Pixelworks, Inc. — Form 10-Q Summary
Business context and reporting period
Pixelworks designs and markets video and pixel-processing semiconductors, intellectual-property cores, software and custom ASIC solutions for digital displays and projection systems. The filing covers the three and six months ended June 30, 2015; financial statements are unaudited. The company reported 23.6 million common shares outstanding as of July 30, 2015.
Key financial metrics
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Revenue | $15.1 million | $15.2 million | $29.5 million | $28.7 million |
| Gross profit | $7.2 million | $7.7 million | $14.2 million | $15.7 million |
| Gross margin | 48% | 51% | 48% | 55% |
| Operating loss | $2.5 million | $1.9 million | $5.7 million | $4.4 million |
| Net loss | $2.8 million | $2.4 million | $6.2 million | $4.9 million |
| Net loss per share | $0.12 | $0.11 | $0.26 | $0.22 |
| Operating cash flow | Not separately provided | Not separately provided | $(1.9) million | $2.3 million |
At June 30, 2015, cash and cash equivalents were $14.4 million, down from $17.9 million at December 31, 2014. Cash included $1.4 million of cash and $13.0 million in money market funds. Current assets were $23.3 million and current liabilities were $16.4 million. The company had $3.0 million of short-term line-of-credit borrowings, no long-term debt, and total liabilities of $19.4 million. Shareholders’ equity was $11.9 million, down from $15.7 million at year-end.
Six-month investing cash outflows were $0.6 million, including $0.5 million for property and equipment and $0.1 million for licensed technology. Financing cash outflows were $1.1 million, primarily asset-financing payments of $1.4 million, partially offset by $0.4 million of common-stock issuance proceeds.
Material changes versus the prior comparable period
- Second-quarter revenue decreased 1%, while first-half revenue increased 3%.
- Integrated-circuit revenue was approximately $15.1 million in each second quarter and increased to approximately $29.4 million in the first half from $25.7 million. Higher average selling prices offset lower second-quarter unit volume; first-half unit volume and average selling prices increased.
- Television and panel sales declined, while digital-projector sales increased due to market-share gains. The company described a transition toward long-lived niche products.
- Licensing revenue was negligible in 2015 versus approximately $0.1 million in the second quarter and $3.0 million in the first half of 2014, including milestone revenue.
- Gross margin fell primarily because of manufacturing-ramp costs in the digital-projection market and the absence of higher-margin licensing revenue.
- Research and development expense increased 4% in the quarter and 1% in the first half. Selling, general and administrative expense decreased 3% and 4%, respectively.
- Operating cash flow deteriorated from $2.3 million provided in the first half of 2014 to $1.9 million used in the first half of 2015.
Outlook, liquidity, risks and unusual items
Management expects manufacturing efficiencies as digital-projection products mature and states that existing working capital should fund operating, investing and financing needs for at least the next twelve months. The company may pursue debt or equity financing or reduce expenditures if additional liquidity is needed, but provides no assurance that financing will be available on acceptable terms.
The revolving credit facility has a stated maturity of January 1, 2016. Borrowing capacity is generally limited to the lesser of $10.0 million or $1.0 million plus 80% of eligible receivables, subject to covenants and other conditions. The company was in compliance at June 30, 2015, and stated that the $3.0 million non-formula advances were repaid within the required terms.
- Revenue concentration is substantial: the top five end customers represented 82% of first-half revenue, the top distributor represented 27%, and one end customer represented 49%.
- Approximately 100% of first-half revenue was generated outside the United States. The company faces Asia-related economic, political, currency, regulatory and natural-disaster risks.
- The company relies on a limited number of foundries and assembly and test vendors, generally without long-term supply agreements, creating supply, capacity, yield and pricing risks.
- Customer orders are generally cancellable and are not supported by long-term purchase commitments. Inventory forecasts may therefore be inaccurate, potentially resulting in shortages or obsolescence charges.
- The company has historically incurred operating losses and reported a $359.7 million accumulated deficit at June 30, 2015. U.S. deferred tax assets remain subject to a full valuation allowance.
- Management disclosed ordinary-course legal matters and intellectual-property indemnification obligations but reported no material related liability at June 30, 2015.
- The company recorded a $0.2 million first-half benefit from reversal of foreign uncertain tax positions and expects approximately $0.3 million of additional reductions within twelve months from expiring statutes of limitation.
- Management concluded that disclosure controls were effective and reported no material changes to internal control over financial reporting.
Investor verification items
- Verify the company’s ability to restore positive operating cash flow before the credit facility maturity date.
- Assess the sustainability of revenue from the digital-projector market and the timing of expected manufacturing efficiencies.
- Monitor customer and distributor concentration, particularly the 49% first-half revenue contribution from one end customer.
- Reconcile the effect of absent licensing milestones on future gross margin and earnings volatility.
- Review foundry and assembly capacity, inventory exposure and potential supply interruptions in Asia.
- Evaluate future financing needs, potential equity dilution and compliance with Nasdaq listing requirements.