Pixelworks, Inc. Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2017. The interim financial statements are unaudited and prepared under U.S. GAAP. Pixelworks designs visual-display and video-processing semiconductors, intellectual-property cores, software and custom ASIC solutions. On August 2, 2017, it acquired ViXS Systems, Inc.
Financial Performance
| Metric | Q3 2017 | Q3 2016 | 9M 2017 | 9M 2016 |
|---|
| Revenue | $18.8 million | $13.7 million | $62.2 million | $37.4 million |
| Gross profit | $9.0 million | $6.6 million | $32.6 million | $16.6 million |
| Gross margin | 48% | 48% | 52% | 44% |
| Operating income (loss) | $(4.4) million | $(1.0) million | $1.0 million | $(10.8) million |
| Net income (loss) | $(4.7) million | $(1.2) million | $(0.6) million | $(11.4) million |
| Net loss per share | $(0.14) | $(0.04) | $(0.02) | $(0.41) |
- Third-quarter revenue increased 37%; nine-month revenue increased 66% year over year.
- Q3 revenue included approximately $2.0 million from ViXS. Revenue from TV and panel markets was zero in Q3 following the completion of legacy end-of-life orders in the first half of 2017.
- Q3 operating results included $1.0 million of inventory step-up and backlog amortization, $1.5 million of restructuring expense, approximately $1.8 million of acquisition-related costs, and $1.5 million of ViXS non-cash acquisition and debt-related amortization.
- Research and development expense was $5.3 million in Q3 and $14.7 million for nine months. Customer co-development payments reduced R&D expense by $1.3 million in Q3 and $4.0 million year to date.
- Q3 selling, general and administrative expense rose 114% to $6.6 million, principally due to ViXS-related headcount, executive severance, acquisition costs and higher bonus accruals.
Cash Flow, Balance Sheet and Liquidity
| Metric | September 30, 2017 | December 31, 2016 |
|---|
| Cash and cash equivalents | $26.3 million | $19.6 million |
| Total assets | $70.5 million | $30.9 million |
| Inventory | $5.1 million | $2.8 million |
| Total liabilities | $29.8 million | $11.8 million |
| Accumulated deficit | $(375.9) million | $(375.3) million |
- Operating cash flow was $10.8 million for the first nine months of 2017 versus $(4.6) million in the prior-year period.
- Investing cash flow was $(0.4) million, including $2.3 million of capital expenditures and $1.9 million of cash acquired with ViXS.
- Financing cash flow was $(3.7) million, including $4.0 million repaid on the acquisition-related line of credit, $1.0 million of convertible-debt repayments and $0.9 million of asset-financing payments.
- The company had no borrowings under its secured revolving line at September 30, 2017. The facility, with availability capped at the lesser of $10.0 million or a borrowing-base formula, matured December 29, 2017, and credit extensions were subject to the bank’s sole discretion.
- 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 may be required over the longer term.
Material Changes and Unusual Items
- ViXS was acquired for preliminary consideration of $17.0 million, primarily through issuance of approximately 3.7 million Pixelworks shares and restricted stock units. The acquisition added video-delivery, infrastructure, networking and consumer-video products.
- The acquisition generated preliminary goodwill of $18.0 million and $6.7 million of identifiable intangible assets. The purchase-price allocation remained subject to change during the measurement period.
- Pixelworks assumed secured convertible debt. The September 30 carrying amount was $5.8 million, with principal of approximately $5.1 million, a 10% stated interest rate subject to specified adjustment, and maturities in September 2019 and January 2020.
- A September 2017 restructuring reduced the workforce by approximately 15%. The company recorded $1.5 million of severance expense and expected approximately $0.5 million of additional charges during the remainder of 2017.
- Revenue from end-of-life products was $14.3 million for the first nine months of 2017, supporting year-over-year revenue growth but not representing an ongoing revenue source.
Outlook, Risks and Contingencies
- The company did not provide quantitative revenue or earnings guidance in the filing. Management expects gross margins to vary with product mix, licensing revenue, average selling prices, restructuring, acquisition-related amortization, inventory step-up and manufacturing conditions.
- Pixelworks planned to adopt the new revenue-recognition standard on January 1, 2018 using a tentative modified-retrospective method. Management expected certain chip sales may be recognized over time rather than at a point in time, potentially resulting in earlier revenue recognition.
- Major risks include integration of ViXS, continued operating losses, customer and distributor concentration, cancelable purchase orders, reliance on a limited number of Asian foundries and assembly vendors, rapid technological change, semiconductor cyclicality and foreign-exchange exposure.
- Customer concentration was substantial: the top five end customers represented 79% of nine-month 2017 revenue, and one customer represented 70% of accounts receivable at September 30, 2017.
- Contractual obligations totaled $24.2 million, excluding $2.2 million of income-tax liabilities whose payment timing could not be reliably estimated. Obligations included $7.3 million of purchase commitments, $5.1 million of convertible-debt principal, $5.5 million of operating leases and $1.2 million of convertible-debt interest.
- Legal matters and intellectual-property indemnification obligations existed in the ordinary course; management did not expect them to have a material adverse effect, but acknowledged inherent uncertainty.
- Management concluded disclosure controls were effective, but excluded ViXS controls from its assessment because the acquisition had occurred recently. Integration of ViXS created a material change in internal control procedures.
Important Facts for Investors to Verify
- Whether ViXS integration delivers anticipated revenue, cost synergies and cash-flow benefits, and whether the preliminary purchase-price allocation changes materially.
- The remaining amortization of acquired inventory step-up and intangible assets, as well as the additional restructuring charges expected after September 30, 2017.
- The refinancing, renewal or replacement of the revolving credit facility after its December 29, 2017 maturity date.
- The company’s ability to manage the $5.1 million convertible-debt principal, 10% interest rate and potential share dilution from conversion.
- The sustainability of revenue growth after the $14.3 million of nine-month end-of-life product revenue and the discontinuation of TV and panel revenue.
- The effect of customer concentration, supplier dependence, international operations and the January 1, 2018 revenue-recognition adoption on future results.
