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Management Changes Leads to Successful Turnaround

|Includes: Pixelworks, Inc. (PXLW)

April 22, 2010

Pixelworks, Inc (NASDAQ:PXLW) is an innovative designer, developer and marketer of video and pixel processing semiconductors and software for high-end digital video applications and hold 119 patents related to the visual display of digital image data. Their solutions enable manufacturers of digital display and projection devices, such as large-screen flat panel displays and digital front projectors, to differentiate their products with a consistently high level of video quality, regardless of the content’s source or format. Their core technology leverages unique proprietary techniques for intelligently processing video signals from a variety of sources to ensure that all resulting images are optimized.


In my opinion the key to evaluating PXLW are the management changes that have occurred in the last few years .


The Company reported strong sales growth in years from 1998 (Sales just under $1 million) until reaching peak sales of $176 million in 2004. Throughout this period the Company reported losses in each year except 2004, when they reported net income of $21.8million or $1.26 per share and the stock price peaked at $62.22 adjusted for a 1:3 reverse stock split on June 4, 2008.  After 2004, sales declined sequentially in each year until bottoming out at $61 million in 2009. Large losses were reported in the years 2005-2007, including the write-off of intangible assets and restructuring charges totaling $148.9 million in 2006, which contributed materially to the total 2006 net loss of  $201.2 million or $(12.50) per share.


Recognizing that the Company was on a financial path to self-destruction, PXLW implemented significant executive management changes including: the VP & CFO in July 2007; the President & CEO in January 2008; the Executive VP – Sales & Marketing in June 2008; the Senior VP- Engineering in January 2009 and the VP of Operations in February 2009.  The new management team recognized the importance of putting the Company on a sound financial footing before pursuing any aggressive expansion of their business. Below is a table, which highlights some of their accomplishments in the period from 2007 through March 31, 2010.



For the Qtr Ended 03-31


    For the Fiscal Year Ended 12-31









 $ 18,692

 $        10,780


 $  61,093

 $      85,164

 $    105,980

Opting Inc. <Loss>







Net Inc. <Loss>








 $     0.32

 $            1.06


 $      1.39

 $          1.13

 $       (1.90)

Shares O/S














Cash & Mkt Sec

 $ 32,697

 $        40,165


 $  30,859

 $      63,317

 $    118,957

Total Liabilities







Liab's net of Cash







Shrhldr Equity







Note: $ Amounts (except EPS data) and Shares Outstanding in Thousands. Also, Net Income amounts in periods after 2007 were favorably impacted by repurchases of debt and tax benefits.


Management was able to increase profitability in 2008 - 2009 despite the significant decline in sales from $106 million in 2007 to just $61 million in 2009.  Besides reigning in their expenses, PXLW reported large gains from the repurchase of their convertible subordinated debentures at substantial discounts, which resulted in their long-term debt declining from approximately $147 million at 12-31-06 to about $16 million as of 03-31-10.

It can be seen from the above table that on 12-31-07  total liabilities ($170 million) exceeded  total cash and marketable securities ($119 million) by approximately $51 million. By March 31, 2010 Pixelworks’s total liabilities ($35.9 million) exceeded their cash and marketable securities ($32.7 million) by just $3.2 million, which was an improvement of about $47.7 million from 12-31-06 to 03-31-10. Additionally, the Company reduced the dilutive impact on share count by repurchasing their convertible debentures. The BOD wisely elected to purchase back common shares at depressed prices, which further reduced the weighted average diluted shares outstanding from 16.1 million shares on 12-31-07 to 14.2 million shares on 03-31-10.


We would not have purchased shares of Pixelworks solely for their ability to repair and restructure their Balance Sheet. We try to find both value, as well as, the potential for future growth in sales, operating income and operating cash flow, when committing to an investment.  After quarterly sales bottomed out at $10.8 million in Q-1 2009 (low point of the recession) there was steady sequential growth in sales during the remaining three quarters in 2009 (Q-2 sales $14.2 million, Q-3 sales 16.7 million and Q-4 sales $19.4million) with accompanying improvements in operating margins. The first quarter each year is a seasonably slow period for PXLW and Q-1 2010 sales ($18.7 million)  were below Q-4 2009 sales ($19.4 million), but up +73% over  Q-1 2009 sales ($10.8 million).


Management appears committed to growing the Company on a sound basis and on their Q-1 2010 conference call expressed optimism over the exciting potential within the markets served by Pixelworks.  A quote from their Q-1 press release sums this up as follows:


“Our ongoing investment in innovation is resulting in a continuous stream of new products that are reestablishing Pixelworks’ leadership in video,” said Bruce Walicek, President and CEO of Pixelworks. “Products such as our new PA130 with n2m® and 3D-ready technology are well positioned to address the growing need for video quality driven by explosive trends such as 3D and Internet video. Delivering our new products to our customers is our number one focus for 2010.”


During 2009 the stock price began mirroring the improvements recorded by the Company. In 2009 the prices ranged from a high of $4.23 to a low of $0.36 (of course in March 2009) and closed the year at $3.04. In the first quarter of 2010 it traded in a range $5.98 - $2.88 and closed at $5.75 on March 31, 2010. At the end of the regular session on April 22, 2010 the stock closed at $5.62 but then sold off to $4.85 in the After Market. While there appears to be resistance in the area of $5.50 to $5.85 we believe the stock price will move higher if Management is able to successfully execute their Business Plan.


A copy of our report on PXLW is available by emailing me at:



Joseph Levy, General Partner

LLG Equities, LP

Allendale, NJ 07401


Disclosure: LLG Equities, LP has a long position in PXLW