Pixelworks, Inc. 2018 Second-Quarter Form 10-Q Summary
Business context and reporting period
Pixelworks designs and markets visual display-processing semiconductors, intellectual property, software and video-delivery solutions for digital projection, mobile devices, streaming and related applications. The filing covers the unaudited three and six months ended June 30, 2018, compared with the corresponding 2017 periods. The August 2017 acquisition of ViXS expanded the company into video delivery and infrastructure markets.
Key financial metrics
| Metric | Three months ended June 30, 2018 | Three months ended June 30, 2017 | Six months ended June 30, 2018 | Six months ended June 30, 2017 |
|---|---|---|---|---|
| Revenue | $19.3 million | $20.7 million | $34.5 million | $43.4 million |
| Gross profit | $9.5 million | $11.2 million | $17.3 million | $23.6 million |
| Gross margin | 50% | 54% | 50% | 54% |
| Operating income (loss) | $(2.5) million | $2.0 million | $(3.7) million | $5.4 million |
| Net income (loss) | $(2.6) million | $1.3 million | $(3.2) million | $4.1 million |
| Net loss per diluted share | $(0.07) | $0.04 | $(0.09) | $0.13 |
| Operating cash flow | Not separately provided | Not separately provided | $(3.4) million | $12.1 million |
Second-quarter revenue was 7% lower year over year, while first-half revenue declined 20%. First-half revenue consisted of $33.1 million of integrated-circuit sales and $1.4 million of engineering services. Research and development expense increased 43% in the quarter and 16% year to date, primarily due to ViXS-related headcount, rent and stock-based compensation. Selling, general and administrative expense increased 6% in the quarter and 9% year to date.
At June 30, 2018, cash and cash equivalents were $17.4 million, compared with $27.5 million at December 31, 2017. Short-term marketable securities were $2.7 million, resulting in cash, cash equivalents and short-term marketable securities of approximately $20.2 million. Accounts receivable were $6.6 million and inventory was $2.9 million. Total assets were $61.9 million and shareholders’ equity was $41.7 million.
The company had no borrowings under its secured revolving line of credit, which matures December 28, 2018. Convertible debt was eliminated during the first quarter through $2.2 million of cash redemptions and the issuance of 435,353 common shares valued at $2.6 million. The company reported a $1.3 million gain on debt extinguishment.
Material changes versus the prior comparable period
- Revenue declined primarily because of lower unit sales in digital projector and TV and panel markets following the end-of-life program for legacy products. The decrease was partially offset by revenue from the ViXS video-delivery business.
- Gross margin declined from 54% to 50%, due primarily to amortization of acquired technology, backlog and inventory step-up, as well as a less favorable product mix than the 2017 legacy-product shipments.
- The company shifted from operating and net income in the 2017 periods to operating and net losses in 2018.
- Operating cash flow declined from $12.1 million provided in the first half of 2017 to $3.4 million used in the first half of 2018, reflecting the net loss and working-capital changes.
- Cash decreased by $10.1 million during the first half. Uses included $2.2 million for convertible-debt payments, $1.3 million for property and equipment and $0.6 million for asset financings.
- Pixelworks implemented an April 2018 restructuring plan involving an approximately 5% workforce reduction, closure of the Hong Kong office and downsizing of the Toronto office. First-half restructuring expense was $0.6 million.
Guidance, outlook, risks and unusual items
- Management expects to recognize the final $2.0 million offset to research and development expense in the second half of 2018 upon completion of the remaining co-development milestone.
- Management expects approximately $0.6 million of additional restructuring charges during the remainder of 2018, including approximately $0.5 million for leased-space consolidation and $0.1 million for severance and benefits.
- Remaining acquisition-related inventory step-up and backlog amortization of approximately $0.2 million was expected to be recognized in cost of revenue over roughly the next three months.
- Management stated that existing working capital was expected to fund operating, investing and financing needs for at least the next twelve months, but also noted that additional financing or spending reductions may be needed over the longer term.
- Key risks include substantial customer and distributor concentration, dependence on a limited number of semiconductor foundries and assembly vendors, rapid technological change, volatile semiconductor demand, international and foreign-currency exposure, restructuring execution, and the need to renew or replace the revolving credit facility after December 2018.
- Top five end customers represented 81% of first-half revenue; one end customer represented 56%. One distributor represented 25% of first-half revenue. Two accounts represented at least 10% of accounts receivable.
- The company had an accumulated deficit of $382.7 million at June 30, 2018 and continued to maintain a full valuation allowance against essentially all U.S. net deferred tax assets. Accounting for the Tax Cuts and Jobs Act remained provisional.
- The company reported no material off-balance-sheet arrangements and stated that its disclosure controls were effective as of June 30, 2018.
Important facts for investors to verify
- Whether revenue stabilizes after the legacy-product end-of-life decline and whether ViXS video-delivery products generate sustained growth.
- Whether gross margin improves after acquired technology, backlog and inventory step-up amortization is substantially completed.
- The timing and cash cost of the 2018 restructuring plan and whether expected savings are realized.
- Progress toward the remaining $2.0 million co-development reimbursement and whether the related product generates future sales; the agreement does not guarantee purchase volumes.
- Liquidity after the December 28, 2018 revolving-credit maturity, particularly if operating cash flow remains negative.
- Customer concentration, accounts-receivable collectibility and exposure to order cancellations or delays.
- Integration of ViXS into internal controls and the potential impact of adopting the new lease accounting standard on January 1, 2019.