Pixelworks, Inc. — Form 10-Q Summary
Business Context and Reporting Period
Pixelworks designs and markets video-processing semiconductors, intellectual-property cores, software and custom ASIC solutions for digital display applications, including digital projectors, tablets and smartphones. The filing covers the unaudited three months ended March 31, 2017, compared with the three months ended March 31, 2016. The company reported 29.6 million common shares outstanding as of April 28, 2017.
Financial Results and Key Metrics
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Revenue | $22.7 million | $11.2 million | Up 103% |
| Gross profit | $12.4 million | $3.6 million | Up $8.8 million |
| Gross margin | 55% | 32% | Up 23 percentage points |
| Operating income (loss) | $3.3 million | ($8.5 million) | Improved $11.8 million |
| Net income (loss) | $2.8 million | ($8.6 million) | Improved $11.5 million |
| Diluted earnings (loss) per share | $0.09 | ($0.31) | Improved $0.40 |
| Net cash used in operating activities | ($1.2 million) | ($3.5 million) | Improved $2.3 million |
- Cash and cash equivalents were $19.6 million at March 31, 2017, substantially unchanged from December 31, 2016. Approximately $18.1 million was held in money market funds and $1.5 million in cash.
- The company had no outstanding borrowings under its secured revolving credit facility and reported no short-term or long-term debt. The facility matures December 29, 2017.
- Accounts receivable increased to $9.6 million from $3.1 million at year-end, while days sales outstanding rose to 38 from 18, primarily because significant end-of-life shipments occurred late in the quarter.
- Inventories declined to $2.5 million from $2.8 million. Total assets were $43.3 million and shareholders’ equity was $24.3 million at March 31, 2017.
- Contractual obligations totaled $15.1 million, including $8.0 million of estimated purchase commitments to contract manufacturers, $4.6 million of operating leases and $2.5 million of asset-financing payments.
Material Changes Versus the Prior Comparable Period
- Revenue increased primarily because units sold into the digital projector market rose 87% and units sold into the TV and panel market rose 218%. Revenue from legacy products subject to end-of-life activity was $9.2 million in Q1 2017.
- Gross margin improved principally because Q1 2016 included $1.7 million of restructuring-related cost of revenue and because end-of-life legacy products had lower direct product costs.
- Research and development expense decreased 14% to $4.9 million following the April 2016 restructuring and workforce reduction. The decrease included a $0.4 million offset from a customer co-development agreement.
- Selling, general and administrative expense increased 7% to $4.1 million, primarily due to higher management bonus accruals.
- No restructuring expense was recorded in Q1 2017, compared with $4.3 million in Q1 2016. The 2016 restructuring plan, which included an approximately 24% workforce reduction and asset write-offs, was completed by year-end 2016.
- Operating cash flow remained negative despite the return to profitability, principally because accounts receivable and prepaid and other assets increased.
Guidance, Outlook, Risks and Unusual Items
- Management expects approximately $5.1 million of revenue above normalized quarterly revenue in Q2 2017 from remaining end-of-life product sales. Revenue from the TV and panel market is expected to decline to zero in the second half of 2017 after fulfillment of end-of-life orders.
- The company expects to record approximately $3.6 million of additional research and development reimbursement during the remainder of 2017 under a best-efforts co-development agreement. The agreement does not guarantee future product sales, and expected development costs exceed customer payments.
- Management expects existing working capital to fund operating, investing and financing needs for at least the next twelve months, but stated that additional financing or expenditure reductions may be required longer term. Additional financing may be unavailable or dilutive.
- Revenue is highly concentrated: distributors represented 56% of Q1 revenue, the largest distributor represented 27%, and the top five end customers represented 68%. Four accounts represented at least 10% of accounts receivable at March 31, 2017.
- Sales, customers and manufacturing are heavily concentrated in Asia. Approximately 99% of Q1 revenue was generated outside the United States, and the company relies on a limited number of foreign foundries and assembly and test vendors without long-term supply agreements.
- Key risks include end-of-life revenue normalization, customer order cancellations, semiconductor cyclicality, rapid technological change, competition, manufacturing and supply disruptions, foreign-exchange exposure, intellectual-property claims, customer and distributor credit risk, and dependence on design wins.
- The company adopted ASU 2016-09 on January 1, 2017, resulting in a $44,000 cumulative-effect adjustment to retained earnings. Adoption did not materially affect financial position, results of operations or cash flows.
- Management concluded that disclosure controls and procedures were effective as of March 31, 2017, and reported no material changes to internal control over financial reporting.
Important Facts for Investors to Verify
- Whether the sharp Q1 revenue increase is sustainable after the expected end-of-life shipments, including the projected Q2 benefit and the expected elimination of TV and panel revenue in the second half of 2017.
- Customer and distributor concentration, the collectability of the $9.6 million accounts-receivable balance, and the effect of late-quarter shipments on future cash conversion.
- The company’s ability to maintain positive operating cash flow without drawing on or refinancing the revolving facility before its December 29, 2017 maturity.
- Whether the co-development agreement produces the anticipated $3.6 million of remaining research and development reimbursement and whether it leads to commercial product sales.
- Exposure to contract manufacturers, purchase commitments and potential inventory write-offs if customer demand or product transitions differ from forecasts.
- Future profitability after the nonrecurring 2016 restructuring charges and the temporary contribution from legacy end-of-life products.