Pixelworks Inc (PXLW) 2008 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Second Quarter 2008 Pixelworks Earnings Conference Call.

My name is Melanie, and I'll be your coordinator for today.

At this time, all participants are in listen-only mode.

We will conduct a question-and-answer session at the end of this conference.

(OPERATOR INSTRUCTIONS.) As a reminder, today's call is being recorded for replay purposes.

I would now like to turn the call over to Mr.

Steve Moore, Chief Financial Officer.

Please proceed.

Good afternoon and thank you for joining us.

This is Steve Moore, Chief Financial Officer of Pixelworks.

With me today is Bruce Walicek, President and 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 second quarter ended June 30, 2008.

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, 2007, and subsequent SEC filings for a description of factors that could cause forward-looking statements to differ materially from actual results.

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

These measures exclude a gain on the repurchase of long-term debt and other than temporary impairment of a marketable security, other income, restructuring charges, acquisition-related items, and stock-based compensation expense.

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.

Bruce will begin today's call with a strategic update on the business, after which I will review our Q2 '08 results and discuss our outlook for the third quarter.

Thanks, Steve, and good afternoon, everyone, and thank you for taking the time to join us today.

During Q2 '08, we continued to focus on our operational objectives of aggressively marketing our products, executing our product roadmap, and managing our expense base as we continue to drive our turnaround plan.

We also strengthened our management team during the quarter with the addition of Tony Bozzini as VP of Sales.

Tony brings over 25 years in the semiconductor industry experience to Pixelworks, and we are pleased to welcome him to the team.

Second quarter results came in within expectations as the sluggishness we noted at the end of Q1 stabilized, and as a result of incremental benefits from the restructuring actions we have taken over the last several quarters.

Revenue for the quarter, at $20.8 million, came in at the high end of our guidance, reflecting a stabilizing trend in our core projector business during the quarter.

Non-GAAP gross profit margins rose to 54% versus 51.7% last quarter and increased eight percentage points versus Q2 '07 as a result of a continued focus on inventory management and lowering product costs.

Non-GAAP operating expenses of $10.9 million decreased $4.4 million from Q2 '07, a reduction of 29% year on year.

Lower costs of revenue and expense reductions year over year once again helped derive positive cash flow from operations of nearly $3 million in Q2.

On a non-GAAP per share basis, we broke even in the second quarter compared to a $0.17 loss per share reported in Q2 '07.

As we enter the second half of the year and continue to execute our turnaround plan, I would like to note a few points about the first half of the year.

The restructuring that has demanded much of management's attention over the last several quarters is largely behind us, and going forward, we will be focusing on incremental streamlining of our business model versus structural change.

We have focused our product offerings on those areas where our video technology can add value by introducing two new leadership products in the first half of the year--the PW9800 DNX Motion Engine and the PW610 Digital Projection Post-Processor.

These products are generating a very high level of interest and engagement with customers and are now beginning to move into production.

Our relationships with our long-term customer base of top-tier manufacturers and OEMs remains very strong and provides a solid foundation to rebuild the Company and continue to execute our turnaround plan.

As you have heard me discuss during the last couple of conference calls, we believe that the dramatic change occurring in how video is created, delivered, and viewed presents significant opportunities for Pixelworks.

Digital video is becoming pervasive, and the demand for higher quality video is increasing as the industry transitions to high resolutions and larger screen sizes.

This is placing new processing demands on the next-generation products to ensure that manufacturers can deliver their products quickly and that customers get the high quality video experience they have come to expect.

Significant video quality problems, such as judder or enhaloing, which are exacerbated with LCD technology, are just a few of the challenges manufacturers face as they look to deliver high-quality video to their customers and differentiate their products.

Not only are there challenges facing manufacturers in delivering quality video, but the convergence of digital media is pushing higher quality digital video into a wide variety of consumer and business applications, such as projection, digital signage, and advanced large-screen LCD TVs, to name a few.

And increasingly, these display mediums are becoming connected.

We believe our core video technology allows us to address a broad range of challenges in digital video.

We will continue to focus our R&D efforts on architectural and algorithmic innovation to provide the high quality video solutions that Pixelworks has been known for over the last decade.

As I have mentioned on previous calls, one of our key objectives is to efficiently leverage our R&D efforts and capitalize on our investments in advanced design technology over the last several years that have resulted in the ability to deliver leading products with first-time silicon success.

To that end, in addition to the leading video products we introduced in the first half of the year, in the current quarter we will begin sampling our fifth-generation digital projector platform code-named Ruby, as we continue to build upon the new product momentum established earlier this year.

Ruby represents a significant upgrade in video capability and quality for our projection customers.

But more importantly, it is our first digital video network display processor.

The Ruby platform plays right into the macro trend of connected video and enables our customers to deliver high-quality and cost-effective network projectors.

While Ruby will be initially targeted at the projection market, its networking and quality video capabilities are a good fit with other video applications that require high quality, connectiveness, and flexibility.

To wrap up, we have a great team, a strong reputation in the market, and a loyal customer base that includes some of the world's leading manufacturers of video and display products.

We are focused on maintaining the integrity of our business model, aggressively marketing our new and key existing products, efficiently leveraging our R&D investment into value-added products and markets, and building on the engineering execution momentum established earlier this year.

We understand that it's extremely important we maintain a business model that will create value for our shareholders, and we are working hard to achieve this and expect to be successful.

While we witnessed some signs of sluggishness in our customers at the beginning of Q2, we have seen stabilization in ordering patterns during the quarter.

That being said, we are cognizant of the overall macroeconomic environment and remain vigilant and cautious in managing our business.

I'd now like to turn the call over to Steve for our second quarter financial review and third quarter outlook.

Thank you, Bruce.

Revenue in the second quarter of 2008 was $20.8 million, which was down $3.2 million, or 13% sequentially, from $24 million in the first quarter of 2008, and down 23% from $26.9 million in the second quarter of 2007.

Revenue in the second quarter of 2008 was at the high end of the guidance we gave at the beginning of the quarter of $19 million to $21 million.

Our Q2 book-to-bill ratio was approximately one-to-one, consistent with the stabilizing trend that Bruce mentioned.

The split in our second quarter revenue by market was 61% projectors, 17% advanced television and LCD panels, and 22% advanced media processors or amps, monitors, and other applications.

Second quarter projected revenue was approximately $12.6 million, down 12% sequentially and down 7% year over year.

ASPs were essentially flat.

Advanced television revenue in Q2 was approximately $3.5 million, up 4% sequentially and down 30% year over year.

ASPs were flat sequentially and down 9% year over year.

Revenues from the amps, monitors, and other markets in the second quarter was approximately $4.7 million, down 26% sequentially and down 44% year over year.

For the third quarter of 2008, we expect revenues to be in the range of $20 to $22 million.

Looking now towards profit margin, GAAP gross profit margin in the second quarter of 2008 was 50.5%, up from 48.7% in Q1 '08 and up 7.4 percentage points from 43.1% in the second quarter of 2007.

Included in cost of sales during the second quarter of 2008 was approximately $725,000 of non-cash expenses for the amortization of acquired intangible assets and stock-based compensation.

Excluding these costs, non-GAAP gross profit margin was 54% in the second quarter compared with 51.7% in Q1 '08 and 46% in the second quarter of 2007.

Gross profit in Q2 2008 was positively affected by continued improvement in inventory management and lower cost of materials.

We expect GAAP gross profit margin in the third quarter of 2008 to be in the range of 47.5% to 50.5% and non-GAAP gross profit margin to be in the range of 51% to 54%, excluding an estimated $700,000 in non-cash expenses for the amortization of acquired intangible assets and stock-based compensation.

GAAP operating expenses were $11.6 million in the second quarter, including a credit to restructuring of $158,000 and $800,000 in non-cash stock-based compensation and amortization of acquired intangible assets.

Excluding restructuring charges and non-cash expenses, non-GAAP operating expenses in the second quarter were $10.9 million, slightly up from $10.5 million in the first quarter of 2008 as a result of increased product development costs, and down 29% from $15.3 million in the second quarter of 2007.

The year-on-year decrease in operating expenses is the direct result of the Company's restructuring actions over the past several quarters, which has included headcount reductions, facility closures, lower depreciation, and a tight rein on discretionary spending.

Our restructuring efforts are now substantially complete, and we are very pleased with the measurable progress we have made in positioning the Company to be consistently profitable.

We expect GAAP operating expenses in the third quarter of 2008 to be between $10.8 million and $11.8 million, and non-GAAP operating expenses to be between $10 million and $11 million.

Excluded from these non-GAAP operating expenses are an estimated $750,000 of non-cash expense for stock-based compensation and amortization of acquired intangible assets.

Going forward, we will continue to evaluate our operations and pursue additional efficiencies while investing in the development of our next-generation products.

Non-GAAP EBITDA was approximately $2.0 million in Q2, down from $3.6 million in Q1 and up from EBITDA of $1.0 million in the second quarter of 2007.

GAAP interest and other income net was approximately $227,000 in the second quarter.

Second quarter interest and other income net included $218,000 in other income from the sale of a previously written-down investment in a non-marketable equity security.

Lower interest income in Q2 was the result of lower cash balances and lower interest rates.

We expect nominal interest and other income in the third quarter of 2008.

The provision for income tax in the second quarter of approximately $375,000 reflects our pool for current and contingent taxes payable in profitable foreign tax jurisdictions.

We expect to record income tax expense of $300,000 in the third quarter of 2008.

Second quarter GAAP net loss was $1.3 million, or $0.09 loss per share, compared with GAAP net income in Q1 of $6.1 million, or $0.41 income per share, and a GAAP net loss in Q2 '07 of $7.6 million, or $0.47 loss per share.

We recorded non-GAAP net loss in the second quarter of $65,000, or $0.00 per share, compared to non-GAAP net income of $3.8 million, or $0.25 income per share in the first quarter of 2008, and non-GAAP net loss of $2.7 million, or $0.17 loss per share in Q2 '07.

These net income and loss per share figures reflect the one-for-three reverse stock split we effected during the second quarter, and all past periods have been restated to reflect the revised share figures.

Looking forward, we expect to record a GAAP net loss per share in the third quarter of 2008 of between $0.17 per share and breakeven, and to record non-GAAP net income or loss per share of between $0.08 loss per share and $0.11 income per share.

Now let's move to the balance sheet.

Cash and marketable securities, which consists of cash and cash equivalents in short- and long-term marketable securities, were $81.7 million at June 30, 2008, up slightly from $81.4 million at March 31, 2008.

Major uses of cash in the quarter included $1.8 million in payments for tools, property, and equipment; $600,000 decrease in value of investments; and $200,000 used in the repurchase of shares of Pixelworks stock.

These uses of cash were offset by positive cash flow from operations of approximately $2.8 million.

Accounts receivable net at June 30, 2008, was $6.7 million compared with $5.8 million at March 31, 2008.

Days sales outstanding on June 30 was 29 days compared with 22 days on March 31.

Inventory net at June 30 was $6.1 million, down $2 million from $8.3 million at March 31.

Over the past few quarters we have paid close attention to improving our management of inventory levels, and we are pleased with the results.

Inventory turns increased to 5.3 times in the second quarter compared with 4.7 times in the first quarter.

Property and equipment net on June 30 was $5.7 million compared with $6.2 million on March 31.

Q2 additions of $900,000 were offset by depreciation and amortization of $1.2 million for the quarter.

In the third quarter of 2008, we expect our depreciation and amortization expense to be approximately $1.5 million, and Q3 capital expenditures to be approximately $1.0 million.

I'd now like to provide a quick update on our stock repurchase program, which runs for 12 months from September 2007 to September 2008.

We repurchased approximately 76,000 shares in the second quarter for a total of 1.9 million shares to date, with $4.4 million remaining of the $10 million authorized.

I'd like to close with a brief update on the status of our delisting notice received from NASDAQ on December 24.

In May shareholders approved a one-for-three reverse stock split that was effected in June, raising our stock price and enabling us to regain compliance with NASDAQ listing requirements.

Finally, we will be presenting at the AEA Oregon Technology Tour at our offices in Tualatin on August 11.

That concludes my comments.

We can now open the call for your questions.

(OPERATOR INSTRUCTIONS.) And I show no questions at this time.

I want to thank you for your time today, and we appreciate your interest in Pixelworks.

We'll look forward to talking to you on our Q3 '08 conference call.

Thanks.

Ladies and gentlemen, thank you for your participation in today's conference.

That does conclude the presentation.

You may now disconnect.

Have a wonderful day.