Pixelworks Inc (PXLW) 2009 Q4 法說會逐字稿

Good day, ladies and gentlemen.

And welcome to the Pixelworks earnings conference call.

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

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

Later we will be conducting a question-and-answer session.

(Operator instructions).

As a reminder, this call is being recorded for replay purposes.

I would now like to turn the conference over your host for today's call, Mr.

Steve Moore, Chief Financial Officer.

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 fourth quarter ended December 31, 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 a marketable security, restructuring charges, acquisition-related items, stock-based compensation expense, additional amortization of a non-cancellable prepaid royalty, and other income.

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

The Company provides...believes these 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 sections of the Pixelworks website.

Bruce will begin today's call with a strategic update on the business, after which I will review our Q4 results and discuss our outlook for the 2010 first quarter.

Thanks, Steve.

Good afternoon, everyone.

And thank you for taking the time to join us today.

2009 was a year of significant challenge and significant progress for Pixelworks.

Like the rest of the industry, we faced a difficult economic environment in the first half of the year, with several months of limited visibility, delayed product orders, and an overall atmosphere of uncertainty.

The difficult macro-environment also accelerated industry trends in 2009 as customers focused on new products in order to increase differentiation and drive down costs.

As a result, the requirements for innovation increased dramatically.

Additionally, market and economic pressures also drove significant consolidation and change in our customer base and the competitive landscape.

In response to these challenges, we continued to focus on our priorities of executing our new product road maps, reducing and efficiently managing our cost structure, and strengthening our balance sheet.

As a result, we exit 2009 with more efficiency across our business, an enhanced product portfolio, significant new product momentum, and in the strongest financial position in years.

In 2009 we achieved a number of significant milestones.

We were able to streamline our cost structure by reducing operating expenses 22% versus 2008, while at the same time continuing to invest in and increase our new product momentum.

We continued to strengthen our balance sheet by retiring an additional $45 million of debt at favorable prices during the year, reducing our long-term debt to $15.8 million at the end of 2009.

Over the past two years we have dramatically improved our balance sheet strength through discounted repurchases of debt as well as positive cash flow from operations.

We continued to execute on our new product road maps and enter 2010 with significant momentum, as evidenced by the exciting new products we demonstrated at the Consumer Electronics Show earlier this month in Las Vegas.

Building on our momentum in 2008, in 2009 we delivered a continuous stream of new products that extended and enhanced our product lines and expanded our market opportunity.

Our new products gained significant traction in 2009 and are now driving our growth.

New products represented 23% of total sales in 2009, compared with 1% in 2008.

This momentum was most evident in Q4 when new product sales were up 45% from Q3 '09, and represented 26% of total revenue, the highest percentage of the year.

Meanwhile, legacy products decreased 59% in 2009 versus 2008, and accounted for only 15% of our sales in Q4 '09 versus 35% a year ago.

All in all, even though the year started out on a difficult note, 2009 was a significant year of accomplishment as we streamlined the Company, strengthened and solidified our team, fortified our balance sheet and increased our new product momentum.

And most importantly, 2009 will mark the inflection point where new products are now driving our growth.

Now a few comments about Q4 '09 results.

An improving market and new product momentum drove strong financial results in Q4.

Revenues came in above guidance and were up 16% sequentially as the streak we witnessed in Q3 '09 continued into Q4.

Customer activity remained high and we witnessed strong bookings across the customer base.

Non-GAAP gross margins came in at the high end of guidance, driven by product mix and ongoing cost reduction initiatives.

Q4 operating expenses came in slightly above guidance, reflecting a high level of new product development activity and the restoration of employee salaries.

Even with the increased development activity, operating expenses were down 9% year on year on a non-GAAP basis as a result of our continued emphasis on expense management and cost efficiencies.

Operating profit increased 68% sequentially and we generated positive EBITDA, non-GAAP net income and cash during the fourth quarter.

But most importantly, we enter 2010 with significant new product momentum.

During the quarter we sampled several important new products that reestablish Pixelworks' leadership and innovation in video.

At CES we demonstrated industry-leading differentiated products that play directly into the exciting trends of 3D, the transition to LED backlight and 240 Hz frame rates, internet video and the connected classroom.

At the show, we demonstrated our next generation Motion Engine device, the PW130.

The PW130 represents a significant architectural advancement in performance and video quality over our popular PW9800 and 9801 series.

It offers support for advanced 120 Hz and 240 Hz applications.

And the PW130 incorporates Pixelworks' proprietary M2M technology which enhances the viewing experience of internet video.

The PW130 also incorporates 3D-ready technology and the platform will support advanced LED backlight control and true 240 Hz performance.

This product demonstrates and reestablishes Pixelworks' leadership in innovation in video.

Also at the show we demonstrated the PWC970 which brings the advanced video processing and connectivity of the Ruby platform to next generation projectors, but with higher performance, more features and lower costs versus previous generations of Ruby such as the PWC950.

We also demonstrated Pixelworks' advanced suite of connectivity and collaboration software, the Pixelworks Network Display Software Suite, that enables a new level of capability and connectedness for the education and enterprise markets.

The education market in particular is driving demand for connectivity and interactivity as classrooms across the globe transition to digital technology.

Reception for these new products was extremely strong and we are encouraged and excited by the level of customer activity.

Coming out of CES this year it is clear that change in the industry is occurring rapidly, creating opportunity for companies that can deliver innovation.

The key trends in video that I have discussed in past conference calls are clearly in place and, in fact, they are accelerating.

Increased demand for video quality driven by the transition to 1080P full HD video, LCD panels as the dominant display medium and video content, connectivity and delivery driven by the internet are all driving requirements for innovative solutions.

To address these challenges, multiple technology transitions are occurring as the need for innovation increases.

We are well into the transition from 60 Hz to 120 Hz frame rates for advanced LCD panels, and now rapidly moving to 240 Hz which presents the need for advanced high performance architectures like the PW130.

A rapid transition to LED backlighting is occurring to improve the contrast and dynamic range of LCD displays as well as improving power consumption to address ecological concerns.

3D requirements have burst onto the scene, driving a new level of performance and innovation requirements in video, and the transition to internet video which is opening up new markets for low quality video content that need enhancement.

Pixelworks is being innovative proprietary technology like our M2M technology to this problem.

And lastly, the connected classroom is driving the need for new connected and interactive digital projection solutions in the education market.

In 2009 these trends accelerated dramatically and are driving the need for innovative advanced video solutions that Pixelworks has a long history of providing.

2009 was a pivotal year for Pixelworks.

And we enter 2010 much stronger and with significant new product momentum.

It has taken several years to revamp the Company, but now Pixelworks finds itself with a new management team, financial strength, significant product momentum execution, and markets that are growing rapidly and demanding innovation.

Q4 '09 was another solid quarter of progress as we saw increased order activity across our customer base, continued traction with our new products and continued improvement of our financial position.

We remain committed to the financial discipline of expense and cost control while at the same time continuing to invest in the efficient execution of our product road maps to capitalize on the exciting and explosive trends in video.

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

Thank you, Bruce.

Revenue for the fourth quarter of 2009 was $19.4 million, above the range of guidance we gave at the beginning of the quarter of $17 million to $19 million, driven by increased sales into the recovering projector market and increased demand for our new products.

This is an increase of 16% from $16.7 million in the third quarter of 2009 and up 2% year over year from $18.9 million in the fourth quarter of 2008.

The split for our fourth quarter revenue by market was 71% digital projection, 16% TV and panel, and 13% other.

The split for our fourth quarter revenue by new, current and legacy products was 26% new, 59% current, and 15% legacy.

As Bruce mentioned, new product sales in the fourth quarter were the highest to date and it is clear that new products are now fueling the Company's growth.

Fourth quarter digital projection revenue was approximately $13.8 million, up 13% sequentially.

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

Revenues from our projection products continue to increase as demand from our customers reflected a recovering global economy.

In addition, we experienced increased demand for our Ruby networks video chip in the quarter.

TV and panel revenue in Q4 was approximately $3.2 million, up 16% from the previous quarter.

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 fourth quarter was approximately $2.4 million, up 38% from Q3 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.

Based on increased visibility, for the first quarter of 2010 we expect revenue to be in the range of $17.5 million to $19.5 million, reflecting solid order activity for both our new and current products within what is typically a seasonably weaker period.

Looking now at gross profit margin, GAAP gross profit margin in the fourth quarter of 2009 was 46.6% compared with 43.9% in Q3 2009.

Included in cost of sales during the fourth quarter of 2009 was approximately $650,000 of non-cash expenses, primarily for the amortization of acquired intangible assets.

Excluding these non-cash expenses, non-GAAP gross profit margin was 50% in the fourth quarter, at the high end of guidance provided of 45% to 50%.

This compares with non-GAAP gross profit margin of 47.7% in Q3 '09.

Non-GAAP gross profit in Q4 reflected a favorable product mix, a small benefit from the sale of products previously written off, and ongoing cost reduction initiatives.

We expect GAAP gross profit margin in the first quarter of 2010 to be in the range of 44% to 49%, and non-GAAP gross profit margin to be in the range of 48% to 52%, excluding an estimated $600,000 in non-cash expense.

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

Non-GAAP operating expenses were $9.2 million in the fourth quarter, slightly above management guidance, and excluded $260,000 in non-cash stock-based compensation and restructuring charges.

Q4 non-GAAP operating expenses were up 19% from $7.7 million in Q3 '09 due to a higher level of development activity for new products and the restoration of salaries which were reduced at the beginning of Q2.

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

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

For the first quarter of 2010 we expect the GAAP operating expenses to be between $9 million and $10 million and non-GAAP operating expenses to be between $8.5 million and $9.5 million.

Looking now at non-GAAP EBITDA, strong revenues and gross margin allowed us to achieve positive EBITDA of $1.7 million in Q4.

This compares with positive EBITDA of $1.4 million in Q3 '09.

On a non-GAAP basis we recorded net income in the fourth quarter of $233,000 or $0.02 income per diluted share, compared to net income of $119,000 or $0.01 income per diluted share in the previous quarter and a net loss of $1.2 million or $0.08 loss per share in the fourth quarter of 2008.

Non-GAAP net income per share of $0.02 was above the middle of the range of our outlook of $0.10 income to $0.14 loss per share.

Looking forward, we expect to record a benefit for income taxes in the first quarter of 2010 of approximately $5 million to $5.5 million or $0.35 to $0.39 per share on both a GAAP and a non-GAAP basis, which reflects the anticipated reversal of a previously recorded tax contingency due to the expiration of the statute of limitations.

We expect to record GAAP net income per share in the first quarter of 2010 of between $0.18 and $0.42 per share, and to record non-GAAP net income per share of between $0.27 and $0.50 income per share.

Moving to the balance sheet.

Cash and marketable securities which consists of cash and cash equivalents as well as short and long-term marketable securities were $30.9 million at December 31, 2009, up approximately $2.1 million from $28.8 million at September 30, 2009.

Cash generated from operations was $2.7 million in Q4.

At December 31, 2009 total cash and marketable securities exceeded long-term debt by $15.1 million, an increase of $12.4 million from December 31, 2008.

Good management of our balance sheet and positive operating results have allowed us to generate cash from operations over the last several quarters in the midst of a difficult economic environment.

Accounts receivable net at December 31 was $5.6 million compared with $5.7 million at September 30, 2009.

As a result of more timely receipt of payments from customers, days sales outstanding decreased to 26 days at December 31 compared with 31 days at September 30.

Inventory net at December 31 was $6.2 million, up from $4.8 million at September 30, due to timing of inventory receipts.

Inventory turns were 7 times in the fourth quarter, compared with 8.2 times in the third quarter.

That concludes my comments about the quarter.

We can now open the call for your questions.

(Operator instructions.) And your first question comes from the line of Orin Hirschman.

Please proceed, sir.

Hi, AIGH Investment Partners.

How are you?

Great.

Well, thank you.

Good.

And congratulations on progress.

Can you give us any more color into the actual bookings trends throughout the quarter and throughout the first month of the quarter as well?

And then I have one or two follow-ups.

We don't give inter quarter -- intra-quarter information at all.

But the trend for bookings has been strong in the last two quarters, Q3 and Q4, above 1.

So again, I don't think historically we've been giving the exact numbers on book to bill, but we have been above 1 for both quarters.

Okay.

And in terms of your normal seasonal pattern, it would suggest that Q1 is a seasonally weak quarter, and then Q2 and Q3 improve from there.

Is there any reason to believe that that won't be the normal seasonal trend this quarter?

And then another question tied into that in terms of when new products really begin to kick in in a bigger way.

We are concerned about the seasonal weakness in Q1 although, again, the book to bill encourages us about Q1 and we've got it to essentially a relatively flat quarter from Q4.

As far as new products kicking in, we're seeing new products already ramping and in fact taking a larger role in our total revenues than our legacy products.

We do expect new products to continue to ramp through the -- and become more important through the year.

I think if you want to think about how kind of the time lag of impact from new products, it varies.

It varies by product line.

The panel TV Motion Engine product lines tend to be, maybe a best case scenario is six to -- kind of six to eight months and, in some cases, maybe 12 months to substantial revenues.

Projectors are typically a little longer.

That might be nine months on a best case and maybe 12 to 14, roughly, if you want to think about from day one of a design win.

But all through the year we're consistently getting new design wins.

It's a major focus of our activities here and that continued through Q4 as well, so.

Two additional follow-ups.

Thank you.

Just in terms of you described the seasonality typical in Q1.

It's not so typical this year, but is there any reason to believe that if your typical seasonality where Q2 and Q3 improve, I believe, over Q1, that there is any reason to believe that it should be otherwise this year?

At this juncture I don't know that we would expect this year to be different from a seasonality standpoint.

We do certainly have a much broader suite of new products that we are addressing to a larger market.

So we certainly have a lot of optimism for the year.

I think if you go back and you look at sort of the seasonality, if you kind of take 2009 out because of the economic situation first half, we've historically been down about 10% in Q1 from a couple of different factors.

I think if you look at the midpoint of our range and you did the math there, it's about down 5%.

So it's a little stronger than normal, but kind of in there in terms of seasonality, but a little less pronounced than normal.

And just in terms of the new family, I believe it's called the 130 family, have you actually gotten any designs yet for the first chip in that family?

We don't talk about design wins.

I think the comments I made on the conference call is that we demonstrated the product.

We have silicon on the product we're demonstrating right now -- at CES, that was a couple of weeks ago.

We always are in close contact with our customers in terms of when our new products are coming out and so forth.

We don't comment on design wins, but obviously, this is a major focus of us, of our activities here on a regular basis of driving new design wins.

In terms of, you mentioned the design cycle in terms of revenue, when revenue begins to ramp from that type of product for the 130 family.

Once again, are you in the sampling stage right now?

In other words, could we -- ?

Yes.

-- (technical difficulty) revenues?

Okay.

Yes, we are.

So we could expect to see initial revenues in Q3, calendar Q3?

Possible.

Okay, thank you very much.

There are no questions at this time, so I'll turn the call over to Mr.

Steve Moore for closing remarks.

Okay.

Well, thank you everyone for joining us.

And we appreciate your time on the call and look forward to talking to you in the future.

Goodbye.

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

This concludes the presentation.

You may now disconnect.

Have a great day.