Pixelworks, Inc. — Q1 2022 Form 10-Q Summary
Reporting period: Three months ended March 31, 2022; unaudited U.S. GAAP financial statements. Pixelworks develops visual-processing semiconductors and software for mobile, projector, home entertainment, content, and business and education applications. The company operates as one segment and generated approximately 95% of revenue outside the United States.
Financial performance and position
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Revenue | $16.628 million | $9.270 million | Up 79% |
| IC product revenue | $16.456 million | $8.637 million | Up approximately 91% |
| Gross profit | $8.763 million | $3.725 million | Up 135% |
| Gross margin | 53% | 40% | Up 13 percentage points |
| Research and development | $7.160 million | $6.785 million | Up 6% |
| SG&A | $5.484 million | $4.854 million | Up 13% |
| Loss from operations | $(3.881) million | $(7.914) million | Improved $4.033 million |
| Net loss | $(4.122) million | $(8.075) million | Improved $3.953 million |
| Net loss attributable to Pixelworks | $(4.592) million | $(8.075) million | Improved $3.483 million |
| Loss per share, basic and diluted | $(0.09) | $(0.16) | Improved $0.07 |
| Cash used in operating activities | $(5.218) million | $(6.651) million | Improved $1.433 million |
- Operating loss margin was approximately 23% negative, compared with 85% negative in the prior-year quarter. Net loss attributable to Pixelworks was approximately 28% of revenue, compared with 87% in Q1 2021.
- Revenue growth was driven primarily by increased unit sales in the digital projector, mobile, and video-delivery markets.
- Gross-margin expansion reflected product mix, improved fixed-cost absorption, and lower stock-based compensation and acquired-intangible amortization.
- Cash and cash equivalents were $55.162 million at March 31, 2022, down from $61.587 million at December 31, 2021. Cash consisted of $43.9 million in cash and $11.3 million in money-market funds.
- Total current assets were $68.678 million versus current liabilities of $13.663 million. Accounts receivable were $8.564 million, and inventories were $1.794 million.
- Total liabilities were $32.082 million. The filing reports asset-financing obligations, a $513,000 TPC-related liability due through January 2024, operating lease liabilities, and a $12.902 million deposit liability. It does not identify a material conventional bank-debt balance.
- Total shareholders’ equity was $36.743 million, while redeemable non-controlling interest was $31.527 million.
Material changes versus the prior comparable period
- Revenue increased $7.358 million, or 79%, with IC sales accounting for nearly all of the increase. Engineering services, license, and other revenue declined to $172,000 from $633,000.
- Gross profit increased $5.038 million and gross margin expanded to 53% from 40%.
- Research and development expense increased $375,000, primarily from higher compensation, headcount, and non-recurring engineering costs. These increases were partly offset by a $983,000 reimbursement under a customer co-development agreement.
- SG&A increased $630,000 because of higher compensation, headcount, and accounting fees associated with the PWSH strategic plan, partly offset by lower stock-based compensation.
- Net cash used in operations improved but remained negative at $5.218 million. Investing cash outflows included $540,000 for property and equipment and $517,000 for licensed technology.
- The company issued 630,876 shares under employee equity plans during the quarter, increasing shares outstanding to 53,998,012 as of March 31, 2022.
- Pixelworks recorded $470,000 of net income attributable to redeemable non-controlling interest in PWSH, reducing the loss attributable to Pixelworks’ shareholders relative to consolidated net loss.
Guidance, outlook, commentary, and risks
- Management expects COVID-19-related disruption to continue affecting revenue and results of operations during 2022. Shanghai operations were fully remote because of lockdowns at the reporting date, while Shenzhen, Taiwan, Japan, and North American operations had varying levels of in-person activity.
- Management expects to record approximately $900,000 of additional co-development reimbursement during the remainder of 2022 from the initial payment and approximately $2.2 million upon the next development milestone. The agreement does not commit the customer to purchase the resulting product.
- Pixelworks expects existing working capital to fund operating, investing, and financing needs for the next twelve months and beyond, but acknowledges that additional financing or expenditure reductions may be required over the longer term.
- The company intends to qualify PWSH to apply for a Shanghai STAR Market listing, presently targeting consummation in 2023. The filing provides no assurance that the listing will be approved or completed.
- Under amended arrangements, investors in PWSH may obtain redemption rights if the listing is not completed by June 30, 2024; employee-owned entities may have redemption rights if it is not completed by December 31, 2024. Any redemption could require substantial additional capital and materially affect liquidity and results.
- Key risks include COVID-19 and supply-chain disruption, reliance on sole-source foundries and assembly vendors in Taiwan and China, component shortages, customer and distributor concentration, rapid technological change, semiconductor cyclicality, foreign-exchange exposure, China and U.S.-China geopolitical risks, intellectual-property claims, cybersecurity, and possible shareholder dilution.
- Revenue concentration is significant: distributors represented 63% of Q1 revenue, the largest distributor represented 32%, and the top five end customers represented 80%.
- Management reported effective disclosure controls and procedures as of March 31, 2022, with no material changes to internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the sharp revenue and gross-margin improvement is sustained, particularly given historical seasonality and product-mix sensitivity.
- The timing, approval status, funding requirements, and ultimate completion of the PWSH STAR Market listing.
- The potential cash requirement and terms of any PWSH investor or employee-interest redemptions.
- Whether operating cash flow turns positive before the company’s cash balance is materially reduced.
- Customer concentration, cancelable orders, distributor exposure, and the collectability of concentrated accounts receivable.
- Foundry capacity, component shortages, manufacturing yields, lead times, and any resulting inventory or margin effects.
- The availability and terms of future financing, including potential equity dilution or restrictions on transferring PWSH-generated cash to Pixelworks’ other operations.