Pixelworks Inc (PXLW) 2012 Q4 法說會逐字稿

Good afternoon, and welcome to the Pixelworks, Incorporated fourth quarter and full year 2012 financial results conference call.

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

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

(Operator Instructions)

As a reminder, this conference call is being recorded today, Thursday, January 31, 2013.

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, 2012.

Before we begin, I would like to remind you that various remarks that 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, January 31, 2013, 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, net income/loss per share.

These non-GAAP measures exclude 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 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 Q4 financial results and discuss our outlook for the first quarter of 2013.

Thanks, Steve.

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

2012 was a year of solid progress for Pixelworks, despite the headwinds of a difficult macro environment and a contracting semiconductor industry.

Overall revenues for 2012 came in at $60 million, down 80% versus 2011, driven by a difficult a global, consumer, and education spending environment.

Despite these headwinds, 2012 was a significant year for demonstrating the value of Pixelworks' technology and capability as we closed $12 million of licensing and co-development deals.

In first half 2012, we closed a significant licensing and partnership for our advanced video display technology, which, combined with our penetration of the top-tier customer base, validates Pixelworks' leading position in providing innovative solutions in video processing.

Also in 2012, we achieved another key milestone as we engaged in a significant customer-funded co-development project to develop a highly integrated next-generation chip that will result in significant revenue and market share gain in 2014 and beyond.

In both of these engagements, Pixelworks was selected because of our industry-leading video processing technology and product execution capability.

In our PA series product line for large-screen display applications, during 2012, we shipped volume production of our PA136 to tier-one customers and captured the first wave of 4Kx2K resolution Ultra High Definition design wins at tier-one customers.

In the second half of the year, the first 84-inch 4Kx2K Ultra Definition display from industry-leader LG Electronics was introduced to the market with Pixelworks' leading video processing technology based on the PA138.

In Q4 2012, we introduced the PA168, which is targeted for Ultra HD 4Kx2K applications, such as TVs, panels, monitors, and projectors.

And this quarter, we've ordered mass production units of the PA168 and expect volume production to build during 2013 and positively impact the second half of the year.

The PA168 Video Display Processor is designed to meet the demanding performance requirements of new high-resolution 4Kx2K screens.

Pixelworks technology handles the most demanding and difficult video processing problems to create the best video quality in the industry.

These displays the status of the latest standard for immersive viewing, delivering truly remarkable picture quality, with eight million pixels per frame.

Pixelworks' PA168 raises the bar for video processing technology, featuring halo-free performance and the ability to eliminate unperceivable pixels to deliver more realistic images.

The depth and richness of the Ultra Definition experience is a revolutionary improvement over today's full High Definition displays.

Pixelworks is pleased to be working with leading tier-one TV manufacturers that have chosen our technology to power the latest state-of-the-art Ultra HD TVs, and we believe we are the leader in this market, with multiple tier-one engagements for the PA168.

In terms of what we see for the Business going forward, I would like to call your attention to three major trends that are developing in the industry, how these trends interrelate to each other, and how they affect our Business.

The first trend we are seeing is a dramatic increase in display resolutions.

At CES this year, high-resolution screens were everywhere, and the clear overriding theme of the show was that we are at the beginning of a massive shift to higher resolutions across all displays.

This shift is analogous to the major transition from standard-resolution CRT analog displays to High Definition flat-panel digital displays one decade ago, but much more pervasive.

Just as a point of reference, the new 4Kx2K Ultra HD screens have four times the number of pixels of today's full HD displays.

That leads me to the second trend, which is resolutions are increasing, not only in large displays, but in small ones as well.

This time, the trend to high-resolution displays is happening across all screens, stationary and mobile alike, driven by the capability of new display technology packing more pixels into less space; while at the same time, these displays are making the transition from simple video playback devices to being communication and compute platforms as well.

A good example of this trend is the current retina display in Apple's iPad 3, which is 2Kx1K resolution and contains one-million more pixels than today's leading 1080p full HDTVs.

That device did not exist three years ago, and already has spawned a new category generating tens of millions of units world wide.

We are in the middle of a convergence of the PC, TV, and phone, which is generating new product categories and use models and they all have one thing in common -- consumers are increasingly using these products to watch video.

That brings me to the third major trend, which is that video is becoming the new killer application.

Industry research from bandwidth providers, switching manufacturers, and communication-chip makers all point to the same thing -- across all these screens, video-content consumption is going up, and it is being consumed on a wide variety of mobile and stationary strains.

There are plenty of statistics to quantify this trend, but one that I find especially graphic is from Cisco, and they predict that in just three years video will make up over 85% of all Internet traffic, and it would take over six-million years to watch it all.

That gives you an idea of what is coming, as these three trends of high resolutions, more video content, and more opportunities to view that content collide.

The quality of the digital-user experience will increasingly become a key element in product quality and brand differentiation.

So, we have this gigantic tsunami of pixels that are headed for the entire ecosystem of video content creation, distribution and delivery, and how does that affect our Business?

At this year's Consumer Electronics Show in Vegas, advanced large Ultra HD TVs from tier-one customers incorporating our technology were prominently displayed on the floor.

We are pleased to be working with leading tier-one TV manufacturers that have chosen our video display technology to power their latest state-of-the-art Ultra High Definition TVs.

These are the very largest screens, at this point, and we are solving industry's most difficult video display issues on the grandest scale.

High resolution, of course, means more noticeable video-quality problems, and the video-quality problems associated with higher-resolution larger screens are now migrating to smaller ones.

As customers become exposed to higher video quality on HD and Ultra HD screens, they will naturally demand an experience similar to the high resolution they are used to on whatever screen they are viewing.

This next wave of pixels will require advanced approaches to video processing that address, not just feeding a high-resolution screen, but also taking into account the issues of size, heat, and power consumption.

All of these issues point to a need for holistic approaches to video processing that will address all of these problems, and as the technology leader and last independent company in the industry creating the highest quality visual user experience, we believe these trends are increasing the value proposition of Pixelworks' video display processing technology, and we intend to focus our efforts to take advantage of them.

In our projector product line in 2012, we expanded the Topaz family of solutions across the spectrum of the projection market by introducing several new members.

The PWC868 and 878 for midrange and high end of the market, as well as the Topaz Lite series for the sub $500-value segment.

In Q4, we further expanded Topaz family by introducing the PWC858, which is specifically targeted for DLP-based products.

Pixelworks projector solutions enable advanced applications in the business, consumer, and education segment, and in 2013, we will be adding additional members of the Topaz family and enhancing our software suite to enable mobile and wireless connected applications.

We experienced outstanding tier-one design-win traction in 2012 and expect the Topaz family to contribute positively to growth in 2013.

In closing, 2012 was a year of significant progress for Pixelworks, despite macroeconomic headwinds.

We demonstrated the value of Pixelworks video display technology by closing $12 million of licensing and co-development deals; we expanded our Topaz family of projector products; and we introduced our next-generation Video Display Processor, the PA168 for Ultra HD Displays, which was adopted by industry-leader LG Electronics and others, to power their flagship products.

We are at the beginning of a massive trend to higher resolutions and video consumption across all screens, and in 2013, we will focus on applying our video display processing technology and innovation to all displays to enable the highest quality video experience.

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

Thank you, Bruce.

Revenue for the fourth quarter 2012 came in at the low end of guidance, as the lack of visibility, noted in our Q3 2012 conference call, continued into Q4.

Total revenue for the quarter was $13.6 million, compared to $16.3 million in the third quarter and $16.8 million in the year-ago quarter.

The sequential and year-over-year decline in revenue was primarily due to soft macroeconomic conditions across product lines, coupled with seasonal weakness.

The split of the fourth-quarter revenue by market was 70% digital projection, 17% TV and panel, and 13% embedded video display.

Licensing revenue was negligible during the quarter compared to approximately $600,000 in the third quarter.

Revenue from digital projection was down $1.3 million sequentially to approximately $9.5 million in Q4, as customers adjusted inventories due to softer demand.

Revenue from TV and panel was down approximately $1 million sequentially to $2.3 million in Q4, primarily as a result of seasonality amplified by the slow macroeconomic environment.

Embedded video display revenue in Q4 was approximately $1.8 million.

Non-GAAP gross profit margin was 49.9% in the fourth quarter, compared to 49% in the previous quarter and 48% in the fourth quarter of 2011.

The improvement in gross margin was largely the result of a favorable product mix.

Non-GAAP operating expenses were at the low end of guidance coming in at $9.2 million in the fourth quarter, as we continued to focus on tight expense management.

This compares to $7.7 million in Q3 and $9 million in Q4 2011.

Operating expenses in the third quarter of 2012 were positively impacted by a reimbursement credit to research-and-development expense from our co-development agreement with a customer due to the achievement of certain milestones.

Fourth-quarter 2012 research-and-development expense did not include a reimbursement credit.

We expect to complete all the milestones related to this agreement and realize the remaining $3.5 million of reimbursement credits during 2013.

The shift created as a part of this co-development agreement is expected to result in significant revenue beginning in 2014.

Adjusted EBITDA was a negative $1.3 million in Q4, compared to a positive $1.4 million in the third quarter of 2012.

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 $2.8 million, or $0.15 per share, in the fourth quarter.

This compares with a non-GAAP net income in the prior quarter of $320,000, or $0.02 income per diluted share, and a net loss of $1.3 million, or $0.07 loss per share, in the fourth quarter of 2011.

Moving to the balance sheet.

Cash and marketable securities ended the quarter at approximately $13.4 million versus $15.6 million at September 30, 2012.

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

Other balance-sheet metrics include -- day sales outstanding at 25 days at December 31, compared with 21 days at September 30; and inventory turns of 7.3 times in Q4, compared to 7.6 times at the end of Q3.

Guidance.

Going into Q1, visibility continues to be lower than normal as customers work through an industry-wide inventory correction, coupled with worse-than-normal seasonality.

Based on these factors, we expect revenue to be lower than typical seasonality, in the range of $9.5 million to $10.5 million.

Going forward, we expect Q1 to be the trough with a return of sequential revenue growth in Q2 2013, based on a return to normal order patterns and second-half growth driven by our Topaz and PA168 products.

We expect gross profit margin for the quarter to range between 50% and 52% on a non-GAAP basis and 48% to 50% on a GAAP basis.

We expect operating expenses in the first quarter to range between $9 million and $10 million on a non-GAAP basis and $9.5 million and $10.5 million on a GAAP basis.

This guidance reflects that we do not expect to achieve a research-and-development credit milestone in Q1 2013.

Finally, we expect to record a non-GAAP net loss between $0.18 and $0.28 per share, and on a GAAP basis, we expect a net loss per share of between $0.22 and $0.32.

That concludes my comments.

We will now open the call for your questions.

(Operator Instructions)

Krishna Shankar, Pixelworks.

Bruce and Steve, congratulations on some good results in a tough macro environment in 2012.

As you look at Q1 potentially being the trough, what kind of data points do you have to suggest that Q1 could potentially be the trough?

And, how quickly will some of the new products, such as the 4Kx2K TV chips and the next-generation projector chips, how quickly with they ramp up starting in Q2?

Thanks, Krishna.

We have seen the seasonal pattern a couple years running now, and really, based on what our customers are telling us, in terms of working through the over-inventory situation they experienced in Q4, and when they expect to have that work through, they are telling us, roughly, they are back on track going into Q2.

So, we have seen the seasonal pattern a couple of times.

It tends to be combined with an inventory correction across -- and I think, specifically, we are seeing this centered around a lot of Japanese customers, as well, specifically.

Would you see a similar recovery in both the projector and TV market, or do you expect one to lead the other?

And, can you also talk about the prospects for new licensing and IP royalty streams going forward?

Yes, I think we will see it from both categories.

What is going to be driving, especially the TV category, would be the PA168.

I think we will begin to see some volume in Q2, but we see the volume ramping in the second half of the year.

The PA168, the dollar content of those systems in 4Kx2K is about 5 to 6 times the dollar content that we had in systems with the PA136.

We will have the dollar-content increase in addition to new products ramping.

Great.

Can you elaborate on your comment for high-resolution video processing on tablets, small screens, and what your activities are there, whether you can talk a little more about your development, chip, or licensing efforts?

Sure.

We are seeing, as I mentioned in the commentary, I think we're seeing a broad transition to higher-resolution screens across just about all screens, for the most part, and I think we're just at the beginning of that trend.

I guess we are not announcing products at this point, right now.

I think what we are discussing is how the relevance of video processing is pervading across, not only large screens, but the small screens as well, and our technology and its importance in solving and creating great video quality.

I think we are seeing that as a requirement across a lot of systems.

There's a -- we have a lot of interaction with the marketplace and need and requirements for video processing technology that we are encouraged by.

I think over, as I mentioned on 2013, our intention is to focus our efforts on bringing our technology to solve those problems across all screens.

Great, thank you.

I would now like to turn the conference back over to management for closing remarks.

Thanks, everyone, for joining us.

We will look forward to discussing our Q2 2013 results with you on our next call.

Ladies and gentlemen, that concludes today's conference.

Thank you for your participation.

You may now disconnect.

Have a great day.