Pixelworks, Inc. — Q2 2017 Form 10-Q Summary
Business context and reporting period
Pixelworks designs video-processing semiconductors, intellectual-property cores, software and custom ASIC solutions for digital projectors, tablets, smartphones and other display devices. This unaudited Form 10-Q covers the three and six months ended June 30, 2017, compared with the corresponding 2016 periods. The company reported one operating segment and held 155 patents as of June 30, 2017.
Key financial metrics
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $20.7 million | $12.6 million | $43.4 million | $23.7 million |
| Gross profit | $11.2 million | $6.4 million | $23.6 million | $10.0 million |
| Gross margin | 54% | 51% | 54% | 42% |
| Operating income (loss) | $2.0 million | $(1.3) million | $5.4 million | $(9.8) million |
| Net income (loss) | $1.3 million | $(1.6) million | $4.1 million | $(10.2) million |
| Diluted EPS | $0.04 | $(0.06) | $0.13 | $(0.36) |
| Cash flow from operations | Not separately provided | Not separately provided | $12.1 million | $(5.0) million |
Revenue increased 65% year over year in Q2 and 83% in the first half. The improvement was primarily driven by higher unit shipments into digital projector and TV/panel markets, including end-of-life orders for legacy products. Gross margin benefited from product mix and the absence of $4.4 million of restructuring charges recorded in the first half of 2016.
At June 30, 2017, cash and cash equivalents were $32.2 million, including $29.7 million in money-market funds. Total assets were $46.6 million and shareholders’ equity was $26.8 million. The company reported no outstanding borrowings under its revolving line and no short- or long-term debt, although asset-financing liabilities remained on the balance sheet. The revolving facility provides up to the lesser of $10.0 million or $1.0 million plus eligible receivables and matures December 29, 2017.
Material changes versus the prior comparable period
- Revenue increased $8.1 million in Q2 and $19.7 million in the first half, primarily from digital projector and TV/panel shipments.
- Operating results shifted from losses to profitability. The first half of 2016 included $4.4 million of restructuring expense; no restructuring expense was recorded in the first half of 2017.
- Research and development expense was flat in Q2 and declined 8% for the first half, partly because of a customer co-development reimbursement. The company recorded offsets of $2.3 million in Q2 and $2.7 million for the first half and expected approximately $1.3 million of additional offsets during the remainder of 2017.
- Selling, general and administrative expense increased 47% in Q2 and 25% in the first half, largely due to legal and accounting costs related to the ViXS acquisition, higher headcount, management bonus accruals and stock-based compensation.
- Operating cash flow improved by $17.1 million year over year to $12.1 million. Cash increased $12.6 million from year-end 2016, while accounts receivable increased to $5.7 million and days sales outstanding rose to 25 from 18.
- Inventory declined to $2.0 million from $2.8 million at December 31, 2016.
Guidance, outlook, commentary and unusual items
- Management expected TV and panel revenue to decline to zero in the second half of 2017 after fulfillment of end-of-life orders. TV and panel revenue had historically ranged from $1.1 million to $1.5 million per quarter in 2016.
- Management stated that existing working capital was expected to fund operating, investing and financing needs for at least the next twelve months, including ViXS-related costs. The filing provides no specific revenue or earnings guidance.
- On August 2, 2017, Pixelworks completed its acquisition of ViXS Systems. It issued approximately 3.7 million common shares and approximately 200,000 restricted stock units. The estimated purchase price was $17.5 million, subject to final valuation and purchase-price allocation. Pro forma financial information was not presented.
- Acquisition costs of $0.7 million in Q2 and $0.9 million in the first half were expensed in selling, general and administrative expense.
- The ViXS acquisition may increase depreciation, amortization, cost of sales and stock-based compensation after final valuation. Integration costs and execution risks remain material.
- Major risks include customer and distributor concentration, reliance on a limited number of semiconductor foundries and assembly vendors, rapid technological change, product-development and design-win uncertainty, Asian operating exposure, foreign-currency fluctuations, potential inventory obsolescence and possible future financing needs.
- Top five end customers represented 75% of first-half revenue, while the top distributor represented 29%. One account represented 80% of accounts receivable at June 30, 2017.
- The company’s U.S. deferred tax assets remain subject to a full valuation allowance. Uncertain tax positions totaled $1.4 million, with approximately $18,000 of reductions expected within twelve months.
Most important facts for investors to verify
- Whether the post-acquisition ViXS business is integrated successfully and delivers the expected strategic and financial benefits.
- The final purchase-price allocation, including acquired technology, customer relationships, trade name, goodwill and resulting amortization or impairment exposure.
- The sustainability of reported profitability and cash generation after the end-of-life TV/panel orders and the approximately $1.3 million remaining co-development reimbursement.
- Customer concentration, particularly the 80% accounts-receivable concentration and the dependence on the top distributor and top five end customers.
- Renewal or replacement of the revolving credit facility before its December 29, 2017 maturity and the bank’s discretion over future credit extensions.
- Supply continuity and pricing from the company’s concentrated foundry, assembly and test suppliers in Taiwan and China.
- Potential shareholder dilution from the ViXS share issuance and any future financing or acquisition activity.