Pixelworks Inc (PXLW) 2011 Q2 法說會逐字稿

Good day ladies and gentlemen, and welcome to the second-quarter 2011 Pixelworks Inc earnings conference call.

My name is Chanel, and I will be your 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, this conference is being recorded for replay purposes.

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

Steve Moore.

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 ending June 30, 2011.

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.

All forward-looking statements are based on the Company's beliefs as of today, Thursday, July 21, 2011, and we undertake no 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, 2010, and subsequent SEC filings for a description of factors that could cause forward-looking statements to differ materially from actual results.

Additionally, the Company's press release and management statements during this conference call will include discussions of certain measures and financial information in GAAP and non-GAAP terms, including gross margin, operating expenses, net income loss, and net income loss per share.

These non-GAAP measures exclude restructuring charges, amortization at required developed technology, stock-based compensation expense, gain on sale of patents, gain on sale of marketable securities, and additional amortization of a prepaid royalty.

We use these non-GAAP measures internally to assess our operating performance.

The Company believes these non-GAAP measures provide a meaningful perspective on our core operating results in underlying cash flow dynamics, but we caution investors to consider these measures in addition to, not as a substitute for, no superior to, the Company's consolidated financial results as presented in accordance with GAAP.

Included in the Company's press release are definitions and reconciliations of GAAP to non-GAAP net income loss and GAAP net income loss to adjusted EBITDA, which provide additional details.

Bruce will begin today's call with an update on the business, after which I will review our [future] results and discuss our outlook for the 2011 third quarter.

Thanks, Steve.

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

Let me start out by making a few comments and observations about our second quarter 2011, and then Steve will follow with more details on our financial results.

Q2 was a quarter of improvement in our overall business as the strong bookings trend we experienced in Q1 continued throughout the quarter, visibility improved, and overall revenue grew 7% sequentially, which is slightly above the midpoint of guidance.

This strength was driven by an improvement in our core projector business as the inventory correction noted on our last conference call returned to normalized levels.

Bookings for the quarter came in strong with a book to bill of 1.1 to 1, driven by our TV panel products as recent design wins moved into production and customers increased orders for the second half of 2011.

Reflecting this rebound, the book to bill in the TV panel category was 1.7 to 1.

TV panel products, while down sequentially reflecting a channel fill transition, were up 19% year-over-year as we continued to have success with our PA series products for the advanced TV market.

Overall, our new product category was up sharply, rising 67% year-over-year and up 7% sequentially.

New products accounted for 51% of revenue during the quarter, up from 26% in the second quarter of 2010, reflecting continued adoption and success across our product lines.

Gross margin came in at the upper end of the guidance range and combined the top line growth and below range operating expenses resulted in positive EBITDA and cash flow from operations for the quarter.

Lastly, we achieved key financial milestones during the quarter as we completed a multi year process of delevering the Company and strengthening the balance sheet by completely retiring our outstanding long-term bonds and completing an equity offering.

On the product front we had an outstanding new product introduction quarter across our product lines.

In our TV panel product line, we delivered production samples of the PA136, our fifth generation advanced video processor, which provides industry leading features and video quality.

PA136 incorporates a number of advanced features including real-time static and motion adaptive 2D to 3D conversion, a simplified design, and significantly reduced the overall system cost.

The 136 also incorporates Pixelworks' ground breaking n2m technology, which uses adaptive frame rate conversion to ensure smooth playback of streaming video or low frame rate Internet content.

In Q3 we will be following up the PA136 with a PA138, which includes all the improvements and features of the 136, but targeted for advanced 240 Hz high-end systems and support for the latest generation high-performance panel interface technology.

In our TV panel product line, we had a solid design performance in Q2.

Our success in the tier 1 segment of the advanced TV market continued as we penetrated an additional top 5 tier 1 TV OEM and also a top 5 tier 1 a LCD panel manufacturer for our PA series products, and these programs will be shipping in production the second half of 2011.

Continuing to penetrate the top-tier customer base validates Pixelworks' leading innovative solutions in video processing and our ability to deliver quality product and high volume to the most demanding customers in the industry.

These customers are selecting Pixelworks products because of the [focus] supplier in this market.

We provide a combination of superior video quality, innovative value-added features, and highly efficient system implementation costs, all at a competitive price performance swing.

This combined with ability to deliver top-quality, high-volume production with world-class customer support is why Pixelworks is increasingly the solution of choice.

In our digital projection product line, we introduced and announced the PW878, the first member of the Topaz family.

We show the most advanced and highly integrated devices for the digital projection market.

The PW878 is the industry's first cost effective 3D display processor with advanced geometry correction capabilities that is designed for the business, education, and mainstream home theater projector markets.

Additionally, the PW878 offers the latest video processing technology combined with industry-leading video enhancement features.

The Topaz family of products will cover multiple segments of the projector market, from entry-level 2D education and business projectors to high-end 3D home theater systems with unparalleled video performance and network connectivity.

Pixelworks projector solutions provide a full suite of software with our projector chips which drives very close relationships with our customers, and we will be introducing additional Topaz family members in the upcoming quarters.

Design win momentum has been strong for this product, and in Q2, we received key design commitments from tier 1 customers for the PW878, and we'll be shipping volume production later in 2011.

Regarding the dynamics we are seeing in the advanced TV market, the need for high-performance video processing continues to accelerate as new requirements such as 4Kx2K resolutions, passive 3D panel technology, and 21 by 9 screen size begin to become requirements for next generation systems.

The competitive dynamic of the TV market is driving brands to keep offering attractive features like higher frame rates, Internet capabilities, and 3D ready to name a few, in order to continue moving forward and maintain price levels.

And as premiums for advanced features narrow, these models become a larger part of the product mix.

This is driving an accelerating need for time to market and innovation as customers strive for differentiation.

The trend toward smart connected TVs is a good example.

In 2011, more than 25% of all flat-panel TVs shipped are expected have some form of Internet connectivity, and according to display search, this number is forecast to grow to 138 million units in 2015, accounting for 47% of all flat panel TVs shipped.

On the panel side, manufacturers are driving transitions as well.

For example, the 3D transition is being accelerated as manufacturers aggressively increase the supply of 3D panels, and the competition between frame sequential and passive 3D panel technology is lowering price premiums for 3D-ready functionality, which is now becoming a checkbox feature on premium TVs.

This continuing technology treadmill is causing complexity in the TV platforms to increase dramatically and driving the need for separate band video processors to handle video processing and provide features and differentiation premium platforms.

All of these trends combined with Pixelworks is one of the last pure play Companies focusing on this application is creating opportunity as we continue deliver industry-leading differentiated products that are validated in the marketplace.

In closing, Q2 was a quarter of improvement, as the inventory correction of the last 2 quarters in our core projector business ended, and we experienced strong bookings and were able to generate positive EBITDA and cash flow from operations.

After several years of effort, we completed a multi year process of delevering the Company and strengthening the balance sheet, and we achieved a number of key new product milestones with a launch of our next generation advanced video processor, the PA136 and the introduction of the PW 878, which is the first device in our Topaz family of projector products.

And lastly, we continued our success with the top-tier customer base as we penetrated an additional tier 1 TV OEM and tier 1 LCD panel manufacturer for our PA series products and received design commitments from tier 1 customers for our PW878.

Now, I would like to turn the call over to Steve to review the financial details for the quarter.

Thank you, Bruce.

Revenue in the second quarter 2011 was $15.7 million, up 7% from the previous quarter as a result of improving digital projector revenues.

Revenue in Q2 was down 16% compared to the same quarter a year ago as the digital projection market emerged from a worldwide inventory correction.

Part of our second-quarter by marked with 78% in digital projection, 11% TV and panel, and 11% imbedded video display.

The revenue split between the new and current products was 51% new and 49% current.

Revenue from digital projection, which includes sales of our chips targeted at the advanced digital projection market, was approximately $12.3 million in Q2, up 24% compared with the previous quarter, primarily due to return to normal order patterns following the earlier channel inventory correction.

Revenue from TV and panel, which includes sales of our chips targeted at large screen flat panel display market, was approximately $1.6 million in Q2, up 19% from the same quarter last year, but down 36% from the previous quarter, primarily as a result of channel fill orders in Q1 by a top-tier customer as they began production with our PA series chips.

Imbedded video display revenue in the second quarter will was approximately $1.8 million, down 20%.

Bookings in Q2 have been very solid, which has provided us clearer visibility into the third quarter resulting in a higher and more narrow guidance range than in previous quarters.

For the third quarter of 2011, we expect revenues to be in the range of $17 million to $18 million.

Non-GAAP gross profit margin was 48.3% in the second quarter, compared to 45.5% in the previous quarter and 49% in the second quarter of 2010.

Product mix and higher absorption of operational costs positively benefited our quarter-over-quarter gross margin percentages.

We expect gross profit margin in the third quarter of 2011 to be in the range of 46% to 48% on a GAAP basis and 47% to 49% on a non-GAAP basis.

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

Non-GAAP operating expenses were $8.7 million in the second quarter which is better than our guidance of $9.5 million to $10.5 million due to the timing of development expenses planned for Q2.

Our operating expense levels reflect our ongoing investment in new product development and will continue to vary based on the timing of development activities.

For the third quarter of 2011, we expect operating expenses to range between $9.5 million to $10.5 million on a GAAP basis, and between $9 million and $10 million on a non-GAAP basis.

Adjusted EBITDA a was a positive $101,000 in Q2, compared to the negative $1.4 million in Q1.

A reconciliation of adjusted EBITDA to GAAP net income may be found in today's press release.

On a non-GAAP basis we recorded a net loss in 2011 second quarter of $1.4 million, or $0.09 loss per share.

This compares with net loss in the previous quarter of $2.8 million, or $0.20 loss per share and a net loss of $438,000 or $0.03 loss per share in the second quarter of 2010.

Looking forward in the third quarter of 2011, we expect GAAP net loss per share to be between $0.02 and $0.13, and on a non-GAAP basis to range between net income of $0.02 and a net loss of $0.09.

Moving to the balance sheet, during Q2, Pixelworks completed an equity offering totaling approximately 4.2 million shares with total gross proceeds to the Company from the offering prior to dejecting various expenses, coming to an approximately $9.4 million.

Also during Q2, Pixelworks purchased all of its remaining convertible debentures at par for approximately $15.8 million.

As a result, cash and marketable securities were $16.8 million at June 30, 2011 compared with $29.2 million at December 31, 2010.

Note that our Q4 2010 balance sheet included $18.8 million in short-term debt, while at the end of Q2, 2011, the Company had no long-term debt and a zero balance on its short-term line of credit.

Other balance sheet metrics include day sales outstanding of 27 days at June 30 compared with 26 days at March 31, and inventory turns of 6.9 times in Q2 compared to 6.7 times at the end of Q1.

That concludes my comments.

We now open up the call for your questions.

(Operator Instructions) And your first question comes from the line of Arnab Chanda, ROTH Capital.

Please proceed.

And it looks like they have dropped from the call.

(Operator Instructions) Your next question comes from the line of Mike Orsak of Worldview.

Hello guys.

I was curious if you could talk about the competitive environment.

What are you seeing out there?

In TV?

Mainly in TV.

Yes.

I think that there's been a fair amount of consolidation recently.

If you look at our normal competitors, there's the Zoran-CSR merger, and typically, I think that we see Morningstar and Trident and some internal solutions, and that is about the landscape at this point.

It remains to be seen what the focus of the resulting Zoran-CSR merger is.

That is pretty much the landscape, and I would say, if you look over the last 18 months to 24 months, it definitely narrowed to that set of competitors.

And do you think they are mainly competing on price whereas you are still leading in terms of capabilities?

It depends on the segment of the market.

Certainly at the very low end, 2D only, not a lot of features, seems to be more price oriented.

Some cases it will be an integrated SoC that would use that -- that would service of that platform.

But typically, at the premium and upper end of the market, it becomes a decision over 3 factors.

One is, of course, cost of the solution, which is a function of device size and package cost, the video quality, features, and so forth, which is the main dimension that the decision is made of, and lastly, what you would consider the system implementation cost which is the chip plus the DRAM memory, and so forth and what cost actually in the building materials.

But far and away, the number-one determinant is video quality and features.

Okay.

And for the TV customer, it sounds like you took you guys a while to get designed in, which I assume also means it would take a while someone else to beat you out of that socket?

Well, I think last call, we reported that we were able to penetrate tier 1, so this is a collimation of a multi year process to get to that point.

Fortunately, we were able to report some good progress this quarter as well.

It's life cycle of the TV, typically is 12 months, maybe 18 on the outside.

Every 6 months, there's new opportunities for design wins and I would say we are competing continuously, and that is true in the projector market as well.

Okay.

Good.

Thank you.

Ladies and gentlemen, that concludes -- your next question comes from the line of Arnab Chanda of ROTH Capital

Thank you.

Sorry.

Let's see if this works this time.

Can you guys hear me?

Yes.

Yes, Arnab.

Thanks, Bruce.

A few questions if I can.

My first question is, I think you, just to be clear, how many tier 1 TV OEMs do you think that you would characterize as tier 1, and could you talk a little bit qualitatively about how many or what kind of geographies that you either have succeeded or are working closely with and what kind of timeframe you could get to some or more than?

So, the way we look at it, the display search, market share numbers and that would be considered the top 10 or tier 1, particularly the top 5 would be considered tier 1.

So, when we say top five tier 1, it's 1 of those.

Those are concentrated in Japan and Korea.

We tend to have a lot of traction in Japan just because our revenue base is there from our projector business.

We have a long history in Japan going back 10 to 15 years, and we know how to service the kinds of customers pretty well.

So, I would say, the majority of our traction by a long shot is out of Japan.

The other important market is Taiwan as well, but when we classify a top five tier 1 directly with the brand itself.

Those brands may outsource some models to ODMs and Taiwan as well, but the ones that we are characterizing directly with the brand itself.

So, Bruce, talk a little bit about that.

I understand that you're -- obviously have a history with Japan.

Japan has be a hard market to penetrate.

Is there technological or sourcing reason why you couldn't receive that in Korea, or are there other encumberments?

Could you talk a little bit about that?

Didn't say we weren't getting traction in the other ones as well.

I just said the majority of our traction tends to be in Japan.

The other thing to consider as well is -- an important customer constituency for us is the panel manufacturers because, there is integration of our technology on the panel readily.

That tends to be centered in Taiwan in terms of the merchant market panel suppliers, pure merchant market suppliers and of course Korea and Japan as well in terms of panel suppliers that actually service their internal TV needs and in a lot of cases external panel supply as well.

So, I would say we have engagement or traction pretty much across all of those geographies.

I'd say it's strongest in Japan, fairly strong in Taiwan, and I think Korea would be included in the places where we are seeing progress, I guess is the best way to put it.

Great.

If I can ask a question about the overall TV market, obviously, there's all kinds of information floating around there.

Think some of the panel manufacturers said they were seeing some difficulty, especially in the high end of the market with some of the 3D TVs.

You obviously are guiding up.

Can you talk little bit about that?

Is occurring because of your product cycle in spite of the market, or if the market was stronger, would you actually have seen better?

Could you talk about how the market is acting and how that affects or doesn't affect you?

Sure.

Let me take first part of your question.

We're coming from very low base and very low market share.

So, most of programs that we are in are new products that are ramping into the market, new programs that are being put into the channel and so forth.

So, from our standpoint, we see growth.

To the second part of your question, it's hard to say.

Could it have been higher?

Possibly.

I don't know.

Hard to say, but certainly we look at the same macro environment reports everybody else does.

Consumer spending and the backdrop of global demand and so forth is not super robust right now.

But from our standpoint, it's product cycle, at least from what we are talking about in visibility we've given, it's product cycle driven.

So Bruce, maybe if you talk little bit about, if you look at the TV market, exactly which segment do you think you're addressing, and what kind of qualitative attitudes are you seeing from your customers there?

I say we tend to be in the premium segment.

That's a minimum 42 inches and above, but in some cases, a little lower, believe it or not.

We tend be in full-feature TVs, although we are in plain 2D TVs as well.

But, I would characterize it as a premium segment.

And I know, ASP, probably $1000 and above segment roughly.

I just had to take a swag at the cutoff point dollar wise.

Great.

Maybe a question either 1 of you guys, either Bruce or -- if you talk a little bit about 2 things.

One is, it seems like gross margin went up in the second quarter, but then it seems like it sort of remaining around the same.

Is it partly mix, partly volume?

Could you talk a little bit about how much mix does or does not affect your gross margin or how we should think about that?

Sure.

Mix can have an effect.

But as you said, it is mix, and it is volume.

We did have the benefit of slightly higher volume, quarter over quarter which helped our margins as well as a richer mix with some -- a larger percentage of projector chips, which tend to be up of that the average -- corporate average, and our television chips, which tend to be below the corporate average.

But, both trending near the average so it's more qualitative.

We do expect, the guidance we gave, is relatively stable.

And those are the ranges we are shooting for on a corporate basis.

Great.

And then last question for either one of you guys.

Obviously, you are still in the product cycle mode, but in general, I remember some of the TV markets tend to be -- Q2 and Q3 tend to be very strong and then Q1 is down, and then Q4 is maybe flattish.

How do you expect your business, just qualitatively (inaudible), what kind of signal patterns do you expect?

Do you have projections also?

Yes.

In terms of this segment having a bigger share of our revenues, it's looking backward.

It hasn't been a much looking forward.

We are going to have that consumer cyclical component you mentioned there.

To what degree, it's hard to say since we are in sort of a new product cycle ramp, and I -- we are planning on being that in a while and hopefully into next year as well.

The projector market will have a big influence.

The cycle there tends to be a little different than the what I would call to your pure consumer market, but Q1 typically does tend to be flat to down, and that's really driven by the Japan fiscal cycle.

Japan is 60% of our revenue, so it's more of a component associated with projector market and with Japan.

Okay.

And then actually, I do have 1 last question.

For this is the last question.

I don't want to hog the mike here.

What is going on with -- there's a couple of your competitors are going through either mergers or perhaps maybe the word is near catastrophic situations.

What does that do for your business and have you seen any kind of changes in the competitive landscape given what's been going on with Zoran and Trident and --

I think it helps.

We are pretty focused We're focused on what we do, and we have been at this for a while, and it has taken a while to get the Company back on track, but I think for the last year-and-a-half, we've been very focused on this.

And I think we're now seeing, particularly in the last -- since maybe last part of 2010, is a very viable supplier that can supply high volume and high quality.

So, it's not only the just the video quality, the solution.

These are high volume.

These are very demanding customers, and you have to have good quality levels and good PPM levels and be able to ship high volume.

So, I think maybe year or two ago -- versus a year or 2 ago, our credibility is up dramatically with a tier 1 segment.

I think secondly, to your point about the consolidation going on in the industry, think that tends to be focused companies that they work through what the focus of the merged organizations are going to be moving forward.

So clearly, I think we've seen some of that, but I wouldn't discount competitors.

They are out there every day trying to win against us as well.

I guess marginally, our focus probably is more on point than other companies that are going to transitions, mergers, and so forth.

Okay.

Thank you very much, Bruce.

Ladies and gentlemen, that concludes the Q&A session.

I'd now like to turn the call back over to Mr.

Bruce Walicek.

Thank you, and I want to thank everyone for attending our Q2 2011 conference call, and we will be looking forward to talking to you again after next quarter.

Thank you.

Ladies and gentlemen, that concludes today's conference.

Thank you for your participation.

You may now disconnect.

Have a great day.