Pixelworks, Inc. 2021 Q1 Form 10-Q Summary
Business context and reporting period
Pixelworks develops visual-processing semiconductors and software for mobile, home entertainment, content, and business and education display applications. The filing covers the unaudited three months ended March 31, 2021, compared with the three months ended March 31, 2020. The company operates as one segment and had 52.2 million common shares outstanding as of April 30, 2021.
Key financial metrics
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Revenue | $9.3 million | $13.8 million | Down 33% |
| Gross profit | $3.7 million | $6.8 million | Down 45% |
| Gross margin | 40% | 49% | Down 9 percentage points |
| Loss from operations | $(7.9) million | $(5.3) million | Loss increased |
| Net loss | $(8.1) million | $(5.4) million | Loss increased |
| Net loss per share | $(0.16) | $(0.14) | More loss per share |
| Cash flow from operations | $(6.7) million | $0.9 million | Declined $7.6 million |
Revenue consisted of $8.6 million of IC product sales and $0.6 million from engineering services, licensing, and other activities. The operating margin was approximately negative 85%, and the net margin was approximately negative 87%.
Research and development expense increased 8% to $6.8 million, while selling, general and administrative expense declined 7% to $4.9 million. No restructuring expense was recorded in Q1 2021 versus $0.6 million in Q1 2020. Stock-based compensation totaled $1.4 million in Q1 2021.
Liquidity, capital resources, and balance sheet
- Cash and cash equivalents were $25.4 million at March 31, 2021, down from $31.3 million at December 31, 2020. The balance included $18.1 million in money market funds and $7.3 million in cash.
- Short-term marketable securities declined to zero from $0.3 million at year-end 2020.
- Total current assets were $34.6 million and total current liabilities were $10.4 million, implying approximately $24.1 million of working capital.
- Total liabilities were $18.6 million and shareholders’ equity was $47.3 million. Accumulated deficit was $423.2 million.
- The secured revolving credit facility matured on March 26, 2021 and was not renewed. No borrowings were outstanding at March 31, 2021.
- Operating lease liabilities totaled $7.1 million, including $2.3 million classified as current. The company also had approximately $0.7 million of remaining TPC-related debt, payable through January 2024.
- Capital expenditures were $0.2 million. Financing cash flow was $0.8 million, including $1.1 million of proceeds from employee equity plans, partially offset by $0.2 million of asset-financing payments.
Management stated that existing working capital is expected to fund operating, investing, and financing needs for at least the next twelve months, but noted that additional financing or expenditure reductions may be required over the longer term.
Material changes versus the prior comparable period
- Revenue decreased $4.5 million, primarily because of lower unit sales into digital projector and video-delivery markets as customers continued correcting inventory levels. Increased mobile-market sales only partially offset the decline.
- Gross margin fell to 40% from 49%, primarily due to product mix, higher product costs, and lower absorption of fixed overhead.
- Operating loss increased by $2.6 million despite the absence of Q1 2020 restructuring charges, because of lower revenue and gross profit and higher research and development spending.
- Operating cash flow shifted from $0.9 million provided to $6.7 million used, driven primarily by the larger net loss and working-capital movements.
- Accounts receivable increased to $5.5 million from $4.7 million, and reported days sales outstanding increased to 54 days from 44 days. Inventory declined to $1.7 million from $2.4 million.
- Common shares outstanding increased from 51.1 million at December 31, 2020 to 52.2 million at March 31, 2021, primarily from employee equity-plan issuance.
Guidance, outlook, risks, and unusual items
The filing does not provide specific numerical revenue, earnings, or margin guidance. Management expects COVID-19 to continue negatively affecting 2021 revenue and results, although the company expects the pandemic’s effects to be temporary. Shanghai and Shenzhen offices had returned to full in-person staffing, while other offices and supply-chain partners were described as operational with a combination of in-office and remote work.
- Customer and distributor concentration is significant: distributors represented 59% of Q1 revenue, one distributor represented 34%, and the top five end customers represented 76%.
- Approximately 92% of Q1 revenue came from outside the United States. Operations, employees, customers, and manufacturing are concentrated in Asia, particularly China, Japan, and Taiwan.
- The company relies on a limited number of third-party foundries and assembly and test vendors, generally without long-term supply commitments. Semiconductor shortages, manufacturing defects, capacity constraints, or price increases could affect revenue and margins.
- The business has incurred annual operating losses since 2010 and reported an accumulated deficit of $423.2 million at March 31, 2021. Management stated that continued losses could impair the ability to continue operations.
- The company has substantial federal, state, and foreign net operating loss carryforwards, but U.S. deferred tax assets are subject to a full valuation allowance and some carryforwards begin expiring in 2021.
- Potential risks include rapid technological change, competition, long development and sales cycles, customer cancellations, foreign-exchange exposure, cybersecurity, intellectual-property claims, regulatory compliance, and Nasdaq listing requirements.
- The company reported no material off-balance-sheet arrangements, no material legal liabilities from indemnification obligations, and no goodwill or intangible-asset impairment triggers during the quarter.
Important facts for investors to verify
- Whether revenue stabilizes or recovers in the mobile, digital projector, and video-delivery markets as customer inventory corrections and COVID-19 effects diminish.
- Whether gross margin can recover from 40% through improved product mix, pricing, manufacturing costs, and fixed-cost absorption.
- The pace of cash usage and whether operating cash flow returns to positive levels without additional equity or debt financing.
- The status and remaining capacity of the company’s at-the-market equity program and the potential dilution from future share issuance.
- Customer and distributor concentration, including the sustainability of the distributor representing 34% of Q1 revenue and the top five end customers representing 76%.
- Supply-chain resilience, especially reliance on sole-source or limited-source manufacturers in Taiwan and China.
- Compliance with Nasdaq continued-listing requirements and the company’s ability to maintain access to capital markets.