Pixelworks, Inc. 2019 Q1 Form 10-Q Summary
Business context and reporting period
Pixelworks designs and markets visual display processing semiconductors, intellectual property, software and custom ASIC solutions for mobile video, digital projection and video delivery applications. The filing covers the unaudited three months ended March 31, 2019, compared with the three months ended March 31, 2018. Pixelworks reported 353 patents related to visual display technology as of March 31, 2019.
Financial performance and liquidity
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Revenue | $16.648 million | $15.292 million | +9% |
| Gross profit | $8.472 million | $7.802 million | +9% |
| Gross margin | 51% | 51% | Unchanged |
| Operating loss | $3.460 million | $1.294 million | Loss increased |
| Net loss | $29 thousand | $598 thousand | Loss narrowed |
| Net loss per share | $0.00 | $0.02 | Improved |
| Cash used in operations | $2.034 million | $4.430 million | Use decreased |
- Revenue included $15.074 million of IC sales and $1.574 million of engineering services, license and other revenue. International revenue represented approximately 96% of total revenue, with Japan contributing $13.461 million.
- Operating expenses increased to $11.932 million from $9.096 million. Research and development rose 45% to $6.472 million, primarily because the prior-year period benefited from $4.0 million of co-development offsets. Selling, general and administrative expense rose 18% to $5.460 million, largely due to stock-based compensation and salary increases.
- The reported net loss was substantially offset by a $3.905 million gain on sale of patents. Excluding that gain, the company remained materially loss-making at the operating and pre-tax levels.
- Cash and cash equivalents were $17.346 million at March 31, 2019, and short-term marketable securities were $6.566 million, for total cash and short-term investments of approximately $23.9 million.
- Total assets were $70.611 million and total liabilities were $23.809 million. Shareholders’ equity was $46.802 million, with an accumulated deficit of $384.124 million.
- There were no borrowings under the secured revolving credit facility. The facility permits borrowings up to the lesser of $10.0 million or $1.0 million plus 80% of eligible receivables and matures December 27, 2019. The company was in compliance with its covenants.
- Operating cash use was partly offset by $4.250 million of patent-sale proceeds. Investing activities also included $1.655 million of property and equipment purchases and $521 thousand of licensed technology purchases.
- The company adopted ASC 842 on January 1, 2019, recognizing operating lease right-of-use assets and liabilities. Operating lease liabilities totaled $6.113 million at March 31, 2019, and future operating lease payments totaled $6.833 million.
Material changes versus the prior comparable period
- Revenue increased 9%, driven by higher unit sales into the video delivery market and recognition of license revenue.
- Gross margin remained stable at 51%, although direct product costs increased to 47% of revenue from 46%, partly due to product mix.
- Operating loss increased by $2.166 million because of higher research and development and selling, general and administrative expenses.
- Net loss improved because Q1 2019 included the $3.905 million patent-sale gain, while Q1 2018 included a $1.272 million gain on debt extinguishment and $2.220 million of convertible-debt repayments.
- Operating cash outflow improved by $2.396 million year over year, although operations continued to consume cash.
- Restructuring expense was zero in Q1 2019 versus $19 thousand in Q1 2018. The 2017 restructuring plan was completed in Q1 2018.
- Shares outstanding increased, with 37.543 million shares outstanding as of May 3, 2019, compared with weighted-average diluted shares of 37.247 million in Q1 2019 and 35.183 million in Q1 2018.
Guidance, outlook, commentary and risks
Management stated that existing working capital was expected to fund operating, investing and financing needs for at least the next twelve months. The filing does not provide specific quarterly or annual revenue, margin or earnings guidance. Management noted that additional debt or equity financing, expense reductions, or both may be required over the longer term, with no assurance that financing would be available on favorable terms.
- Results are subject to seasonality, product mix, average selling prices, customer orders and semiconductor-industry cycles. Digital projector revenue has historically been higher in the third quarter and lower in the first quarter.
- Revenue is highly concentrated: the top five end customers represented 82% of Q1 revenue, one end customer represented 56%, and the top distributor represented 22%.
- Pixelworks relies on a limited number of semiconductor foundries and assembly and test vendors, primarily in Taiwan and China, without long-term supply agreements. Supply disruption, capacity constraints, defects, yield issues, tariffs or regional instability could materially affect results.
- The company continues to face rapid technological change, intense competition, lengthy design-win cycles and substantial research and development requirements. Design wins do not guarantee future sales volumes.
- Accounts receivable concentration is significant: two accounts represented 52% and 23% of receivables at March 31, 2019.
- Contractual obligations included $7.107 million of estimated purchase commitments to contract manufacturers, $6.833 million of operating lease payments and $1.310 million of other purchase obligations. Income taxes payable of approximately $2.3 million was excluded from the contractual-obligations table because payment timing was uncertain.
- Pixelworks reported an accumulated deficit and has generally incurred operating losses since 2004. Future profitability is not assured, and additional financing could dilute existing shareholders or impose restrictive covenants.
- The company disclosed ordinary-course legal matters and intellectual-property indemnification obligations but did not identify a material pending legal liability. It also has Technology Partnerships Canada repayment obligations extending to January 2024.
- Management concluded that disclosure controls and procedures were effective and that there were no material changes to internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether revenue growth in video delivery and license revenue is recurring or reflects one-time customer or licensing activity.
- The sustainability of the 51% gross margin amid product-mix changes, pricing pressure and semiconductor supply costs.
- Operating cash burn and the company’s ability to reach positive operating cash flow without relying on patent sales or additional financing.
- The renewal or replacement of the revolving credit facility before its December 27, 2019 maturity date.
- Customer, distributor and accounts-receivable concentration, including the potential effect of order cancellations or delayed payments.
- Supply-chain dependence on foundries and assembly vendors in Taiwan and China, including exposure to geopolitical, trade, natural-disaster and capacity risks.
- Potential dilution or increased leverage if the company pursues additional financing or acquisitions.
- The effect of ASC 842 lease liabilities and the remaining contractual commitments on future liquidity.