Pixelworks Inc (PXLW) 2009 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q3 2009 Pixelworks earnings conference call.

I will your operator for today.

(Operator Instructions).

I would now like to turn the presentation over to your host for today, Mr.

Steve Moore, Chief Financial Officer.

Please, go ahead.

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, 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 income loss and net income loss per share.

These non-GAAP measures exclude gains on the repurchase of long-term debt, other than temporary impairment of the market security, restructuring charges, acquisition-related items, stock-based compensation expense, additional amortization of a non-cancelable pre-paid royalty, and other income.

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

The Company believes that 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 when I will review our Q3 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.

Q3 was a quarter of continued solid progress on many fronts.

Q3 '09 revenues came in at the high end of guidance, and were up 18% sequentially, with new products contributing 21% of the mix.

During the quarter, the pace of customer activity picked up significantly, and we witnessed strong bookings across the customer base.

We are encouraged by the increasing visibility and order stabilization within our customers, and we'll continue to tightly manage expenses and costs in order to drive efficiencies and productivity in our business.

As a result of the expense-reduction actions we initiated in Q1 and continued strict expense control and cost management, Q3 operating experiences came in below guidance, and were down 27% year-over-year on a non-GAAP basis and in line with Q2 levels.

Non-GAAP gross margins came in above the midpoint of guidance, driven by product mix, costs associated with the ramp-up of new products, and ongoing cost reduction initiatives.

Reduced operating expenses in Q3, combined with continued revenue growth, enabled Pixelworks to generate positive EBITDA and build cash during the quarter.

Close inventory management allowed us to increase inventory turns from 6.9 in Q2 to 8.9 in Q3.

Our results within third quarter demonstrate our continued focus on financial discipline, which combined with significant deleveraging achieved by repurchasing debt at favorable prices over the last year have put Pixelworks in a solid financial footing.

We're pleased with the progress we continue to make in building a healthy financial base, and we'll continue to focus on financial discipline.

Even as we have continued to drive efficiencies in our business and reduce our structural expenses, we have continued to improve productivity and make investments in next generation technology and products.

So far in 2009, we have delivered three new leading edge product, and will sample another one in the current fourth quarter.

New products are now meaningfully contributing to our growth, and we'll continue to focus on investing in and executing our new product road maps.

New product sales in Q3 were up 46% from Q1 '09, and again represented over 20% of total revenue for the third consecutive quarter.

New and current products combined represented 82% of revenue in Q3, with legacy products coming in at 18% of total sales.

This compares with 35% of revenue from legacy products in Q3, 2008.

This momentum is the result of continued new product 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 growth.

Customer activity for our new products continued to be robust during the quarter.

We secured new design win commitments from leading tier-one customers for our PWC950 Ruby product, which provides leading video quality and connectivity for digital projection systems.

And as I mentioned last quarter in Q2, we introduced the PWC807 based on the review platform, and aimed at the value segment of connected 3LCD and DLP projectors.

The PW807 brings the advanced video processing and connectivity of the PWC950 to next generation projectors; and combined with Pixelworks' advanced suite of connectivity and collaboration software, enables a new level of compatibility for the value segment of the education and enterprise segments of the digital projection market, as well as the digital signage market.

We are seeing very good customer acceptance for this new product.

We saw good progress on our motion engine products during the quarter.

We secured new design wins for our PW9801 motion engine device, which was introduced earlier this year and enhances the viewing experience of advanced display systems requiring 120 Hz supplement.

In the current fourth quarter, we'll be sampling our next generation motion engine device, the PW130.

The PW130 represents a significant advancement in performance and video quality over our popular PW9800 series and offers support for advanced 120 Hz and true 240 Hz applications.

Additionally, the PW130 incorporates Pixelworks' propriety [N2M] technology, which enhances the viewing experience of low frame rate and variable frame rate internet video.

The key trends in video that I have discussed in past conference calls are driving increasing requirements for high quality connected video, and over the last several quarters we have seen a dramatic acceleration in these trends.

The increasing 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 all driving 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 increase.

To address these challenges, multiple technology transitions are occurring as the 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, as well as improving power consumption to address ecological concerns, and the drive to connect the network display devices together.

Now 3D requirements have burst onto the scene, driving a new level of performance and innovation requirements.

All of these accelerating trends are driving the need for innovative advanced video solutions, and Pixelworks has a long history of providing industry-leading products that deliver high quality video, and we're well-positioned to capitalize on these exciting market opportunities.

Q3 was another solid quarter of progress for Pixelworks, as we saw a strong recovery and increased visibility across our customers.

Again, new products contributed meaningfully to our revenue growth, and we saw significant traction from tier-one customers during the quarter from our new products.

Our continued commitment to expense and cost control and focus on financial discipline enabled us to be EBITDA positive and generate cash on an operating basis, and continues to be our focus going forward.

Our new products continued to gain traction in the market and drive revenue, and we have exciting new product road maps that are well-positioned to capitalize on the explosive trends in video.

Now I would like to turn the call over to Steve to review the financial details of our third quarter.

Thank you, Bruce.

Revenue in the third quarter of 2009 was $16.7 million, at the high-end of the rage of guidance we gave at the beginning of the quarter of $15 million to $17 million.

This is an increase of 18% from 14.2 million in the second quarter of 2009 and down 22% year-over-year from 21.5 million in the third quarter of 2008.

The split for third quarter revenue by market was 73% digital projection, 16% TV and panel, and 11% other.

The split for our third quarter revenue by new, current and legacy products was 21% new, 61% current, and 18% legacy.

Third quarter digital projection revenue was approximately $12.3 million, up 36% from Q2 2009.

Projection revenue includes sales of our chips targeted at the advanced digital projection industry.

Revenue from our projection products increased as demand from our customers reflected a recovering global economy.

TV and panel revenue in Q3 was approximately $2.7 million, unchanged from Q2.

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

Other revenue in the third quarter was approximately $1.7 million, down 31% from Q2 2009.

Other revenue includes sales of chips to non-target segments, including advanced media processor -- which is largely for the video conferencing market -- monitor and other legacy markets.

For the fourth quarter of 2009, we expect revenue to be in the range of $17 to $19 million, reflecting solid order activity for both our new and current products.

Looking now at gross profit margin, GAAP gross profit margin in the third quarter of 2009 was 43.9% compared with 47.7% in Q2 '09.

Included in cost of sales during the third quarter of 2009 was approximately $639,000 of non-cash expenses, primarily for the amortization of acquired intangible assets.

Excluding these non-cash expenses, non-GAAP gross profit margin was 47.7% in the third quarter, above the mid-range of guidance provided of 45% to 50%.

This compares with non-GAAP gross profit margins of 52% in Q2 '09.

Non-GAAP gross profit in Q2 was driven by product mix, and included new product ramp-up costs which were partially offset by ongoing cost improvements across our product lines.

We expect GAAP gross profit margin in the fourth quarter of 2009 to be in the range of 41% 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.

Pixelworks' gross margin is subject to variability based on changes in revenue levels, product mix, start up costs, timing and execution of manufacturing ramp, and other factors.

Non-GAAP operating expenses were 7.7 million in the third quarter, below management guidance and excluding $295,000 in non-GAAP stock-based compensation and restructuring charges.

Q3 operating expenses were flat with Q2 and continued to reflect close management of discretionary spending, as well as headcount and salary reductions implemented earlier in the year.

We will continue to closely monitor and control expenses in order to move to sustainable profitability as our revenues grow.

We expect our operating expense run rate to vary based on the timing of development and activities.

Beginning in the fourth quarter, we have restored full salary levels to all employees below the level of vice president.

For the fourth 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 and 9 million, including the incremental increase related to the restoration of salaries.

Looking now at non-GAAP EBITDA, strong revenues and low expense levels allowed to us achieve positive EBITDA of $1.4 million in Q3.

This compares with positive EBITDA of $741,000 in Q2.

We recorded GAAP net loss in the third quarter of $890,000 or $0.07 loss per share.

On a non-GAAP basis, we recorded net income in the third quarter of $119,000 or $0.01 income per diluted share, compared to net loss 918,000 or $0.07 loss per share in the second quarter of 2009, and net income of 748,000 or $0.05 income per diluted share in the third quarter of 2008.

Non-GAAP net income per share of $0.01 was at the high-end of the range of our outlook of $0.18 loss to $0.02 income per share.

Looking forward, we expect to record a GAAP net income loss per share in the fourth quarter of 2009 of between $0.01 income and $0.24 loss per share, and to record non-GAAP net income loss per share of between $0.10 income and $0.14 loss per share.

Moving to the balance sheet, cash and market securities -- which consists of cash and cash equivalents, as well as short and long-term marketable securities, were 28.8 million at September 30, 2009, up approximately $600,000 from $28.2 million at June 30, 2009.

Cash generated from operations was $1.9 million in Q3.

At September 30, 2009, total cash and marketable securities exceeded long-term debt by $13.1 million, an increase of $10.4 million from December 31, 2008.

Accounts receivable net at September 30 was $5.7 million compared with $5.1 million at June 30, 2009.

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

Inventory net at September 30 was $4.8 million, up from $3.7 million at June 30 as we ramped up to supply growing revenues.

As one measure of our efficient use of working capital, even with this ramp-up, inventory turns increased to 8.2 times in the third quarter, compared with 6.9 times in the second quarter.

During Q3, we did not repurchase debt or buy back any shares under the stock repurchase program, which expired September 30, 2009.

That concludes my comments about the quarter.

We can now open the call for your questions.

(Operator Instructions).

Your first question from the line of Jeff Shriner with Capstone Investments.

Please go ahead.

Good afternoon, gentlemen.

Thank you for taking my questions.

I just was trying to get an idea.

Have you given any guidance to the Street about maybe what the average content, or dollar content, per TV is for Pixelworks?

.

No, I don't believe we have.

We certainly are a small part of a large screen television.

We provide -- currently what we provide is a motion -- estimation motion compensation chip.

Okay, and did you give -- I'm sorry, I got on the call a little late with the dial-in -- but any percentage of tier-one revenues given out in the call?

No.

We don't break out the revenues by type of customer.

And could you just give a little more help with the gross margin line?

What has been going on there?

I saw a little pop-up and then guided down.

Are new products really driving that in terms of some of -- you referenced some of the new start up costs, but it seems that they are still kind of outrunning the little bit of headwinds there.

Is there some cost erosions in some of the current products, or are they new products -- lower-margin type products?

Well, we have a fairly complicated gross margin explanation over our product mix, but let me give you a couple of key points.

One would be, in Q2 and in several quarters of last year, we sold through inventory that had been previously written down.

We did not have any of that in this quarter, and we did not -- we don't -- when we do our guidance or our planning we don't expect any sell-through of previously written off inventory.

So the Q2 gross margins were a little higher than they would have otherwise been because of that.

Then within the normal gross margins, we have a mix of products.

Some of our legacy products -- well, within the legacy products we have both higher and lower-margin products, but at is this point, the remaining legacy tend to be above the average.

So with declining revenues from legacy products, we would expect some reduction in gross margins depending on the volume of new television products which tend to be more competitive.

Yes, I think the way to think about is some of the motion engine, which are typically higher volume, the little more competitive products tend to be sort of below our corporate average.

The projector products and some of those tend to be above the corporate average, so you can get a mixed dependency in any given quarter, depending on what the mix is.

Okay, thank you, gentlemen.

And just one last question.

I was just wondering, pretty wide guidance for the top line revenue that you're giving, and even the -- you have a pretty tight topline revenue guidance.

What are kind of the puts and takes of maybe achieving the high-end or mid-range or low-end of your earnings per share, and what is driving that?

Well, we have -- certainly over the eight or ten quarters that Bruce and I have been involved in the Company, we have been pretty conservative about what guidance we have provided, and we have always been within the range of guidance, or in some -- not in revenue, but in some other of our guidance elements, we have beaten them.

We believe that -- we certainly are not going to handicap the guidance that we're giving, but we do feel quite confident at this point in the quarter that we're going to make those numbers -- that we will be within those numbers.

All right, thank you, gentlemen.

Your next question from the line of [Oren Hirsch] with [AGICH].

Go ahead.

Hi, how are you?

It's Oren Hirsch with AGICH Investment Partners.

Congratulations on a lot of progress.

It's nice to see non-GAAP EPS finally.

I had a handful of questions.

(Inaudible), in terms of your (inaudible) -- TV -- the flat panel TV business for you, what's going on?

Are there a lot of design wins that have not yet gone into production, and where is your sweet spot in terms of panel size?

I know you've (inaudible) a few of the designs, but I guess I'm kind of curious to see whether the bulk of the design wins are in production, or we haven't really gotten there yet?

Yes, we kind of don't give granular design win guidance or really talk generally about them.

If customers will let us do a press release, we have done that from time to time.

Typically those products are already out in production.

I can tell you we're always driving to design wins every quarter, so there's a pipeline of things in production, things in design, things designed -- designs that are -- that we're going after and being won.

What is the sweet spot in terms of panel size?

Oh, yes, sorry.

I would say above 37 inches.

Okay.

You actually see some enhancement of motion starting to creep below 37 inches, but the vast preponderance of it is 37 inches and above.

Okay.

In terms of existing TVs or new designs that have higher frame rates built in, does that lessen the need for the motion compensation that you provide or increase it?

Or --

No, it actually increases it.

I touched a little bit at a high level on some of these trends.

I think that in the last six months, I would say, we have witnessed quite an acceleration of requirements for processing in larger LCD TVs.

There is some inherent limitations in terms of image, particularly when you have fast-moving video, like sports and so forth, and that is why you see products out in the market today that are actually 240 Hz and now beginning to have LED backlight for better color performance and a lot of various other issues, but -- and now 3D has been announced by companies like Sony and so forth, are starting to be pushed.

So it seems like -- particularly in 2000 -- in the second half of 2009 -- there has been an acceleration of requirements.

On that note, though -- and again, I plugged in a drop late, but it sounded like your actual revenues from the TV business did not really change much quarter to quarter, and I would've (inaudible) with some of those accelerating trends that it would have -- or is that not a fair question?

Yes, I think at any given time, we have various cycles going on in our business.

Our customers have cycles going on.

Q4 tends to be the strong period for these product as well.

So a lot of things moving into the TV business.

I think generally, the projector -- our digital projection business -- tends to be a longer cycle business, and the flat panel/large panel TV side of the business tends to be a much more quick cycle, more volatile cycle, part of our business.

Okay.

In terms of -- once again, if you can't give this level of granularity, just in a very general sense -- are design wins accelerating because of those trends that you indicated?

Or it's just such a small slice of the market that it's just -- it's not enough?

I -- again, we don't give sort of guidance on design wins, number of design wins and who and what; but I'd just -- generally, I think that there are more products in general requiring these kind of technologies.

Okay.

From a longer term -- a mid-term and a longer term, the 240 Hz ultimately going to 480 Hz, and the LED backlighting, will create a larger pool of opportunities.

I think the way to think about it right now is over the past, say, 18 months to two years, there has been a transition from 60z to 120 Hz.

We are well into the 120 Hz transition.

I don't have the numbers in front of me in terms of percentages, but the percentage of 120 Hz systems above 37 inches is pretty big, and ultimately it will be completely 120 Hz.

We're just now entering the transition to 240 Hz.

240 Hz tends to be matched with LED backlighting sources as opposed CCFL, which was the previous, kind of current generation lighting source as well.

So I would just say generally, opportunities in general I would think would be growing, just because all of these systems are converting to 120 Hz, 240 Hz, so forth and beyond.

So there is a fair amount of runway on this treadmill here for at least the -- certainly the near-term foreseeable future.

Now just on that note, is there some kind of -- for lack of a better term -- a break point, where when you go from 120 to 240, where all of a sudden it really becomes more important to have these motion compensation technologies in there?

Yes, that is a good question.

I think -- I don't know.

I think sometimes -- at some point does it saturate and become good enough?

I think it's possible.

I think you see quite a bit of technological change going on in this product right now, and a lot of new technologies coming into this just sort of overnight.

3D has burst on the scene, and I think there is a long transition to ubiquitous 3D, but you have companies like Sony and Panasonic pushing 3D now, and I think we're in the extreme early beginnings of that transition.

So between processing power and lighting sources and panel and refresh rates, and there's a lot of -- quite a lot of technical trends driving change here for the near-term, at least.

But another way to ask that same question is that you had just indicated that the majority of the large screens above 37 inches are going to the 120 frame rate, but I guess that didn't drive like a massive increase in your revenues.

Is that because it's almost a necessity at that level, you can still get away without it?

Or if you go to 240 or 480 you will see enough of a difference that there is more of a reason why the customer needs that?

I think the second part of your comment is probably more accurate.

I think that it's becoming a necessity at this point.

Okay.

And one or two more, and then I will let other people ask, thank you very much.

In terms of competition in the LCD and other type of flat panel TV business against you, has there been any major change in terms of anybody incorporating into their chipsets anything that would negate the need for what you are providing?

Yes, I think it's a very competitive space.

I think there are some solutions that have tried to integrate it.

They haven't been very successful.

I think the best analogy you can look at here is the graphics chip business.

Graphics chip business -- graphics chip was a very separate chip for many years.

Some of the functionality got integrated into the chip set, but still there is a big graphics chip stand alone business.

I think you will see this is a natural evolution of semiconductor integration and semiconductor technology, and I think you will see that over time in this market as well.

I think the technology is moving so fast right now that SoC integrated solutions have not gotten a lot of traction so far.

That doesn't mean that I don't think they will pick up some share, because at some point 120 -- plain vanilla 120 Hz becomes good enough.

I think someone -- maybe you did -- had mentioned, what is the saturation point of requirements?

And I think for plain vanilla 120 Hz, that part of the cycle is probably moving to good enough out in 2010.

But right behind that you have LED backlighting sources, you have 240 Hz, you have 3D and a whole host of other requirements coming onto the system.

And the last question just on the projected side, when the business picked up, was that just because of the natural pick up in the economy or is it (inaudible) on your design wins?

And is there any trend within the projector market that is helping you here?

Are you in, for example, some of these new little (inaudible) projectors that have been (inaudible)?

So I'd say it's a -- to answer the first part of your question -- a combination of all of the above.

Clearly, there has been a recovery in the market in general.

And -- but I think, as I had mentioned, we have a Ruby product -- the PWC950 -- that we introduced late last year that we feel we're making very good progress with a wide range of customers.

We have some new initiatives to sort of expand our market into some more of the DLP side of the market that requires connectivity.

Historically, we haven't had a whole lot of share in the DLP share of the market.

So I think a little bit of all of which you mentioned is the factor behind it.

And the second part of your question, I'm sorry?

Just wondering if any of the trends within the projector market -- let's say like the little mini projectors --

Oh, yes, yes.

Okay.

So I think there is a pico projection trend right now that is getting a lot of coverage.

There is a new Nikon camera with a little embedded projector.

I think you have seen a lot of pico projects offered to the market.

They really haven't taken off quite yet, just because of the cost and functionality and so forth.

It's sort of a -- it's an emerging market, remains to be seen.

We're not in that market today.

It's certainly something we keep our eye on.

I think the trends that are benefiting us more so, though, are really the networking and connectivity coming into projectors that allows for collaboration in -- not only in enterprise or in corporations, but in education.

Education globally is driving a big piece of the projector market right now, and the ability to share content or share presentations from one classroom and pipe it over the campus, those sorts of things are really driving the trends that we're participating in in the projector market.

Not only do we offer silicone, though -- and I think I mentioned this in my comments -- we offer a full suite of software that enables a lot of this collaboration connectivity as well.

Thank you so much.

You bet, thank you.

(Operator Instructions).

Your next question comes from the line of Chris Cook.

Please go ahead.

Hi, thanks for taking my question.

I was -- and I may have missed this.

What was capital spending in the quarter, and what do you project it to be in the fourth quarter and beyond?

We didn't give that number, but our capital spending was less than our depreciation, and our depreciation is about $1.1 million --

Okay.

-- for the quarter.

We haven't given guidance to capital spending number for next quarter.

And you want to wait until the Q comes out to tell us what CapEx was in the third quarter?

I can look it up for you.

Thanks.

It was about $600,000.

Okay, great.

Thanks very much.

Is that it?

There are no further questions.

All right.

Thank you, very much, and we'll look forward to talking to you on our calendar Q4 2009 conference call.

Thank you.

Ladies and gentlemen, that concludes today's conference.

Thank for your participation.

You may now disconnect, and have a good day.