Pixelworks, Inc. Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2011. The financial statements are unaudited. Pixelworks designs and markets video and pixel-processing semiconductors and software for digital televisions, projectors, and other display devices. The company reported 17,950,420 common shares outstanding as of October 31, 2011.
Financial Results and Position
| Metric | Q3 2011 | Q3 2010 | 9M 2011 | 9M 2010 |
|---|---|---|---|---|
| Revenue | $17.4 million | $18.0 million | $47.8 million | $55.4 million |
| Gross profit | $8.5 million | $8.3 million | $22.4 million | $25.6 million |
| Gross margin | 49% | 46% | 47% | 46% |
| Operating loss | $1.2 million | $1.0 million | $6.2 million | $2.4 million |
| Net income (loss) | $(1.1) million | $0.01 million | $(4.6) million | $3.6 million |
| Diluted loss per share | $(0.06) | $0.00 | $(0.29) | $0.25 |
- Q3 revenue declined 4% year over year; nine-month revenue declined 14%.
- Q3 unit volume increased 23%, but average selling price declined 22%. For the nine-month period, units increased 7% while average selling price declined 19%.
- Research and development expense increased 7% in Q3 and 6% for the nine-month period, primarily due to compensation, headcount, intellectual property, and engineering software costs.
- At September 30, 2011, cash and cash equivalents were $17.0 million, compared with $16.9 million at December 31, 2010. Marketable securities declined from $13.0 million to zero.
- Working capital increased $5.9 million during the first nine months. Accounts receivable were $4.4 million, inventories were $4.7 million, and total assets were $39.1 million.
- Net cash used in operating activities was $0.04 million for the first nine months, compared with $3.1 million of cash provided in the prior-year period.
- Net cash provided by investing activities was $12.5 million, principally from sales and maturities of securities and $1.6 million of patent-sale proceeds.
- Net cash used in financing activities was $12.4 million, including the $15.8 million debenture repurchase, $3.0 million repayment of the credit line, $2.2 million of asset-financing payments, and $8.3 million of equity-offering proceeds.
- The company stated that it had no short- or long-term debt at September 30, 2011. Its secured revolving credit facility provided capacity of up to the lesser of $10.0 million or 80% of eligible receivables, subject to covenants and borrowing conditions; there were no outstanding borrowings at quarter-end.
Material Changes Versus Prior Period
- Revenue pressure reflected lower pricing and product mix, including increased sales of lower-priced MotionEngine co-processor ICs and reduced pricing on older digital-projector products.
- Gross margin improved to 49% in Q3 from 46%, primarily because of lower inventory charges, manufacturing improvements, and increased scrap-disposal benefits.
- Operating performance deteriorated for the nine-month period because revenue declined while research and development spending increased. The prior-year period also benefited from a $5.9 million reversal of uncertain tax positions, compared with a $1.0 million reversal in 2011.
- The company redeemed the remaining $15.8 million principal amount of its 1.75% convertible subordinated debentures for cash at par on May 16, 2011.
- In May 2011, Pixelworks issued 4.2 million common shares at $2.24 per share and received approximately $8.3 million of net proceeds.
- The company sold certain patents and related rights for a $1.6 million gain during the first quarter of 2011.
- Revenue became more concentrated: distributors represented 75% of Q3 revenue and 69% of nine-month revenue, while the largest distributor represented 58% and 52%, respectively.
Guidance, Outlook, Risks, and Unusual Items
- Management’s fourth-quarter 2011 outlook was revenue of $17 million to $18 million, gross margin of approximately 46% to 48%, and operating expenses of $9.5 million to $10.5 million.
- Management expected existing working capital and the revolving credit facility to fund operating, investing, and financing needs for the next twelve months, but noted that additional financing or spending reductions could become necessary.
- The company has incurred operating losses since 2004 and stated that it may be unable to achieve or sustain profitability.
- Liquidity was materially reduced by the debenture repurchase. Future financing could dilute shareholders, and the company acknowledged that financing may not be available on acceptable terms.
- Pixelworks relies on four wafer foundries and three assembly and test vendors, generally without long-term supply agreements. Each product’s wafers are fabricated by a single foundry, creating supply, capacity, yield, pricing, and geopolitical risks.
- Sales and customers are highly concentrated in Asia. Japan, Taiwan, China, Korea, and Europe accounted for most reported revenue, and approximately 98% of nine-month revenue was generated outside the United States.
- Reserved inventory totaled $0.9 million at September 30, 2011. Management stated that it did not currently expect to sell or use the reserved inventory, although future customer purchases remained possible.
- Accounts receivable and revenue were concentrated among a limited number of customers and distributors; the largest accounts represented 38%, 14%, and 11% of receivables at quarter-end.
- The company disclosed risks from rapid technological change, declining average selling prices, semiconductor cyclicality, product defects, customer cancellations, intellectual-property claims, foreign-exchange movements, tax contingencies, and potential Nasdaq listing compliance issues.
- Accrued lease-termination costs were $0.1 million and were expected to be paid over approximately two years. The filing disclosed no material off-balance-sheet arrangements and no currently material legal proceedings.
Investor Verification Priorities
- Verify whether MotionEngine design wins convert into sustained volume shipments and offset lower average selling prices.
- Monitor quarterly cash generation, inventory reserves, and the remaining liquidity available under the secured revolving credit facility.
- Assess the sustainability of gross-margin improvement as product mix shifts toward newer products with higher material costs.
- Track revenue and receivables exposure to the largest distributor and end customers, including cancellations or order deferrals.
- Review the company’s ability to fund research and development while operating at a loss and without long-term debt.
- Evaluate exposure to foundry concentration, Asian manufacturing and customer locations, technology transitions, and potential product-quality or supply disruptions.
- Confirm the impact of tax-contingency reversals, deferred-tax valuation allowances, and the expected approximately $1.4 million reduction in uncertain tax positions within twelve months.