Pixelworks Inc (PXLW) 2011 Q3 法說會逐字稿

(missing audio) third quarter 2011 Pixelworks Incorporated earnings conference call.

My name is Caris and I will be your operator for today's call.

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

Following Management's prepared remarks, we will conduct a question-and-answer session.

This conference call is being recorded for replay purposes.

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

Steve Moore.

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 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, 2011.

Before we begin, I would like to mind 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, October 20, 2011, and we undertake no obligation to update any such as 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 of acquired 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 and 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 provides additional details.

Bruce will begin today's call with a strategic update on the business after which I will review our future financial results and discuss our outlook for the fourth quarter of 2011.

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 third quarter 2011.

And then Steve will follow with more details on our financial results.

Q2 was a solid quarter of growth as revenues increased 11% sequentially and came in at the midpoint of guidance.

This increase was primarily driven by rebound in our advanced TV panel product line as new customers ramped into volume production.

TV panel products were [17%] of revenues and they were up 84% sequentially and 102% year-over-year.

While overall book-to-bill was less than 1, reflecting and customers providing less lead time on orders.

The book-to-bill on the TV panel products was 1.2 to 1 as we continued to have success with our PA series devices.

Overall, our new products continue their growth rising 33% year-over-year and up 21% sequentially.

New products accounted for 56% of revenue during the quarter, up from 40% in the third quarter of 2010, reflecting continued adoption and success across our product lines.

Gross margin came in above the range of guidance and combined with top line growth and lower than range operating expenses resulted in positive EBITDA and positive cash flow from operations for the second quarter in a row.

On the product front, we introduced and ramped into production several new devices across our product lines.

In our TV panel product line, we ramped our fifth generation advanced video processor, the PA136, into high-volume production.

The PA136 provides industry leading video quality and incorporates a number of advanced features, such as real-time static and motion-based 2D and 3D conversion and Pixelworks' innovative n2m technology which ensures a smooth playback of low frame-rate Internet video.

In Q3 we sampled the PA138, which includes all of the improvements and features of the 136, but is targeted for advanced high-end systems and support for the latest generation of high-speed panel interface.

Our momentum in the tier 1 segment of the advanced TV market continued in Q3 as we penetrated an other top 5 tier 1 TV OEM for our PA series products and these programs will begin shipping and production in Q4.

Our penetration of the top-tier customer base confirms Pixelworks' leading position in providing innovative solutions in video processing to this market.

These customers are selecting Pixelworks products because we provide superior video quality and innovative value added features at a competitive price performance point combined with the ability to deliver high volume to the highest quality standards.

In our digital projection product line, we deliver production devices of the PW878, the first member of the Topaz family, which are the most advanced and highly integrated devices for the digital projection market.

The PW878 is the industry's first cost effective 3D display processor.

It is designed for the business, education and mainstream home theater projector markets.

The Topaz family of products will cover the full range of the projector market from entry-level 2D education and business projectors to high-end 3D home theater systems.

This quarter we will sample our second device in the Topaz family with PWC868 which is the non-3D network version of the Topaz family and offers the latest video processing technology combined with extensive connectivity capabilities.

Design [and] momentum continues to be strong for this product line and in Q3 we received key design commitments from tier 1 customers for the PW878 and PWC868.

We will be shipping volume production later this quarter.

Regarding what we are seeing in the advanced TV market, the combined forces of sluggish demand, [strained] profitability, and decreasing time to market requirements are driving brands to accelerate innovation and the introduction of new features and capabilities.

This is driving the need for more high-performance video processing as new requirements such as 4K by 2K resolutions, glasses-free 3D, and passive 3D panel technology are becoming mandatory for next-generation systems.

These trends, combined with the move to outsourcing is continuing to drive the need for separate video processors and creating opportunity for Pixelworks.

A notable and pronounced trend over the last few years that accelerated in the last quarter is the consolidation of competitors in the market segments we serve.

Over the last several years, we have seen many competitors focused on our niche of the market either be acquired or exit.

This trend accelerated in the last quarter as [Ran] was acquired by Cambridge Silicon Radio.

IDT video products were acquired by Qualcomm, eliminating a competitor in the separate advanced TV processor and projector chip market.

And in the last few weeks, Broadcom and Intel have exited the market.

This week Pixelworks is one of the last pure-play company focusing on this important market segment and pursuing in innovative, separate high-end video processor strategy.

In closing, Q3 was a solid quarter of growth driven by our TV panel products, and we generated positive EBITDA and overall cash flow.

We achieved a number of key new product milestones with a launch of our next generation advanced video processor, the PA138 and the introduction of the PWC868 which is the second device in our Topaz family.

And we continued our success with the top-tier customer base as we penetrated an additional tier 1 top 5 TV OEM manufacturer for our PA series products and received design (inaudible) from tier 1 customers for our Topaz family of projector products.

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

Thank you, Bruce.

Revenue in the third quarter 2011 was $17.4 million, up 11% from the previous quarter, driven by record revenue for our new products.

Revenue in Q3 was down 4% compared to the same quarter a year ago, as the digital projection market continued to rebound from an inventory correction earlier in the year.

The split of our third quarter revenue by market was 73% digital projection, 17% TV and panel, and 10% embedded video display.

The revenue split between new and current products during the quarter was 56% new and 44% current.

Revenue from digital projection, which includes sales of our chips targeted at the advanced digital projection market, was approximately $12.7 million in Q3, up [30%] sequentially and driven by increased sales at a number of key customers.

Revenue from TV and panel which includes sales of our chips targeted at large screen flat panel display market was approximately $3 million in Q3, up 84% from the prior quarter, and up 102% from the year-ago quarter.

This growth in quarterly revenue in our advanced product line was primarily the result of the continued ramp of previous design ramps for our PA chips at tier 1 manufacturers.

Embedded video display revenue in the third quarter was $1.7 million or approximately flat compared to Q2.

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

Non-GAAP gross profit margins was 49.4% in the third quarter, compared to 48.3% in the previous quarter and 46.1% in the third quarter of 2010.

Increased overhead absorption and a continued focus on product cost improvement drove the increase in gross margins during the quarter.

We expect gross profit margins in the fourth quarter of 2011 to range from 47% to 49% on a non-GAAP basis and 46% to 48% on a 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 ramps as well as other factors.

Non-GAAP operating expenses were $9.1 million in the third quarter which is at the low end of our guidance of $9 million to $10 million due to the timing of expected development expenses.

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

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

Adjusted EBITDA was a positive $730,000 in Q3, compared with $101,000 in the second quarter of 2011.

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 of $470,000 or $0.03 loss per share in the third quarter.

This compares with a net loss in the prior quarter of $1.4 million or $0.09 loss per share and non-GAAP net income of $172,000 or $0.01 per share in the third quarter of 2010.

Looking forward to the fourth quarter of 2011, we expect non-GAAP results of between net loss of $0.02 and $0.14 per share.

On a GAAP basis, we expect a net loss per share of between $0.05 and $0.18.

Moving to the balance sheet, cash and marketable securities increased during the quarter to $17 million from $16.8 million at June 30, 2011.

At quarter end the Company had no long-term debt and a zero balance on its short-term line of credit.

Other balance sheet metrics include days of sales outstanding of 23 days at September 30 compared with 27 days at June 30 and inventory turns of 7.5 times in Q3, compared with 6.9 times at the end of Q2.

This concludes my comments.

We will now open up the call for your questions.

(Operator Instructions) And your first question comes from the line of Jeff Martin with Roth Capital Partners.

Please proceed.

Thanks, good afternoon, guys.

Just curious if you could go into which prior wins in your TV segment are now in production?

Or are they in production?

And could you touch on your recent wins and when you expect those to be in production?

Sure.

So I think over the last couple of quarters, we talked about penetration and what we term of the top 5 tier 1 segment which is top 5 vendors sort of focusing on our segment.

And I think we talked about several wins.

All of those are essentially in production at this point.

Some are different stages, some are beginning to ramp.

Some have ramped and are at run rate levels.

So pretty much all the ones we've discussed, at least that we appointed to at least at the top 5 tier 1 are at some stage of production right now.

Okay.

And how long is the tail on those wins?

I would peg through the life cycle of these type of design wins is about a year maybe 18 months for the full product life cycle, beginning to peak to phase out.

So I would maybe 12 to 18 months depending on who it is and sort what models it's in.

Okay.

And then, did you have multiple wins this quarter?

Was a 1 win and I think you said it would ramp in Q4?

Is that right?

Yes.

So that was acquired at the very beginning of Q3.

So it is probably on the faster side of the win to launch cycle.

So it catches part of Q4.

That's about 6 months roughly, but that is maybe a best case scenario in some of these.

And some of them could be as long as 12 months, from win to production.

So it just depends on the customer.

It depends on the model, it depends on -- is it a cut over to a current run rate platform and so forth and so on.

We don't talk about numbers of design wins.

We really don't report that.

But we are trying to do at least at this stage is to give some indication of our progress in this segment by acquiring additional tier 1 customers and broadening our customer base with our products.

Okay.

And then with all the change going on in the TV side of the business, at least in terms of the competitive market, could you provide a sense of whether you think that is helping you?

Whether you think that is more of a broader concern that the industry is not developing?

What kind of impact do you have that is affecting your strategy?

Some insight there would be helpful.

Sure.

It hasn't changed our strategy.

We have always been focused at the upper midrange high end of this segment.

This is a very typical process in semiconductors.

I think the best template to look at is the graphics industry.

Graphics industry went through a similar sort of a phase like this a number of years ago.

And it eventually got down to a duopoly -- a very big business, but a duopoly as consolidation happened and so forth.

I think this segment is has been undergoing that process for the last 2 years actually.

And as I noted during my comments, it seems to have accelerated and I don't know if it has completely run its course, but it is has accelerated dramatically in the last quarter, with essentially 4 people in the segment either being acquired, exiting, so forth and so on.

I think the impact it has had for us is that I think that our customers, or the customers are looking even more to us to provide innovation at the high-end.

And solutions at the upper midrange and high end for separate video processors than they might have before.

And that combined with the fact that we penetrated tier 1 and have been able to deliver in high volume to meet the quality standards which are probably the most demanding, some of the most demanding in the industry.

I think we are considered a contender and a extremely viable supplier.

And in some cases, a critical technology partner to a number of these companies now.

So hasn't changed.

It is pretty much been our strategy for some time to focus on that niche and if anything, it's has been reinforced.

On the projector set, IDT was a minor competitor.

But we have seen marginal opportunities because Qualcomm we don't believe will pursue the projector chip business at all.

They bought that division for the core technology more so than projector chip or FRC business.

Okay.

And then speaking about projectors perhaps more broadly.

Where is the sector in terms of a business recovery?

Where would you peg it in a cycle and what is the growth outlook look like?

Well I think you will note our guidance is kind of flattish.

I think that as I noted, we go into Q4 with a little less visibility that we had going into Q3.

And I think that is pretty much a systematic trend across semiconductors right now because there is somewhat of an inventory correction going on.

I think our guidance has comprehended that.

Typically, the projector cycle works a little different than the typical consumer cycle since it is more of an enterprise business than a consumer business.

10% of projectors are shipped in the consumer home theater type applications, 90% going to what I call enterprise -- it's businesses, government and so forth.

And then education, in schools, which is a big driver.

So Q4 tends to be a decent quarter, but I would that the inventory correction that the industry is going on right now -- seem to be seeing a little moderating in the projector chip business.

But you know, our guidance comprehends that.

Okay.

That answers my inventory question regarding the projector industry.

So could you speak to gross margins?

What has affected at this quarter and how do you compare that relative to your guidance for Q4?

Steve, take that one?

It will, it was positively affected by higher revenues that are absorption as well as the mix between TV and projector was slightly negative, but offset quite well by an improved mix within the projector business.

Additionally, we did better than we had internally forecast on our standard cost.

Every quarter, we're working on reducing our costs and we had a pretty successful quarter this quarter.

As far as going forward, we said the guidance that we have given is kind of flat.

It is similar but up revenues.

And similar identical guidance on gross margin.

We believe that we would continue to improve the products costs.

And that will help us with the change in percentage between projector and television.

And then a final question.

Could you comment please on the yields on new projector and TV parts; how that is progressing?

Progressing well.

On new products in both were -- pretty much across the board we had improved yields on most all products, including, frankly, including our current products.

We still have a ways to go on our [truly new] products, the PA130 series, PA136 series and the Topaz family.

But that again is contemplating our forecast.

To date we are doing better than forecast on those products.

I guess just add to what Steve said, over the last year and half or so, we have had a pretty big focus on things like design for test, built-in memory test and really from a standpoint of increasing yields and increasing product quality, a lot of focus from engineering and operations to build that into our products.

That has been going on about a year and a half at this point, so we're starting to see the benefits of that.

The second thing is we moved into TSMC and global foundries.

At 65 nanometer and of course 90 nanometer for some very mixed signal intensive parts at TSMC.

Marginally the [defect densities] in those fabs are very good.

That has helped our overall yields and product costs.

So I think that has been a trend that has been sort of underlying our results for the last several quarters.

And we had a really good benefit from it again this quarter.

All right great.

Thanks for taking my questions.

Good luck guys.

Thank you.

(Operator Instructions) And at this time, there are no further questions in queue

Well, thank you for joining us today, and we look forward to reporting to in January the results of our Q4 2011 quarter Thank you.

Ladies and gentlemen that concludes today's conference.

Thank you for your participation.

You may now disconnect.

Have a wonderful day.