Pixelworks, Inc. — Q1 2018 Form 10-Q Summary
Business context and reporting period
Pixelworks designs visual-display processing semiconductors, intellectual-property cores, software and ASIC solutions for display, mobile-video and video-delivery applications. The unaudited report covers the three months ended March 31, 2018, with comparison to March 31, 2017. The August 2017 acquisition of ViXS expanded the company into video delivery and infrastructure markets.
Key financial metrics
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Revenue | $15.3 million | $22.7 million | Down 33% |
| Gross profit | $7.8 million | $12.4 million | Down 37% |
| Gross margin | 51% | 55% | Down 4 percentage points |
| Operating income (loss) | $(1.3) million | $3.3 million | Declined |
| Net income (loss) | $(0.6) million | $2.8 million | Declined |
| Diluted EPS | $(0.02) | $0.09 | Declined |
| Cash flow from operations | $(4.4) million | $(1.2) million | Higher use of cash |
Q1 2018 revenue included $14.6 million of IC sales and $0.7 million of engineering services. Operating expenses were $9.1 million, including $4.5 million of research and development, $4.6 million of selling, general and administrative expense and $19,000 of restructuring expense. Interest income and other, net was $1.0 million, including a $1.3 million gain on extinguishment of convertible debt.
Cash and cash equivalents were $20.6 million at March 31, 2018, down from $27.5 million at December 31, 2017. Current assets were $31.4 million versus current liabilities of $16.0 million. The company had no borrowings under its revolving line of credit and was in compliance with its covenants. Convertible debt was eliminated during the quarter through $2.2 million of cash redemptions and the issuance of 435,353 common shares valued at $2.6 million.
Material changes versus the prior comparable period
- Revenue declined $7.4 million, primarily because of lower unit sales in digital projectors and TV and panel markets following the end-of-life of legacy products. The ViXS acquisition provided a partial offset through video-delivery revenue.
- Gross margin decreased from 55% to 51%, primarily due to acquired-technology amortization, inventory step-up and backlog amortization related to the ViXS acquisition.
- Research and development expense decreased 9% to $4.5 million, helped by a $2.0 million offset under a customer co-development agreement, compared with $0.4 million in Q1 2017.
- Selling, general and administrative expense increased 11% to $4.6 million because of higher headcount and expanded operations following the acquisition.
- Weighted-average basic shares increased to 35.2 million from 29.3 million, primarily reflecting shares issued in the ViXS acquisition and debt conversion.
- Operating cash use increased to $4.4 million, while financing activities used $2.3 million, principally for convertible-debt redemption and asset-financing payments.
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, while noting that additional financing or expenditure reductions may be required over the longer term and may not be available on favorable terms.
Pixelworks expected to recognize the final $2.0 million co-development reimbursement in the second half of 2018 upon completion of the remaining milestone. Remaining inventory step-up of approximately $0.3 million and backlog amortization of approximately $0.1 million were expected to affect cost of revenue over roughly the next six months.
On April 27, 2018, the company committed to a new restructuring plan involving an approximately 5% workforce reduction, primarily in development, marketing and administration. It expected substantial completion by the end of Q3 2018, estimated charges of approximately $2.0 million, cash expenditures of approximately $2.0 million over four years and annualized savings of approximately $2.0 million.
Key risks include revenue concentration, reliance on a limited number of Asian customers, distributors, foundries and assembly/test vendors, rapid technological change, product-development and design-win uncertainty, semiconductor cyclicality, foreign-currency exposure, customer order cancellations, potential inventory obsolescence, intellectual-property claims, cybersecurity incidents and the need for future financing. The revolving credit facility matures December 28, 2018 and had no outstanding balance at quarter-end.
The company adopted the new revenue-recognition standard on January 1, 2018 without a reported material impact. Lease accounting changes were scheduled to become effective January 1, 2019 and were expected to add right-of-use assets and lease liabilities for operating leases. The company also continued refining its accounting for the Tax Cuts and Jobs Act; related changes could be material to income-tax expense.
Facts investors should verify
- Whether revenue from new ViXS-related video-delivery products offsets continued declines in legacy projector and TV/panel products.
- Progress toward the remaining $2.0 million co-development milestone and the timing of related expense offsets.
- Actual restructuring charges, cash costs and savings compared with management’s estimates.
- Cash burn, liquidity after debt retirement and the company’s ability to refinance or replace the revolving facility before its December 2018 maturity.
- Customer and distributor concentration, including the top end customer at 53% of Q1 revenue and the top five end customers at 80%.
- Potential effects of acquired intangible-asset amortization, inventory step-up and backlog amortization on future margins.
- Integration of ViXS into internal controls and the company’s continuing tax accounting under the Tax Cuts and Jobs Act.