Pixelworks Inc (PXLW) 2014 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Pixelworks, Inc.

third-quarter 2014 earnings conference call.

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.

Please note that 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 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, 2014.

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, October 30, 2014, 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, 2013, 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 discussion 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 and additional amortization of our 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 the strategic updates on the business, after which I will review our third-quarter financial results, and then provide our outlook for the fourth quarter of 2014.

Thanks, Steve.

Good afternoon, everyone, and thanks for joining us today.

Q3 2014 was another quarter of growth, as overall revenues of $17.1 million were up 12% year-over-year, driven by accelerated growth in our Product business, which grew 63% versus the year-ago quarter, marking the highest chip revenue level in four years.

All of the metrics are solidly within the range of guidance and we generated a positive EBITDA for the quarter.

While we experienced a very strong Q3, we began to see some moderating of order patterns in our customer base, and expect to see seasonality earlier than typical going into the end of the year.

That being said, we expect significant overall growth in 2015 in our current Product business, driven primarily by our co-development project.

Steve will review the results of the quarter and provide the outlook later in this call.

Q3 was a great quarter of progress, as we launched the Iris product line targeted at mobile applications, and delivered initial silicon samples of our first device in a family of mobile video processors.

Iris is the industry's first mobile video processor designed to bring cinematic experience of large screens to mobile screens, while enhancing system performance and lowering power consumption, and represents several years of research to leverage Pixelworks' technology and expertise in large-screen applications to create the best video quality in smaller mobile displays as well.

The PX3883 is the first device in the product line of Iris chips on our roadmap based on our advanced video display processing, and addresses the markets for mobile devices with high resolution screens from 5.5 to 15 inches.

Iris technology not only optimizes all aspects of display that affect video quality, but also works at the system level, improving battery life and freeing up valuable system resources to create the optimal viewing experience.

Interest in Iris in our customer base and partner ecosystem is very strong, and we are seeing excellent momentum in a wide range of design opportunities for Iris.

The value propositions of Iris are resonating with customers and partners as they face the increasing challenges of delivering great visual experience without reducing battery life.

Historically, this level of dedicated video processing has only been applied to large screens.

The next-generation displays are requiring innovative video solutions as companies begin to recognize the importance of the visual experience to the differentiation and positioning of their products.

Pixelworks' core video technology and expertise applies across the spectrum of screen sizes from 5.5 inches to large projected displays, and we continue to see a robust licensing pipeline for our advanced video processing technology.

Our expansion into smaller display sizes from 5.5 to 15 inches positions the Company to address a large market opportunity and ride the explosive third wave of video, as resolutions rise across all screens.

We will be showing our current and future generation technology for all displays and demoing the PX8338 running on Intel and Qualcomm platforms at the upcoming Consumer Electronics Show in January.

Delivering great video quality is an art as well as a science, and it takes many years to develop the expertise necessary to provide solutions that are tested by the industry's most demanding customers.

Pixelworks has a long history of delivering innovative video processing solutions for large screens, and have now brought that expertise and innovation to mobile screens as well.

By building on 15-plus years of expertise, the portfolio of over 125 issued patents, and experience in the marketplace at solving the most difficult video problems, our latest technology represents the culmination of over a decade of video processing innovation.

Increasing mobile video consumption is a key driving factor in the need for next-generation video solutions, as consumers increasingly view their content on ultrabooks, tablets, and smartphones.

According to the most recent Adobe Digital Index, market share of online video consumption continues to rise on mobile devices, with 26% of the 38 billion online videos viewed on a mobile device in Q2 -- a market share increase of 59%.

And according to eMarketer, US consumers now view more video on mobile devices than on desktops and laptops.

Another driving factor is the relentless progress of display technology as the industry continues to deliver advancements and increasing resolutions and pixel density with no end in sight.

We are just beginning a multiyear transition to high resolutions across all screens as the entire video ecosystem upgrades to 4K in the coming years.

According to the latest forecast from ABI Research, within five years, 478 million smartphones a year will ship with a UHD 4K display as standard.

But today, mobile devices are in transition to full HD and just beginning the transition to 2K quad HD displays, such as the recently announced LG G3 smartphone coming in at 538 pixels per square inch.

High-resolution magnifies video quality issues lessening the consumer experience, and small displays suffer from the same problem as large ones.

As mobile screens become the first screens consumers watch, the same emphasis on video quality and efficiency that is applied to the large-screen TV market is beginning to be applied to mobile screens.

Hollywood is beginning to recognize the problem as well, as content creators and providers are beginning to focus on the problem of accurate presentation of content.

To that end, we announced during the quarter that Pixelworks joined the Entertainment Technology Center, which was founded by major Hollywood studios in 1993 with the goal of bringing technology and entertainment visionaries together to collaborate on the future of entertainment technology in conjunction with USC's School of Cinematic Arts.

And in 2015, we will bring innovation to the market to give content creators creative control of the presentation of their content.

For large-screen projected and panel display applications, we continue to see great opportunities across our families of video coprocessors, as 4K applications broadened out to include monitor, digital signage, and projected displays, in addition to large-screen TVs.

And during the quarter, we ramped into high-volume production the advanced SOC we developed under our codevelopment partnership.

This is a significant milestone, and we expect this project to continue to ramp into next year and drive significant year-on-year growth in 2015 in our overall product business for large-screen applications.

We continue to see great design win adoption for our Topaz family of SOC's for projectors.

And we also introduced VueMagic Mate Pro, which is a small Topaz chip-based dongle that transforms any display into a connected collaborative environment by enabling the features of VueMagic software.

This product doubles the addressable market opportunity for Topaz chips by adding the installed base of non-Topaz-based projectors as well as large-screen panel displays used in business conference rooms and digital signage applications.

VueMagic software provides wireless connectivity for mobile devices to Topaz-based projectors or dongles, and adds features such as live video as well as advanced content sharing capabilities.

There are now over 70 VueMagic-enabled Topaz-based projector models available, and that number is growing each quarter.

We also released the Android 2.0 version of our VueMagic software during the quarter, which is a major update for Android-based mobile devices, and is now available on Baidu for download to address the growing education market in China.

Our latest VueMagic hardware and software solutions transform how presenters engage with their audience, and increase collaborative sharing of information in business and educational environments.

We have an exciting roadmap of features and capabilities coming in 2015 that will continue to enhance and expand the VueMagic and Topaz platform, and provide value to our customers.

In closing, Q3 2014 was a solid quarter of growth driven by our product business that grew 63% versus the year-ago quarter, marking the highest chip revenue level in four years.

During the quarter, we ramped into high-volume production the advanced SOC for large-screen applications we developed under our codevelopment partnership.

And while we see some early seasonality going into the end of the year, we expect to see significant growth in our current products for large-screen applications business in 2015 versus 2014, primarily driven by our codevelopment project.

We launched the Iris product line targeted at mobile applications and delivered silicon samples of our first device, the PX3883, and introduced the VueMagic Mate Pro that extends our market opportunity for Topaz products.

We will be demoing our current and future generation technology and products for all displays at the upcoming Consumer Electronics Show in January, so please come by for a visit to our suite if you attend the show.

Now I'd like to turn the call over to Steve to review the financial results for the quarter.

Thank you, Bruce.

Revenue for the third quarter of 2014 was $17.1 million, up 13% sequentially and up 12% year-over-year.

Strong chip sales drove the increased revenue during the quarter.

The split of our third-quarter chip revenue by market was 87% digital projection and 13% TV and panel.

Digital projection revenue increased 34% sequentially to $14.9 million from $11.1 million in the prior quarter, as we continue to ramp sales of products for new and existing platforms.

Revenue from TV and panel totaled $2.2 million for the third quarter compared to $3.9 million in the second quarter.

The quarter-over-quarter decline was due primarily to inventory adjustments at certain customers.

Licensing revenue made a negligible contribution in the third-quarter revenue.

We continue to expect the recognition of licensing revenue to be lumpy in future quarters.

Non-GAAP gross profit margin was 50.4% in the third quarter compared to 51% in the prior quarter.

Non-GAAP operating expenses were $9.3 million in the third quarter compared to $8.7 million in the prior quarter.

Adjusted EBITDA was a positive $423,000 for the third quarter compared to a positive $182,000 in the second quarter.

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

On a non-GAAP basis, we recorded a net loss of $950,000 or a loss of $0.04 per share in the third quarter of 2014 as compared to a non-GAAP net loss of $1.5 million or a loss of $0.06 per share in the prior quarter.

Moving to the balance sheet, we ended the third quarter with cash and cash equivalents of approximately $19.3 million compared to $20.9 million at the end of the second quarter.

The Company has no long-term debt.

And similar to the previous quarter, the Company had a balance of $3 million on its working capital line of credit.

Other balance sheet metrics include days sales outstanding of 32 days of the quarter-end compared to 24 days at the end of the second quarter, and inventory turns remained largely in line with the previous quarter at approximately 12 times.

Guidance.

For the fourth quarter of 2014, we expect revenues should be in the range of between $14 million and $16 million, reflecting early seasonality going into the year-end.

We expect gross profit margin for the quarter to range between 48% to 50% on a non-GAAP basis and 47% to 49% on a GAAP basis.

In terms of operating expenses, we expect the fourth quarter to range between $8.5 million and $9.5 million on a non-GAAP basis, and $10 million to $11 million on a GAAP basis.

And finally, we expect a non-GAAP fourth-quarter net loss of between $0.04 and $0.14 per share.

And we expect a GAAP net loss of between $0.11 and $0.21 per share.

That concludes my comments.

We will now open the call for your questions.

(Operator Instructions) Krishna Shankar, ROTH Capital.

Congratulations on the Q3 results.

And can you give us some sense for how the Iris chip might ramp into production over the next 6 to 12 months?

I know there's a lot of customer interest.

Can you give us some sense for production design wins there and when that might start to contribute to revenues?

And secondly, also can you give us a sense for licensing and royalties?

I know that's been lumpy.

Can you talk about any potential deals in the pipeline and when that might pick up again?

Sure.

Thanks, Krishna.

In terms of Iris, as I had mentioned on the call, we are seeing a lot of interest, a lot of momentum, a lot of excitement.

And what Iris is bringing to customers is definitely resonating, as they address the pain points we discussed.

Iris was just launched in Q -- just this last quarter, in earnest.

We are out to pretty much the global customer base.

And as you know, design cycles can range from six to nine months, I think, on the short end, anywhere up to a year.

And that's depending on what kind of product it is, whether it's an ultrabook or a smartphone.

Is it a Tier 1 customer?

Is it an ODM?

So that can have an impact -- that has a bearing on sort of the design cycle for the particular customer we are working with.

So, generally, we are expecting good contribution from Iris in 2015.

And we also have a nice product roadmap coming that we'll be talking to you -- talking about to you in the future.

From the licensing side, I think I mentioned this -- I mentioned that we are seeing a lot of interest.

I would say the interest has never been higher in sort of our IP and technology.

It's really a testament to the trends that we talk about, and the level of interest in video and the need to solve the problems that we discussed, as well.

So I would say our pipeline has never been bigger.

You know these things are complicated, and especially the larger ones tend to take time.

But we are pretty excited about where we are and what we're seeing in the marketplace.

Okay, thank you.

And then on the TV business, that I guess you talked about some inventory correction in your customer base.

Can you talk about the outlook for the TV and panel business next year in terms of any new design wins, and how you are impacted by the advance of 4K TVs to higher performance/lower price points?

Yes.

We continue to aggressively work on new design wins.

We experienced, probably in Q2, a little overbuying in a couple of customers and have seen the impact on that.

We do expect, 2015, that TV and panels and the broader market for those chips will contribute very nicely to our totals.

Yes.

One thing we are seeing, Krishna, is the 4K applications are broadening out in addition to the TV segment monitors unit projection, as well.

So we are seeing good opportunities across more markets at this point, sort of in addition to the traditional TV 4K market.

One thing I will say about the market and the way it's developed, it has largely turned out to be a China market in terms of the bulk of the market -- 60%, maybe greater percent of 4K TVs are going into China.

A lot of those tend to be very low price points and very sort of commoditized ones that don't have a lot of video processing or high-quality video capability.

The top end of the market does.

And in the Western world, I think at least in this year, price points are still fairly high for a consumer item.

And, of course, the content is still coming.

So, that's sort of the development of the market in 2014, sort of going into 2015, what we are seeing.

Okay.

And my final question with respect to Iris, do you see the uptick more in larger screen mobile devices like tablets and premium notebooks, or in smartphones?

Of course, there is some blurring between the two, but can you talk about the near-term opportunity for the uptake of the Iris mobile video processor and IP licensing, whether it's -- is it smartphones, tablets, or premium notebooks?

Okay.

We are pretty much across all those categories.

We are in engagement evaluations, and with customers across all those various products.

So it still remains to be seen how the traction goes across the various segments.

But sort of pretty much without exception, all of those categories are looking at Iris right now.

So, it's really a testament to what's going on in terms of resolutions and screens across all these devices right now, and the pain points that they're feeling on various aspects of providing good quality video, and still not using up all your battery life to watch a video.

So, we'll see how that develops in the coming quarters.

But right now, it's across the board.

And on the IP licensing, again, it's across the board.

I would say that we are seeing -- it's across the board from large-screen to small-screen.

I would say we are also seeing probably increase in the mobile side, especially since Iris has been launched, and there is actually a product in the market that customers and partners can evaluate.

Okay.

And I realize the licensing and royalty business is lumpy, but as you look longer-term, would you expect growth in that business 2015 versus 2014?

We certainly have that opportunity with our pipeline.

We hesitate to ask you to forecast that, but it certainly has the capability of doing that.

Yes.

I mean, our goals would always be to try to grow the segment each year -- definitely.

Okay.

Thank you

Jaeson Schmidt, Lake Street Capital.

Thanks for taking my questions.

I'm wondering if you could talk a little bit about what you're seeing from a pricing standpoint in each of your segments?

Well, I'd say sort of in our large-panel segment, pricing is very stable.

You know, there is not a lot of pricing pressure, I think, in -- certainly, the projected images.

And I think they're -- at least in the high-end of the large-panel segment, at this moment right now, there is not a lot of tremendous amount of price pressure.

I think, certainly, over time, out in 2015 and 2016, by definition, that will have to come under a lot more pressure as the volumes build.

But 4K is, from the large-panel segment, is still a really small part of the market.

I think the total market is probably a niche or something like that in 2014.

So, that's how I would characterize the large-panel segment.

On our mobile side, it's new.

So, you know there is -- we have a value proposition and a very competitive sort of Bill of Materials solution for customers as well, that adds a lot of value, and for not a tremendous premium.

So, I think our value proposition and our Bill of Materials pricing proposition is resonating well at this point.

Okay, thanks.

And then, not looking for specific guidance but, with you noting you're seeing seasonality a bit earlier than you traditionally do, would it be fair to assume, maybe in Q1, typical seasonality is a bit more moderated this time around?

Yes, that's a fair statement.

Typically, we've -- our business has a backdrop of seasonality from a consumer cycle segment.

A lot of our business is in Japan as well, so there's Japan fiscal year segment.

We also have a sort of what I would call enterprise ordering, and education ordering aspect of it as well, in addition to the normal consumer type of cycles you would see in TVs and so forth.

And normally, we kind of characterize sort of our seasonality into Q1 anywhere from sort of 8% to 12% plus or minus a little bit.

We are seeing that a little early this year.

So I think it would be fair that the pattern is going to be a little different this year.

And we are seeing seasonality a little earlier.

And it would be less pronounced or not at all in Q1.

Okay.

And then, finally, Steve, it seems like there's so many opportunities with this mobile chip.

Do you envision having to ramp OpEx significantly next year?

No.

We currently believe that OpEx is going to look a lot like 2014 with sort of normal inflation on the current headcount.

There will be some headcount adds with the ramping out of mobile, but they will be relatively modest.

All right.

Thanks, guys.

Jeff Schreiner, Feltl and Company.

Thank you for taking my questions.

The first question I wanted to talk about is, can you talk about the level of caution within your customer base right now?

And how is that caution -- that cautious tone from your customers impacting your view of growth prospects relative to maybe three to six months ago?

Yes, I would say that -- you know, customers aren't super-cautious, overly cautious.

They are I call it moderating order patterns.

You know, they're -- the inventories have not gotten built up, especially in the projector segment.

We -- it was some specific customers in the TV segment that Steve mentioned.

But just generally, I think the customers see the environment pretty stable.

I think they are being a little cautious from ordering patterns in managing inventories going into the end of the year.

But I don't think it's undue caution.

We've seen this customer behavior off and on over the years, and especially when -- you know, 2013 going into 2014, which was super cautious.

And we're definitely not seeing that level of caution.

I would just say I call it moderating and managing their inventories a little more carefully just going into the end of the year.

Okay.

Very helpful.

The next question I had is, I wanted to inquire as to whether there was some implied sequential increase of shipments from the codeveloped SOC in the fourth quarter guidance?

Or has that ramp already kind of hit some headwinds?

No, I think -- well, that -- you know, we're not breaking out specific products or whatever into the guidance -- as an overall view.

But just to kind of frame the codevelopment and how it will sort of roll out, I think I said that we expect it to drive significant growth in next year in our kind of large-panel segment, which would be TV and projection.

And that's -- this is kind of -- it's going to ramp and build over the next couple of quarters.

And it would be fully deployed about mid-2015 where we would see the full steady-state ramp of that project -- that product.

So, we'll see it build.

And as it rolls out into new products and new platforms, it steps up a little bit.

And we'll see that process going on between now and sort of mid-next year.

Then my final question is just wondering if you guys would start in the future, or if you have in the past, maybe providing kind of a range for your licensing pipeline?

And was also kind of wondering if you could provide maybe what the historical kind of close rate has been over the last year, year-and-a-half?

Yes.

Those are good questions but sort of hard to answer.

This is not like a product line, like arm or sort of imagination.

These tend to be -- at least the big ones, which are sort of -- you know, some of the ones we printed historically that have met the test of materiality.

They tend to be lumpy.

There is not really a way to put a range on them.

So, that's a tough question to answer.

On the rearward-looking close rate, I mean, I'm probably not going to talk about that.

It's kind of a level of detail we don't talk about on these things.

Okay.

Thank you for your time.

Thanks, Jeff.

(Operator Instructions) Jessica McHugh, Dougherty & Company.

Thanks for taking my question.

In terms of the codevelopment agreement, I was just wondering how that affects Pixelworks in terms of projector market share?

Are you going to see a market share increase, decrease?

How does that look next year?

Yes, that will increase our market share, definitely.

Is it still in that, like, 50% range?

We certainly think we can get to that level of market share within 2015.

Okay.

And then my other question was, you know there's been these SOC makers, like the Qualcomm's and MediaTek's of the world, that have this video display processing technology.

Do you see any of them closing the gap with your discrete mobile chip at all?

Good question.

We want to enhance and add value to these platforms because we coexist on Intel platforms, Qualcomm platforms or others.

Iris is not specific to any one SOC or any mobile system.

You know, the rate of change in these platforms is really high.

And the rate of change in display technology is really high as well.

So, we are able to fill the innovation gap in between big SOC cycles.

You know, the SOC development cycle is years; our development cycle is a year or less.

So, we are able to continue to bring enhancement and value-add to these platforms to help enhance the platform in the SOC.

So, this is not unlike what happens with graphics chips in a PC.

You know why graphics chips are -- still exist in models today, because graphics chips can -- graphics can continue to add value ahead of the integration of the large processors.

Thank you.

Okay.

So, I'm showing no further questions in the Q&A.

I'd like to turn it back to management for closing remarks.

Well, thanks for joining us every day.

And we'll look forward to talking to you on our Q4 2014 conference call.

And please come see us if you happen to be at Consumer Electronics Show, and stop by our suite and see our latest technology.

Thank you.

Okay, ladies and gentlemen.

This does conclude your conference.

You may now disconnect and have a great day.