Pixelworks Inc (PXLW) 2009 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q2 2009 Pixelworks Earnings Conference Call.

My name is Anita, and I will be your operator for today.

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

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, 2009.

Before we begin, I would like to remind you that various remarks we make on this call, including those about our projected future financial results, economic and market trends, and our competitive position constitute forward-looking statements.

These forward-looking statements and all other statements made on this call that are not historical facts, are subject to a number of risks and uncertainties that may 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, 2008, 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 results or projections, including gross margin, operating expenses, EBITDA, net loss, net income, and net income and loss per share.

These non-GAAP measures exclude gains on the repurchase of long-term debt, restructuring charges, acquisition-related items, stock-based compensation expense, and additional amortization of non-cancelable, prepaid royalty.

Pixelworks uses these non-GAAP measures internally to assess our operating performance.

The Company believes these non-GAAP measures provide a meaningful perspective on our underlying cash flow dynamics but cautions investors to consider these measures in addition to, not as a substitute for nor superior to, Pixelworks' 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 Pixelworks website.

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

Thanks, Steve.

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

Despite a challenging economic environment, we saw strong Q2 results on a number of fronts as we continued to introduce and ramp new products, tightly manage expenses and costs, and improve our balance sheet.

Q2 '09 revenues came in within guidance and were up 32% sequentially primarily as a result of new products ramping into high volume production and stabilization of customer ordering patterns as the quarter progressed.

While visibility remains below our historic levels, we saw substantial improvement during the quarter as customers worked through the inventory correction and began to order, and we expect to see this trend continue into Q3.

As a result of the expense reduction actions taken in Q1 and strict expense control and cost management, Q2 operating expenses came in significantly below our guidance and were down compared with prior periods, decreasing 7% sequentially and 29% year on year on a non-GAAP basis.

Lower cost of revenue and reduced operating expenses combined with Q2 revenue growth resulted in positive cash flow from operations.

Even though we have reduced our structural expense profile, we have continued to make investments in next generation technology and have significantly increased execution and productivity as evidenced by our continued new product momentum as we have sampled three new products so far in 2009.

Non-GAAP gross margins were up significantly during the quarter coming in at 52% as a result of continued focus of reducing direct material and overhead costs and yield improvement and cost reduction programs for our new and current products which combined made up 78% of revenues for the quarter.

During the quarter we also continued to improve our balance sheet with the repurchase of an additional $18 million of convertible bonds.

This follows repurchases of approximately $106 million of Pixelworks' outstanding debentures since the beginning of 2008.

We have now reduced the Company's long term debt from $140 million at the beginning of 2008 to $15.8 million today putting Pixelworks on a solid financial footing.

Additionally, tight inventory management allowed us to reduce inventories again in Q2, down 11% versus Q1 '09 and increasing inventory turns from 5.1 to 6.9 in Q2.

Inventory is down 41% compared to the same period last year as we continue to reduce and have largely worked through legacy products.

But most importantly, our overall financial performance allowed us to generate positive EBITDA and build cash in a very difficult environment.

Our focus in the coming quarters will be to continue to execute our new product roadmaps, keep a tight rein on expenses, drive cost reduction programs, and continue to strengthen our balance sheet.

On the product side, momentum continues to build for our new next generation products that significantly improve the video quality and connectivity of advanced display systems.

Design wins with tier one electronics manufacturers for our new and current products were strong during the quarter.

We secured new design wins for our PW9801 motion engine device which was introduced in Q1 '09 and enhances the viewing experience of advanced display systems requiring 120 Hz support and also offers the significant performance improvement over our PW9800.

High volume production shipments of our PW9800 continued to build during the quarter and we will be ramping the PW9801 into high volume production in Q3.

We also secured significant new design win commitments from leading tier one customers for our PW950, code name Ruby, which provides a significant upgrade in video quality and connectivity.

Continuing our new product momentum in Q2, we introduced the PW807 based on the Ruby platform and aimed at the value segment of connected 3LCD and DLP projectors.

The PW807 brings the advanced video processing and connectivity of the PW950 to next generation projectors and combined with advanced software applications enables a new level of connectivity and collaboration to the value segment of the education and enterprise markets.

The trend towards connected video continues to gain momentum as applications such as next generation digital projection, digital signage, and video teleconferencing systems require high quality connected video.

But most significantly, revenue from new products introduced in 2008 and 2009 represented over 20% of total sales for the second consecutive quarter.

Our new and current products represented 78% of revenue in Q2 with now only 22% of Q2 revenue coming from legacy products.

This compares with 45% of revenue from legacy products in Q2 2008 and demonstrates that new product momentum is now driving our revenue.

This momentum is a result of continued execution and validates our product strategy of providing leading high quality connected video solutions.

Going forward we expect that revenue from our legacy products will continue to decline as a percentage of sales as new product momentum drives Pixelworks to sustainable, healthy growth.

The key trends in video that I have discussed in past conference calls continue to drive increasing requirements for high quality connected video and in many respects they are accelerating.

The increased demand for video quality driven by the transition to 1080p full HD video, the dominance of LCD panels as the preferred display medium, and video connectivity are driving increasing requirements for innovative solutions.

Next generation solutions have to handle a wide range of standards, formats, frame rates, and resolutions that significantly impact video quality and become more apparent and problematic as screen sizes and resolutions continue to increase.

To address these challenges, multiple technology transitions are occurring as key trends accelerate.

The transition from 60 Hz to 120 Hz frame rates and now 240 Hz, LED backlighting to improve the contrast and dynamic range of LCD displays, and the drive to connect the network display devices together.

Video quality issues are best handled during the final processing steps before video is delivered to the display and Pixelworks has a legacy of expertise and IP in this area.

Pixelworks has a long history of delivering industry leading innovative solutions that deliver high quality video and we are well positioned to capitalize on these accelerating trends and the resulting market opportunities.

In spite of the difficult macro environment, Pixelworks made significant progress in Q2.

The improving trends we witnessed at the end of Q1 continued into Q2 as bookings strengthened and customer order patterns stabilized as the quarter progressed.

While still below our historic levels, visibility has improved and we believe we will see sequential revenue growth again in Q3.

We secured significant new design wins from tier one customers during the quarter and have continued strong revenue performance from new products that are now driving sustainable growth.

Continuing our new product momentum, we introduced the PW807 during the quarter and recently delivered initial samples of the PW118 which is aimed at the value segment of the motion engine market as we continue to broaden our product lines.

Meanwhile, we strengthened our balance sheet by retiring debt, focusing on tight inventory management and expense control which allowed us to be EBITDA positive and generate cash on an operating basis despite the global macroeconomic downturn.

We have continued to demonstrate our ability to strengthen our financial base, our new products are gaining traction in the market and driving revenue, our customer relationships remain strong, and we have in place a team of seasoned executives to continue to drive execution.

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

Thank you, Bruce.

Revenue in the second quarter of 2009 was $14.2 million, in the middle of the range of guidance we gave at the beginning of the quarter of $13 million to $15 million.

This is an increase of 32% from $10.8 million in the in the first quarter of 2009, and down 32% year over year from $20.8 million in the second quarter of 2008.

The split of our second quarter revenue by market was 63% projector, 22% TV, and 15% other.

Second quarter projector revenue was approximately $9 million, up 99% from Q1 2009.

Projector revenue includes sales of our chips targeted at advanced digital projector industry.

Revenues from our projectors, from our projector products increased from very low levels in Q1 as demand from our customers began to stabilize.

TV revenue in Q2 was approximately $3.2 million, up 33% sequentially.

TV revenue includes sales of our chips targeted at the LCD panel market which are primarily used in flat screen and high resolution digital televisions.

Other revenue in the second quarter was approximately $2 million, down 47% from Q1 2009.

Other revenue includes sales of chips to non-target segments including advanced media processor, monitor, and other legacy markets.

For the third quarter of 2009 we expect revenue to be in the range of $15 million to $17 million reflecting the increased stability in order levels we are seeing from our customers, mitigated by the cautionary economic environment overall.

Looking now at gross profit margin, GAAP gross profit margin in the second quarter of 2009 was 47.7%, up from 38.6% in Q1 '09.

Included in cost of sales during the second quarter of 2009 was approximately $622,000 of non-cash expenses primarily for the amortization of acquired intangible assets.

Excluding these non-cash expenses, non-GAAP gross profit margin was 52% in the first quarter, above the range of guidance provided of 43% to 47%.

This compares with non-GAAP gross profit margin of 45.4% in Q1, '09.

The increase in non-GAAP gross profit percentage in Q2 was primarily due to incremental reductions in product costs and higher absorption of operations costs as well as sell through of previously reserved inventory.

We expect GAAP gross profit margin in the third quarter of 2009 to be in the range of 40% to 46% and non-GAAP gross profit margin to be in the range of 45% to 50%, excluding an estimated $700,000 in non-cash expense.

Non-GAAP operating expenses were $7.7 million in the second quarter, excluding $277,000 in non-cash stock based compensation and restructuring charges.

This represents a 7% decrease in non-GAAP expenses sequentially.

We will continue to control expenses in order to position the Company to more quickly return to profitability as our revenues increase.

We currently expect our expense run rate will vary based on the timing of development activities, but will remain below $9.5 million on a non-GAAP basis.

For the third quarter of 2009 we expect GAAP operating expenses to be between $8.5 and $9.5 million and non-GAAP operating expenses to be between $8 million and $9 million.

Looking now at non-GAAP EBITDA, stronger revenues, lower product costs, and lower expenses allowed us to generate cash and achieve positive EBITDA of $741,000 in Q2.

This compares with negative EBITDA of $2.1 million in Q1.

We realized a gain on the repurchase of long-term debt in Q2 of approximately $3.8 million.

This gain was the net result of repurchasing approximately $17.8 million of convertible bonds at a cost of approximately $13.8 million plus the write off of previously capitalized debt issuance costs of approximately $175,000.

We recorded GAAP net income in the second quarter of $2.2 million or $0.16 income per diluted share.

On a non-GAAP basis, we recorded net loss in the second quarter of $918,000 or $0.07 loss per share compared to net loss of $2 million or $0.15 loss per share in the first quarter of 2009 and net loss of $65,000 or $0.00 loss per share in the second quarter of 2008.

The second quarter of 2009's non-GAAP net loss per share of $0.07 was significantly better than the range of our outlook of $0.14 to $0.32 loss per share.

Looking forward, we expect to record a GAAP net loss per share in the third quarter of 2009 of between $0.06 and $0.28 loss per share and record non-GAAP net income loss per share of between $0.02 income and $0.18 loss per share.

Moving 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 $28.2 million at June 30, 2009, down approximately $12 million from $40.2 million at March 31, 2009.

As I mentioned, we used $13.8 million in cash during the quarter for the repurchase of debt.

Cash generated from operations was $1.7 million in Q2.

At June 30, 2009, total cash exceeded long term debt by $12.4 million, an increase of $5.8 million from March 31, 2009 and an increase of $9.7 million from December 31, 2008.

Accounts receivable net at June 30 was $5.1 million compared with $4.5 million at March 31, 2009.

As a result of more timely receipt of payments from customers, days sales outstanding decreased to 33 days at June 30 compared with 37 days at March 31.

Inventory net at June 30 was $3.7 million, down from $4.2 million at March 31.

We are pleased with our ongoing ability to improve inventory levels and continue to pay close attention to inventory management.

Inventory turns increased to 6.9 times in the second quarter compared with 5.1 times in the first quarter.

During Q2, we did not buy back any shares under the stock repurchase program.

This concludes my comments about the quarter.

We can now open the call for your questions.

(Operator Instructions).

I would now like to turn the call back over to Bruce Walicek for closing remarks.

I want to thank everyone for attending the conference call today and we'll look forward to communicating with you on our next quarter's conference call.

Thank you.

This concludes the presentation.

Thank you for your participation.

You may now disconnect, and have a great day.