Pixelworks, Inc. Form 10-Q Summary
Business Context and Reporting Period
Pixelworks designs and markets visual-display processing semiconductors, intellectual-property cores, software and ASIC solutions for digital projection, mobile devices, video delivery and streaming applications. The unaudited filing covers the three and nine months ended September 30, 2018, with comparisons to the corresponding 2017 periods. Pixelworks operated as one segment and held 399 patents as of September 30, 2018.
Financial Results and Position
| Metric | Q3 2018 | Q3 2017 | Change |
|---|---|---|---|
| Revenue | $21.5 million | $18.8 million | 14% |
| Gross profit | $11.2 million | $9.0 million | 25% |
| Gross margin | 52% | 48% | +4 points |
| Operating income (loss) | $0.4 million | $(4.4) million | Improved |
| Net income (loss) | $0.2 million | $(4.7) million | Improved |
| Diluted EPS | $0.01 | $(0.14) | Improved |
| Metric | Nine months 2018 | Nine months 2017 | Change |
|---|---|---|---|
| Revenue | $56.0 million | $62.2 million | (10)% |
| Gross profit | $28.6 million | $32.6 million | (12)% |
| Gross margin | 51% | 52% | (1) point |
| Operating income (loss) | $(3.3) million | $1.0 million | Declined |
| Net income (loss) | $(3.0) million | $(0.6) million | Worsened |
| Diluted EPS | $(0.08) | $(0.02) | Worsened |
Q3 revenue comprised $20.7 million of IC sales and $0.8 million of engineering services. Nine-month revenue comprised $53.8 million of IC sales and $2.2 million of engineering services. The company attributed the quarterly revenue increase primarily to higher unit sales in digital projection and mobile markets. The nine-month decline reflected lower digital-projector, TV and panel volumes, including the wind-down of legacy products, partially offset by video-delivery revenue from the ViXS acquisition.
Operating expenses were $10.8 million in Q3 and $31.9 million for the first nine months, including restructuring expense of $0.4 million and $1.0 million, respectively. Research and development expense was $5.3 million in Q3 and $16.2 million year to date; selling, general and administrative expense was $5.1 million and $14.6 million, respectively. The company recognized $3.8 million of customer co-development reimbursements against research and development expense during the first nine months.
Cash and cash equivalents were $18.1 million at September 30, 2018, compared with $27.5 million at December 31, 2017. Short-term marketable securities totaled $6.1 million, resulting in cash, cash equivalents and short-term marketable securities of approximately $24.1 million. Net cash provided by operating activities was only $0.2 million for the first nine months, compared with $10.8 million in the prior-year period. Investing cash use was $7.8 million, primarily for marketable securities and property and equipment; financing cash use was $1.9 million.
The company had no borrowings under its revolving line of credit. The facility permits borrowings up to the lesser of $10.0 million or $1.0 million plus eligible receivables and matured on December 28, 2018. Convertible debt was extinguished during the first quarter through $2.2 million of cash redemptions and conversion of $2.6 million into common stock, producing a $1.3 million gain on extinguishment. Total assets were $64.1 million and total liabilities were $19.4 million at September 30, 2018. Accumulated deficit was $382.5 million.
Material Changes Versus Prior Comparable Period
- Q3 revenue increased 14%, while nine-month revenue decreased 10%.
- Q3 gross margin expanded to 52% from 48%; management attributed changes largely to acquisition-related amortization, inventory step-up and backlog amortization.
- Q3 operating results moved to income from a substantial loss, helped by higher revenue, lower SG&A and lower acquisition-related costs.
- Nine-month operating income turned into a loss because of lower revenue and higher research and development expense, despite lower SG&A.
- Q3 SG&A declined 23%; nine-month SG&A declined 5%, primarily because 2017 ViXS acquisition and integration costs did not recur.
- The April 2018 restructuring plan reduced the workforce by approximately 5%, included closure of the Hong Kong office and downsizing of the Toronto office, and generated $1.0 million of charges through September 30.
- Acquired backlog was fully amortized by September 30, 2018; the remaining inventory step-up was expected to be fully recognized by December 31, 2018.
- Accounts receivable increased to $5.8 million from $4.6 million, and inventory increased to $3.0 million from $2.8 million.
Guidance, Outlook, Risks and Unusual Items
Management stated that existing working capital was expected to fund operating, investing and financing needs for at least the next twelve months, but noted that additional debt or equity financing or expenditure reductions could be required over the longer term. The company expected approximately $0.2 million of remaining co-development reimbursement in the fourth quarter of 2018 and approximately $0.4 million of additional restructuring charges during the remainder of 2018.
Management disclosed no formal revenue or earnings guidance. Pixelworks identified substantial uncertainty from semiconductor cyclicality, rapid technological change, competitive pressure, customer and distributor concentration, reliance on a limited number of Asian foundries and assembly vendors, geopolitical and natural-disaster exposure in Asia, foreign-currency movements, design-win uncertainty and the potential need for additional financing. The top five end customers represented 82% of nine-month revenue, and the top distributor represented 29%. Two accounts represented 10% or more of accounts receivable, including one account at 53%.
Contractual obligations totaled $17.1 million, including $8.4 million of purchase commitments to contract manufacturers, $5.7 million of operating leases and $1.6 million of asset-financing payments. The company also had $2.3 million of long-term income taxes payable and a Technology Partnerships Canada obligation with payments scheduled through January 2024. The filing reported no material off-balance-sheet arrangements and no material legal liabilities at the reporting date.
Pixelworks expected adoption of the lease accounting standard on January 1, 2019 to materially affect the balance sheet through recognition of right-of-use assets and lease liabilities. The company also had not finalized all accounting for the Tax Cuts and Jobs Act as of September 30, 2018. Management concluded that disclosure controls were effective and reported no material changes to internal control over financial reporting during the quarter.
Important Facts for Investors to Verify
- Whether the Q3 revenue recovery in digital projection and mobile markets continued beyond the seasonally stronger third quarter.
- Whether the company can sustain positive operating cash flow after co-development reimbursements and restructuring benefits decline.
- The status and terms of replacement or renewal financing following the December 28, 2018 maturity of the revolving credit facility.
- The effect of customer concentration, particularly the 49% Q3 and 53% nine-month revenue contribution from End Customer A.
- Progress and final costs of the April 2018 restructuring plan and achievement of expected savings.
- The impact of the ViXS integration, remaining intangible amortization, and any future goodwill or intangible impairment indicators.
- The final accounting impact of the Tax Cuts and Jobs Act and adoption of lease accounting.
- Supply continuity, pricing and capacity risks involving concentrated foundry and assembly suppliers in Taiwan and China.