Pixelworks Inc (PXLW) 2018 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to Pixelworks First Quarter 2018 Earnings Conference Call.

I will be your operator for today's call.

(Operator Instructions) This conference call is being recorded for replay purposes.

I would now like to turn the call over to Pixelworks' CFO, Mr. Steve Moore.

Good afternoon, and thank you for joining us today.

With me on the call is Todd DeBonis, Pixelworks' 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 first quarter 2018.

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, Wednesday, May 2, 2018, 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, 2017, 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 income loss and net income loss per share.

These non-GAAP measures exclude deferred revenue fair value adjustment, inventory step-up and backlog amortization, amortization of acquired intangible assets, acquisition and integration-related costs, stock-based compensation expense, restructuring expenses, fair value adjustment on convertible debt conversion option, discount accretion on convertible debt fair value, extinguishment of convertible debt and a tax benefit related to tax reform.

With the exception of stock-based compensation and the tax benefit related to tax reform, all of these adjusting items are related to the acquisition and integration of ViXS Systems.

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 income loss to adjusted EBITDA, which provide additional details.

With that said, I will now turn the call over to Todd for his opening remarks.

Thank you, Steve, and good afternoon to those joining us on today's call.

As reported in today's press release, our first quarter financial results were at or above the high end of our guidance range that we provided in mid-February.

Revenue for the quarter was $15.3 million with the sequential decline reflecting the typical first quarter seasonality in our core projector business.

Gross margin and operating expenses both came in slightly better than expected in the first quarter, and as a result, we achieved breakeven EPS on a non-GAAP basis.

Also, during the quarter, we successfully converted or paid off all remaining convertible debt that we acquired as part of the ViXS transaction last August.

Before walking through our end markets and recent customer traction, I wanted to make a few brief comments on operations.

Over the last 2 years, we've taken numerous actions to streamline our product portfolio and successfully implement initiatives to drive increased efficiencies across the organization.

As part of our ongoing effort to position Pixelworks to deliver long-term sustainable growth and increased profitability, in late April, we implemented a relatively small restructuring to further improve the operational efficiencies and prioritize the allocation of resources for near-term revenue growth.

As part of this plan, we anticipate recognizing charges in the second and third quarters, totaling approximately $2 million.

Note, these actions will have no impact on our strategy, prospective growth opportunities or any of our current customer engagements.

With that, I'll turn to an update on our end markets of projector, video delivery and mobile.

Beginning with our core projector business, revenue was sequentially lower but in line with the typical first quarter seasonality.

As a reminder, Pixelworks' SoCs represent a large majority of the 3LCD market share.

Many of our largest projector customers are based in Japan and have fiscal years ending in March.

And these OEMs are incentivized to close out their fiscal year-end with as little inventory as possible.

This, in addition to consumer buying patterns, is what drives seasonally lower demand and revenue in our calendar first quarter.

As such, our projector business performed as expected, and we anticipate solid sequential growth in the second quarter.

During the quarter, we continued to make good progress on our codevelopment of a next-generation SoC for a large projector customer.

This project remains on schedule, and we recorded an approximately $2 million offset to R&D during the first quarter associated with the achievement of specific development milestones.

We are on track to release this new chip for production by the end of the year.

Notably, although this SoC is being developed for a specific large customer, we expect to quickly leverage the resulting intellectual property and the development of similar chips for other projector customers.

More broadly, the projector market looks to be healthy and Pixelworks remains well positioned.

We continue to have good near-term visibility with our customers, and both channel inventories and backlog are consistent with expected seasonal patterns.

Given what we believe is normalized demand environment, we expect the projector market to be flat to slightly up in 2018.

Finally, bookings for the current quarter are solidly higher, and this is reflected in our second quarter guidance.

Turning to video delivery.

This portion of our business performed largely as expected in the first quarter, and revenue was consistent with the normalized annual run rate of roughly $10 million exiting 2017, which we outlined on our previous conference call.

Following our completed integration of the video delivery business in the fourth quarter, we are increasing focus on 2 meaningful market opportunities.

The first is the consumer electronics market in Japan and the second is over-the-air streaming, or OTA streaming, primarily here in the U.S.

In Japan, we continue to see healthy traction for our XCode family of advanced decoding and transcoding SoCs, which enable HD and UHD Blu-ray playback and recording in branded set-top box devices.

Unlike in the U.S, where dedicated equipment is issued to the consumer by a service provider, such as Comcast or Charter Communications, many Japanese consumers purchase their own set-top boxes that support over-the-year terrestrial broadcast signals.

This market is predominately served by 4 consumer electronic suppliers.

Japan has been trialing a new advanced standard called ADSB-T, that will support terrestrial broadcast in 4K and HDR quality.

This service is expected to go live in December of 2018, and we currently have multiple programs that are scheduled to be released in advance of this rollout.

In OTA streaming, a combination of current market dynamics and consumers' desire for more control over the video content is increasingly driving more traditional pay-TV customers to cut the cord.

According to video trends report published by TiVo in March of this year, 87% of cord cutters canceled their pay-TV service because it was too expensive.

A growing number of these consumers are embracing cheaper OTT alternatives that offer à la carte or skinny bundles, and many cord cutters combine these OTT services with an OTA antenna to access their local HD broadcast channels for free.

Pixelworks' transcoder chips enable the streaming of live HD broadcast television to wireless devices throughout the home, including smart TVs, streaming media players, smartphones and tablets.

Today, our transcoders can be found in several single-, dual- and quad-channel OTA solutions that are being shipped by several OEMs.

We continue to believe that OTA represents a significant growth opportunity as consumers increasingly embrace alternatives to traditional pay-TV, and we are actively working with both our existing customers as well as other ecosystem partners to develop a more seamless and integrated solution for cord cutters.

Looking forward, we remain excited about emerging opportunities across our video delivery business.

We continue to have significant activity and expanding customer engagements in both the consumer electronics market in Japan and OTA in North America.

Near term, our anticipated growth in video delivery is most likely to be weighted toward the end of 2018, coinciding with the launch of products supporting the new broadcast standard in Japan.

Shifting to our mobile business.

Although contribution was still relatively modest, mobile revenue increased sequentially and year-over-year in the first quarter as we began shifting volume production orders in support of an April launch of Blackshark's gaming smartphone.

Notably, at Xiaomi Blackshark's official launch event in Beijing, Pixelworks was one of only 2 component suppliers mentioned during the Blackshark CEO on-stage introduction of the phone.

The launch event received a significant amount of media coverage, resulting in great visibility for both the smartphone itself and Pixelworks' display technology.

Our third-generation Iris chip provides the innovative smartphone for mobile gamers with a full suite of advanced display technologies, including high dynamic range, sophisticated color mapping and contrast management as well as Pixelworks' proprietary and industry-leading motion estimation, motion compensation.

Collectively, the capabilities provided by our Iris processor enable Xiaomi Blackshark's gaming smartphone to deliver advanced display preprocessing that matches today's leading flagship smartphones.

Early indications suggest there has been strong demand for the Blackshark phone.

Additionally, today, we formally unveiled the full feature set of our fourth-generation Iris mobile display processor, which we began sampling to customers in the fourth quarter of last year and subsequently released for production in early 2018.

Not intended to be an upgrade or replacement for the third-generation Iris chip, our fourth-generation Iris provides a distinctly different feature set, and it was specifically designed to lower the barriers of adoption for mobile OEMs.

The fourth-generation Iris has a smaller physical profile that requires 45% less board space, and it consumes 40% less power than its predecessor while still delivering an unparalleled suite of advanced video capabilities, including mobile HDR video for both OLED and LCD displays, our auto-adaptive True View technology that adjusts the display based upon ambient lighting as well as the industry-leading color accuracy.

In addition to having a significantly lower cost point, the fourth-generation Iris also features real-time conversion of SDR, or standard dynamic range, video content to HDR quality video.

Given that our focus is predominantly on aging handset OEM, we received a number of questions about our -- about the U.S. Department of Commerce recent actions related to exports to a specific OEM in China.

First, I want to remind investors that our existing pipeline of mobile engagements stand 4 different regions in Asia, and not just China.

That said, we do have multiple programs with the OEM in question that we anticipated to launch in the second and third quarter of this year, and we're hopeful that the customer reaches a quick resolution with the U.S. Department of Commerce.

However, regardless of the outcome related to this customer, I want to emphasize that our expectation for a meaningful ramp in mobile revenue from our collective engagements is still intact, though it may ultimately be more pronounced in the back half of 2018.

With that said, as demand for advanced display processing grows, so will our customer engagements and active programs.

Since the beginning of the year, the number of customer programs have noticeably increased to the level that we needed to adjust support resources, and the sales force is now rigorously prequalifying all new engagements to align with our objectives.

Given the significant product traction and customer activity just outlined across our mobile business, we remain confident that we will experience a meaningful ramp in mobile revenue in 2018, which will accelerate further in 2019 as OEMs launch an increasing number of smartphones that incorporate Pixelworks' display processing technology.

Before providing my concluding remarks, there's one additional area that I'd like to highlight.

As indicated on previous calls, a portion of our ongoing research and development activity is dedicated to cultivating complementary market opportunities.

These are areas where we believe Pixelworks can leverage its industry-leading display processing and video delivery technology.

As part of one of these ongoing development initiatives, earlier this week, we announced a collaboration with Wanda Film Group to establish a film, innovation and ecosystem lab in China.

This lab extends Pixelworks' existing R&D efforts, with the objective of creating new tools and technology for cinema displays.

Note, while we do not expect a direct monetary benefit from this collaboration in the near term, we do believe this development lab represents longer-term potential to offer new technology and commercial solutions for movie production and theatrical presentation.

In summary, the first quarter reflected a solid start to the year.

The relevance of Pixelworks' advanced display processing and video delivery technology is growing rapidly with a prevailing demand for high-quality displays and associated content.

We are well positioned with innovative products in each of our target end markets.

Within mobile, customer interest in the number of programs that we engage in has increased dramatically over the last 6 months, and we continue to anticipate the meaningful ramp of mobile revenue in 2018.

Equally important, we continue to drive operational efficiencies and optimize the allocation of resources in order to capitalize on the multiple growth opportunities while also remaining cognizant of our near-term bottom line results.

With that, I'll turn this call over to Steve to review our first quarter financials and guidance for the second quarter in more detail.

Steve?

Thank you, Todd.

Revenue for the first quarter of 2018 was $15.3 million, which reflected the expected first quarter seasonality in our digital projection business.

This compared to $18.4 million in the fourth quarter of 2017 and revenue of $22.7 million in the first quarter of 2017.

Revenue in the comparative periods included approximately $1 million and $9.2 million of legacy end-of-life product revenue, respectively.

The breakdown of revenue during the first quarter was as follows; revenue from digital projector was approximately $12.3 million, mobile revenue was approximately $430,000 and revenue from video delivery was $2.4 million.

Additionally, we recorded approximately $144,000 of legacy TV and panel products sold.

Non-GAAP gross profit margin was 54.2% in the first quarter of 2018 compared to 56.9% in the fourth quarter of 2017 and 54.8% in the first quarter of 2017.

Non-GAAP operating expenses were $7.8 million in the first quarter of 2018 compared to $10.6 million in the fourth quarter of 2017 and $8.3 million in the first quarter of 2017.

Lower operating expenses in the first quarter of 2018 were primarily due to the recognition of approximately $2 million offset to R&D associated with our co-development project with a large projector customer.

Adjusted EBITDA was $1.3 million for the first quarter of 2018 compared to $778,000 in the fourth quarter of 2017 and $5 million in the first quarter of 2017.

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

We reported non-GAAP net income of $38,000 or breakeven on a per share basis in the first quarter of 2018 as compared with a non-GAAP net loss of $379,000 or loss of $0.01 per share in the prior quarter and non-GAAP net income of $3.8 million or $0.12 per diluted share in the first quarter of 2017.

Moving to the balance sheet.

We ended the first quarter with cash and cash equivalents of approximately $20.6 million, a decrease of $6.9 million from the end of 2017, primarily reflecting a combination of cash used in operations and the payoff of all remaining convertible debt that was acquired as part of ViXS' Systems.

Other balance sheet metrics include day sales outstanding of 26 days at quarter end compared with 23 days at the end of the fourth quarter 2017.

Inventory turns during the first quarter of 2018 were 12x compared to 10.6x in the prior quarter.

Before turning to guidance, as Todd mentioned, the Board of Directors approved a restructuring plan at the end of April to further streamline our operations and improve efficiencies.

We expect this relatively small restructuring to be substantially completed by the end of the third quarter, and we expect to record charges in the second and third quarter of 2018 totaling approximately $2 million.

Our guidance for the second quarter of 2018 is as follows: we expect revenue to be in the range of between $18 million and $19 million; we expect non-GAAP gross profit margins of between 53% and 55%; for operating expenses, we expect the second quarter to range between $9.5 million and $10.5 million on a non-GAAP basis.

Note, unlike in the first quarter of 2018, our expectation for operating expenses in the second quarter do not anticipate any offsets to R&D related to our co-development project with a large digital projector customer.

And finally, we expect second quarter non-GAAP EPS to be in the range of between a loss of $0.04 per basic share and income of $0.02 per diluted share.

With that, we will now open the call for questions.

Operator?

(Operator Instructions) Our first question comes from the line of Suji Desilva with Roth Capital.

Just a quick housekeeping question.

Steven, were their end-of-life revenues in the first quarter '18?

There were, but they were de minimis.

Got it, okay.

And then, Todd, maybe on the Iris product.

I mean, did the -- engagements have accelerated the last 6 months.

I wanted to get a sense of whether you think it's more than market force is exogenous or whether the -- it's the products you have, the Gen 4 coming out, that have been driving that.

I'd love to kind of get a sense of which is more of a factor.

I think they've both contributed.

I'd say I think clearly, the push to higher quality displays, which had nothing to do with us coming out with the fourth-generation, peaked interest.

And the leading flagship phone manufacturers highlighting features and functionality that are included in the fourth-generation helped.

But we've been out pushing hard at, let's say, a dozen customers.

And I think we're being heard.

Right.

And then can you help us quantify perhaps in 2018, how much you think video and mobile will grow to give us some kind of ballpark ranges there?

What kind of time frame are you talking about?

2018.

Calendar '18.

Well, we haven't given any specific guidance for the full year on broken-out.

We do expect growth in both areas, particularly in mobile.

The actions that we're now seeing, the designs that are going into production clearly will mean a growth year for mobile.

Not sure that I can give you an exact percentage at this point though.

(inaudible) We're not putting annual guidance out there, Suji.

I mean clearly, if I had given you an annual guidance 3 months ago, and then the Department of Commerce would've -- went forward with what they did, I probably would've been wrong with guidance.

And so if I give a guidance today, who knows what can happen in the future.

So we just don't give annual guidance.

We're going to give a quarter out.

We still have -- what I want to do is just give color that we have multiple programs active.

Many of them still targeted launch this year or early next year.

And even if it's -- if there is a launch early next year, the phone manufacturers today start building production prior to launch.

I would add to that though that within mobile, it's clear even with -- even if one were to take out the -- an effect from our Commerce Department, we're expecting meaningful growth and meaningful revenues in mobile.

That came across in the call.

Last question from me.

You talked about the Japan projector development project.

Can you talk about some of the other projects you have?

So specifically, in the video delivery, we talked about it, the development we have with a lead customer in Japan.

Also, it just happens to be that our projector co-development is with our -- a large customer in Japan.

So they're both Japanese customers, and they're both funding developments for their respective markets.

Yes, it, it -- a little more color on that.

The projector co-development is a true co-development where we're both providing technology and working on a chip.

And that is accounted for as a offset or a credit to expense.

In video delivery, though that's entirely our development and the customer's contributing to that development, the cost of that development, and therefore, that is treated as revenue, with an intended cost.

Our next question comes from the line of Richard Shannon with Craig-Hallum.

Just here a question on the second quarter guide here.

I am just trying to fit things together via your segments here.

Obviously, projector seasonality points you upwards to some degree.

Your commentary about video delivery suggested the minimal growth more back end-weighted to the year.

And so, if we try to fit that together, it might suggest that mobile would grow substantially percentage-wise and even dollar-wise.

How close am I to fitting this well?

I mean could mobile be, well, greater than a $1 million in the second quarter?

Well, we don't break out the specifics of them until we've actually accomplished them.

But we do expect some growth in mobile in the quarter.

I think as Todd alluded, we had actually expected it to be somewhat greater.

But we are seeing a seasonal increase in projector that should be expected and has occurred.

Okay, fair enough.

Following down the income statement here, implemented a small restructuring here.

Obviously, seems to be there to be an impact on, I would guess, on OpEx here.

How should we think about that in magnitude?

And would we see the full effect of that starting when, like the third quarter or beyond that?

Well, the restructuring really is about efficiency.

So we are placing resources in the areas where we think we'll get the most impact.

We are -- I'd say a good chunk of this, about a little more than 1/2 of it is related to facilities that we are either abandoning or reducing.

And all of that will likely be complete by the end of the third quarter.

The -- however, the total impact on overall OpEx may be offset or expected to be offset as we add our resources to areas, particularly the growth in mobile to support that growth.

Okay, fair enough.

All of them won't fall through.

Some of it will be reallocated to other areas.

Okay.

Makes sense.

Makes sense.

Okay.

Todd, a question for you.

I think the last quarter you talked about in the mobile area having 10 engagements with 8 OEMs total.

Based on your prepared remarks, it sounds like it's improved dramatically.

I don't know if you still include the potential ones, whatever ones you had the ETS still part of that.

But can you further clarify or quantify what the pipeline looks like now?

I'm not -- if was going to put numbers down, I would have put them in the prepared remarks.

I kind of want to get away from that.

I think we're at a point now -- I think the reason I started including numbers was just to give some magnitude that I feel the company is at critical mass.

And this is a company that for 4 years was pitching technology to the market and felt there was a need for the market to utilize that technology.

We had a little pool but not enough to justify the development, okay?

I -- What I'm trying to communicate is I believe we have enough pool to justify the development from here on now.

We'll see how long it lasts, but right now, it looks -- feels -- it's a busy time at Pixelworks.

Okay.

Last question for me.

I will jump out of line.

Your press release today and your remarks regarding Wanda Group, which I'm not particularly familiar with, you said you're not expecting any near-term monetary outcomes from this, but wondering maybe you can describe a little bit more how you expect to see benefit from this over what time frame and then what manner.

Okay.

Well, I mean -- and I figured this was probably going to catch you guys offguard.

So cinema display technology, it's developing.

It's actually evolving.

And today, you can go into China, and there's a couple of leading-edge cinemas from Wanda that include both 4K laser HDR projectors and full LED emissive displays, a giant LED display that displays 4K HDR.

So these are capable of much higher resolutions, higher dynamic range and higher frame rates than the current content was developed to be displayed on.

And so what this collaboration, or one of the main purposes of this collaboration, is develop new production and presentation technologies that allow moviemakers to take advantage of the displays that are now emerging.

And so, we've been working on algorithms that can help movie postproduction houses, and directors understand the capabilities of the screen that they're going to be displayed on and work at formatting the original content to be seen on those displays the way they want it to be seen on those displays.

And so that's what this collaboration is about.

I mean, Wanda, if you know anything about this development, what Wanda did is Wanda invested quite a bit of money, I mean billions of dollars to create the largest movie production house in China, if not the world, In Qingdao, and their grand opening of this large facility.

It has the largest underwater film stage.

It has multiple other film stages.

It has postproduction capabilities on premise.

It has hotels and restaurants, et cetera.

But within the same grand opening of this large facility, we announced this collaboration with Wanda for the lab -- for the ecosystem lab.

Our next question comes from the line of Charlie Anderson with Dougherty.

Todd, you released the specs of the fourth-generation Iris I think after holding back for a little while.

I wonder maybe you could give us a little bit of the context of the timing of giving the specs now, and maybe you would -- you wanted to highlight those specs to the market.

And then I got a follow-up.

Well, I think the timing is -- when we release publicly our device, part of it is for the customer base although most of them have seen it, and a big part of it is for the investment community or our ecosystem partners.

So they may not understand all the details and want it.

So we felt the timing was right to announce it.

Most of the pipeline of programs that we allude to on this call are fourth-generation.

So I thought it was important to get out what the specs and the benefits of that device were.

Got it, okay.

And then in OTA, a lot of us have asked about mobile and the pipeline, but maybe if you could just lend some color on what you're seeing as far as the OTA pipeline is concerned?

OTA is still developing.

I think it's work in progress.

We've got a large customer who sees the value proposition in bundling an OTA appliance, an OTA streaming appliance with a skinny bundle linear TV service.

They are in the -- still in the midst of developing their launch plans and how they're going to go about it.

And so -- I would say that's a little bit fluid and unpredictable sort of like this whole OTT linear services.

And then we have a half dozen open market customers that are going out with using their own software or bundled software and pushing the emerging customer base to adopt the technology.

And we're trying a couple of different of things.

We're still working with the large guy that we think will help to find the space, and we're working on roadmap technology with that customer.

And then we're trying to develop an ecosystem for a ground-up approach.

I'm showing no further questions in queue at this time.

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

No closing remarks today.

I'm -- as you might have heard, I'm down with a cold.

So I think we'll shorten it up today.

Thanks for joining.

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

This concludes the program, and you may now disconnect.

Everyone, have a great day.