Business Context and Reporting Period
Pixelworks, Inc. designs and markets video and pixel-processing semiconductors and software for digital display and projection applications, and licenses related intellectual property. The filing is an unaudited Form 10-Q for the three months ended March 31, 2013, compared with the three months ended March 31, 2012. Pixelworks reported one operating segment and held 121 patents.
Key Financial Metrics
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Revenue | $8.3 million | $14.3 million | Down 42% |
| Gross profit | $4.0 million | $7.8 million | Down 49% |
| Gross margin | 48% | 54% | Down 6 percentage points |
| Research and development | $5.9 million | $5.1 million | Up 16% |
| SG&A | $3.6 million | $4.0 million | Down 10% |
| Loss from operations | $5.5 million | $1.3 million | Loss increased |
| Net loss | $5.4 million | $0.6 million | Loss increased |
| Net loss per diluted share | $0.29 | $0.04 | Loss increased |
| Cash used in operations | $2.5 million | $2.7 million | Improved by $0.2 million |
Cash and cash equivalents were $12.6 million at March 31, 2013, compared with $13.4 million at December 31, 2012. Current assets were $19.2 million and current liabilities were $13.0 million, including a $2.3 million short-term line-of-credit advance. Shareholders’ equity was $10.1 million, compared with $14.7 million at year-end 2012. The company had no long-term debt; the $2.3 million non-formula advance was repaid within the required period after quarter-end.
Revenue from IC products was $8.3 million, versus $12.2 million in the prior-year quarter. Licensing revenue was negligible in Q1 2013 compared with $2.1 million in Q1 2012. Unit volume declined 35%, partly offset by a 3% increase in average selling price due largely to product mix.
Material Changes Versus the Prior Comparable Period
- Revenue declined $6.1 million, primarily because of lower digital projector and advanced television sales, customer inventory adjustments, weaker macroeconomic demand, and customer transition to Ultra High Definition products.
- Gross margin fell to 48% from 54%, principally because the prior-year quarter included high-margin licensing revenue with minimal associated cost. Excluding that licensing impact, direct product costs as a percentage of revenue improved modestly.
- Research and development expense increased $0.8 million because of higher non-recurring engineering costs and increased headcount. No co-development expense offset was recognized in Q1 2013; $3.5 million had been offset during 2012.
- Management expected additional co-development milestone payments to reduce research and development expense in Q2 2013.
- SG&A declined $0.4 million because of lower compensation expense and reduced non-recurring legal costs.
- Accounts receivable decreased to $2.4 million from $3.8 million at December 31, 2012, while inventories decreased to $2.4 million from $2.7 million.
- Operating cash use remained significant despite the lower net loss-related working-capital burden. Financing cash flow was positive $1.8 million, reflecting the $2.3 million credit advance, partly offset by $0.6 million of asset-financing payments.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
Management stated that existing working capital and availability under the revolving line were expected to fund operating, investing, and financing needs for the next twelve months. It also stated that additional debt or equity financing, or expenditure reductions, might be required if cash needs increased; no assurance was given that such financing or reductions would be available.
The co-development agreement provides an initial $3.5 million payment, already received, and two additional $1.75 million milestone payments that had not yet been earned. The arrangement is on a best-efforts basis and does not guarantee future product sales. Development costs are expected to exceed customer funding.
Income-tax benefit was $0.2 million, primarily reflecting a $0.5 million reversal of foreign tax contingencies. The company maintains a full valuation allowance against essentially all U.S. net deferred tax assets. Uncertain tax positions totaled $1.7 million at March 31, 2013, and management expected approximately $0.3 million of reductions within twelve months from expiring statutes of limitation.
- Customer and distributor concentration is substantial: one distributor represented 43% of Q1 revenue, and the top five end customers represented 56%.
- Approximately 99% of revenue was generated outside the United States, primarily in Asia, exposing the company to foreign-exchange, economic, political, regulatory, and regional-disruption risks.
- The company relies on a limited number of third-party foundries and assembly and test suppliers, generally without long-term supply agreements.
- Rapid technological change, competitive pressure, product-development delays, manufacturing defects, inventory forecasting errors, and declining average selling prices could adversely affect results.
- The company has incurred operating losses since 2004 and reported an accumulated deficit of $340.2 million at March 31, 2013.
- Shareholders’ equity was only $10.1 million, near the $10.0 million NASDAQ requirement identified in the filing, creating a potential delisting risk if losses continue.
- Legal matters arising in the ordinary course were not expected by management to have a material adverse effect, and no material liabilities had been recorded for intellectual-property indemnification obligations.
- The company reported no material off-balance-sheet arrangements and stated that disclosure controls and internal control over financial reporting were effective.
Important Facts for Investors to Verify
- Whether unit demand in the digital projector and advanced television markets stabilizes and whether Ultra High Definition products generate meaningful volume.
- Whether the anticipated co-development milestones are achieved and the resulting research and development offsets are recognized.
- Whether cash burn declines sufficiently to preserve liquidity without additional financing or equity dilution.
- Compliance with the revolving credit facility’s borrowing-base requirements, covenants, and December 2014 expiration.
- Customer and distributor concentration, order cancellations, receivable collectability, and the absence of binding backlog commitments.
- Manufacturing capacity, supplier continuity, product yields, inventory obsolescence, and exposure to Asian supply-chain disruptions.
- Shareholders’ equity relative to NASDAQ listing requirements and the potential impact of continued losses or future financing.
- The availability and usability of approximately $187 million of federal and $32.8 million of state net operating loss carryforwards, including potential Section 382 limitations.