Pixelworks Inc (PXLW) 2008 Q4 法說會逐字稿

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

My name is Shamika, and I will be your coordinator for today.

(Operator Instructions) I would now like to turn the presentation over to your host for today's call, Mr.

Steve Moore, Chief Financial Officer.

Please proceed, Sir.

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 fourth quarter ended December 31, 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 a reference to non-GAAP gross margin, operating expenses, EBITDA, net income loss, and net income loss per share.

These measures exclude gains on the repurchase of long-term debt other than temporary impairments of a marketable security, other income, restructuring charges, acquisition-related items, stock-based compensation expense, and accelerated amortization of a non-cancelable, prepaid royalty.

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 Q4 '08 results and discuss our outlook for the first quarter of 2009.

Thanks, Steve.

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

2008 was a year of significant progress for Pixelworks with the introduction of leading new projects, key senior management additions, and significant improvements to our financial strength.

Pixelworks enters a difficult 2009 as a much stronger company from a financial and operational standpoint.

On last year's Q4 conference call, I outlined our priorities for 2008.

Maintaining the integrity of our business model, aggressively marketing our current and new products, efficiently leveraging our R&D investment into value added products and markets, executing our new product roadmap, and most importantly, focusing on our customer base of leading, global electronics companies.

During 2008, we maintained a consistent focus on these priorities and as a result have made significant progress on many fronts.

To give you a little more detail on these accomplishments, I'd like to first recap some of the key financial operating metrics that illustrate the continued progress we have made in strengthening our business.

First, non-GAAP gross profit increased from 47% in 2007 to 53.7% in 2008, the result of the continued focus on operational efficiencies through inventory management and reductions in product costs.

Non-GAAP operating expenses continued to decrease in 2008 with Q4 OpEx coming in at $10.1 million, down 15% from the previous year's fourth quarter, and full year 2008 operating expenses decreasing 28% from 2007.

We exited 2008 with seven consecutive quarters of positive non-GAAP EBITDA and generated $10.4 million of non-GAAP EBITDA for 2008 as a whole.

Our focus on cost and expense reduction enabled us to be cash flow positive from operations in each quarter of 2008 and generate cash flow from operations of approximately $15 million for the year.

And we recorded non-GAAP net income of $3.8 million or $0.26 a share in 2008 versus a non-GAAP net loss of $8.3 million or $0.52 per share in 2007.

During 2008, we significantly strengthened our balance sheet through bond repurchases, bringing $140 million of long term debt down by $80 million to approximately $60 million today which is not due until 2011 and puts us in a net cash positive position for the first time since Q2, 2005.

By all measures we substantially improved the financial strength of Pixelworks in 2008 and enter a turbulent 2009 with a significantly improved financial base.

Our balance sheet strength positions us with sufficient liquidity to effectively execute our business strategy in an uncertain economic environment.

In addition to putting the company on a stronger financial footing, we accomplished significant operational milestones during 2008 as well.

We made key executive additions in critical position in sales and marketing, engineering, and operations.

Uniformly, these executives each have over 25 years of experience and have backgrounds from the leading semiconductor companies in the industry such as Intel, Texas Instruments, National Semiconductor, Cirrus Logic, and Genesis Micro to name a few.

And each have run and scaled much larger businesses than Pixelworks today.

The Company returned to new product momentum in engineering execution in 2008 by hitting key milestones against our product roadmaps.

We delivered four new leading edge products on time, with first time silicon success validating the investments made in design technology over the last few years.

We are pleased with the progress we have made against engineering milestones in 2008 and will continue to focus on driving and further improving our execution in 2009.

In 2008 we introduced two generations of our industry leading motion engine products based on DNX technology, the PW9800 and the PW9801.

These products have been well received by our customer base and are in production.

We also introduced our PW610 digital projection post processor which provides industry leading horizontal and vertical keystone correction and has been designed in by industry leading customers.

Also during 2008, we introduced our fifth generation digital projector platform, Ruby.

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 trend of connected video and enables our customers to deliver high quality and cost effective network projectors.

We introduced Ruby in Q4 and are ramping this product into production in the first quarter of 2009.

During the year, we developed significant customer traction at leading tier one electronics companies.

We secured design wins in next generation projectors, high-end digital TVs, advanced LCD panels, video conferencing systems, and next generation PCTVs.

And several of these products were demonstrated at CES.

During 2008, we announced design wins at some of the world's top manufacturers.

Customers including Optoma, a growing brand in home theater projectors which selected both our new PW9800 coprocessor and our Pearl video processor for two of their new multimedia projectors.

Haier, the leader in HDTV, which is using our PW9800 in their newest line of 42" and 47" 120 hz LCD TVs.

Chi Mei Optoelectronics, one of the world's top three suppliers to the global flat panel TV market, which has selected Pixelworks' PW9800 family of coprocessors for their latest line of cost effective eco-friendly LCD panels.

And Sanyo, which is using our PW610 digital projection post processor for their advanced business projectors.

These are just a few examples of the types of the design wins we captured in 2008 and validates market acceptance of Pixelworks' solutions and product strategy.

As I have discussed on past calls, we believe there is significant opportunities for long term revenue growth available to Pixelworks as a result of the dramatic changes occurring in how video is created, delivered, and viewed.

Major trends are defining a new set of requirements for video processing.

In many ways, the economic downturn is reinforcing and accelerating some of these trends.

There is an explosion of professional and user generated content distributed over broadband as consumers seek lower ways to reduce their cost and viewing content.

Industry is rapidly shifting from 720p high definition to 1080p full HD high resolution video as lower cost panels make full HD more affordable.

There are a host of new video display devices from cell phones to large screen LCD TV displays and LCD displays themselves are undergoing a rapid transition from 60 hz to 120 hz and now to 240 hz to improve video quality.

And lastly, there's a major trend to connect to and network all these displays together.

All of these trends create new challenges and opportunities for video solutions and Pixelworks is well positioned to capitalize on these trends.

One of the effects we are seeing of the current downtrend is the need for proven solutions as engineering staffs and budgets are reduced.

Pixelworks has always provided video solutions that provide not just the ICs, but the full solution including software, and that value proposition is increasing as we move into 2009.

Before closing, I'd like to make a few comments about the economic environment.

Q4 '08, while coming in at the lower end of our revenue guidance, was a solid quarter on all fronts and Steve will recap the details in a minute.

That being said, during the quarter, we began to see the effects of the global economic crisis as customers slowed their ordering rate dramatically towards the end of the year.

Our end markets are characterized by the enterprise and education segments and we believe this accounts for us feeling the slowdown later than others who are more consumer centric.

As you have no doubt heard from other companies across the semiconductor and other industries, our customers are telling us that their visibility is dramatically lower and they are focused on decreasing their inventories as a result of contracted demand.

And as a consequence, our visibility into our business is severely reduced as well.

Customers are working in a just-in-time delivery mode and providing little to no visibility or lead time.

In response to this challenging environment, we have acted quickly to initiate restructuring actions and reduce our costs.

We recently implemented a 5% reduction in force which we expect will reduce our compensation expense run rate by approximately 10%.

Our focus in the coming quarters will be to continue to keep a tight rein on expenses and work to preserve cash flow and remain proactive in looking for other opportunities to reduce spending and maximize capital efficiency.

While 2009 will be a difficult year for everyone, we believe Pixelworks is positioned to continue to drive forward our business strategy in a very difficult environment.

We are on a strong financial footing, have new products that are gaining traction in the market, and our customer relationships are stronger than ever.

For 2009, our priorities will be to tightly manage and reduce expenses with a laser beam focus on reducing costs, focus on capital efficiency to achieve more results, continue to drive crisp execution of our product roadmaps, and continue to focus on our customer base of leading electronics companies.

Now I'd like to turn the call over to Steve to review the financial details of our fourth quarter.

Thank you, Bruce.

Revenue in the fourth quarter of 2008 was $18.9 million, at the low end of the guidance we gave at the beginning of the quarter of $18.5 million to $20.5 million.

This reflects a decrease of $2.6 million, or 12% sequentially, from $21.5 million in the third quarter of 2008, and a decrease of 30% from $27 million in the fourth quarter of 2007.

Our Q4 book-to-bill ratio was approximately 0.6:1.0, reflecting order weakness across the markets we address.

The split for our fourth quarter revenue by market was 62% projectors, 17% advanced television and LCD panels, and 21% advanced media processors, or amp, monitors, and other applications.

Fourth quarter projector revenue was approximately $11.7 million, down 19% sequentially and down 27% year over year.

ASPs were essentially flat, down 1% sequentially and down 2% year over year.

Advanced television and LCD panel revenue in Q4 was approximately $3.1 million, up 3% sequentially and down 29% year over year.

ASPs were up 6% sequentially and up 36% year over year.

Revenue from the amp, monitors, and other markets in the fourth quarter was approximately $4.1 million, flat sequentially and down 39% year over year.

For the first quarter of 2009, we expect revenue to be in the range of $10 million to $13 million reflecting the general economic outlook.

Looking now at gross profit margin, GAAP gross profit margin in the fourth quarter of 2008 was 47.7%, down from 53.3% in Q3 of '08 and from 48.7% in the fourth quarter of 2007.

Included in cost of sales during the fourth quarter of 2008 was approximately $952,000 of non-cash expenses for the amortization of acquired intangible assets and prepaid royalties, restructuring, and stock-based compensation.

Excluding these costs, non-GAAP gross profit margin was 52.7% in the fourth quarter, above the range of guidance of 49% to 52%.

Fourth quarter non-GAAP gross profit margin was down from 56.6% in Q3 '08 and up from 51.5% in the fourth quarter of 2007.

The sequential decrease in non-GAAP gross profit percentage was due primarily to a less favorable product mix and additional amortization of [masks] and purchased IP in the fourth quarter.

We expect GAAP gross profit margin in the first quarter of 2009 to be in the range of 35% to 40% and non-GAAP gross profit margin to be in the range of 42% to 46%, excluding an estimated $735,000 in non-cash expenses for the amortization of acquired intangible assets, accelerated amortization of non-cancelable prepaid royalty, and stock-based compensation.

The margin estimate assumes a less favorable product mix and proportionately higher fixed operating costs on the sequentially lower revenue estimate.

GAAP operating expenses were $11.1 million in the fourth quarter and included $618,000 in restructuring charges and $408,000 in non-cash stock-based compensation.

Fourth quarter GAAP operating expenses were flat relative to $11 million in Q3 '08 and down 44% from $19.7 million in the year ago quarter.

Excluding restructuring charges and non-cash expenses, non-GAAP operating expenses in the fourth quarter were $10.1 million, at the low end of the range of management guidance of $10 million to $11 million.

This reflects a decrease of 4% from $10.5 million in the third quarter of 2008 and a decrease of 15% from $11.9 million in the fourth quarter of 2007.

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

We expect GAAP operating expenses in the first quarter of 2009 to be between $9.5 million and $10.5 million, and non-GAAP operating expenses to be between $9 million and $10 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 seventh consecutive quarter in Q4.

Non-GAAP EBITDA was approximately $1.6 million in Q4, compared with $3.3 million in Q3 and $5 million in the fourth quarter of 2007.

We expect to record interest expense net of $200,000 on both a GAAP and a non-GAAP basis in the first quarter of 2009.

The provision for income taxes in the fourth quarter of approximately $940,000 reflects our accrual for current and contingent taxes payable in profitable foreign tax jurisdictions.

This provision includes a charge of approximately $460,000 related to the effect of lower tax rates in China which eliminated the deferred tax assets recorded in Q1 this year.

We expect to record a benefit from income taxes of $1.5 million in the first quarter of 2009 on both a GAAP and a non-GAAP basis.

Fourth quarter GAAP net loss was $4.6 million, or $0.34 loss per share, compared with a GAAP net income in Q3 of $8.2 million, or $0.56 income per share, per diluted share, and a GAAP net loss in Q4 '07 of $6.4 million, or $0.42 loss per share.

We recorded non-GAAP net loss in the fourth quarter of $652,000, or $0.05 loss per share, compared to non-GAAP net income of $748,000, or $0.05 income per diluted share in the third quarter of 2008, and non-GAAP net income of $2.3 million, or $0.15 income per diluted share in Q4 of '07.

The fourth quarter net loss of $0.05 loss per share was within the guidance of our outlook of $0.03 per share income to $0.16 loss per share.

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 first quarter of 2009 of between $0.22 and $0.42 loss per share, and record non-GAAP net loss per share of between $0.13 and $0.33 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 long-- short and long-term marketable securities, were $63.3 million at December 31, 2008, up approximately $500,000 from $62.8 million at September 30, 2008.

The major sources and uses of cash in the quarter included $1.8 million positive cash flow from operations, $620,000 increase in the value of investments, $1.4 million in payments for tools, property and equipment, and $573,000 used in the repurchase of shares of Pixelworks stock.

At December 31, 2008, total cash continued to exceed long term debt.

Accounts receivable net at December 31, 2008, was $6.1 million compared to $5.9 million at September 30 2008.

Days sales outstanding on December 31 was 29 days compared with 25 days on September 30.

Inventory net at December 31 was $5 million, down $276,000 from $5.3 million at September 30.

We continue to pay close attention to improving our management of inventory levels, and we are pleased with the results.

Inventory turns increased to 7 times in the fourth quarter compared with 6.5 times in the third quarter and 3.9 at the end of 2007.

Property and equipment net on December 31 was $5.2 million compared with $4.8 million on September 30.

Q4 '08 additions of $1.7 million were offset by depreciation and amortization of $1.3 million for the quarter.

In the first quarter of 2009, we expect our depreciation and amortization expense to be approximately $1.5 million, and Q1 capital expenditures to be approximately $1.2 million.

To wrap up my comments about the quarter, during Q4 we repurchased approximately 594,000 shares of Pixelworks' stock under our stock repurchase program.

Since the program's inception and through the end of 2008, we have repurchased a total of 2.9 million shares with 3.1 million remaining of the $10 million authorized.

That concludes my comments.

We can now open up the call for your questions.

(Operator Instructions).

There are no questions in the queue at this time.

Okay.

Well, thank you very much for joining us and we look forward to having you join us again at the Q1 call.

Thank you for your participation in today's conference.

This concludes the presentation.

You may now disconnect.

Good day.