Pixelworks Inc (PXLW) 2012 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third quarter 2012 Pixelworks earnings conference call.

My name is Jeff and I will be your coordinator for today.

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

Later we will facilitate 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 your host for today, Mr. Steve Moore, Chief Financial Officer.

And you have the floor, sir.

Good afternoon.

Thank you for joining us.

This is Steve Moore, Chief Financial Officer at 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 third quarter ended September 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 or 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 18, 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, 2011, 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 stock-based compensation expense, gain on sale of patents, gain on sales 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, 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 income 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 third quarter financial results and discuss our outlook for the fourth quarter of 2012.

Thanks, Steve.

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

I'll start by making a few comments and observations about our third quarter 2012 and then Steve will follow with details on our financial results and outlook for Q4.

Q3 was a solid quarter with overall revenues were up 5% driven by chip revenue which increased 19% sequentially across our product lines.

This performance, combined with in-the-range metrics across the P&L, resulted in positive net income and EPS.

The quarter was positively impacted by the continuing production ramp of our new Topaz family of projector products and our PA series products for advanced large displays, as well as the continuing execution of our licensing and co-development engagements.

These key engagements with industry leaders are significant validation and recognition of Pixelworks' video quality excellence.

And Pixelworks was selected because of our market leadership and IP position in video display technology.

Overall product revenue for advanced large display applications were 20% of revenues, up 8% year-over-year and 38% sequentially, driven by seasonal strength and volume production of our PA series products.

Projector products came in at 70% of revenues and were up12% sequentially, reflecting the production ramp of Topaz family products.

Overall, book-to-bill was less than one, impacted by a slowing global economy and semiconductor industry, as order patterns weakened at the end of the quarter and consumers adjusted to a weak global macro environment resulting in lower visibility than normal going into Q4.

Non-GAAP gross margin came in at the top of the range of guidance at 49%, and combined with low end of the range operating expenses of $7.8 million, resulted in positive EBITDA and cash generation as well as positive non-GAAP EPS of $0.02 per share.

In our PA series product line for large screen display applications, our current generation of products continue to experience good design win performance with customers.

But more importantly in Q3, the first 84 inch 4K x 2K ultra definition display from industry leader LG Electronics was introduced to the market with Pixelworks' leading video quality technology powered by the PA138.

4K x 2K ultra definition displays are four times the resolution of full HD displays available today, raising the bar for image quality and creating stunning realism and a completely immersive experience.

The depth and richness of ultra definition experience is a revolutionary improvement over today's full HD displays.

This display from LG sets the standard for high-resolution realism and validates Pixelworks' industry leadership position in advanced video technology.

Continuing our momentum in Q3, we sampled the PA168, which is targeted for the high resolution advanced display market and solidifies Pixelworks' leadership position.

The PA168 was our sixth generation device and it provides industry leading video quality performance.

We are at the beginning of a massive shift to higher resolutions across all displays.

This shift is analogous to the major transition from 480i analog to 1080p digital displays, but much more pervasive, as content sources expand exponentially and video consumption is increasingly the killer application across all displays.

Resolutions are increasing everywhere as evidenced by the introduction of 4K x 2K large screen displays as well as 2K x 1K tablet devices.

And the video quality problems associated with large screens are now migrating to smaller screens as the visual user experience is increasing a key element in product differentiation.

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

In our digital projector product line during the quarter, we ramped the Topaz-Lite into volume production and we continue to experience strong design win traction overall for Topaz products.

In Q4, we will expand the Topaz family of products further by introducing the PWC 858, which is specifically targeted for DLP-based projectors, further enhancing our market opportunity.

In addition to Pixelworks' leading video quality, it includes key features for the DLP systems, such is four corner correction as well as robust connectivity features.

In Q3, we released version 2.4 of our next-generation software, which enables the advanced features of the Topaz platform and includes connectivity capability to enable mobile connected applications for the education enterprise market.

The Topaz and Topaz-Lite family of products are in mass production and cover the full range of the projector market, and during the quarter we continue to experience outstanding design momentum and received additional design commitments from tier 1 3LCD and DLP customers.

In closing, overall, Q3 was a solid quarter of product growth and profitability, driven by the ramping of new products and Pixelworks' video technology was adopted by industry leader LG Electronics to power their flagship 4K x 2K ultra definition display.

We sampled the next generation PA168, which is the industry's leading video quality solution for high-resolution large displays, and we ramped the Topaz-Lite into volume production and experienced outstanding design win momentum for our Topaz family.

Also during the quarter, Richard Miller joined us as our Senior VP of Technology as we look to apply are leading video technology across a wider spectrum of video quality problems.

Richard brings to Pixelworks a long track record of success at companies such as PortalPlayer where he was instrumental in leading successful new product development projects.

Now I'd like to turn the call over to Steve to review the financial details of the quarter and our outlook for Q4 2012.

Thank you, Bruce.

Revenue in the third quarter 2012 was $16.3 million compared to $15.5 million in the second quarter and $17.4 million in the year ago quarter.

Revenue increased 4.9% sequentially as a result of increased sales of our chip products for both the digital projection and advanced large display markets.

The split of our third quarter revenue by market was 70% digital projection, 20% advanced large display, and 10% embedded video display.

Licensing revenue during the quarter totaled approximately $600,000, compared to $2.3 million in the second quarter, and was largely attributable to the digital projection market.

Digital projection revenue increased by approximately $1.2 million during the quarter to $11.3 million.

Projector revenue increased on continued ramping of our Topaz family products as well is the recognition of licensing revenue.

Advanced large display revenue decreased approximately $1.1 million to $3.3 million in the third quarter, primarily as a result of lower licensing revenue from advanced large display development agreements.

Embedded video display revenue during the third quarter was approximately $1.7 million.

NonGAAP gross profit margin was 49% in the third quarter compared to 50.6% in the second quarter and 49.4% in the third quarter of 2011.

The sequential decrease in gross margin was driven primarily by lower licensing revenue recognized during the quarter.

Also of note, we recorded certain costs related to licensing revenue during the quarter that were largely in line with our corporate average gross margin.

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

Non-GAAP operating expenses were $7.7 million in the third quarter compared to $8.1 million in the second quarter and $9.1 million during the year ago quarter.

Operating expenses in Q3 and Q2 include reimbursement to research and development expenses related to a previously announced customer co-development agreement.

Adjusted EBITDA was a positive $1.4 million in the third quarter, a sequential and year-over-year improvement compared to $960,000 in the prior quarter and $734,000 in the third quarter of 2011.

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

On a non-GAAP basis, we recorded net income of $322,000, or $0.02 per share in the third quarter.

This compares with a non-GAAP net loss in the second quarter of $331,000, or a $0.02 loss per share, and a net loss of $470,000, or $0.03 loss per share in the third quarter of 2011.

Moving to the balance sheet.

Cash and cash equivalents increased to approximately $15.6 million from $15.1 million at the end of the second quarter.

The nearly $500,000 increase in net cash was due in part to generating approximately $1.4 million from operating activities during the quarter.

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 day sales outstanding, which improved to 21 days as of September 30 compared with 31 days at June 30, primarily due to the timing of sales through the quarter.

Inventory turns were 7.6 times in Q3, compared to 8.5 times in the second quarter.

Guidance.

For the fourth quarter of 2012, we expect revenue to be in the range of $13.5 million to $14.5 million.

We expect gross profit margin for the fourth 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 fourth quarter to range between $9 million and $10 million on a non-GAAP basis and $9.5 million to $10.5 million on a GAAP basis.

This guidance for operating expenses includes expenses related to a previously announced customer co-development agreement; however, we do not expect to receive reimbursement of these expenses in the fourth quarter as our next reimbursement milestone is anticipated to be met in the first half of 2013.

And finally, we expect non-GAAP fourth quarter 2012 results of between a net loss of $0.12 and $0.23 per share and on a GAAP basis we expect a net loss per share of between $0.16 and $0.26.

This concludes my comments.

We will now open the call for your questions.

(Operator Instructions)

Our first question comes from the line of Krishna Shankar with Roth Capital.

Please proceed.

Yes.

Congratulations on some solid results and a couple of questions -- as you look at the Q4 results that you talked about some softness in terms of macro caution impacting demand.

Can you talk about demand trends both of the projector and the display side of the business, and how it is sort of distributed in the mainstream products that you have in the market and some of the new products ramping?

Thanks, Krishna.

Yes, I think that we are seeing some reaction from customers in terms of ordering patterns and visibility going into Q4.

And I think largely it's sort of some conservatism on their views on 2013.

I think typically Q4 tends to be a seasonally down for at least the TV market, projector market a little bit as well but I think it's across both product lines for the most part.

Okay.

And then can you talk about some of the new products such as PA138, PA168 and the Topaz family and what impact that could have on the first half 2013 as some of these design wins ramp into production.

As we press released, we are pretty excited about our 4K x 2K technology and offering.

That announcement referred specifically to the PA138, which is sort of an initial generation product.

And I think, as I also mentioned on the call, we sampled this quarter our PA168, which is higher integration, more performance, more video quality -- pretty significant improvement over the PA138.

And so we are actively pursuing and engaging with customers on that product as we speak right now.

We would expect volumes to begin in 2013 so we are expecting good -- positive benefit from the 168 next year as well.

Topaz family, as I mentioned as well, we are very happy with sort of our design win performance on that.

I think the Topaz family will, over time, pervade across most of our tier one customers.

They are adopting it and ramping it pretty much every quarter so we are expecting continued good performance in growth underneath sort of our top-line revenue from the Topaz family as well.

Okay.

And then my final question -- can you talk about the outlook for licensing, royalties, or co-development agreements in Q4 or over the next few quarters?

Yes.

I think we kind of don't outlook based on product mix or chip revenue versus license mix.

But just generally as I can -- as I discussed last quarter, licensing is a component of our go-to-market strategy, our partnership strategy, and our engagement strategy with tier one customers and that will be a continuous component of our business going forward.

I think we're continuing to see very good opportunities along those lines and had a good pipeline of opportunities of that nature.

It's going to tend to be lumpy, driven by just sort of the nature of these type of engagements, and sometimes the recognition of these -- whether it's a license or a co-development in terms of the accounting of those activities as well.

But I think it's a testament to our technology.

It's some -- and the relevance of our technology as some of the trends that were mentioned on the call in terms of the importance of video across a lot of spectrums in the industry and Pixelworks' excellence in video quality.

So we're pretty heartened with a lot of the opportunity set that we are continuing to see for these type of deals.

Do you actually have specific deals or negotiations in progress, perhaps with some smart phone or tablet type costumers which could take advantage of your IP course or technology for high-ended display quality in smart phones and tablets and what might be the nature of those deals going forward?

Yes.

I'm not going to get down to that level of detail on sort of what is in the pipeline.

I think that what we can see today and what we've talked about is in our typical markets of projector and TV.

But I would say we sort of believe that our video technology, and what it does for video quality, is we think over time is applicable across more applications than what you see today.

Great.

Thanks.

And, Steve, can you talk about the balance sheet going into Q4 in terms of inventory build and what the cash might look at going into Q4?

Well we don't give a guidance to any line of the balance sheet but inventory builds was modest.

We did -- we still have 7.5 turns, which is a good level for us.

I think our corporate target has routinely been 7 so anything above that I think we are pretty pleased with.

The guidance into Q4 would indicate that we would expect receivables to be down in that quarter and the effect on cash would depend on what our ending EBITDA number would be.

Thank you.

Thank you, Krishna.

(Operator Instructions)

Rob Romano with 1st Source Bank.

Thank you.

I am just trying to reconcile the discussion regarding design wins and the trends that seem to be moving your way with the lack of consistent revenue growth.

Just wonder if you could comment on that.

So there are many determinants and components of sort of growth, particularly along our markets.

And we are certainly subject to macro environment -- macro environment affects as well.

Projector business, for instance, is a global business.

It's driven by education, largely, and enterprise to a second degree.

And being a global business, it's -- a lot of the growth has been driven by emerging markets -- China, India, so forth and so on and consistency in Western domestic markets -- the United States, Europe, and Japan.

So to the extent that macroeconomic effects are affecting global growth, we will see some affect in our customers' viewpoint in terms of there aggressiveness with inventory and build ahead based on their future outlook.

And I think the same goes for some of the TV customers as well.

Do you have any idea if you expect this to be a one quarter event or is this something that's a little more deeper?

Well if we kind of look back over the last sort of 36 months in the semiconductor industry, we've seen the same sort of pattern that the rest of the industry has seen as well.

And if we go back to last year, the downturn, I guess, or inventory correction began around this time and went into Q4 and we saw it begin to pick up pretty substantially into Q1 and late Q1.

Now last year was affected by a flood in Thailand.

That did not hit chips but it did hit our customers in terms of their bill of materials for their system builds and really wreaked havoc with their MRP and build systems so that that one might have been overstated a little bit.

The year before that it, a similar situation except it was impacted by an earthquake in Japan that disrupted the supply chain as well.

So this is prognostication and sort of just thinking about this cycle and how it could roll out.

I don't think inventories are ahead of themselves in the industry in general.

We don't think they are in our customers as well.

We tend to think right now that this is reaction to some conservatism and sentiment around our customers and what they think about 2013.

So think if there's some stabilization in that, I think that we could see a very similar pattern that we saw the last two times in the last two years that this has happened.

And I think that we saw it come back pretty quickly from our customer base in mid to late Q1 last year and was very robust into Q2 and Q3.

Are you gaining any market share from competitors who have exited the business?

That's hard to tell because, as I described our competitive landscape, sometimes it is internal.

And in fact at the very high-end where we are right now in terms of -- you can break the markets into two, sort of in the high resolution, large screen market that the 168 is aimed at, some of our competition is internal.

So that's a hard one to answer.

We have seen a lot of exits -- our sort of historical competitor base was [Ran] and Trident and Genesis Micro and so forth.

Those have all gone away in one form or another.

But I think we've moved into the segment of the industry at the very high-end of technology here where this has been considered important technology to product differentiation in a lot of these large tier one OEMs.

And in some cases, we are becoming sort of the technology partner or the kind of solution of choice for their leading-edge products.

Regarding the announcement with the Korean TV maker, any idea what type of revenue you can expect from the 4K x 2K next year, especially with the cost of the TV?

Sure.

You know, we kind of don't guide out a year.

I just think -- I guess I'll make some comment about that particular announcement.

I think that one, specifically, there is two key points about that announcement -- first off, I think you mentioned this, we're at the beginning of the trend to higher resolutions so this is definitely an emerging market and an emerging application.

So we are very early, at the very high-end of this trend.

Secondly, I think it's a testament to our technology that in the highest resolution, largest screen with the leader that is driving the transition to this resolution right now, at least at large screens, has selected our technology.

So I think that sort of beyond that, I think you're going to see a pretty big wave of 4K x 2K announcements.

They're already starting to begin.

And I think at CES this year you'll see a lot of product lines that go down from 84 inches down to a low end of maybe 55 inches and cover the spectrum with higher resolution products.

And that's where the volume sort of would emerge.

I don't -- a $20,000 high-level screen is not the high-end volume segment of the market by a long shot.

Sure.

Last question, you've been talking about other displays in your video technology, where -- what other -- give us an example of some other displays where your technology would be a good fit.

I think you can basically look at what is sort of going in one of these systems.

You have pixels being processed and they're -- they are translated to a display -- a LCD panel these days or a projector screen or a projected screen.

The basic functionality of algorithms and video processing techniques and things that we do that enhance the video quality of these images in large screens where you clean the image up, you don't see any blur, you don't see any what's called halo effect -- all these kind of images, all these kind of problems that you have on screens that are very high resolution where you have high-quality -- you have video moving through, our technology makes those a lot better at the last step of the video processing.

So I guess the trends we are trying to lay out are that resolutions, as they increase, increase the amount of pixels that need to be processed and also increase the amount of resolution and effects that the I can see and those things need to be improved.

So from a fundamental processing standpoint, an algorithmic video processing -- a video processing and algorithmic standpoint -- it's the same techniques.

So that's why I guess we just make the comment that the problems that we solve in sort of our current customer base, we just see a trend across the industry as large screens and smaller screens begin to see a very significant resolution increase.

The observation is a retina display right now is 2K x 1K which is significantly more pixels to be processed than sort of a non-retina display in a TV in the large screens that we are focused on right now from 1080p to 4K x 2K is 4x.

So the load on the system, the overhead on the system, the number of pixels that need to be processed and so efficiently, that's what we approach with our technology.

Sure.

Sure and I understand the applications within projector and TV, but what outside of those two would this technology apply to?

Any screen that has high resolution, that has video, and needs video quality in it from seven inches and above, I would say that this technology applies to.

Okay.

And is that a focus of the Company going forward?

Looking at markets outside of projector and TV?

Yes.

We really haven't said what we are announcing any product plans or any specific plans going forward.

I think we did announce that we hired an individual to look at applying our technology at other markets and those can be any market that has a screen that has high resolution and requires high-quality video.

Okay.

Thank you.

Thanks.

Ladies and gentlemen, that concludes the time we have for questions.

I'd now like to turn the call over to Mr. Walicek for closing remarks.

Thanks, everyone, and we will look forward to talking to you on our Q4 2012 conference call.

Thank you.

Ladies and gentlemen, that concludes today's conference.

Thank you for your participation.

You may now disconnect.

Have a great day.