Pixelworks Inc (PXLW) 2010 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first quarter 2010 Pixelworks earnings conference call.

My name is Melanie and I will be your conference operator today.

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

We will conduct a question-and-answer session at the end of this conference.

(Operator Instructions).

As a reminder, today's call is being recorded for replay purposes.

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

Steve Moore.

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 first quarter ended March 31, 2010.

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 positions 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 statement to reflect events or circumstances occurring after today.

Please refer to today's press release, our annual report on Form 10K for the year ended December 31, 2009, 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, net income loss per share.

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

The 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 Q1 results and discuss our outlook for the 2010 second quarter.

Thanks, Steve.

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

Q1 2010 was another solid performance for Pixelworks.

All financial metrics were in the middle of the range of guidance in what is typically a seasonally weak quarter.

Revenues were up 73% year on year and down 3% sequentially, which is slightly better than normal seasonality.

OpEx was down 3% sequentially and up 8% on a year-over-year basis, driven by R&D spending and reflecting increasing investment in new products.

We were profitable on a non-GAAP EPS basis, exclusive of a one-time tax gain, and we generated positive EBITDA and added to cash in the quarter.

We continued to have a strong performance from new products coming in at 16% of revenues.

Current products were especially strong during the quarter, due to a mix shift towards value models in the education projector segment.

All total, new and current products accounted for 84% of revenue during the quarter, while legacy products continued to be a less significant part of our revenue stream.

Pixelworks had an outstanding new product introduction quarter as the exciting product line that we showed at CES earlier this year gained significant traction.

During the quarter, we sampled two new leadership products, achieved initial customer design wins and released these products into production.

During Q1, we launched the PA 130, which is our third-generation MotionEngine device that offers support for advanced 120 Hz and 240 Hz applications and incorporates Pixelworks's proprietary n2m technology, which enhances the viewing experience of Internet video.

In addition to providing industry-leading video quality, the PA 130 platform also incorporates 3-D ready technology, advanced LED backlight control and true 240 Hz performance.

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

We also launched the PWC 970, which brings the advanced video processing and connectivity of the Ruby platform to next-generation projectors but with higher performance, more features, and lower cost versus previous generations of Ruby, such as the PWC 950.

All of these exciting new products are receiving excellent customer reception and were released into production during the quarter.

Continuing the new product momentum, in the current quarter we will sample a number of exciting new products.

The PWC 808 and 806 version, which offers extended connectivity and performance to the value segment of the digital projection market, and the PWC 980, which offers leading video performance and connectivity to the high end of the projector market.

All of these new product family members support the Pixelworks network display software suite, which enables advanced connectivity and content sharing to the next generation of digital projection systems based on Pixelworks products.

Later this quarter, we will be sampling the PA 132 which is our fourth generation MotionEngine device and will offer robust support for 3-D video systems in addition to 240 Hz performance and advanced LED backlight control.

The PA 132 will offer unparalleled price performance and video quality for advanced flat-panel and digital projection 3-D systems.

We are seeing strong customer interest for our new product pipeline.

And our number one focus for 2010 is to deliver these products to our world-class customer base.

Coming out of this year's Consumer Electronics Show, it is clear that change in the industry is occurring very rapidly, creating opportunity for companies that can deliver innovation.

The key trends in video that I have discussed in past conference calls over the last two years are clearly in place and they are accelerating.

Without exception all of these trends are driving the need for high-performance in video quality.

These trends are driving major technology transitions and accelerating the need for innovation.

The most notable of these trends is the rapid transition to 3-D video.

3-D requirements have burst onto the scene, driving a new level of performance in video quality requirements.

3-D is everywhere from blockbuster Hollywood movie releases to emerging support from broadcasters, and this is driving the demand for advanced 3-D video systems.

We are at the beginning stages of this pervasive trend and display search projects the market for TV units alone to grow at 121% compound annual growth rate through 2013.

The 3-D video trend is cutting across not only the TV market but will impact a wide variety of display markets, such as digital projection and advanced monitors.

Also, the transition to Internet video is opening up new markets for low quality video content that need enhancement and bandwidth efficiency.

Pixelworks is bringing innovation to this problem with our proprietary n2m technology, which will handle low frame rate Internet video.

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 our PA series products.

Additionally, a rapid transition to LED lighting sources is occurring to improve the video quality and power consumption of LCD displays, as well as provide a more efficient and reliable light source for digital projection systems.

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

Pixelworks is delivering industry-leading differentiated products that play directly into all of these exciting and explosive trends.

In closing, Q1 2010 was another solid quarter as we launched our recently introduced products into the market and continued our new product introduction 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, and markets that are experiencing explosive growth and demanding innovation.

Now our focus is to continue to build on the momentum and drive our new products to market while, at the same time, continuing to invest in our new product pipeline.

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

Thank you, Bruce.

Revenue in the first quarter of 2010 was $18.7 million, in the middle of the range of guidance we gave at the beginning of the quarter of $17.5 million to $19.5 million, driven by increased sales into a strong projector market and continued demand for our new products in what is typically a seasonably weaker period.

Q1 2010 revenue increased 73% year over year from $10.8 million in the first quarter of 2009 and was down 3% sequentially from $19.4 million in the fourth quarter of 2009.

The split for our first-quarter revenue by market was 78% digital projection, 10% TV and panel, and 12% other.

The split for our first-quarter revenue by new, current and legacy products was 16% new, 68% current, and 16% legacy.

We are encouraged by our engagement with customers on new products and we expect that new products will comprise a larger component of revenue for the balance of the year.

First-quarter digital projection revenue was approximately $14.6 million, up 6% sequentially.

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

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

TV and panel revenue in Q1 was approximately $1.8 million, down 42% from the previous quarter due to new product transition, seasonality and the timing of customer orders.

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

Other revenue in the first quarter was approximately $2.2 million, down 6% from Q4 2009.

Other revenues include sales of chips to other segments, including videoconferencing and monitors.

For the second quarter of 2010, we expect revenue to be in the range of $17.5 million to $19.5 million, reflecting steady order activity for both our new and current products.

Looking now at gross profit margin, GAAP gross profit margin in the first quarter of 2010 was 46.3%, compared with 38.6% in Q1 2009, and 46.6% in Q4 '09.

Included in cost of sales during the 2010 first quarter was approximately $585,000 of non-cash expenses, primarily for the amortization of acquired intangible assets.

Excluding these non-cash expenses, non-GAAP gross profit margin was 49.4% in the first quarter, just below the mid-range of guidance provided.

This compares with non-GAAP gross profit margin of 45.4% for the first quarter of 2009 and 50% in Q4 '09.

We expect GAAP gross profit margin in the second quarter of 2010 to be in the range of 45% to 47%, and non-GAAP gross profit margin to be in the range of 48% to 50%, excluding an estimated $500,000 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 $8.9 million in the first quarter excluding $307,000 in non-cash stock-based compensation and restructuring charges.

Q1 non-GAAP operating expenses were down 3% sequentially and up 8% year on year, driven by higher R&D spending and reflecting our increased investment in new products.

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

For the second quarter of 2010, we expect GAAP operating expenses to be between $9.5 million and $10.5 million and non-GAAP operating expenses to be between $9 million and $10 million, reflecting increased spending on new product development.

Looking now at non-GAAP EBITDA, strong revenues and gross margin allowed us to achieve positive EBITDA of $1.4 million in Q1.

This compares with positive EBITDA of $1.7 million in Q4 '09.

As expected, we recorded a benefit from income taxes in the first quarter of 2010 of $5.3 million on a GAAP basis and $5 million on a non-GAAP basis.

The benefit was primarily related to the exploration and reversal of previously recorded tax contingencies.

A similar benefit of $1.6 million was recorded in the first quarter of 2009.

The net benefits recorded for tax items not expected to be settled in cash contributed $0.36 to non-GAAP diluted earnings per share in Q1 2010 and $0.12 to diluted non-GAAP earnings per share in Q1 2009.

On a non-GAAP basis, we recorded net income in the first quarter of $5.2 million or $0.37 income per diluted share compared to net loss of $2 million or $0.15 loss per share in the first quarter of 2009 and net income of $233,000 or $0.02 income per diluted share in the fourth quarter of 2009.

Looking forward, we expect to record GAAP net loss per share in the fourth -- in the second quarter of 2010 of between $0.04 and $0.24 loss per share and to record non-GAAP net income loss per share of between $0.04 net income and $0.16 net 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 $32.7 million at March 31, 2010 -- up approximately $1.8 million from $30.9 million at December 31, 2009.

Cash used in operations was $541,000 in Q1.

Accounts receivable net at March 31 was $5.9 million compared with $5.6 million at December 31, 2009.

Day sales outstanding was 29 days at March 31 compared with 26 days at December 31.

Inventory net at March 31 was $6.1 million compared with $6.2 million at December 31.

Inventory turns were 6.1 times in the first quarter compared with 7 times in the fourth quarter.

That concludes my comments about the quarter.

We can now open the call for your questions.

(Operator Instructions).

Orin Hirschman.

AIGH Investment Partners.

Hello.

How are you?

Just in terms of the current generation of 120 refresh product, are those products still gaining new designs or there's a rapid shift of the 240 on the refresh rate where really the new products are what we should be looking at in terms of additional penetrations or additional sales on the TV market?

Yes, I think -- this is Bruce.

You should definitely be looking to the new products.

I think that the 120 Hz plain-vanilla TVs are pretty much commoditized, particularly if they are see CFL backlight as well.

So there is a pretty rapid shift to LED backlight largely edge web, some cases, local dimming, and 240 Hz.

And of course right on top of that now we have the 3-D trend.

In terms of when there might be material revenues from the new products and [made] safely from the 240 frame rate and from the other related products, when does that really began to make a difference with you?

Well, you can think of it like this, you know, we kind of don't give guidance on design wins and so forth.

But you can think of sort of the TV panel side of our business sort of like -- and this would range from Tier 1 customers would be the longest and sort of smaller customers might be quicker.

It could range from a six-month design in cycle by the time the customer is designing and do their quality tests and so forth and begin to move to the channel.

So it could be six to nine months to kind of what I would call high-volume meaningful production.

Along the way, there is always prototype build and some preproduction builds and initial builds, and things like that.

But that is roughly the horizon you are looking at.

And just for the other half of our business projectors it tends to be nine- to 12-month design cycle and potentially go to 12 or 15 month to high volume, I guess I would say.

In terms of the new 240 frame rate part, when -- does that mean [it's going to be] just second half of this year or Q4 this year before you can see the ramp?

Again we don't give the guidance.

I told you the horizons was with these things ramp, we are actively working and seeking and done design wins and busy doing that right now.

And these products were officially from our standpoint -- at least the 130 and the 970 -- production-worthy.

So got to go through the design win process and so forth.

So.

And we were getting boards into customers' hands in Q1.

In early Q1.

Okay.

Just in terms of competition for similar part from a broad converse someone else or integration of similar moving techniques within an integrated part, which might put any pressure on you, can just give us just your thoughts?

Yes, well, there is plenty of competition in this segment.

No doubt about it.

I think we like to think that we bring some value proposition and innovation to the problem.

I think I mentioned one feature called n2m, which takes variable and low frame rate Internet video and makes it high-quality video on the other end.

There is a fair amount of other type of innovative things that we believe we are doing in these products.

So we think this is kind of what we do.

We focus on this sort of niche in the market.

We think we're pretty good at it.

So we think we are competitive.

But clearly there is certainly competition in this market.

In terms of actual designs, do you have reference designs together with other chips from other chipmakers that are important to use those reference designs on so that's not really the story here?

Well, there are reference designs and different customers use different [TV SoCs].

Our part works takes the output from those TV SoCs and works seamlessly with them, but, yes, there are other chips on various designs that customers have.

Anything where there's a standard design that you designed together with the other chip maker?

I'm sorry.

Say it again?

Anything where you actually have a reference board that you did together with the other chipmakers?

We are not marketing directly with any other chip manufacturer, no.

But certainly our [MMEC] products are compatible with any of the leading SoCs that are driving digital television.

Okay and that (multiple speakers).

It tends to be customer-driven.

It tends to be customer-driven.

Okay, and my last question just on the [POP] side of the business, the projector's side, when does that begin to really have an impact?

Well, the products that have been -- that are addressing that market are being sampled and, again, you can sort of add on to that a number of months for customers to design in and bring into production products.

We have had a lot of success with customers as far as engagement, but again we don't provide guidance there, but --.

I think a couple of conference calls back I referenced a part called the PWC 807 which sort of was one of our first products.

And I think that might have been Q3 or Q4 I referenced that.

So the ones I referenced today, the 808 and 806 are continuation and follow on of that family aimed sort of at that kind of hot lower, lower end of the market, sort of more value segment of the market that needs connectivity.

And that would be DLP or 3-LCD.

It doesn't matter which light engine it is.

Okay.

Thank you very much.

(Operator Instructions).

I show no further questions at this time.

Well, thank you for joining us and we will be presenting at the Tech America Conference in San Francisco on the 13th of May and at the ThinkEquity Tech Conference in New York on June 3.

So hopefully you can join us.

And again, thank you for joining us today, and we look forward to reporting to you again on our Q2 2010 conference call.

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

That does conclude the presentation.

You may disconnect.

Have a wonderful day.