenue number suggests. Bullish.

"We delivered initial samples of the advanced chip we are developing under our co-development partnership. This is an important milestone in this project and we are on track for volume production in the first half of next year that we believe will result in significant market share gains in 2014."

This agreement is with a tier-1 player in the TV projector space. While this is not a super-hot market in U.S. homes, it is hot in Asia and in commercial establishments worldwide. The market is expected to grow 15% per year and PXLW is firmly entrenched as the market leader for video processing. This agreement will extend that lead into a territory that I would describe as "dominant".

"…we achieved several major milestones that significantly improved our business and financial position. During the quarter, we closed a $10.3 million license and services engagement...we continue to experience a robust licensing pipeline.

Pixelworks holds a portfolio of over 120 UltraHD patents and has won several UltraHD designs to date. I believe they are the leader among independent players.

"Traditionally this type of video processing has typically been applied to large screens, but in 2014 Pixelworks will bring our industry-leading video expertise and innovation to all screens and we are on track to deliver products in the first half of 2014. At CES in January we will demonstrate our seventh-generation technology designed to improve the video display quality of mobile applications for key industry partners and customers."

This development will further expand PXLW beyond the projector and TV space and into all mobile devices. Considering the increasingly integrated nature of TVs and mobile devices, I believe this move will serve to expand PXLW's market share in the TV market while establishing them in the enormous mobile device market.

"Today, large screens are just starting to move the 4Kx2K Ultra HD resolution 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 square inch, four times the resolution of a mobile HD display and Japan Display announced a 12.1 inch display with 4K resolution and 365 pixels per square inch."

PXLW customers.

"Licensing revenue was $4.8 million in the third quarter compared to effectively no licensing revenue during the previous quarter."

This demonstrates that PXLW's patents hold strategic value that is not becoming unlocked. As discussed in my article Shares Of Pixelworks Could Be Poised To Triple, tertiary TV manufacturers are looking to save money on R&D. They are looking to do this by outsourcing their image processing capabilities to PXLW.

"Revenue for digital projection in Q3 was approximately flat quarter-over-quarter at $6.6 million."

This is a marked improvement for PXLW's projector business. Customers have been undergoing an inventory reconciliation, which has had a significantly negative impact on PXLW this year. "Flat" indicates that this business has bottomed out and may now start contributing to company growth again.

Again, industry experts continue to expect projector revenues to grow at 15% per year, so this should represent a nice inflection point for PXLW.

"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, this 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."

So, they went from $1.6 million in Q2 to $2.8 million in Q3. With most of this coming from UltraHD, it appears that UltraHD went from something like $700,000 to $1.8 million. Nice progress there … and I suspect that only represents about a million TVs.

"Looking ahead to Q4, we currently expect revenue to be in the range of $14 million to $16 million. We expect our GAAP results to range between $0.04 loss per share and $0.04 profit per share."

Good enough for me. Anything within that range will be acceptable proof of continued progress.

We should expect Q1 to be slower, as usual. However, I couldn't care less about Q1. The PXLW story is all about its 1) its new projector opportunity for 2014, 2) its move into mobile devices, which should ramp nicely in 2015, and 3) its UltraHD business, which should kick into a higher gear as we enter 2016.

Of course, the first generation of flat panels are starting to die (they only last 4-10 years), so a replacement cycle should be a theme throughout 2014-2016.

"We'll see a lot of 4K x 2K at CES this year. I think it's certainly the beginning of the market, and a lot of attention is being paid to it. I think, the only customer we've actually talked about is LG."

In other words, they have several other customers, but most do not wish to be disclosed. This is an especially common practice of Apple (NASDAQ:AAPL).

During Q&A, Krishna Shankar (the well-versed PXLW analyst at ROTH Capital Partners) asked about PXLW's chip development process for the tablet and mobility market. CEO Walicek replied:

"Yeah. So I think what I said was you would see products from us in the first half of 2014 and we're on track to execute to that. If we're - we're well down that path at this stage and we're anticipating demonstrations at a very deep technical level coming up at CES. And like I said we'd introduce products in the first half of 2014."

CES should be very interesting. FYI, Krishna maintained his $6 twelve-month price target on the stock, up 50% from current levels. I believe that is just the beginning. My target calls for shares of PXLW to triple from my initiation price, which would occur at $9.72, more than double its current levels.

Disclosure: I am long PXLW. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.