Pixelworks Inc (PXLW) 2015 Q3 法說會逐字稿

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

Third Quarter 2015 Earnings Conference Call.

I'll be your operator for today's call.

[Operator Instructions]

I'd 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, 2015.

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, November 5, 2015, 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, 2014, and subsequent SEC filings for a description of factors that could cause forward-looking statements to differ materially from actual results.

Additionally, the company's press release and management's statements during this conference call will include discussions of certain measures and financial information in GAAP and non-GAAP terms, including gross margin, operating expenses, net loss and net loss per share.

These non-GAAP measures exclude stock-based compensation expense 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.

Also 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 third quarter financial results and then provide our outlook for the fourth quarter of 2015.

Thanks, Steve.

Good afternoon and thanks for joining us on our Q3 2015 conference call.

I'll begin today with an overview of the quarter, and then Steve will review the financial results and provide our outlook for Q4.

Q3 results came in within the range of guidance with revenues of $16.6 million, representing a 10% increase in product revenue quarter-over-quarter, driven by favorable seasonality and market share gains in our projection business.

All other non-GAAP metrics came in within the range of guidance and we generated positive EBITDA.

Despite a challenging macro environment, design win momentum for our product lines of SoC chips for projectors was strong during the quarter, with new wins in the ultra-short throw, mainstream, and personal projector segments.

And our co-developed SoC for the projection market continues to expand to additional platforms and drive market share gains and overall year-on-year growth.

Our VueMagic platform continued its momentum as over 30 new projector models were added by major projector brands during the quarter.

There are now over 100 models commercially available in the market, with additional brands and models to launch in the coming quarters.

Looking forward to Q4, we are seeing slowing order patterns in our core projection and large panel product lines, driven by the effects of a slowing China and emerging markets.

While the year is ending on a weak note for the projector market, we gained market share year-over-year and expect to grow product revenues from chips in the low single-digit range for 2015, despite overall projector market likely declining versus 2014.

Overall, we expect to continue to gain market share in 2016 and for the projector market to return to growth.

Turning to our mobile initiative, Q3 was an outstanding quarter of progress.

We introduced and sampled the second chip in the Iris family of mobile display processors, and we gained volume production during the quarter.

This device is targeted for mobile products with high-resolution displays with screen sizes ranging from 5.5-inch to 10 inches with up to 2K resolutions.

It includes the full suite of True Clarity display features and benefits and is geared for power-hungry, compute-intensive video applications.

Also during the quarter, ASUS launched its flagship ZenPad tablet with Iris, and it is receiving positive reviews for its display experience, and we are seeing follow-on Iris orders for this product.

Now that there is a flagship product in the market from a leader like ASUS, we've been seeing increasing momentum and interest in the features and benefits of Iris as customers are aggressively seeking solutions to address display challenges and differentiate their product.

Over the last several quarters, during the first phase of market development, we have seen traction in early adopter high-end products with our first chip trending towards notebook PC-oriented devices, predominantly Intel-based Skylake platforms.

While some of these earlier engagements have taken longer to transition to production due to customer platform transitions, we continue to expect good contribution from this category in 2016.

The second chip is receiving a great response and faster adoption at the concept of bringing T.V.-quality processing to mobile gains momentum.

As we move into the next phase of market development with the ASUS tablet as a proof point in the market, we are seeing opportunities and higher volume platforms as many mid-range mobile SoCs can leverage the performance and benefits and features of Iris, allowing them to compete against more expensive, higher end SoC platforms.

Regarding SoC partners, we are seeing significant pull as the benefits of Iris can help differentiate their platforms as well as enhanced capability and performance.

As a key part of our strategy to drive Iris design wins, we are engaged in joint selling and reference designs with major mobile SoC providers, and our activity increased significantly during the quarter.

Confirming this trend, this quarter we captured a significant milestone design win for a major U.S. mobile wireless carrier, and we expect to see Iris-enabled tablets in their channel in mid-2016.

This design is based on a midrange SoC that, combined with Iris, delivers upgraded performance and brings True Clarity features and benefits that differentiate the platform.

Not only our OEM customers, but SoC partners, ODMs, and carriers are appreciating the differentiation Iris can bring to their products and platforms.

And we are actively engaged in multiple collaborative efforts with these key partners across the ecosystem.

Before I finish, I would like to discuss something else we have been working on for a number of quarters which is a new aspect of our mobile strategy.

A key driver of mobile video and the increasing importance of the display experience is over-the-top video streaming services.

And next quarter, we will be rolling out a key piece of our strategy to leverage Pixelworks' video processing technology, and we are calling this TRUE CUT.

TRUE CUT brings Pixelworks' video processing algorithms upstream to the server level to drive pull for Iris-based mobile devices and ultimately drive design wins for Iris.

It is an end-to-end solution that enables products based on Iris to display a higher quality streaming video experience.

TRUE CUT software resides on the distribution server and enables mobile devices based on recently introduced and future Iris devices to provide an enhanced mobile streaming video experience.

TRUE CUT not only provides a value proposition to products based on Iris, but to carriers and content distributors as well.

We are currently in initial trials for TRUE CUT with a major China-based carrier and expect to begin live demos of this capability in Q1 2016.

In summary, Q3 was a good quarter of progress as we sampled and ship production of our next device in the Iris family of mobile display processors.

ASUS launched its Iris-based flagship ZenPad, which is a key proof point and validation in the market, and we won a key milestone design for a major wireless carrier, and we are receiving good validation from our partners.

And finally, we'll be rolling out TRUE CUT in 2016 which is a key piece of our mobile strategy and will leverage Pixelworks' video processing technology to enhance the video streaming experience.

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

Thank you, Bruce.

Revenue for the third quarter of 2015 was $16.6 million compared to $15.1 million in the prior quarter.

The sequential increase in Q3 revenue was primarily driven by market share gain and favorable seasonality in the projector market.

The split of our third quarter revenue by market was 91% digital projection, 7% T.V. and panel, and 2% mobile.

Digital projection revenue was $15.2 million compared to $13.6 million in the second quarter of 2015, and revenue from T.V. and panel totaled $1.1 million in the third quarter compared to $1.4 million in the prior quarter.

As previously mentioned, we recognized our first mobile revenue during the third quarter in conjunction with initial volume shipments of Iris.

This revenue amounted to approximately $250,000 in Q3.

Non-GAAP gross profit margin was 50.2% in the third quarter compared to 48.3% in the second quarter of 2015.

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

Non-GAAP operating expenses were $8.5 million in the third quarter compared to $8.8 million in the prior quarter.

Adjusted EBITDA was a positive $890,000 for the third quarter compared to a negative $521,000 in the second quarter.

As previously mentioned, a 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 $173,000 or a loss of $0.01 per share in the third quarter of 2015 compared to non-GAAP net loss of $1.9 million or loss of $0.08 per share in the prior quarter.

Moving to the balance sheet, we ended the third quarter with cash and cash equivalents of approximately $29 million compared to $14.4 million at the end of the second quarter.

The company has no long-term debt, and similar to previous quarters, the company had a balance of $3 million on its working capital line of credit at quarter-end.

Other balance sheet metrics, including days sales outstanding of 26 days at the end of the third quarter compared to 28 days at the end of the second quarter, and inventory turns were approximately 10 times, increasingly slightly over the prior quarter.

Guidance.

For the fourth quarter of 2015, we expect revenue to be in a range of between $13 million and $15 million.

As Bruce mentioned, our guidance range largely reflects macroeconomic weakness in China and emerging markets for projectors, and we expect mobile revenue to increase modestly over the third quarter.

We expect gross profit margin for the quarter to range between 48% to 50% on a GAAP and non-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 $9.5 million to $10.5 million on a GAAP basis.

And finally, we expect a fourth quarter non-GAAP net loss of between $0.05 and $0.14 per share, and we expect a GAAP net loss of between $0.09 and $0.18 per share.

That concludes our prepared remarks.

We will now open the call to questions.

Thank you.

[Operator Instructions] Our first question comes from Charlie Anderson of Dougherty & Company.

Your line is open.

Yes.

Thanks for taking my questions.

Bruce, in the press release, you mentioned meaningful growth in 2016 and you laid out a few of the opportunities on the call here.

I wondered if maybe you could give us a little bit more color on sort of what gives you the confidence about growth next year, what are the drivers of that, and where is the visibility behind it?

Sure.

Really coming from inputs from our customers, getting their inputs on our outlook for next year after sort of this inventory correction at least in the core projection business and looking to market at least the Pacific Media Associates market estimates, they feel there's growth in the mid to high single-digits in the projector market.

Combined with that, we'll continue to gain share in 2016; expand.

I think going out of the year or in 2016, we'll be growing to about 50% market shares.

So, when you kind of put those two things together, that's growth out of the core business, and of course, we're expecting growth out of our mobile business as well.

Great.

And on TRUE CUT, I wonder if you could help us with the TAM there.

It's a new product for you, it's a new type of a customer, anything behind units ASPs would be helpful, just any color you can provide there would be good.

And then these trials that you're in with China, can that materialize into revenue in 2016?

So, I want to position TRUE CUT, we'll be talking more about it, and we wanted to expose this to investors as well since we will be demoing it and talking about it in Q1.

In its first step, this is really a way to drive Iris design wins in clients -- based on Iris.

So this is end-to-end solution for a carrier not really a revenue generating opportunity at the moment right now.

Over time, we'll be filling in more of the pieces of the business strategy with TRUE CUT and being able to sort of give you some framework for those kind of questions.

But in its first incarnation, this is really a way to provide a value proposition to a carrier and also make video great on clients in their networks based on Iris.

And then last one for me.

You mentioned there was a carrier win in the U.S., I think, for a tablet.

Is that a carrier-branded tablet?

Any more info there would be helpful.

Yes, it's not announced.

We kind of wanted to try to give investors visibility on significant things that are happening on the design win front.

And so, I don't want to pre-announce what this product is.

Suffice to say, this was a specification from a carrier, a design.

This is kind of what we're seeing.

In fact, this is sort of a trend we've seen since the last time we had a conference call.

We have a number of these opportunities we're working on as we speak.

But carriers spec out tablets and things like that.

And ODMs, brands, they bid on these, and we're working on a number of these opportunities.

And as I mentioned in my call, this is in conjunction with SoC partners where we're going in together and we're pitching the benefits of Iris for the platform.

In other cases, it's with a brand and going in, pitching the benefits of Iris, and also exposing TRUE CUT to them as well.

So, it's kind of how the flow is going right now, and I think I'll just leave it at that in terms of more characterization of this.

But I look at it as a significant milestone win because it's moving us into sort of the kind of upper mid-range, higher-volume opportunities that we're beginning to see in the pipeline now.

Perfect.

Thanks so much.

Thank you.

Thank you.

Our next question comes from Jaeson Schmidt of Lake Street.

Your line is open.

Thanks for taking my questions.

Wondering if you could comment on the projector market.

Do you think it's an inventory issue or more just customers being really cautious on ordering?

Steve, I'll give a little bit of color on that.

We spent, obviously -- in fact, we were at one of our major customers this week discussing this.

I think that it's really emerging-market-driven, as we mentioned in the call.

Emerging markets and China turned out to be about 40% of the market.

Europe and U.S. make up the bulk, and then there's a little bit of Latin America in there.

So, it's a significant portion of the market that they saw this slowing going into Q4.

I think they're adjusting their inventories now at this point right now.

I think we've seen this from time to time in the projection industry.

So, I would characterize it more as a fairly sharp inventory correction that we typically see work through in a quarter or so.

Okay.

And then just a clarification on the TRUE CUT product, you guys would be licensing your technology then.

It wouldn't be selling a chip?

Yes.

So, let me clarify.

What our first offering of TRUE CUT would be essentially an end-to-end approach where there is software, a plug-in software that runs in the current encoder infrastructure at a carrier.

And on the other end, a Iris-based tablet phone client that would sort of decode the TRUE CUT piece and make the video streaming experience a higher quality on that product, handset, tablet, that sort of thing, based on an Iris chip.

And so, right now, it is really a way to drive preference for products based on our Iris in carrier channels.

So they can offer a better video streaming experience for their service in a given product that is based on Iris.

So that's our first step into the market.

We'll be talking about our strategy with TRUE CUT more and layering in more of the opportunity as 2016 goes on.

But just for the next quarter, we'll be demoing this.

In fact, we're kind of live trials right now, at least initial trials I would characterize it and would plan to be demoing this at CES, and then rolling this out and demoing this to other carriers and OEMs that build tablets, handsets and so forth as part of a marketing strategy.

Okay.

Thanks a lot.

Thank you.

Thank you.

[Operator Instructions] Our next question comes from Krishna Shankar of ROTH Capital.

Your line is open.

Hi.

Yes, Bruce.

Did you say that the projector business you would expect mid single-digit sort of revenue growth next year or can you sort of clarify your outlook for the base projector business in calendar year 2016?

Yes.

So, this is Pacific Media Associates' numbers, and offline we can go over those with you, Krishna.

What they see is about a mid to high single-digit 6%, 7% growth in the projector market for 2016.

2015 looks like now it will be a down year.

It will shrink 3%, 4%, or 5% or something like that.

I think when it's all tallied, we'll see.

And then it's sort of back to 2014 levels and 2016 maybe a little better, and that would mean it's mid to high single-digit growth.

So, those are PMA numbers.

Those are market projections.

There is one company that actually does market research on the projection industry, and then, of course, our comments that we have from our customers and their views about next year as well.

Great.

And then congratulations on the second design win of the wireless carrier.

Can you give us some sense for the types of design activity you have for Iris in terms of tablet companies in China, Korea?

And then also curious, can you give us some sense what the distribution of sort of Iris design wins you are working on, and what the range for mobile revenue growth might be in calendar year 2016 based on what you have in the design win pipeline?

So, I would say that from the last call we had, the pipeline has increased in quality.

We're seeing some more Tier 1 opportunities.

And as I mentioned, one of the other things that's new from the last time we had a conference call is that we're seeing pull from working with partners, and that's sort of going in jointly to pitch the benefits of Iris, to enhance the platform that's being presented to carriers or customers as well.

And also, reference, we're working on potential reference design activity as well.

So, I think that's sort of new and incremental since the last time we had a call.

I think our SoC partners, and carriers, and so forth are also seeing the benefits for Iris.

The number of the valuations we have going on increased quarter-to-quarter, and I would say the quality of them went up as well in terms of types of Tier 1 customers that are in the pipeline improved.

So, in terms of types of designs all the ones we talk about in terms of what's in the pipeline, tablets, handsets, two-in-one laptop-type things, those all are opportunities that are in the pipeline.

And is most of the design win activity for next year around Iris 2, or do you see a mix of Iris 1 and 2 in terms of revenues next year?

It's a mix, but I will say that Iris 2 has been going faster, and I think that's because we've had this product in the market for three or four quarters now.

And it was a new concept when we first introduced the chip, the Iris 1 chip.

Mobile, the idea of T.V.-level quality video and video quality in the mobile industry is a new concept.

It's well-known and focused on in the T.V. industry.

But I guess if I look across the industry, it's a new concept.

So that was a period of understanding, an educational process, I guess, now that Iris 2 has been going a lot faster.

So, we've seen both, but I think there's quite a bit of activity on Iris 2.

Okay.

Thank you.

Thank you, Krishna.

Thank you.

That's it for the Q&A session for today.

I'd like to turn the call back over to management for any further remarks.

Thank you for joining us today.

And I'd like to point out that we'll be attending the ROTH Technology Corporate Access Day in New York on November 18, and we'll look forward to discussing the results of our Q4 2015 with you early next year.

Thanks.

Ladies and gentlemen, thank you for participating in today's conference.

This concludes today's program.

You may all disconnect.

Everyone, have a wonderful day.