Pixelworks Inc (PXLW) 2012 Q2 法說會逐字稿

Good afternoon and welcome to Pixelworks, Incorporated second-quarter 2012 financial results conference call.

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

At the conclusion of today's conference, instructions will be given for the question-and-answer session.

(Operator Instructions)

As a reminder, this conference call is being recorded today, Thursday, July 19, 2012.

I would now like to turn the conference over to Steve Moore.

Good afternoon, and thank you for joining us.

This is Steve Moore, CFO of Pixelworks.

With me is Bruce Walicek, President and CEO.

The purpose of today's conference call is to supplement the information provide in our press release, issued earlier today, announcing the Company's financial results for the second quarter ended June 30, 2012.

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 19, 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 10K for the year ended December 31, 2011, and subsequent SEC filings for description of factors that could cause forward-look 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 margins, earnings per share, and net loss per share.

These non-GAAP measures exclude stock-based compensation expense, gain on sale of patents, gain on sales marketable securities, and additional amortization of the 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, nor 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 loss and GAAP net 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 second-quarter financial results and discuss our outlook for the third quarter of 2012.

Thanks, Steve.

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

I will start by making a few comments and observations about our second quarter 2012, and then Steve will follow with details of our financial results and outlook for Q3.

Q2 was an outstanding quarter on many fronts as revenues were up 8% sequentially, coming in at $15.5 million, which was at the high end of the range of guidance we outlooked on our Q1, 2012, conference call.

The quarter was positively impacted by the ramping into production of our Topaz family of projector kits and by the continuing execution and recognition of the license of our current generation video technology for the TV market with one of our industry partners.

Also in Q2, we achieved another key milestone as we won a significant co-development project with a major customer to develop a highly integrated next-generation chip that will result in significant revenue impact in 2014 and beyond.

This engagement is a significant positive for Pixelworks and reinforces Pixelworks' market leadership position in video.

In both of these engagements, Pixelworks was selected because of our industry-leading display technology, recognized leadership in video quality, and world-class execution capability.

Overall, TV panel products came in at 28% of revenues and were up 166% year-over-year and 6% sequentially.

Driven by volume production of our PA Series products and by the recognition of the second phase of the license mentioned above.

Projector products came in at 65% of revenues and were up 25% sequentially, reflecting the production ramp of Topaz products and improving order patterns noted on our Q1 conference call.

Overall book-to-bill was much greater than Q1 as order patterns continued strong throughout the quarter, driven by new products ramping, resulting in visibility greater than normal going into Q3.

Non-GAAP gross margin came in above the range of guidance at 50.6% and, combined with below-the-range operating expenses of $8.1 million, resulted in positive EBITDA for the quarter and cash generation from operations of $4.1 million, a significant up tick from Q1.

On the product front in our TV panel product line, our current generation PA Series product continued to experience good design with traction at Tier 1 customers in smart and advanced TV applications.

In particular, the PA138, which is targeted for advanced high end systems, designing traction in the first wave of 4K x 2K ultra definition systems.

We expect to see the first wave of 4K x 2K flagship model high-end TVs from Tier 1 customers introduced this year, powered by up to four Pixelworks PA138s.

These products will be the most advanced systems available at the apex of the market, which validates Pixelworks is an industry leadership position in advance video technology.

Early this quarter we will sample the PA168, which is targeted for high resolution TVs, panels, monitors, and projectors, which solidifies Pixelworks' leadership position in the market.

We believe we are the leader in this market and expect multiple Tier 1 engagements for the PA168 in 2012.

The PA168 is our sixth-generation device and it provides industry leading performance for high-resolution systems, full 3D and 2D to 3D support, and multi-view capability, which enables emerging glasses free 3D product, all in an expandable architecture.

Pixelworks is early in the trends in the next generation of high resolutions, and resolutions are increasing in displays everywhere, not only in large screens but in smaller ones as well.

A good example of this trend is the iPad 3 retina display, which at 2K x 1K resolution, is greater than today's high-definition displays.

Video is increasingly the killer app as consumption rises across all screens, small and large, and the video quality problems with large screens are now beginning to migrate to small screens as video consumption grows and the visual user experience is increasingly the product differentiator.

As the leader in creating the highest quality visual user experience, these trends are increasing the value proposition of Pixelworks technology.

In our digital projection product line, during the quarter, we ramped the PWC878, the second member of the Topaz product line, into volume production.

It is the industry's first cost effective 3D display processor that is specifically designed for the business, education, and mainstream home theater projector markets.

This quarter, we will continue to expand the Topaz family of products by introducing the OH version of the Topaz light series, which includes networking features for the value segment, the fastest-growing part of the projector market.

Topaz products are in mass production and went into high-volume manufacturing during the quarter at a Tier 1 customer and we expect more Tier 1 customers to ramp production in 2012.

In Q3, we will release our next-generation software, the Pixelworks Network Display Software Suite, version 2.4, which enables the advanced features of the Topaz platform and will include mobile connectivity capability supporting such applications as Office Viewer and I Presenter.

The Topaz and Topaz light family of products covers the full range of the projector market from entry-level to the education and business projectors for the value segment to high-end 3D home theater systems.

At Infocom in June, Pixelworks released our reference design for advanced 3D, DLP, and 3LCD projectors based on the PW980 and PA136.

This solution is receiving outstanding acceptance of Tier 1 customers, especially in the DLP market.

We continue to experience strong design win momentum for the Topaz family, and, during the quarter, we received additional design commitments from Tier 1 3LCD and DLP customers.

In closing, overall, Q2 was a great quarter of accomplishment as we posted a solid quarter of performance strong bookings and cash generation driven by the ramping of new products, especially our Topaz family, as well as a return to normalized ordering patterns.

We experienced good design with traction for our PA Series family and are leading the industry with our PA138 in the first wave of 4K x 2K ultra definition TVs, and will solidify our position in this market with the delivery of the PA168 early this quarter.

We ramped the Topaz PWC878 into volume production as well as introduced Topaz light to the value segment of the projector market and experienced outstanding design win momentum for our Topaz family.

We executed the second phase of the license pf our current-generation PA series technology with our major industry partner, and we achieved a significant milestone as we engaged with a major customer for a joint developed partnership that will result in significant revenue in 2014 and beyond.

The achievement of these milestones demonstrates clear leadership and validates Pixelworks' leading position in video display technology.

And now I'd like to turn the call over to Steve to review the financial details of the quarter and our outlook for Q3, 2012.

Thank you, Bruce.

Revenue in the second quarter, 2012, was $15.5 million, compared to $14.3 million in the first quarter and $15.7 million in the year-ago quarter.

Revenue increased 8.4% sequentially as a result of increased demand for our products sold in digital projection and advanced TV markets.

The split of our second quarter revenue by market was 65% digital projection, 28% TV and panel, and 7% embedded video display.

Licensing revenue during the quarter sold at approximately $2.3 million and was comprised of $300,000 recorded to our digital projection market category and $2 million related to advanced TV, as part of our achievement of additional milestones according to the licensing agreements we have for our current-generation technology.

Digital projection revenue, which includes sales targeted at the advanced digital projection market, increased by approximately $2.1 million during the quarter to $10.1 million.

Projected revenue increased primarily due to ramping of our Topaz family and higher demand for other projector solutions as well as the recognition of licensing revenue.

TV and panel revenue, which include sales targeted at the large-screen flat panel display market increased $300,000, sequentially, to approximately $4.3 million in the second quarter as a result of increased demand for products at certain Tier 1 TV OEMs.

Both Q1 and Q2, 2012, TV revenues include approximately $2 million of licensing revenue.

Embedded video display revenue during the second quarter was approximately $1.1 million.

Non-GAAP gross profit margin was 50.6% in the second quarter, compared to 55.7% in the first quarter and 48.3% in the second quarter of 2011.

The sequential decrease in gross margin was affected by a shift in product mix within both our digital projector and advanced TV end markets.

Also of note in Q2, we recorded approximately $400,000 of costs related to our licensing agreements versus approximately $100,000 in Q1.

Additionally during the Q2, we initiated the end-of-life process for our PA130 product and recorded a one-time cost for the [navset] and a purchase commitment for end process wafers.

As mentioned in the past, Pixelworks' gross margin is subject to variability based on changes in the revenue levels, recognition of likeness revenues, product mix, start-up costs, and the timing and execution of manufacturing ramps, as well as other factors.

Non-GAAP operating expenses were $8.1 million in the second quarter, compared to $8.6 million in the first quarter and $8.7 million during the year-ago quarter.

Our operating expense levels continue to reflect our commitment to prudently manage expenses, even though they will continue to vary based on the timing of future development activities.

Adjusted EBITDA was a positive $960,000 in the second quarter, a sequential and year-over-year improvement compared to $503,000 in the prior quarter and $101,000 in the second quarter of 2011.

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

On a non-GAAP basis, we recorded a net loss of $331,000 or $0.02 loss per share in the second quarter.

This compares with a net loss in the first quarter of $148,000, or a $0.01 loss per share and non-GAAP net loss of $1.4 million or $0.09 loss per share in the second quarter of 2011.

Moving to the balance sheet, cash and marketable securities ended the quarter at approximately $15.1 million versus $11.6 million at the end of the previous quarter.

The nearly $3.5 million increase in net cash was due primarily to generating approximately $4.1 million from operating activities during the quarter reflecting the return to a more normal and linear revenue stream including normalization of DSO and inventory levels.

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 included day sales outstanding which decreased to 31 days as of June 30 compared with 42 days at March 31.

Inventory turns were 8.5 times in Q2, compared to 7 times during the first quarter.

Guidance -- for the third quarter of 2012, we expect revenues to be in the range of $16 million to $18 million.

We expect gross profit margin for the third quarter to range between 47% to 49% on a non-GAAP basis and 46% to 48% on a GAAP basis.

We expect operating expenses in the third quarter to range between $7.5 million and $8.5 million on a non-GAAP basis and $8 million to $9 million on a GAAP basis.

Operating expenses in Q3 both on a non-GAAP and GAAP basis will benefit from a credit to R&D expenses related to a development agreement with a customer.

And finally, we expect non-GAAP third-quarter 2012 results of between earnings per share of $0.08 and a net loss per share of $0.06 and on a GAAP basis we expect results between earnings per share of $0.04 and a net loss per share of $0.09.

This concludes my comments.

We will now open the call to your questions.

(Operator Instructions)

Krishna Shankar, Brock Capital Markets.

Yes, congratulations on a nice quarter and great execution.

Just a couple of questions.

Can you talk about the growth drivers for the September quarter in terms of the sequential growth?

What's driving the growth?

Is it projector, TV display processors, or are there some other new products that you introduced, or is this one of the mainstream product lines which is driving growth?

Well, I think Q3 is driven by both our, you know, pretty much all our product lines, TV and projector.

And as mentioned in the comments, Topaz is ramping up quite nicely so at least in terms of new products, just recently that would be the product driver.

Okay.

And then can you talk a little more about the design contract deal that you signed in June and the implications of that for revenue?

You said significant revenue opportunities for 2014.

Can you talk about how that sort of shapes up over the next 12 months, both in terms of the impact on OpEx and revenue potential?

Yes.

There will be no revenue potential from that contract over the next 12 plus months.

We don't expect revenue until 2014, but we do expect it to start to ramp within 2014 and have some real significance to the Company.

From an expense standpoint, it will cause some lumpiness in our expenses.

We will have some benefits in some quarters and in other quarters, it will be somewhat negative.

Within this quarter, we do expect -- within Q3, I should say -- we do expect to see a credit to -- a net credit to operating expenses and that's reflected in our guidance.

Okay.

And then can you also talk about the potential for other licensing deals over the next few quarters?

I would say we have an active pipeline and a focused activity to pursue, license and co-development and co-marketing engagements that make sense.

But I want to sort of give a back drop on our strategy there.

Our main goal is selling chips, but I think in the sense that, from a strategic standpoint, a customer engagement standpoint, further developing our customer engagements or a partnership standpoint, we pursue these kind of activities.

Thank you.

(Operator Instructions)

Gentlemen, it doesn't appear you have any further questions at this time.

Would you like to make some closing remarks?

I would like to thank everyone for joining us today, and we will look forward to talking to you on our conference call announcing the results of our third quarter of 2012.

Thank you.

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

This does conclude our presentation, and you may now disconnect.

Have a great day.