Pixelworks, Inc. — Q3 2023 Form 10-Q Summary
Reporting period: Three and nine months ended September 30, 2023; filed November 7, 2023. Pixelworks designs visual-processing semiconductors and software for Mobile, Home & Enterprise, and Cinema applications. Its Mobile and Home & Enterprise businesses operate through majority-owned Pixelworks Semiconductor Technology (Shanghai) Co., Ltd. (PWSH).
Financial performance and position
| Metric | Q3 2023 | Q3 2022 | Change |
|---|
| Revenue | $16.0 million | $17.6 million | Down 9% |
| Gross profit | $6.9 million | $8.8 million | Down 22% |
| Gross margin | 43% | 50% | Down 7 percentage points |
| Operating loss | $7.6 million | $4.7 million | Loss increased |
| Net loss | $7.3 million | $4.5 million | Loss increased |
| Net loss attributable to Pixelworks | $7.0 million | $4.5 million | Loss increased |
| Loss per share | $0.12 | $0.08 | Loss increased |
| Metric | Nine months 2023 | Nine months 2022 | Change |
|---|
| Revenue | $39.6 million | $53.3 million | Down 26% |
| Gross profit | $16.7 million | $26.9 million | Down 38% |
| Gross margin | 42% | 51% | Down 9 percentage points |
| Operating loss | $24.5 million | $13.8 million | Loss increased 77% |
| Net loss | $23.2 million | $13.6 million | Loss increased 70% |
| Net loss attributable to Pixelworks | $22.4 million | $14.1 million | Loss increased 59% |
| Loss per share | $0.40 | $0.26 | Loss increased |
- Revenue mix: Q3 IC revenue was $16.0 million, including $8.2 million from Mobile and $7.7 million from Home & Enterprise. Mobile revenue rose 44% year over year, while Home & Enterprise revenue fell 32%. For the first nine months, Mobile revenue declined 2% and Home & Enterprise revenue declined 38%.
- Operating expenses: Q3 research and development expense increased 4% to $8.8 million; selling, general and administrative expense increased 14% to $5.8 million. Nine-month R&D expense declined 1% to $23.9 million, while SG&A increased 4% to $17.3 million.
- Other income: Interest income and other, net was $0.5 million in Q3 and $1.6 million for the first nine months, primarily reflecting interest income.
- Cash flow: Nine-month operating cash use was $17.0 million, compared with $11.5 million in the prior-year period. Capital expenditures were $3.4 million, and financing activities provided $14.0 million, principally from PWSH equity issuances.
- Liquidity: Cash and cash equivalents were $50.3 million at September 30, 2023, down from $56.8 million at December 31, 2022. Management expects existing working capital to fund operating, investing, and financing needs for the next twelve months and beyond, while noting that additional financing or expense reductions may be required over the longer term.
- Balance sheet: Total assets were $101.2 million, total liabilities were $33.6 million, and Pixelworks shareholders’ equity was $16.2 million. Accumulated deficit was $473.4 million. Inventories increased to $5.9 million from $1.8 million at year-end 2022.
- Debt and obligations: The filing does not identify material conventional bank debt. It reports $1.3 million of current asset-financing obligations, $1.6 million of long-term liabilities, $5.5 million of operating lease liabilities, and $0.1 million payable under the former Technology Partnerships Canada arrangement, scheduled to end in January 2024.
Material changes versus the prior comparable period
- Revenue declined because Home & Enterprise customers were absorbing inventory accumulated during the 2022 supply shortage, and certain legacy Video Delivery products reached end-of-life.
- Mobile revenue improved in Q3 as customers adopted next-generation products with higher average selling prices, partially offsetting Home & Enterprise weakness.
- Gross margin contracted primarily because of unfavorable product mix and lower fixed-overhead absorption.
- Operating losses widened despite relatively stable R&D spending because revenue and gross profit fell while SG&A increased.
- Cash use increased, and inventory rose substantially, contributing to the decline in cash balances.
- Pixelworks received $14.6 million of net proceeds from a PWSH equity issuance in February 2023. Permanent non-controlling interest increased to $24.0 million, while redeemable non-controlling interest was $27.4 million at September 30, 2023.
Guidance, outlook, commentary, and risks
- Management expects to record an approximately $1.3 million offset to R&D expense during the remainder of 2023 under a customer co-development agreement. The agreement does not commit the customer to purchase the resulting product.
- PWSH is preparing an application for a STAR Market listing in China, but the filing states that PWSH is not currently profitable under China GAAP and that Chinese regulators have tightened listing standards. There is no assurance that the listing will be filed or approved.
- If the PWSH listing is not completed by June 30, 2024, certain investors may require redemption of their interests at the original purchase price; employee-owned entities generally have comparable redemption rights if the listing is not completed by December 31, 2024, potentially with 5% annual simple interest. Pixelworks may need additional capital to fund any redemptions.
- Revenue is highly concentrated: the top distributor represented 45% of nine-month revenue, and the top five end customers represented 88%. Two accounts represented at least 10% each of accounts receivable at September 30, 2023.
- The company relies on a limited number of third-party foundries and assembly/test vendors, generally without long-term supply commitments. Supply disruption, manufacturing defects, shortages, or price increases could reduce revenue and margins.
- Operations and customers are concentrated in Asia, particularly China, Japan, and Taiwan. Key risks include China-related regulatory and geopolitical developments, foreign-exchange movements, restrictions on transferring funds from China, natural disasters, and renewed COVID-19 disruptions.
- Pixelworks has incurred operating losses each fiscal year since 2010 and may require additional debt or equity financing if operating cash flow does not improve. Additional equity financing could dilute existing shareholders.
- Management reported effective disclosure controls as of September 30, 2023, with no material changes to internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether Mobile growth can offset continuing Home & Enterprise demand weakness and whether next-generation products sustain higher ASPs and margins.
- Inventory levels, customer sell-through, potential excess or obsolete inventory charges, and future cash conversion.
- The timing, regulatory status, profitability requirements, and financing implications of the proposed PWSH STAR Market listing.
- The amount and timing of any PWSH investor or employee-interest redemptions if listing deadlines are not met.
- Customer and distributor concentration, including the sustainability of orders from the largest distributor and end customers.
- Operating cash burn, available liquidity, and the likelihood and terms of any future financing.
- Compliance with Nasdaq’s $1.00 minimum bid-price requirement and other continued-listing standards; the filing states the company was compliant as of September 30, 2023.
