Pixelworks Inc (PXLW) 2011 Q4 法說會逐字稿

Good afternoon and welcome to Pixelworks Incorporated fourth-quarter and fiscal 2011 financial results conference call. At this time, all participants are in a listen-only mode. At the conclusion of today's conference call, instructions will be given for the Q&A session. (Operator Instructions). As a reminder, this conference call is being recorded today, Monday, January 30, 2012.

I would now like to turn the conference 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 fourth quarter ended December 31, 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, Monday, January 30, 2012, 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's statements during the conference call will include discussions about 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 pre-paid 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 underline cash flow dynamics. But we caution investors to consider these measures in addition to, not as a substitute for or 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 a strategic update on the business, after which I will review our Q4 financial results and discuss our outlook for the first quarter of 2012.

Thanks Steve. Good afternoon everyone, and thank you for taking the time to join us today. 2011 was a year of solid progress for Pixelworks as we expanded our product lines for the digital projection and advanced TV markets. Building on our new product momentum in 2010, we delivered a series of new products that extended our product lines and experienced strong customer traction.

While overall revenues for 2011 were down 7% as the year began on a difficult mode characterized by an inventory correction and a major earthquake in Japan, our new products gained significant traction and are now driving growth. On a year-over-year basis, new products were up 66% over 2010 and represented 56% of total sales compared with 31% in the prior year. While projector products were down for the year, that was largely offset by advanced TV products, which grew 97% year-over-year, driven by our new product momentum and Tier 1 customer penetration. Lastly, embedded video products were down 32% year-over-year, reflecting the winding down and discontinuation of legacy products in 2011 versus 2010.

In our projector product line, we now offer a full range of products for the entire spectrum of the projector market, from low-end connected systems to high-end 3-D cinema projectors. Our products enable advanced applications in the Business and Consumer segments as well as the education market, which now accounts for over 50% of the global projector market and is driving growth. Applications such as interactivity, 3-D video, and network as well as mobile connectivity are increasingly being demanded as the global education market shifts to the digital classroom.

In 2011, we introduced our next-generation projector platform code-named Topaz that offers unparalleled integration, video performance, and connectivity, as well as support for advanced keystone correction in 3-D video. The Topaz family of products covers multiple segments of the projector market from entry level 2-D education and business projectors to high-end 3-D home theater systems. Topaz is a significant operational milestone for the Company since it is the first comprehensive upgrade to our product line since 2005 and is based on the next-generation video processing architecture designed from the ground up. We believe the Topaz family of products will serve the market well for the foreseeable future as projector platforms tend to last three to five years or more.

Pixelworks' Projector Solutions provide a full suite of software and the Topaz family of products are compatible with our Ruby series, allowing customers to maintain their investment in software while migrating to a next-generation highly integrated solution.

During the year, we introduced the PW878, which is the industry's first cost-effective 3-D display processor with advanced geometry correction capabilities that is designed for the business, education, and mainstream home theater projector markets. We also sampled our second device in the Topaz family, the PWC868, which is the non-3-D network version of the Topaz family. It offers the latest video processing technology combined with extensive connectivity capabilities. Design win momentum is very strong for these products, and we have received key design commitments from Tier 1 customers and are now ramping Topaz products into production and will be rolling out additional family members during 2012.

For the advanced TV market, we delivered the next-generation of our motion engine devices. In 2011, we introduced and ramped the high-volume production of the PA136 family, which is our fifth-generation advanced video processor. The PA136 family provides industry leading video quality, and incorporates a number of advanced features such as real-time static and motion-based 2-D to 3-D conversion and Pixelworks' innovative end-to-end technology which improves low frame rate Internet video. The PA136 family offers significant improvements over previous generations by simplifying design and significantly reducing overall system costs, all at a compelling price performance point and with Pixelworks' industry leading video quality.

We followed up the 136 with the PA138, which includes all of the improvements and features of the 136 but targeted for advanced high-end systems and supports the latest generation of high-performance panel interface technology. These devices are in high-volume production and we enter 2012 with significant momentum for these products.

During 2011, we penetrated several additional top-five Tier I TV OEMs for our PA series of products and continuing to penetrate the top-tier customer base validates Pixelworks' leading innovative solutions in video processing. These customers are selecting Pixelworks because, as the focused supplier in this market, we provide a combination of superior video quality, innovative value-added features, and highly efficient system implantation costs. This, combined with the ability to deliver top-quality, high-volume production with world-class customer support, is why Pixelworks is winning.

At CES this year, advanced large screen TVs from Tier 1 customers incorporating Pixelworks' technology were prominently displayed on the floor. At the show, we demonstrated industry-leading technology across our product lines that play directly into the key trends in video.

In our projector product line, we demonstrated our 3-D home cinema reference design for DLP platforms and our Topaz 3-D interconnected display products. We also showed our network display technology, demonstrating smooth playback of low frame rate wireless video streaming from a mobile device. In our advanced TV product area, we demo-ed our 2-D to 3-D conversion technology on a PR panel, which allows for the use of low-cost, passive classes. We showed our 4Kx2K platform based on our PA138 as well as a demonstration of our PA168 halo free (inaudible) technology.

In the first half of 2012, we will introduce the PA168, which is the next generation of video processing performance with advanced 4Kx2K support. This product puts Pixelworks in a leadership position at the high end of the market and sets the stage for further Tier 1 customer penetration in 2012.

At CES this year, TVs demonstrating the coming transition to 4Kx2K resolution were prominent to show. Brands such as LG Electronics and Sharp unveiled ultra-definition TVs with four times more pixels compared to a full HDTV. These systems deliver hyper-realism thanks to large screens and real full HD 3-D picture with no crosstalk and require an order of magnitude increase in video processing performance.

Other technologies such as Internet connectivity enabling smart TVs as well as voice-recognition and [jester] control are all adding complexity to the TV platform, creating opportunity for separate advanced video processors. All of these trends imply increasing complexity in requirements on the TV platform for functionality and video processing.

Now, a few comments about our Q4 '11 results. Overall revenues for the quarter came in at the low end of guidance as the low visibility noted in our Q3 '11 conference call continued into Q4. Gross margin came in at the midpoint of guidance and OpEx was at the low end as we continue to manage expenses carefully.

Going into Q1, we see visibility continuing to be lower than normal as customers experience an industry-wide inventory correction, coupled with typical seasonality. This is being exacerbated by the Thailand flood, especially for our projector customers, where component shortages caused disruptions in their supply chains and build plans. Based on these factors, we see revenues lower than typical seasonality in the $12 million to $14 million range for the quarter. That being said, we expect to return to sequential growth in Q2 2012 based on a return to normal patterns and by new programs in our TV and projector product lines ramping into production.

In closing, 2011 was a year progress for Pixelworks. While the year ended on a sluggish note, we enter 2012 with significant new product momentum and customer traction across our product lines and look forward to continuing to deliver exciting leadership products that play into the key trends in video.

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

Thank you Bruce.

Revenue in the fourth quarter of 2011 was $16.8 million compared to $17.4 million in the third quarter and $14.1 million in the year-ago quarter. Revenue declined sequentially primarily due to weaker than expected demand in the digital projection market, while the increase compared to a year-ago quarter was driven by higher sales of new products and volume shipments for advanced TV.

The split of our fourth-quarter revenue by market was 67% digital projection, 25% TV and panel, and 8% embedded video display. The revenue split between new and current products during the quarter was 65% new and 35% current.

Revenue from digital projection, which includes sales of our chips targeted at the advanced digital projection market, was down sequentially to approximately $11.2 million in Q4 on weaker than expected demand. Revenue from TV and panel, which includes sales of our chips targeted at the large screen and flat panel display market, was approximately $4.3 million in Q4, up 43% from the prior quarter and up over 200% from the year-ago quarter. Revenue growth in our advanced TV product line was primarily the result of the continued ramp of previous design wins from our PA series of chips at Tier 1 manufacturers. Embedded video display revenue in Q4 was approximately $1.3 million.

Non-GAAP gross profit margin was 48% in the fourth quarter, compared with 49.4% in the previous quarter and 47.1% in the fourth quarter of 2010. The sequential decrease in gross margin was primarily the result of a shift in product mix and the manufacturing ramp of new products into volume production for both the TV and projector markets. Pixelworks' gross margin is subject to variability based on changes in revenue levels, product mix, start-up costs, and the timing and execution of manufacturing ramps, as well as other factors.

Non-GAAP operating expense was $9 million in the fourth quarter, compared to $9.1 million in Q3 and $9.7 million in Q4 2010. Our operating expense levels continue to reflect our commitment to tight expense management and will continue to vary based on the timing of future development activities.

Adjusted EBITDA was a positive $368,000 in Q4, compared to $734,000 in the third quarter of 2011. The 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 $1.3 million, or $0.07 loss per share, in the fourth quarter. This compares with a net loss in the current quarter of $470,000, or a $0.03 loss per share and a non-GAAP net loss of $3.6 million or $0.27 loss per share in the fourth quarter of 2010.

Moving to the balance sheet, cash and marketable securities ended the quarter at approximately $15.1 million versus $17 million at September 30, 2011. At quarter end, the Company had no long-term debt and a zero balance upon its short-term line of credit.

Other balance sheet metrics include day sales outstanding of 24 days at December 31, compared with 23 days at September 30, and inventory turns of 8 times in Q4 compared to 7.5 times at the end of Q3.

For the first quarter of 2012, we expect revenue to be in the range of $12 million to $14 million. As mentioned by Bruce, in addition to normal seasonality, Q1 revenue will be impacted by supply disruptions in our customers' projected business resulting from the Thailand floods.

We expect gross margin, gross profit margin, for the quarter to range between 45% to 47% on a non-GAAP basis and 43% to 45% on a GAAP basis. We expect operating expenses in the first quarter to range between $8.5 million and $9.5 million on a non-GAAP basis and $9 million to $10 million on a GAAP basis. Finally, we expect non-GAAP first-quarter 2012 results of between a net loss of $0.06 and $0.20 per share. On a GAAP basis, we expect a net loss per share of between $0.11 and $0.24.

That concludes my comments. We will now open the call for your questions.

(Operator Instructions). Krishna Shankar, ROTH Capital Partners.

Thank you. As you look out to Q2 beyond (inaudible) in Q1, can you talk about which of the products will drive growth? Will it be the Topaz projector family or the new TV family in advanced TVs (inaudible) into Q2 and beyond?

So, your question is into Q2, yes?

Yes, that is right.

So I think that it would -- you know, Topaz is just beginning to ramp. I think we will see a contribution from Topaz in Q2. Also as we sort of mentioned in the call, we have Topaz ramping and then some TV platforms ramping as well. So I think the contribution will come from both product lines. I do think we will see sequential growth in Q2 as we said as well, so I think there will be contribution from our other products as well.

Okay. Would you expect -- can you talk a little bit about how the balance sheet trend in Quarter 1 in terms of cash and the operating expenses going beyond Q1? Will they grow much slower than revenues, or can you talk about the ramp of OpEx during the rest of the year?

Yes, we don't expect any great fluctuations in operating expense. The main driver in any fluctuation is usually development expenses, and our current plans for 2012 would have operating expenses in the same order of magnitude or below 2011.

Okay. And the final question, you did talk about the Thailand disruptions impacting the projection, the projector business. Was there any impact of that on the advanced TV business also?

It seems less so. A number of our projector customers had passive components, connectors, and so forth that were supplied by Japanese suppliers, but yet built in Thailand. So it seems to have impacted projector customers largely.

Terrific. It sounds like you are sort of distancing yourself from the competition in terms of some of these advanced features, which are needed for next-generation TVs and projectors. Can you talk about the competitive landscape both in terms of SoCs and other sort of merchant video processor companies, any changes in any trends you see in the competitive landscape?

Sure. I think maybe we might have mentioned in the last call we've seen quite a bit of consolidation and exits from the market over the last year or so, so I think the 168 is aimed at the high end of the market. It's sort of a high-end segment. I think that it puts us in a position to hopefully have further Tier 1 penetration in 2012. It is a leadership product. 4Kx2K is just now emerging, but I think, if you were at CES, I think you were, Krishna, you saw quite a bit of focus from panel and TV manufacturers on 4Kx2K as sort of the next transition at the high end. I think we're in pretty good position on that.

I guess on the projector business, you really dominate that market. Any trends in terms of the competitive landscape there?

No, I think the competitive landscape remains the same. We had one competitor exit a quarter or so ago IDT, so marginally I think we have some tier opportunity there. They weren't a big supplier. I think the competition remains the same. It would internal suppliers or what I call substitution competition where someone tries to cobble together an off-the-shelf solution which typically is not competitive with our integrated solutions. But no, we haven't seen any new entrants that focus only on projector chips.

Great. Thank you.

At this time, I'd like to turn the call back over to management for closing remarks.

Thanks everyone for joining us today. We'll look forward to talking with you on our conference call discussing our Q1 2012 results. Thank you.

We thank you for your participation in today's conference. This does conclude your presentation. You may now disconnect and have a great day.

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