Pixelworks, Inc. Form 10-Q Summary
Reporting period: Quarterly and year-to-date periods ended September 30, 2016; filed November 4, 2016. The interim financial statements are unaudited and prepared under U.S. GAAP.
Business Context
Pixelworks designs and markets video and pixel-processing semiconductors, intellectual-property cores, software and custom ASIC solutions for digital projection, mobile and other display applications. The company operates as one segment and had 144 patents related to digital image processing as of September 30, 2016. Sales are heavily concentrated in Asia, particularly Japan, Taiwan and China.
Financial Performance and Liquidity
| Metric | Q3 2016 | Q3 2015 | First 9 Months 2016 | First 9 Months 2015 |
|---|---|---|---|---|
| Revenue | $13.656 million | $16.570 million | $37.403 million | $46.040 million |
| Gross profit | $6.557 million | $8.278 million | $16.564 million | $22.479 million |
| Gross margin | 48% | 50% | 44% | 49% |
| Loss from operations | $0.960 million | $1.201 million | $10.782 million | $6.894 million |
| Net loss | $1.242 million | $1.243 million | $11.444 million | $7.403 million |
| Net loss per diluted share | $0.04 | $0.05 | $0.41 | $0.31 |
| Net cash used in operating activities | Not provided | Not provided | $4.562 million | $2.022 million |
Research and development expense declined 28% year over year in the quarter and 21% year to date, primarily due to workforce reductions and lower development-related costs. Selling, general and administrative expense declined 8% in the quarter and 6% year to date.
At September 30, 2016, cash and cash equivalents were $16.580 million, including $15.112 million in money market funds. Cash declined from $26.591 million at December 31, 2015. Current assets were $24.220 million and total assets were $29.248 million.
The company had no outstanding borrowings under its revolving line of credit and reported no short- or long-term debt at September 30, 2016. The credit facility had a stated maturity of December 30, 2016, and the company was in compliance with its covenants. Management stated that existing working capital was expected to fund operating, investing and financing needs for at least the next twelve months, but cautioned that additional financing or expenditure reductions could be required over the longer term.
Material Changes Versus Prior Comparable Period
- Revenue decreased 18% in Q3 and 19% in the first nine months, primarily because of lower digital-projector unit volumes as customers adjusted inventories and lower average selling prices resulting from increased mobile-market sales.
- Year-to-date gross margin declined to 44% from 49%, principally because of $1.777 million of restructuring-related cost-of-revenue charges, including tooling and inventory write-offs.
- Operating loss increased to $10.782 million year to date from $6.894 million, despite lower research and development and selling, general and administrative expenses.
- Year-to-date net loss increased to $11.444 million from $7.403 million. The comparison was affected by restructuring charges and the absence of the $16.356 million net proceeds from the August 2015 equity offering.
- Operating cash use increased to $4.562 million from $2.022 million. Investing cash use was $1.783 million, and financing cash use was $3.666 million, including repayment of a $3.0 million line-of-credit balance.
- Accounts receivable declined to $3.895 million from $5.988 million at year-end, and days sales outstanding improved to 26 days from 40 days. Inventory declined modestly to $3.084 million from $3.266 million.
Guidance, Outlook, Commentary and Unusual Items
- In April 2016, Pixelworks implemented a restructuring plan that reduced its workforce by approximately 24%, primarily in development, and narrowed operations and product offerings. The company incurred $4.385 million of restructuring expense through September 30, 2016, including $2.611 million of severance and benefits and $1.744 million of asset write-offs.
- Management expected negligible additional restructuring charges during the remainder of 2016, although the filing also disclosed an estimated additional $27,000 charge.
- As part of an end-of-life program for legacy products, primarily in the TV and panel market, management expected revenue above normalized quarterly levels during the first half of 2017: approximately $7.0 million in excess revenue in Q1 2017 and $5.0 million in Q2 2017. TV and panel revenue was expected to decline to zero in the second half of 2017 after fulfillment of end-of-life orders.
- Revenue concentration remained significant: the top five end customers represented 82% of nine-month revenue, the top distributor represented 24%, and one end customer represented 54% of nine-month revenue. One account represented 72% of accounts receivable at September 30, 2016.
- The company relies on a limited number of semiconductor foundries and assembly and test vendors, generally without long-term supply agreements. Manufacturing and customer exposure is concentrated in Taiwan, China and Singapore.
- Principal risks include continued operating losses, customer and distributor concentration, inventory and order volatility, rapid technological change, competition, dependence on design wins, foreign currency exposure, Asian operating and political risks, supply disruptions, intellectual-property claims and the potential need for additional capital.
- Management reported effective disclosure controls and procedures and no material changes to internal control over financial reporting during the quarter. No material off-balance-sheet arrangements were reported.
Most Important Facts for Investors to Verify
- Whether the company can reverse declining revenue and achieve sustainable positive operating cash flow after the restructuring.
- Whether the planned TV and panel end-of-life orders produce the projected 2017 revenue uplift and whether revenue falls to zero in that market thereafter.
- Whether the revolving credit facility was renewed, replaced or allowed to expire after December 30, 2016.
- Customer and distributor concentration, including the ability of the largest end customer and distributor to maintain orders and pay receivables.
- Progress and commercial volume associated with mobile and digital-projector products, including new design wins.
- The company’s ability to fund ongoing losses without equity dilution or additional debt financing.
- Compliance with Nasdaq listing requirements and the effect of continued losses and declining shareholders’ equity on listing status.