PIXELWORKS, INC annual report, FY2018

Pixelworks, Inc. — FY2018 Form 10-K Summary

Business context and reporting period

Pixelworks designs and markets visual display-processing semiconductors, intellectual-property cores, software and ASIC solutions for mobile devices, digital projection, video delivery and over-the-air streaming. The filing covers the fiscal year ended December 31, 2018, with quarterly data for the three months ended December 31, 2018. The company acquired ViXS Systems in August 2017, expanding its video-delivery product portfolio.

Financial performance and key metrics

Metric	2018	2017	Change
Revenue	$76.6 million	$80.6 million	Down 5%
Gross profit	$39.5 million	$41.8 million	Down 5%
Gross margin	51.6%	51.8%	Approximately flat
Operating loss	$4.8 million	$2.0 million	Worsened by $2.8 million
Net loss	$4.6 million	$4.2 million	Worsened by $0.4 million
Basic and diluted loss per share	$0.13	$0.13	Unchanged
Cash flow from operations	$1.0 million	$12.2 million	Down $11.2 million

Fourth-quarter 2018 revenue was $20.5 million, gross profit was $10.9 million, operating loss was $1.5 million and net loss was $1.6 million, or $0.04 per share.
2018 revenue consisted of $74.2 million of IC sales and $2.3 million of engineering services and other revenue.
Video-delivery revenue increased to $11.3 million in 2018 from $4.5 million in 2017; mobile revenue also increased. These gains were more than offset by lower digital-projector and TV/panel revenue, including the effect of legacy-product end-of-life activity.
Research and development expense increased 7% to $22.9 million. A customer co-development arrangement reduced reported R&D expense by $4.0 million in both 2018 and 2017.
Selling, general and administrative expense declined 2% to $20.0 million, primarily because 2017 included $2.5 million of ViXS acquisition and integration costs.
Restructuring expense was $1.5 million, including facility-closure and employee-severance costs related to the April 2018 plan.
Interest and other income, net, was $0.6 million, including a $1.3 million gain on extinguishment of convertible debt. The convertible debt was fully redeemed or converted during 2018.

Liquidity, capital resources and balance sheet

Cash and cash equivalents declined to $17.9 million at December 31, 2018 from $27.5 million at December 31, 2017. Short-term marketable securities were $6.1 million, compared with none at the prior year-end.
Total cash, cash equivalents and short-term marketable securities were approximately $24.0 million at year-end.
Operating cash flow was $1.0 million; investing cash flow used $8.1 million, primarily for marketable securities and $2.1 million of capital expenditures; financing cash flow used $2.4 million.
Accounts receivable increased to $7.0 million from $4.6 million, while inventories increased modestly to $3.0 million from $2.8 million.
The company had no borrowings under its secured revolving line of credit at year-end. The facility provides availability up to the lesser of $10.0 million or $1.0 million plus 80% of eligible receivables and matures December 27, 2019.
Total liabilities were $20.5 million and shareholders’ equity was $44.8 million at December 31, 2018. The accumulated deficit was $384.1 million.
Management stated that existing working capital was expected to fund operating, investing and financing needs for at least the next twelve months, while noting that additional financing or expenditure reductions could be required longer term.

Material changes versus prior comparable period

Revenue declined 5% in 2018 after increasing 51% in 2017, reflecting the discontinuation of legacy products and lower projector and TV/panel unit volumes.
Video-delivery revenue more than doubled year over year following the full-year contribution from ViXS, but did not fully offset declines in legacy markets.
Gross margin remained approximately 52%, despite changes in product mix and higher full-year amortization of acquired technology.
Operating losses increased as R&D expense rose and revenue declined. The prior-year period also benefited from acquisition-related revenue and included only five months of ViXS operating expenses.
Operating cash generation fell sharply, primarily reflecting the net loss and increases in accounts receivable and inventory, as well as reductions in accrued liabilities.
Shares outstanding increased to 36.9 million at year-end from 34.7 million, partly due to employee equity issuance and conversion of convertible debt.

Guidance, outlook, risks and unusual items

No formal financial revenue or earnings guidance is provided in the filing. Management highlights opportunities in mobile video processing, 5G devices, foldable smartphones, digital projection, OTA and IP streaming.
The company completed its 2018 restructuring plan and stated that it did not expect additional charges in 2019 related to that plan.
Customer and channel concentration is substantial: the top five end customers represented 82% of 2018 revenue, the largest distributor represented 34%, and sales outside the United States represented approximately 98%.
Pixelworks is fabless and depends on a limited number of third-party foundries and assembly/test vendors, often on a sole-source basis, without long-term supply commitments.
Key risks include rapid technological change, competitive pressure, declining average selling prices, design-win uncertainty, inventory obsolescence, supply-chain disruption, foreign-exchange exposure, geopolitical and operating risks in Asia, intellectual-property claims, cybersecurity incidents and dependence on key personnel.
The company has substantial tax attributes, including approximately $199.6 million of federal net operating-loss carryforwards, but maintains a full valuation allowance against U.S. deferred tax assets. Utilization may be limited by tax rules, including Section 382.
Contractual obligations totaled $13.6 million, excluding $2.3 million of income taxes payable whose timing could not be reliably estimated. The company disclosed no material off-balance-sheet arrangements.
The company adopted ASC 606 in 2018 without a cumulative-effect adjustment. It expected adoption of the lease standard on January 1, 2019 to add approximately $6.0 million to $7.0 million of operating lease liabilities and $5.5 million to $6.5 million of right-of-use assets.
KPMG issued unqualified opinions on the consolidated financial statements and internal control over financial reporting.

Most important facts for investors to verify

Whether growth in mobile and video-delivery products can offset continuing declines in legacy projector and TV/panel products.
The sustainability and commercial value of ViXS-related revenue, including margins, design wins and customer commitments.
Cash-burn trends and the company’s ability to renew or replace the revolving credit facility before its December 2019 maturity.
Customer, distributor and geographic concentration, particularly the dependence on Japan and a small number of accounts.
Whether restructuring savings materialize without impairing product development or customer support.
The effect of stock-based compensation, equity issuance and potential future financing on per-share value.
Potential inventory write-downs, supply constraints, intellectual-property claims and limitations on tax-attribute utilization.