Pixelworks Inc (PXLW) 2008 Q3 法說會逐字稿

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

My name is Krista, and I'll be your operator for today.

(Operator Instructions) As a reminder, this conference is being recorded for replay purposes.

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

Steve Moore, CFO.

Please proceed, Sir.

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 third quarter ended September 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 this 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, 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 Q3 '08 results and discuss our outlook for the fourth quarter.

Thanks, Steve.

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

During Q3, we continued to make good progress against our operational objectives.

Third quarter results were at the high end of expectations as the result of stable demand for our products and continued improvements in key financial metrics.

We experienced good traction with customers in Q3 across our product lines and secured design wins with some of the world's top electronics manufacturers for our new and current products.

We made good progress against our product roadmap as we hit engineering milestones for our new network video chip Ruby, and taped out our next generation motion engine device.

From a financial perspective, revenue for the quarter, at $21.5 million, came in at the high end of our guidance, due to stability in our core projector business.

Non-GAAP gross profit margins once again improved on both a sequential and annual basis in Q3 increasing to 56.6% of revenue.

Year on year, the increase was 10.9 percentage points, the result of our continued focus on inventory management and lowering product costs as well as richer product mix in the quarter

Non-GAAP operating expenses of $10.5 million were in the middle of our range of guidance and reflected a decrease of $3 million from Q3 '07, a 22% year on year reduction.

We also strengthened our balance sheet with the repurchase of $29.1 million of additional long term debt during the quarter, realizing a net gain of $8.1 million.

Since the beginning of 2008, we have significantly delevered our balance sheet bringing $140 million of long term debt down to approximately $60 million today which is not due until 2011.

Lower cost of revenue and expense reductions year over year once again helped drive positive cash flow from operations of approximately $6.2 million in Q3 and we were profitable in Q3 on both a GAAP and non-GAAP per share basis.

Maintaining profitability continues to be a focus and priority as we execute our turnaround plan.

We believe there is significant opportunities for revenue growth available to Pixelworks stemming from the dramatic changes occurring in how video is created, delivered, and viewed.

One way to look at this is that we are entering our third wave of video that is characterized by four major trends.

First, the explosion of video content generated by users and the growing use of broadband to deliver that content.

Secondly, the shift from 720p high definition to 1080p full HD high resolution video.

Thirdly, the proliferation of new display devices from cell phones to large screen LCD displays.

And lastly, the drive to connect and network all of these display devices together.

All of these trends create new challenges for video quality which Pixelworks is extremely well positioned to address.

One key trend is that LCD technology driven by mass economies of scale, has become the leading platform for large screen displays.

According to display search projections, nearly 100 million units of LCD panels greater than 40 inches are expected to be shipped in 2012.

From a video quality standpoint, LCD is inherently inferior to other approaches in terms of pixel response time.

This means that with LCD technology, you get a host of image quality issues and the larger the screen, the higher the resolution, the more the video quality suffers.

One approach the LCD industry is taking to address video quality issues is to move to faster screen refresh rates.

Today's LCD panels operate at 60 hertz and they are transitioning to 120 hertz.

This shift is happening rapidly and about 40 million units of 120 hertz LCD panels greater than 40 inches are expected to be shipped in 2012.

But increasing the refresh rate creates new video quality problems such as judder, blurring, and haloing.

Another key trend is that we are now at the beginning of the transition from 720p high definition to 1080p full HD resolution.

While full HD provides the next level of video capability, it also brings out video quality issues such as artifacts and noise.

This trend, combined with the transition to larger screen sizes and faster refresh rates, provides Pixelworks with numerous opportunities to add value and improve video quality.

Pixelworks' motion estimation algorithms and advanced DNX technology are designed to address these issues by providing industry leading video quality.

We continue to ramp our PW9800 into production in Q3 and secured additional design wins with key leading OEMs during the quarter.

Additionally in Q3, we taped out our next generation version of our motion engine and we expect to begin sampling this product in the current quarter.

In addition to the key trends mentioned above, video is becoming connected and networked.

A good example of this is the digital signage screens showing infotainment at gas stations, in the airport, or in an elevator.

This trend is impacting the projector market as well where projectors are proliferating and being networked in the enterprise and in the classroom.

Our fifth generation projector platform, Ruby, plays directly into these trends by combining networking capability with Pixelworks' leading video quality.

As I discussed last quarter, Ruby represents a significant upgrade in capability and quality for our projection customers.

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

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

During the quarter we secured additional design wins for Ruby and for our PW610 digital projection post processor with some of the world's top electronics manufacturers.

We are also on track to ramp Ruby into full volume production later this quarter.

Also of note, Pixelworks' technology was selected by one of the world's leading electronics companies to provide key video processing functions in one of the market's first offerings in a new class of converged PCTV products.

Overall, it was a good design win quarter as the investments we are making in our channel yielded significant results.

To wrap up, as we move into the fourth quarter, we continue to focus on those areas where our video technology can add value and differentiation for both Pixelworks and our customers.

We have a low cost development platform that leverages the best of Silicon Valley and China and we're beginning to see some good results from the design and technology investments we've made over the last two years.

Our relationships with our long term customer base of top tier manufacturers and OEMs remains very strong and provides a solid foundation for Pixelworks' turnaround.

And we have a financial position that supports profitability and a generation of cash from operations.

In terms of the overall market, while we have seen some signs of sluggishness in those parts of our business that intersect with the consumer market which represents about 10% to 15% of our business, the majority of our end market is primarily within the enterprise and education segment and the trends we see there enable us to head into Q4 with normal visibility into the quarter.

That being, said we are cognizant of the uncertainty that characterizes the map for economic environment and are continuing to tightly manage our expenses and to look for ways to further reduce spending.

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

Thank you, Bruce.

Revenue in the third quarter of 2008 was $21.5 million, which was up $700,000, or 3% sequentially from $20.8 million in the second quarter of 2008, and down 24% from $28.1 million in the third quarter of 2007.

Revenue in the third quarter of 2008 was at the high end of the guidance we gave at the beginning of the quarter of $20 million to $22 million.

Our Q3 book-to-bill ratio was approximately 0.9:1.0, reflecting stability in our core projector business.

The split for our third quarter revenue by market was 67% projectors, 14% advanced television and LCD panels, and 19% advanced media processors for amp, monitors, and other applications.

Third quarter projected revenue was approximately $14.3 million, up 14% sequentially and down 13% year over year.

ASPs were essentially flat.

Advanced television revenue in Q3 was approximately $3 million, down 13% sequentially and down 49% year over year.

ASPs were up 15% sequentially and up 29% year over year.

Revenue from the amp, monitors, and other markets in the third quarter was approximately $4.1 million, down 12% sequentially and down 29% year over year.

For the fourth quarter of 2008, we expect revenue to be in the range of $18.5 million to $20.5 million.

Looking now at gross profit margin, GAAP gross profit margin in the second [sic] quarter of 2008 was 53.3%, up 2.8 percentage points from 50.5% in Q2 '08 and up 10.3 percentage points from 43% in the third quarter of 2007.

Included in cost of sales during the third quarter of 2008 was approximately $713,000 of non-cash expenses for the amortization of acquired intangible assets and stock-based compensation.

Excluding these costs, non-GAAP gross profit margin was 56.6% in the third quarter compared with 54% in Q2 '08 and 45.7% in the third quarter of 2007.

Gross profit in Q3 2008 was positively affected by continued improvements in inventory management and lower cost of materials as well as a more favorable mix of products sold in the quarter.

We expect GAAP gross profit margin in the fourth quarter of 2008 to be in the range of 45% to 48% and non-GAAP gross profit margin to be in the range of 49% to 52%, 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 million in the third quarter, at the low end of guidance of $10.8 million to $11.8 million and included $121,000 in restructuring charges and $404,000 in non-cash stock-based compensation.

Excluding restructuring charges and non-cash expenses, non-GAAP operating expenses in the third quarter were $10.5 million, down 4% from $10.9 million in the second quarter and down 22% from $13.4 million in the third quarter of 2007.

The year-on-year decrease in operating expenses is the direct result of the Company's restructuring actions during 2007 and 2008.

We are very pleased with the measurable progress we continue to make in positioning the Company to be consistently profitable.

We expect GAAP operating expenses in the fourth quarter of 2008 to be between $11 million and $12 million, and non-GAAP operating expenses to be between $10 million and $11 million.

Excluded from non-GAAP operating expenses are non-cash expenses for stock-based compensation and restructuring charges.

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

We were EBITDA positive for the sixth consecutive quarter in Q3.

Non-GAAP EBITDA was approximately $3.3 million in Q3, up from $2 million in Q2 and up from EBITDA of $2.7 million in the third quarter of 2007.

We realized a gain on the repurchase of long term debt in Q3 of approximately $8.1 million.

This gain was the net result of repurchasing approximately $29.1 million of convertible bonds for a cost of approximately $20.6 million plus the write-off of previously capitalized debt issuance costs of approximately $390,000.

Excluding the bond repurchase, GAAP interest and other expense net was approximately $21,000 in the third quarter.

This small amount of interest expense in Q3 was the result of lower cash expenses, excuse me, lower cash balances and lower interest rates on invested cash.

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

The provision for income taxes in the third quarter of approximately $314,000 reflects our accrual for current and contingent taxes payable in profitable foreign tax jurisdictions.

We expect to record income tax expense of $750,000 in the fourth quarter of 2008 on a GAAP basis and $250,000 on a non-GAAP basis.

Third quarter GAAP net income was $8.2 million, or $0.56 income per diluted share, compared with a GAAP net loss in Q2 of $1.3 million, or $0.09 loss per share, and a GAAP net loss in Q3 '07 of $4.4 million, or $0.27 loss per share.

We recorded non-GAAP net income in the third quarter of $748,000, or $0.05 income per diluted share, compared to non-GAAP net loss of $65,000, or $0.00 loss per share in the second quarter of 2008, and non-GAAP net loss of $869,000, or $0.05 loss per share in Q3 '07.

These net income and loss per share figures reflect the one-for-three reverse stock split we effected during the second quarter of 2008 and all past periods have been restated to reflect the revised share amounts.

Looking forward, we expect to record a GAAP net loss per share in the fourth quarter of 2008 of between $0.13 and $0.32 loss per share, and to record a non-GAAP net income or loss per share of between $0.03 income and $0.16 loss per share.

Now let's move to the balance sheet.

Cash and marketable securities, which consist of cash and cash equivalents as well as short and long-term marketable securities, were $62.8 million at September 30, 2008, down $18.9 million from $81.7 million at June 30, 2008.

Major uses of cash in the quarter included $20.6 million for the repurchase of $29.1 million of bonds, $2.3 million in payment for tools, property, and equipment, $1.4 million decrease in the value of investments, and $700,000 used in the repurchase of shares of Pixelworks stock.

These uses of cash were offset by positive cash flow from operations of approximately $6.2 million due to solid operating results and effective balance sheet management.

As a result of our bond buyback in Q3 and the strong generation of cash from operations, total cash now exceeds long term debt.

Accounts receivable net at September 30, 2008, was $5.9 million compared with $6.7 million at June 30 2008.

Days sales outstanding on September 30 was 25 days compared with 29 days on June 30.

Inventory net at September 30 was $5.3 million, down $1 million from $6.3 million at June 30.

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 6.5 times in the third quarter compared with 5.3 times in the second quarter and 4.7 in the first quarter.

Property and equipment net on September 30 was $4.8 million compared with $5.7 million on June 30.

Q3 '08 additions of $315,000 were offset by depreciation and amortization of $1.2 million in the quarter.

For the fourth quarter of 2008, we expect our depreciation and amortization expense to be approximately $1.8 million, and Q4 capital expenditures to be approximately $2.4 million, primarily due to acquisition of IP and design tools.

I'd like to wrap up with a couple of comments about our bond and stock buyback activities in Q3.

Including the bond repurchases in August and those completed earlier this year, in 2008 to date Pixelworks has repurchased approximately $79.4 million of our outstanding bonds at purchase prices ranging from 70% to 74% of face value.

These repurchases have reduced Pixelworks' long term debt from $140 million at the beginning of the year to approximately $60.6 million at the end of Q3.

As announced in August, our board of directors has extended our stock repurchase program through September 2009.

During the third quarter, we repurchased approximately 424,000 shares.

Since the program's inception and through the end of Q3, we have repurchased a total of 2.3 million shares with $3.7 million remaining of the $10 million authorized.

This concludes my comments.

We now open the call for your questions.

(Operator Instructions).

Your first question comes from the line-- at this time you have no questions.

Thank you for joining us today and we look forward to seeing you on our next quarterly conference call after our Q4 results.

Thank you.

Thank you for your participation in today's conference.

This concludes the presentation.

You may now disconnect.

Good day.