Pixelworks Inc (PXLW) 2010 Q4 法說會逐字稿

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

My name is Diana and I will be the operator for today.

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

Later we will conduct a question-and-answer session.

(Operator Instructions).

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

I would now like to turn the conference over to your host for today, 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 fourth quarter ended December 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 position constitute forward-looking statements.

These forward-looking statements and all the 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 they 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 10-K for the year-ended December 31 2009 and subsequent SEC filings for 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 restructuring charges, acquisition related items, stock-based compensation expense, gain on sale of marketable security and additional amortization of a 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 that cautions investors to consider these measures in addition to, not as a substitute for, nor [superlative], 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 Q4 results and discuss our outlook for the 2011 first quarter.

Thank you, Steve.

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

2010 was another year of solid progress for Pixelworks as we delivered significant new products for the digital projection and advanced TV markets.

Building on our momentum in 2009, in 2010 we delivered a continuous stream of new products that expanded our product line, expanded our market opportunity and experienced outstanding customer traction.

Overall revenues for 2010 were up 14% versus 2009, but more importantly our new products gained significant traction and are now driving our growth.

On a year over year basis, new products were up 58% over 2009 and represented 31% of total sales compared with 23% in the prior year.

This momentum was most evident in Q4 when new products grew 34% year-over-year and composed 48% of sales in spite of the inventory correction we experienced during the quarter.

Legacy products accounted for only 16% of sales in 2010 versus 22% in 2009 and new products increasingly drive our top line.

Over the year, operating expenses were up 12% which left the continued investment in our new product pipeline and gross margins came in at 48% overall.

While operating income disappointed we were EBITDA positive for the year in key operational milestones in the execution of our new products and significant tier one customer penetration.

In our digital projection product line we delivered a full range of products for the entire spectrum of the projector market from low end connected DLP systems to high end 3LCD based projectors.

These products enabled advanced applications in the business, education and consumer segments such as SMART whiteboard, 3D video and [VC less] presentation.

During the year we introduced the PWC808 and 806 which offers extended connectivity and performance for the value segment of the digital projection market with particular focus on DLP based systems.

We also introduced the PWC970 and 980 series which brings the advanced video processing and connectivity of the Ruby platform to next generation midrange and high end projectors.

Though with higher performance, more features and lower costs versus previous generations.

All of these projector products are supported by the Pixelworks network display software suite which was enhanced significantly in 2010 and enable advanced connectivity and video sharing for the next generation of digital projector systems.

And in Q1 2011 we will sample our next generation of projection products, code name Topaz, that offer unparalleled video performance and connectivity as well as support for all formats of 3D video.

For the advanced TV market we introduced the PA130 and the PA131-132 series of motion MotionEngine devices.

These products represent our third and fourth generation products and offer support for advanced large screen TV applications.

All these products incorporate Pixelworks proprietary n2m technology which enhances the viewing experience of internet video.

The PA131 and 132 products in particular provide support for 120 hertz and 240 hertz systems, advanced 3D video processing and full local dimming led back light control, all at a compelling price performance point.

At CES this year customer products ranging from 42" to 70" advanced large screen TV's incorporating Pixelworks technology were prominently on displayed on the floor.

These devices earn high volume production and we enter 2011 problem with significant momentum for these products.

Additionally in Q1 2011 we will sample 2D to 3D conversion enabled versions of the PA131 and 132 series.

At CES this year we demonstrated industry leading differentiated products and technology that play directly into the exciting trends in video.

At the show Pixelworks demonstrated 3D video processing on a number of LCD panels and technology ranging from 120 hertz frame sequential to 21 by 9 formats as well as full local venting direct LED panels.

Pixelworks also demoed our next generation 2D to 3D conversion technology as well as our 3D projector reference design and a number of mobile video connectivity and streaming technologies which are part of our network display software suite.

These products and technology demos illustrate Pixelworks leadership in innovation and video and we are encouraged and excited about a level of customer activity.

Once again CES reinforces that the rapid pace of change continues creating opportunities for companies that can deliver innovation.

During 2010 the transition to 3D continued to accelerate as 2D to 3D conversion technology, passive and active 3D technology, LED back light and various new panel technologies were introduced to the market.

3D, while still in the early phase of adoption, continues to be the major driver of change as panel and glasses technology advance and as more content is available.

Display Search estimates that 91 million 3D TV's will be shipped in 2014 whereas today the TV market stands at only 4% 3D penetration.

Also, internet connectivity is driving change in the requirements for the TV platform with 21% of all TV's shipped in 2010 internet enabled.

The transition to internet video is opening up new markets for low quality video that need enhancement and Pixelworks is bringing innovative proprietary technology like our n2m to this problem.

Future Pixelworks products will incorporate innovative technology to address this need.

Now a few comments about Q4 2010 results.

As we noted on our Q3 2010 conference call and our pre-announcement earlier this month, the inventory correction in our [core] projector business that began late Q3 continued into Q4 as revenue came in below our outlook and we experienced lower than normal visibility.

That being said we expect a return to sequential growth in Q1 driven by new products in our TV segment.

Regarding other metrics, non-GAAP gross margins came in within the range of guidance driven by product mix and ongoing cost reduction initiatives and Q4 operating expenses came in within the range of guidance reflecting a continuing investment in new products.

Steve will go into more detail on these and other metrics later in this call.

In closing, 2010 was a pivotal year for Pixelworks, and while the year ended on a sluggish note with the industry experiencing a significant inventory correction we enter 2011 with significant new product momentum and customer attraction across our product line and look forward to continuing to deliver exciting leadership products that play into the explosive trends in video in 2011.

Now I would 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 2010 was $14.1 million down 22% from $18 million in the previous quarter and down 27% from the $19.4 million in Q4 2009.

As a result of ongoing inventory correction in the digital projection market and (inaudible) .

The split of our fourth quarter revenue bi-market was 80% digital projection, 8% TV and panel and 12% other.

The split of our fourth quarter revenue by new, current and legacy products was 48% new, 37% current and 15% legacy.

Fourth quarter digital projection revenue was approximately $11.3 million down 18% compared with the previous quarter primarily as a result of channel inventory correction.

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

TV and panel revenue in Q4 was approximately $1.1 million down 24% through the previous quarter due primarily to a transition to new products.

TV revenue includes sales of our chips targeted at the large screen flat panel display market.

Other revenue in the fourth quarter was approximately $1.7 million down 38% from Q3 2010 due to decreased sales of legacy products.

Other revenue includes sales of chips to other segments including video conferencing and monitors.

For the first quarter of 2011 we expect revenue to be in the range of $14.5 to $16.5 million reflecting a more positive outlook for our digital TV products.

Looking now at gross profit margins, non-GAAP gross profit margin was 47.1% in the fourth quarter within the range of guidance provided.

This compares with non-GAAP gross profit margin of 46.1% in Q3 2010 and 50% in the fourth quarter of 2009.

We expect gross profit margin in the first quarter of 2011 to be in the range of 44% to 48% on a GAAP basis and 45% to 49% on a non-GAAP basis.

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 $9.7 million in the fourth quarter within the range of management guidance of $9.5 to $10.5 million and excluded $335,000 in non-cash stock based compensation expense.

Q4 non-GAAP operating expenses were up 8% sequentially and up 6% year over year driven by increased investment in new product development.

Operating expense levels will continue to vary based on the timing of development activities for the first quarter of 2011 we expect operating expenses on both the GAAP and non-GAAP basis to be between $9.5 and $10.5 million reflecting continued investment in new product development.

We recorded non-GAAP negative EBITDA of $1.8 million in Q4 compared with positive EBITDA of $493,000 in Q3.

On a non-GAAP basis we recorded a net loss in 2010 fourth quarter of $3.6 million or $0.27 loss per share compared to net income of $172,000 or $0.01 income per share in the previous quarter, a net income of $233,000 or $0.02 income per share in the fourth quarter of 2009.

Non-GAAP net loss in the fourth quarter of 2010 excluded again on the sale of marketable securities of $737,000 or approximately $0.05 cents income per share.

Looking forward we expect net loss per share in the first quarter of 2011 to be between $0.11 and $0.33 on a GAAP basis and non-GAAP net loss per share to be between $0.12 and $0.34.

Moving to the balance sheet, cash and marketable securities which consists of cash and cash equivalence as well as short and long-term marketable securities are $29.8 million at December 31, 2010 and approximately $1.4 million from $31.2 million at September 30 and down approximately $1.1 million from $30.9 million at December 31, 2009.

Other balance sheet metrics include day sales outstanding at 29 days at December 31 compared with 27 days at September 30.

In inventory [terms] of 5.8 times in Q4 , concurred with seven times in the previous quarter due to lower revenue for the quarter.

This concludes my comments.

We now open the call for

(Operator Instructions).

And we have a question from the line of P.J.

Solit, Potomac Capital.

Hi.

It's P.J.

Solit.

I guess the cash burn actually looked pretty good relative to such a low revenue level, but I guess my question is could you give a little more granularity on some of the design wins and what you are seeing in terms of the excitement of the new potential products?

Yeah, we don't break out design wins or really talk about customers specifically for a number of reasons, but as I eluded to in my comments, we feel like we had pretty good success with the 131, 132 family in particular.

We don't do segment guidance typically, but this time we talked about our TV segment driving our Q1 outlook.

Okay.

What point would that have to get to for you to break it out a little more explicitly?

We break TV out, we break the TV, the projector and we have a segment called "other." The TV segment percentage and whatever that absolute number is, you will see the affect, or the impact, of success show up in that segment break out.

Okay.

Given the pipeline and design wins are you looking at, would you expect sequential growth in the June quarter as well over the March quarter?

We don't give guidance out that far.

Certainly we want to keep growing.

We don't give guidance out that far, but that's the idea.

Okay, and assuming some success in the new products, sort of a broad range of when that could comprise more than 50% or 50% of the revenue?

Again, it is difficult to forecast.

New products are 48% of Q4, albeit it was a down quarter with an inventory correction sort of in the runway products.

So you can kind of -- trajectory for there it's already a pretty significant piece of our revenue albeit in a depressed quarter.

Okay and lastly, once you burn through the inventory in the projector business, when do you see that getting back to historical levels or revenue?

It depends on which customers.

Our customers are telling us that either in Q1 or Q2 they expect to be on a more normal revenue and ordering patterns.

If you look across the industry there were some segments that didn't experience an inventory correction.

Our core business tends to be education and enterprise driven and Japan centric as well.

So a strong yen and so forth.

Then typically also Q4 is a weak quarter for Japan revenues just because it is the end of their fiscal year.

Calendar Q1 turns up at the end of the Japanese fiscal year.

So the inputs were getting cleared up Q1 going into Q2.

And I think that coincides with what some of the other more broad-based companies are saying, at least on conference calls, and what we hear from other companies as well.

Okay.

I guess you guys have kind of roughly talked about (inaudible) and target margins and things in the past about profitability at higher revenues like a $20 million per quarter rate.

If you got a normalized projector business quarter in there and then the new stuff kicking in, could you be at that kind of rate a couple quarters out?

Yeah.

It is really mixed.

We have a very sensitive margin model here, it's pretty mix dependent.

You know the projector products tend to be above what you might consider the mid-point of our guidance in corporate margin.

The TV products tend to be below that.

In any given quarter it can swing 100 basis points or 150 basis points pretty easily.

So it really depends on mix.

If we are wildly successful in TV it will be towards the lower end of that.

If we have good success in TV with more contribution for projector it would tend to be the mid or above that.

Kind of tough to predict.

Okay, thanks a lot.

Thank you.

Thank you.

And there are no more questions at this time.

This concludes the Q&A portion of today's conference.

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

Thank you for joining us today and we look forward to updating you again on our Q1 2011 conference call.

Thank you.

Ladies and gentlemen, this concludes today's presentation.

Thank you for your participation.

You may now disconnect.

Have a great day.