Business Context and Reporting Period
Pixelworks, Inc. filed an unaudited Form 10-Q for the quarter and nine months ended September 30, 2022. The company develops visual-processing semiconductors and software for mobile, projector, video-delivery and cinema applications, with operations and customers concentrated in Asia. Pixelworks reported one operating segment.
Management continued its strategy of operating Pixelworks Semiconductor Technology (Shanghai) Co., Ltd. (“PWSH”) as an Asia-focused profit center and pursuing a potential listing on the Shanghai Stock Exchange STAR Market, currently targeted for 2023 but subject to regulatory approval and other uncertainties.
Key Financial Metrics
| Metric | Q3 2022 | Q3 2021 | 9M 2022 | 9M 2021 |
|---|---|---|---|---|
| Revenue | $17.6 million | $15.2 million | $53.3 million | $38.5 million |
| Gross profit | $8.8 million | $8.0 million | $26.9 million | $18.8 million |
| Gross margin | 50% | 53% | 51% | 49% |
| Loss from operations | $(4.7) million | $(3.9) million | $(13.8) million | $(16.3) million |
| Net loss attributable to Pixelworks | $(4.5) million | $(4.1) million | $(14.1) million | $(16.5) million |
| Net loss per share | $(0.08) | $(0.08) | $(0.26) | $(0.32) |
| Operating cash flow | Not separately provided | Not separately provided | $(11.5) million | $(3.0) million |
Q3 revenue was primarily IC product sales of $17.2 million, with $0.4 million from engineering services, licensing and other activities. Nine-month IC sales were $52.3 million. Research and development expense increased to $8.4 million in Q3 and $24.1 million for the nine-month period, while selling, general and administrative expense was $5.1 million in Q3 and $16.6 million for nine months.
At September 30, 2022, cash and cash equivalents were $57.6 million, down from $61.6 million at December 31, 2021. Cash included $19.0 million in money market funds and $38.6 million in cash. Accounts receivable were $10.8 million, inventories were $2.7 million and total current assets were $72.6 million.
Total liabilities were $29.6 million, including $0.4 million of long-term liabilities, $11.8 million of deposit liability and operating lease liabilities totaling approximately $3.8 million. The filing does not present conventional bank debt as a material balance. A Technology Partnerships Canada obligation of $0.4 million remained payable through January 2024.
Pixelworks reported total shareholders’ equity of $44.5 million, including $10.7 million of non-controlling interest, and a redeemable non-controlling interest of $28.2 million. The accumulated deficit was $449.1 million. The company stated that existing working capital is expected to fund operating, investing and financing needs for the next twelve months and beyond, but acknowledged that additional financing may be required over the longer term.
Material Changes Versus Prior Comparable Period
- Q3 revenue increased 16% year over year, while nine-month revenue increased 38%. Management attributed the growth to higher demand across mobile, projector and video-delivery markets.
- Nine-month mobile IC sales increased 59%, projector sales increased 26% and video-delivery sales increased 132%. Q3 increases were 36%, 10% and 38%, respectively.
- Q3 gross margin declined to 50% from 53%, primarily because of product mix. Nine-month gross margin improved to 51% from 49%, mainly because acquired-intangible amortization declined.
- Q3 operating loss widened to $4.7 million from $3.9 million, despite higher revenue, reflecting increased research and development expense and the absence of a $1.3 million co-development reimbursement recognized in Q3 2021.
- Nine-month operating loss improved to $13.8 million from $16.3 million, but operating cash usage worsened to $11.5 million from $3.0 million.
- Accounts receivable increased to $10.8 million from $8.7 million, and reported days sales outstanding increased to 55 from 47. Inventory increased to $2.7 million from $1.5 million.
- In August 2022, Pixelworks received approximately $10.7 million, net of costs, for selling a 2.74% interest in PWSH. Pixelworks continued to own 80.87% of PWSH after the transaction.
- Foreign currency translation increased accumulated other comprehensive income to $2.7 million from a loss of $0.5 million at year-end 2021.
Guidance, Outlook, Risks and Unusual Items
- Management expected an approximately $2.2 million offset to research and development expense during the remainder of 2022 under the co-development agreement. The agreement does not guarantee future product sales.
- Management stated that PWSH’s STAR Market listing is currently intended for 2023, but there is no assurance that PWSH will file, obtain approval or complete the listing on that timetable or at all.
- Investors in PWSH may have redemption rights if the listing is not completed by specified dates, generally June 30, 2024 for private-equity and strategic investors and December 31, 2024 for employee-owned entities. Any required redemption could require substantial additional capital and materially affect Pixelworks’ financial condition.
- COVID-19 lockdowns under China’s zero-COVID policy continued to weaken Chinese consumer demand and disrupt portions of the company’s workforce, customers and supply chain. The filing also identifies inflation, rising interest rates, economic uncertainty and the war in Ukraine as risks.
- Pixelworks relies on a limited number of foundries and assembly and test vendors, primarily in Taiwan and China, without long-term supply agreements. Supply shortages, manufacturing defects, capacity constraints and geopolitical or natural-disaster disruptions could affect revenue and margins.
- Revenue is highly concentrated. Distributors represented 61% of nine-month revenue, the largest distributor represented 33%, and the top five end customers represented 79%. Substantially all customer orders are cancelable and generally lack long-term purchase commitments.
- Approximately 97% of nine-month revenue came from outside the United States. The company faces China-related regulatory, geopolitical, currency-conversion and U.S.-China relationship risks.
- Pixelworks has incurred operating losses each fiscal year since 2010 and reported an accumulated deficit of $449.1 million at September 30, 2022. Continued losses could require spending reductions or additional debt or equity financing, potentially diluting shareholders.
- The company reported effective disclosure controls and procedures as of September 30, 2022, with no material changes to internal control over financial reporting during the quarter.
Important Facts for Investors to Verify
- Verify the sustainability of revenue growth and whether mobile, projector and video-delivery demand remains strong after COVID-19-related disruptions and semiconductor-market changes.
- Assess whether gross margin can remain near or above the nine-month 2022 level despite product mix, average selling-price declines, manufacturing costs and supply-chain pressures.
- Monitor operating cash burn, working-capital trends, customer collections, inventory turnover and the adequacy of the stated $57.6 million cash balance.
- Review the potential cash impact, timing and enforceability of PWSH redemption obligations if the STAR Market listing is delayed or unsuccessful.
- Evaluate customer, distributor and accounts-receivable concentration, including the risk of cancellations or delayed payments.
- Track progress toward the expected $2.2 million co-development reimbursement and confirm that it is treated as an expense offset rather than recurring product revenue.
- Confirm share-count information: the balance sheet shows 54.836 million shares at September 30, 2022, while the cover page reports 54.856 million shares outstanding as of November 4, 2022.