Pixelworks, Inc. — Q1 2020 Form 10-Q Summary
Business context and reporting period
Pixelworks develops semiconductor and software solutions for visual processing, display optimization and video delivery across mobile, digital projection, home entertainment, content and business markets. The filing covers the unaudited three months ended March 31, 2020, compared with the three months ended March 31, 2019. The company operates as one segment and reported 39.3 million common shares outstanding as of May 4, 2020.
Financial results and key metrics
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Revenue | $13.8 million | $16.6 million | Down 17% |
| Gross profit | $6.8 million | $8.5 million | Down 20% |
| Gross margin | 49% | 51% | Down 2 percentage points |
| Loss from operations | $(5.3) million | $(3.5) million | Loss widened |
| Net income (loss) | $(5.4) million | $0.1 million | Turned to loss |
| Diluted loss per share | $(0.14) | $0.00 | Unfavorable change |
| Cash flow from operations | $0.9 million | $(2.0) million | Improved $2.9 million |
Revenue comprised $13.1 million of integrated-circuit sales and $0.7 million of engineering services, license revenue and other revenue. International revenue represented approximately 88% of total revenue, with Japan contributing $8.5 million and China $2.8 million.
Operating expenses were $12.1 million, including $6.3 million of research and development, $5.2 million of selling, general and administrative expense, and $0.6 million of restructuring expense. The implied operating margin was approximately negative 38%, and the implied net margin was approximately negative 39%.
At March 31, 2020, cash and cash equivalents were $17.9 million, short-term marketable securities were $2.5 million and total cash, cash equivalents and marketable securities were $20.4 million. Accounts receivable were $8.9 million and inventories were $4.5 million.
Short-term borrowings under the secured revolving credit facility were $5.2 million at a weighted-average interest rate of 3.5%, compared with no borrowings at December 31, 2019. The facility has a stated maturity of December 27, 2020 and was subject to customary covenants; the company reported compliance as of March 31, 2020.
Investing activities provided $4.3 million, primarily from net sales and maturities of marketable securities. Financing activities provided $5.5 million, primarily from the revolving credit draw. Capital expenditures were $0.2 million. The company reported $15.9 million of contractual obligations, including operating leases, manufacturer commitments, asset-financing payments and other purchase obligations.
Material changes versus the prior comparable period
- Revenue decreased $2.9 million, primarily because of lower digital-projector unit sales as customers corrected inventory levels and lower engineering, license and other revenue following license revenue recognized in Q1 2019. Mobile unit sales increased from design wins and ramping programs.
- Gross margin declined to 49% from 51%, primarily because of inventory write-down charges and product-mix changes.
- Research and development expense decreased 3% and selling, general and administrative expense decreased 5% as management pursued cost controls, including actions in response to COVID-19.
- The company recorded $0.6 million of severance and benefits expense under a January 2020 restructuring plan that reduced the workforce by approximately 4%. Management stated that the plan was completed in Q1 2020 and no further related expense was expected.
- Operating cash flow improved to $0.9 million from a $2.0 million use in Q1 2019, primarily reflecting working-capital movements and the absence of the prior-year patent-sale gain adjustment in operating cash flow.
- Accumulated deficit increased to $394.0 million from $388.6 million at December 31, 2019.
Guidance, outlook, risks and unusual items
Management did not provide a specific quarterly or annual revenue or earnings forecast. It stated that fiscal 2020 revenue was expected to be lower than initially anticipated at the beginning of the year because of COVID-19. Management also stated that existing working capital was expected to fund operating, investing and financing needs for at least the next twelve months, while noting that additional financing or further expenditure reductions might be required and may not be available on favorable terms.
COVID-19 had not materially adversely affected the business during Q1 2020, but management identified substantial forward-looking risks involving customer demand, supplier operations, supply-chain interruptions, travel restrictions, border closures, remote-work effectiveness, liquidity, capital investments and financing arrangements. The company drew $5.2 million on its revolving facility and implemented salary reductions, hiring restrictions, delayed merit increases, elimination of the 2020 executive bonus program and equity compensation alternatives.
On April 25, 2020, subsequent to quarter-end, the company borrowed $0.8 million under the Paycheck Protection Program. The loan bears interest at 1.0%, matures two years from disbursement and may be forgiven in whole or in part if proceeds are used for qualifying expenses. The company intends to seek forgiveness, but stated that forgiveness is not assured.
Key business risks include dependence on a limited number of customers and distributors, reliance on a limited number of Asian foundries and assembly vendors without long-term supply agreements, rapid technological change, semiconductor-industry cyclicality, customer order cancellations, inventory obsolescence, foreign currency and geopolitical exposure, intellectual-property claims, cybersecurity incidents and the continuing effects of COVID-19. The top five end customers represented 72% of Q1 revenue, and one end customer represented 46%.
The filing also discloses $347 patents, an accumulated U.S. net deferred tax asset valuation allowance, uncertain tax positions, future lease payments and acquired goodwill of $18.4 million. Management reported no goodwill or intangible-asset impairment triggers during the quarter, no material litigation liabilities and no material off-balance-sheet arrangements.
Important facts for investors to verify
- Whether COVID-19 causes further declines in demand, particularly in digital projection, or creates material customer, supplier or logistics disruptions.
- The company’s ability to maintain liquidity, comply with revolving-credit covenants and refinance or replace the facility before its December 2020 maturity.
- Whether the $0.8 million PPP loan qualifies for full or partial forgiveness.
- Progress and revenue conversion from mobile design wins, new products and the TrueCut video platform.
- Customer and distributor concentration, including the 46% contribution from the largest end customer and the 72% contribution from the top five end customers.
- Potential inventory write-downs, margin pressure from product mix and the effects of semiconductor supply constraints.
- Whether sustained operating losses and the $394.0 million accumulated deficit require additional debt or equity financing, potentially diluting shareholders.
- Future utilization or expiration of federal, state and foreign net operating loss carryforwards and developments in uncertain tax positions.