Pixelworks Inc (PXLW) 2007 Q2 法說會逐字稿

Good afternoon, and thank you for joining us.

This is Steve Moore, Pixelworks' CFO.

With me today is Hans Olsen, President and Chief Executive Officer.

The main purpose of this conference call is to supplement the information provided in our press release issued earlier today announcing the Company's financial results for the second quarter ended June 30, 2007.

The press release and contents of this conference call contain comments about our business outlook and include forward-looking statements.

Investors are cautioned that all forward-looking statements involve risks and uncertainties that could cause actual results to differ materially.

The forward-looking statements we make today speak as of today, and we do not undertake any 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, 2006, and subsequent SEC filings for a description of factors that could cause forward-looking statements to differ materially from actual results.

During this conference call, we will also be making reference to non-GAAP gross margins, operating expenses, EBITDA, net loss, and net loss per share.

These measures exclude certain restructuring charges, amortization of acquired intangible assets, intangible asset impairments, goodwill impairment, stock-based compensation expense, and a gain on the repurchase of long term debt.

The Company uses these non-GAAP measures internally to assess its operating performance.

The Company believes these non-GAAP measures provide a meaningful perspective on its underlying cash flow dynamics but cautions investors to consider these measures in addition to, not as a substitute for nor superior to, its consolidated financial results as presented in accordance with GAAP.

A complete reconciliation between GAAP and non-GAAP financial measures is included in the press release, which is available in the Investor Relations section of the Company's website.

Now I'll turn the call over to Hans.

Good afternoon, and thank you for taking the time to join us today.

I'm pleased to be joined by Steve Moore, our new Chief Financial Officer, who came on board last week.

As you may have seen in our earlier press release, Steve has a strong track record of leading finance and accounting teams and rapidly growing high tech companies, with his most recent position being CFO at Adept Technology, and I'm happy to have Steve on board.

Thanks, Hans.

I'm pleased to be here.

Let me start by giving you an update on our business.

We had an encouraging second quarter, during which we saw the impact of our restructuring efforts produce positive results that, in some aspects, exceeded our guidance.

As we discussed during our annual meeting in May, we have implemented strategies that we believe put the Company on the path to profitability.

We are calling this Pixelworks 2.0, and our second quarter results show accelerated progress on the transition to our new business model.

In fact, during the second quarter, we achieved our goal of being EBITDA positive ahead of our original timeline.

We are pleased with reaching this key milestone, recognizing that it is just one of many ahead of us.

Let's highlight some of the other areas in our financial results for the quarter in order to offer a better picture of how we achieved our results.

Our revenue in the second quarter was $26.9 million, which was a 12% increase sequentially and at the high end of our outlook from April.

Revenue growth was driven by increased sales in projectors and stronger than expected demand in our advanced media processors.

We saw modest growth in all our markets, except advanced television, where, as expected, we saw a 22% sequential decline in revenue.

The split for our second quarter revenue by market is 50% projectors; 17% advanced television; 17% advanced media processors; and 16% LCD panels, monitors, and other applications.

We made tremendous progress on controlling our operating expenses and saw the benefits of the restructuring actions we've taken during the last two quarters.

We lowered our quarterly non-GAAP operating expenses by $2.5 million, or 14%, compared to the first quarter.

Our non-GAAP operating expenses were $15.3 million, and we will achieve our goal of lowering non-GAAP operating expenses to below $15 million by the end of the third quarter.

Additionally, our non-GAAP gross profit margin increased to 46% in Q2.

If we step back and look at our performance during the first half of the year, it offers some perspective on the extent of our progress.

During the last six months, we have succeeded in lowering our quarterly non-GAAP operating expenses by more than 20%.

Meanwhile, we have seen our non-GAAP gross margins rise by nearly 5%.

These are very encouraging results.

Full credit for making this progress goes to our entire team, which did an outstanding job of controlling expenses and realizing efficiencies.

Our employees have stepped up across the board to take responsibility to turn the Company around.

We made significant gains by lowering our personnel costs and development expense and are carefully managing capital spending.

We continue to evaluate our operations on an ongoing basis and are pursuing additional efficiencies while investing in development of our next generation of products.

To this point, we recently took a hard look at our organization in Asia and are undertaking efforts to focus and streamline our operations there.

At this time, we have three offices in China, in Shanghai, Beijing, and Shenzhen.

We feel we can better support our product lines and customers going forward while, at the same time, lowering our overhead by folding these resources into our Shanghai office.

Our outlook for next quarter anticipates continued progress towards profitability.

Our revenue outlook is $26.5 to $28.5 million.

And, with continued benefit from our restructuring, we anticipate our non-GAAP operating expenses will be $13.5 to $14.5 million, and our GAAP and non-GAAP losses are expected to narrow further.

Now I'll give a brief update on our strategic direction and products.

We continue to make progress on our new product strategy, and I believe we'll continue to excel as the leader in pixel processing.

Rather than pursuing strategies aimed at the commodity TV/SOC market, we're finding new ways to leverage our unique advantages.

With our pixel enhancement technologies aimed at some of the most demanding applications for image and video quality, we're well positioned for the transition to next-generation displays and the increased image and video quality requirements.

We expect this transition to occur over the next 12 to 24 months.

Additionally, we're taking our technology into new areas beyond our traditional applications.

We see great opportunities for our technology in helping drive the convergence of TV, media PC, and internet TV and video.

Our innovative PixelAmp and Motion Engine technologies can dramatically improve the performance of video by overcoming some of the challenges that now face these emerging sources of information and entertainment.

To that point, today we announced that we are collaborating with ASUSTeK to provide our video processing technology and products for personal computers.

For those who may not be familiar with ASUS, this company is a world leader in manufacturing components for personal computers and is a significant player behind the scenes in the PC market.

This application is a great example of the power of our PixelAmp product and its ability to enhance video performance in new ways.

Our products can elevate video performance, regardless of the source.

In this case, ASUS is working to meet the highest standards for video processing that are required in PCs that are increasingly used for watching on-demand movies, DVDs, internet videos, and even television programs.

We are excited about this relationship and are looking forward to exploring new ways to close the gap in performance between video and PC and other devices compared with traditional TV.

Turning to our mainstay projector business, we remain focused and committed.

Our projector business has been the foundation of Pixelworks from the beginning.

We've committed to extending our leadership in this market by investing in further development of our leading image processor architecture and remaining true to our philosophy of taking a system approach to designing our chips.

Our progress, our new strategies, and the market opportunities ahead of us makes us optimistic and encouraged about the future of Pixelworks 2.0.

I will now turn the call over to Steve, and he will walk you through the details of the second quarter financial results.

Thanks, Hans.

Revenue in the second quarter of fiscal 2007 was $26.9 million, an increase of $2.9 million, or 12.2%, from $24 million in the first quarter of fiscal 2007 and a decrease of $4 million, or 13%, from $30.9 million in the second quarter of fiscal 2006.

Our Q2 book to bill ratio was approximately 1.1 to 1 and reflects strong order patterns in our projector and advanced media processor markets.

We are expecting revenue in the third quarter to be in the range of $26.5 to $28.5 million.

I'll take the next few minutes to discuss second quarter revenue by market, beginning with projectors.

Second quarter projector revenue was approximately $13.5 million, up 7% sequentially and down 7% year over year.

ASPs improved 5% sequentially, primarily due to a shift in product mix to our new generation of image processors that feature higher levels of integration.

We expect third quarter revenue from projectors to be up approximately 12% to 16% from the second quarter of 2007.

Advanced television revenue in Q2 was approximately $4.5 million.

As anticipated, advanced television revenue was down 22% sequentially and down 46% year over year.

Unit volumes decreased 34% sequentially, partially offset by a 17% increase in average sales price in the quarter, due to customer mix.

We expect advanced television revenue in the third quarter to be relatively unchanged from the second quarter.

Revenue for the advanced media processor market in the second quarter was approximately $4.6 million, up 18% sequentially and down 3% year over year.

We expect third quarter Amp revenue to be up 8% to 16% from the second quarter of 2007.

Second quarter revenue from LCD monitor, panel, and other applications was approximately $4.3 million, up 166% sequentially and up 32% year over year.

The increase in revenue in the second quarter was due primarily to last time sales of end-of-life products and sales of legacy monitor products.

Looking forward to the third quarter of 2007, we expect revenue from monitor, panel, and other applications to be down 35% to 50% from the second quarter.

GAAP gross profit margin in the second quarter of fiscal 2007 was 43.1% compared to the first quarter of 41.1%.

Included in cost of sales during the second quarter was approximately $35,000 in restructuring charges, along with approximately $700,000 of noncash expenses for the amortization of acquired intangible assets and stock-based compensation.

Excluding these costs, non-GAAP gross profit margins improved 1.5% to 46% in the second quarter from 44.5% in the first quarter as a result of a more favorable product mix and lower material costs.

We expect GAAP gross profit margins in the third quarter to be 41.5% to 43.5% and non-GAAP gross profit margins to be 44% to 46%, excluding an estimated $800,000 in restructuring charges and noncash expenses for amortization of acquired intangible assets and stock-based compensation.

GAAP operating expenses were $19.4 million in the second quarter, including $2.6 million in restructuring charges and $1.5 million in noncash amortization of acquired intangible assets and stock-based compensation.

Excluding restructuring charges and noncash expenses, non-GAAP operating expenses in the second quarter were $15.3 million, down $2.5 million from $17.8 million in the first quarter, primarily due to lower compensation as well as NRE and development expenses.

This expense level is better than we had guided to last quarter, reflecting our success in accelerating our restructuring efforts.

We expect third quarter GAAP operating expenses of $16.1 to $17.6 million and non-GAAP operating expenses of $13.5 to $14.5 million.

This expected reduction in operating expenses is due in large part to lower compensation expenses.

Excluded from non-GAAP operating expenses are an estimated $2.6 to $3.1 million of restructuring charges and noncash expenses for stock-based compensation and amortization of acquired intangible assets.

Non-GAAP EBITDA was approximately $1 million in the second quarter compared to a negative $3.2 million in the first quarter.

Interest in other income net was approximately $590,000 in the second quarter, down slightly from approximately $700,000 in the first quarter.

We expect interest and other income to be approximately $550,000 in the third quarter.

The provision for income taxes in the second quarter of approximately $400,000 reflects our accrual for current and contingent taxes payable in profitable foreign-taxed jurisdictions.

We expect income tax expense in the third quarter of 2007 to be approximately $300,000.

The second quarter GAAP net loss was $7.6 million, or $0.16 loss per share, compared with first quarter GAAP net loss of $12.4 million, or $0.25 loss per share.

Excluding the noncash expenses and restructuring charges, net loss on a non-GAAP basis in the second quarter was $2.7 million, or $0.06 loss per share, compared to a non-GAAP net loss of $7 million, or $0.14 loss per share, in the first quarter of 2007.

Now let's move to the balance sheet.

Cash and marketable securities consisting of cash, cash equivalents, and short and long term marketable securities were $125.2 million at June 30, 2007, an increase of $2.7 million from a balance of $122.5 million at March 31, 2007.

The increase in cash and marketable securities during the quarter resulted primarily from a $3.6 million decrease in accounts receivable, an increase of $3.6 million in accounts payable, partially offset by a $3 million increase in inventory and $1.5 million net payments on other accrued liabilities.

Accounts receivable net at June 30, 2007 were $9 million and decreased $3.6 million, or 29%, from $12.6 million at March 31.

Days sales outstanding on June 30 decreased to 30 days compared with 47 days on March 31.

Inventory net at June 30 was $16.7 million compared to $13.9 million at March 31.

This increase was due primarily to large receipts late in the quarter.

Inventory turns were 3.8 times in both the second and third quarters of 2007.

Property and equipment net on June 30 of $15.7 million is down $2.8 million from a balance of $18.5 million at March 31, reflecting normal depreciation and amortization, asset write-offs, and minimal capital expenditures as part of our goal to improve free cash flow.

In Q3, we expect our depreciation and amortization expense to be approximately $3.3 million, and third quarter capital expenditures will total approximately $1.5 to $2 million.

I will now turn the call back to Hans for his closing comments.

Thank you, Steve.

We're proud of the progress we made during the second quarter in achieving our goal of being EBITDA positive well ahead of our original timeline.

We are realizing the benefits of our restructuring efforts that have reduced Pixelworks' quarterly non-GAAP operating expenses by 20% over the course of the first half of the year.

However, we know we're not going to be able to cut our way to success.

With a balanced business model combining innovative new products, execution, and product development and controlling and modifying our cost structure, we believe we will be able to deliver profitability and increase shareholder value.

The focus of the management team is on maintaining our momentum in developing and delivering compelling video and pixel processing products to the market.

We have a number of products in the pipeline that we believe will maintain our leadership in the digital projector market and will open doors to new markets for our pixel processing technologies.

The future of Pixelworks 2.0 is indeed bright.

Thank you.

We can now open up the call for your questions.

Thank you.

(OPERATOR INSTRUCTIONS).

We'll go first to Adam Benjamin with Jefferies & Company.

Just a couple questions on the revenue here.

It appears that the LCD monitor business had a big uptake in the June quarter, as well as the equator business.

Can you talk a little bit about each one, because you're expecting both to come back down?

Sorry.

You're expecting the LCD monitor to come back down.

So was that just a one-time benefit, or what's going on in that business?

Then we can talk about the Amp business.

Okay.

On the LCD monitor business and the category of other, we had some benefits of shipping some end-of-life product during the quarter.

And that's what increased revenue in that particular segment.

And that's not a continued benefit that we enjoy.

So that's the primary reason for that.

So we shouldn't expect anything going forward coming from that line item, whether it's with Samsung and Peanut you've talked about historically.

Yes.

We continue our efforts with Samsung on Peanut, and there will be a continued effort in that area.

But you should not expect to see-- in the quarter that we are outlooking, there is no significant change.

Okay.

And then on the Amp business, it grew from some last-time orders, and it sounds like you're going to get some more here in the September quarter.

How should we be thinking about that over the longer term?

You guys have indicated in the past that that business kind of winds down.

Is it doing better than you originally thought in terms of when it winds down, in terms of timing?

Yes.

We've had a positive surprise in that business.

We are able to sustain that at a level and for a longer time than we originally anticipated.

And we actually expect that we can sustain this level at the foreseeable future.

Okay.

And then on the gross margin side, you had pretty decent gross margin improvement, even with the monitor-- the projectors being lower, which is your best margin business.

Can you quantify?

You mentioned some costs helping you.

How much was mix?

How much was cost?

And how should we be thinking about some of those other segments, including the monitors as well as the Amp business, in terms of roughly where they are in terms of gross margin versus the corporate average?

I don't have the breakout by product.

But, generally, I think you can expect that, with the higher levels of integration and the advantages that we bring to market, we're able to sustain a reasonable margin in both the projector business and in the higher end TV and pixel processing products that we have.

We think that we can-- as we outlook the next quarter, we continue to have the benefits of serving higher end markets, and, also, we have the benefit of reducing material costs.

So we'll be able to maintain-- our model is in the mid 40s, and, as you can see, we outlooked 44 to 46 for the coming quarter.

Maybe asked a different way, did you significantly benefit from the Amp increase in last-time orders?

I assume those margins now are significantly higher.

Is that the case?

That would be correct.

They are higher.

Significantly can mean different things, but they are certainly higher.

Higher than the corporate average?

Yes.

Okay.

All right.

Then, just lastly, on some of the newer products that you guys have been talking about, can you give us some more color on Pixel GX and PixelAmp?

And what--?

Obviously, it doesn't sound you're seeing much traction this year.

Is that a next-year event now at this point?

Well, as we talked about in our earlier calls, we're rolling out the new products, really starting about this time.

And the benefits from that you'll see towards the end of the year and into next year.

And it's basically on the plan that we originally outlined.

But they are both (inaudible) and PixelAmp are being rolled out at the moment.

And what about--?

Can you talk about the slim CRTs as to the total ATV revenue and how much that represented in the quarter?

We don't break that out.

But what I can tell you is that we are obviously heavily engaged with Samsung on the slim CRT effort.

That product is selling in the market.

I think you would have to get the information directly from Samsung as far as the ramp of that product.

But I think, generally, the success of the slim CRT is taking a little longer to take off that market than originally anticipated.

But we are seeing-- we're certainly seeing growth in that market.

So we shouldn't think of that as a material contribution to your ATV line for several quarters now?

Not in the next quarters.

No.

Okay.

That's all I have.

Thanks, guys.

And we'll move on to [Ying Wong] from Wedbush Morgan Securities.

Just a quick one.

You mentioned an inventory increased from a late receipt in the quarter.

So can you give us some more color on this one?

It is exactly that.

We did have significant receipts both at the end of the quarter and inventory in transit.

So we would expect to see inventories decrease over the next couple of quarters.

In which product category?

Do you have any more details on this?

I don't have a specific detail, but--

We don't have detail here, but we can certainly provide some of that.

Okay.

That sounds fine.

Thanks.

I think that's all I have.

Thank you.

(OPERATOR INSTRUCTIONS).

We'll now go to Ian Gilson from Zacks Investment.

Nice results.

Looking at the projector market, could you give us a geographical breakdown of the customer mix?

And what was the strength in the Japanese client base versus the rest of Asia?

Well, what I can give you-- we do not provide a detailed breakout.

But we-- as you probably know, we serve the polysilicon part of the projector market.

And that is heavily concentrated in Japan.

So a very large portion of our projector business is in Japan.

I think as we-- As you know from previous disclosures, Epson is a significant customer for Pixelworks.

So Japan is the primary market, and that's where the majority of the revenue comes from.

Okay.

On a geographical basis, I'm looking for overall and not just in projectors.

Can you give that number?

We can.

I do not have it on-- handy here.

But we can get back to you with that number.

If you would, please.

That's fine.

That's all I had.

We'll now go to Eric Reubel from Miller Tabak Roberts.

Great work on working capital in the quarter.

Hans, if I can turn back to the LCD product for just a second, I thought that Peanut was going to start to move into low volume production in 2Q.

Did we see that?

And has that been pushed out?

There has been some delay in that, not as a result of Pixelworks but more the ramp from Samsung.

There is-- we are still in the early stages of preproduction.

Peanut is being used in multiple LCD panel types.

We do not necessarily have the visibility into the exact forecast of Samsung, but we are in the early stage of preproduction.

So it's just kind of-- I was kind of thinking that Peanut might be moving into low volume production in Q2 and that the Amp products might be kind of winding down through the second half of the year.

I think you said that the Amp products will be up and that you think that's sustainable.

It's sustainable in the short term, yes, as far as we have the visibility.

Okay.

And you mentioned a little more restructuring from the Asian facility base.

Will there be any cash restructuring charges?

And how do we expect those to flow through in Q3?

There would be cash restructuring charges that were accrued in-- for the most part, accrued in Q2 that would flow in Q3.

I can't go into the exact detail, but there certainly would be.

Okay.

I think that's it for me.

Thanks a lot.

(OPERATOR INSTRUCTIONS).

We'll go now to Joanna Wa from Southpaw Asset.

Just a couple-- a few housekeeping questions here.

I might have missed it earlier.

And, if I did, I apologize.

But what was your CapEx for the quarter?

CapEx was a little less than $1 million, I believe.

Got you.

And was working capital a net source or use of cash?

Working capital was a net source, I believe.

Do you have that number at the top of your head?

No, I don't.

Got you.

I'm just sort of working it out as we're talking.

But, yes, most of it did in fact come from working capital.

Okay.

And do you have a sense of what kind of operating cash flow was generated in this quarter?

Well, on a GAAP cash flow basis, the operations did not generate cash flow.

But, obviously, on our adjusted non-GAAP EBITDA calculation, we believe we're creating cash once all the unusual or one-time or restructuring-oriented elements are taken out.

Okay.

So it was still in that use of cash from operations.

On a GAAP basis.

On a GAAP basis.

And, on a non-GAAP basis, do you expect that to be positive?

That's certainly the direction that we're headed.

Yes.

Okay.

So you do think that you're actually already cash flow positive at the end of Q2?

Well, we generated $2.7 million in cash.

Now, to your earlier point, there was enough change in working capital-- some of it did come out of the management of working capital.

But I think we're definitely headed on the path of being consistently able to generate cash.

Okay.

Great.

I think certainly we are ahead of our original plans for cash.

Okay.

Great.

And then, lastly, just the last housekeeping question as far as non-GAAP EBITDA, what was the amount on that?

It was $1 million, approximately.

Okay.

Thanks so much.

That's all I have.

We'll take a follow-up question from Eric Reubel.

If you could talk a little bit more about the projector market, where do you think--?

We're heading into what should be the stronger second half.

If you could talk about the competitive landscape on chip component side-- And then where do you see the breakout between DLP and polysilicon?

How are things going?

Well, we see a continued strength of polysilicon in Japan and continued strength of DLP outside of Japan.

Where the numbers eventually are going to end up is obviously a little difficult for us to forecast.

What we can tell about our business, which is, as you know, aimed at the polysilicon business, we continue to see strength through the second half of the year.

As you can see, we are forecasting increased revenue in the second half of the year, which would certainly lend us to believe that we continue to do well or that polysilicon continues to do well.

But there certainly is a lot of competition between polysilicon and DLP.

Where it's eventually going to fall out, I don't know.

I think the forecasted numbers are pretty much even between DLP and polysilicon.

That's fair enough.

And, Hans, can you give us any color on the direction of sort of the very high end projector systems for home?

Are you seeing any adoption for a consumer product for projectors?

We are seeing some adoption.

What we also see is it's a much slower adoption than forecasted and hoped for by the projector manufacturers.

The adoption rate is slower than hoped.

So it's-- there still is a lot of interest, but the real material change we have not seen yet.

Okay.

Thank you.

And we'll go to a follow-up question from Adam Benjamin.

Did you benefit from the sale of written off inventory at all?

Did the gross margin benefit from the sale of any written off inventory?

There was some element of changes in reserves that were created for a number of reasons, one of which would be the sell-through of previously written down inventories.

It was not a particularly significant element.

So, if you were to sort of quantify it, it would probably be less than-- are we talking a couple hundred thousand dollars here?

Well, within the change, the change in our gross margins on a non-EBITDA basis-- the primary factor-- there were nonrecurring factors, if you will, that sort of offset one another.

And then the primary factors that were recurring were related to-- or we believe were recurring were related to mix and lower material costs.

Okay.

Thank you.

And we'll take a follow-up question from Joanna Wa.

Just a follow-up on your long term marketable securities.

Can you talk about what that consists of and whether or not you've been affected by the recent market downturn?

We mark all of our securities to market.

So, to the extent that the market changes, we'll show the balance at its fair value on the balance sheet date.

And do you have a sense of kind of where it stands as of today?

I'm not sure I follow that.

Maybe I didn't understand your first question.

As of June 30, it's mark to market about $15 million, right?

Correct.

And can you provide a rough gauge of what that number looks like today?

I'm sorry.

This $15 million came from--?

It's on the balance sheet under long term (inaudible).

I'm sorry.

Okay.

You're just looking at the long term portion.

Yes.

Okay.

All of our marketable securities are mark to market.

Yes.

And has this $15 million amount--?

I'm not aware of it changing dramatically since the end of June, which, I think, is your question.

Okay.

Great.

Thank you.

Gentlemen, there are no other questions at this time.

I'll turn the conference back to you for any additional or closing remarks.

If there are no further questions, I'd like to thank you all for joining the call.

Thank you.

Again, that does conclude our conference for today.

We thank you for your participation, and have a great day.