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Edited Transcript of PXLW earnings conference call or presentation 1-Aug-19 9:00pm GMT

Q2 2019 Pixelworks Inc Earnings Call

SAN JOSE Aug 19, 2019 (Thomson StreetEvents) -- Edited Transcript of Pixelworks Inc earnings conference call or presentation Thursday, August 1, 2019 at 9:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Steven L. Moore

Pixelworks, Inc. - VP, CFO, Treasurer & Secretary

* Todd A. DeBonis

Pixelworks, Inc. - President, CEO & Director

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Conference Call Participants

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* Charles Lowell Anderson

Dougherty & Company LLC, Research Division - VP and Senior Research Analyst

* Sujeeva Desilva

Roth Capital Partners, LLC, Research Division - Senior Research Analyst

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to Pixelworks, Inc. Second Quarter 2019 Earnings Conference Call. I will be your operator for today's call. (Operator Instructions) This conference call is being recorded for replay purposes.

I would now like to turn the call over to Pixelworks' Vice President and CFO, Mr. Steve Moore.

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Steven L. Moore, Pixelworks, Inc. - VP, CFO, Treasurer & Secretary [2]

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Good afternoon and thank you for joining us today. With me on today's call is Todd DeBonis, Pixelworks' President and CEO. The purpose of today's conference call is to supplement the information provided in our press release issued earlier today, announcing the Company's financial results for the second quarter 2019.

Before we begin, I would like to remind you that various remarks we make on this call, including those about our projected future financial results, economic and market trends and our competitive position constitute forward-looking statements. These forward-looking statements and all other statements made on this call that are not historical facts are subject to a number of risks and uncertainties that may cause actual results to differ materially. All forward-looking statements are based on the Company's beliefs as of today, Thursday, August 1, 2019. And we undertake no obligation to update any such statements to reflect events or circumstances occurring after today. Please refer to today's press release, our annual report on Form 10-K for the year ended December 31, 2018 and subsequent SEC filings for a description of factors that could cause forward-looking statements to differ materially from actual results.

Additionally, the Company's press release and management statements during this conference call will include discussions of certain measures and financial information in GAAP and non-GAAP terms including gross margin, operating expenses, net income loss, and net income loss per share. These non-GAAP measures exclude gain on sale of patents, inventory step up and backlog amortization, amortization of acquired intangible assets, stock-based compensation expense, restructuring expenses, discount accretion on convertible debt fair value and gain on extinguishment of convertible debt. We use these non-GAAP measures internally to assess our operating performance. The Company believe these non-GAAP measures provide a meaningful perspective on our core operating results and underlying cash flow dynamics. But we caution investors to consider these measures in addition to, not as a substitute for, nor superior to the Company's consolidated financial results as presented in accordance with GAAP. Included in the Company's press release are definitions and reconciliations of GAAP to non-GAAP net income loss and GAAP net income loss to EBITDA, to adjusted EBITDA, which provide additional details.

With that said, I will now turn the call over to Todd for his opening remarks.

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Todd A. DeBonis, Pixelworks, Inc. - President, CEO & Director [3]

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Thank you, Steve and good afternoon and welcome to everyone joining on today's call. As outlined in today's press release, we had a solid quarter with financial results that were in line or better than our guidance. Second quarter revenue of $18 million was at the midpoint of our guidance range. Reflecting a continued year-over-year growth in mobile and video delivery businesses. Gross margin expanded 80 basis points sequentially and 140 basis points year-over-year to 54.1% and operating expense came in better than anticipated, resulting in breakeven adjusted EPS for the quarter, which was at the high end of our guidance.

During the quarter we continue to execute well across all areas of the business. As I emphasized on previous calls, the team's priority and focus continue to be on advancing our growth initiative in mobile, while maintaining our position in projector and video delivery. Customers have responded positively to Pixelworks' expanded portfolio of visual processing solutions. Our product portfolio for mobile devices now includes multiple Iris visual processors with distinctive feature sets and at different, but compelling price points as well as our software-only Soft Iris solutions. This expanded portfolio provides us with greater flexibility to meet specific customers' needs and requirements in addition to expanding the total addressable market.

Looking from -- looking more specifically at our Mobile business during the second quarter. Revenue grew year-over-year for the sixth consecutive quarters and for the first half of 2019, Mobile revenue increased more than 100% over the first half of last year. In addition to the wins we've announced on recently launched smartphones incorporating both our Iris visual processors and our newly introduced Soft Iris solutions, we continue to actively sample production volume of our fifth generation Iris visual processor to a targeted group of mobile OEMs. One of these engagements is a close collaboration with a Tier 1 OEM customer targeting a launch before year end.

To briefly highlight our most recent announced wins. Earlier this week, Black Shark introduced its newest gaming phone the Shark 2 Pro, which is the fourth Black Shark device to include our Iris visual processor. This flagship smartphone also leverages Pixelworks' True View auto-adaptive display capabilities, including our next-generation DC dimming technology designed specifically to enhance visual and system performance for AMOLED displays. Built on Qualcomm Snapdragon 855 plus mobile platform, the Shark 2 Pro smartphone also embraces the full suite of visual enhancements provided by our Iris visual processor including Pixelworks' industry leading motion engine MEMC technology, Always-HDR mode that provides real-time SDR to HDR conversion as well as a combination of picture quality enhancements and high efficiency display calibration.

Also announced ASUS launched its next generation ROG Phone 2 in conjunction with Tencent Games. The ROG 2 is the first smartphone to utilize our recently introduced Soft Iris technology running on Qualcomm's flagship Snapdragon 855 and 855 Plus mobile platform. Leveraging our Soft Iris solution, the ROG 2 smartphone features industry leading color calibration and HDR tone mapping. As a reminder, we introduced Soft Iris in March, as part of an announced cooperative agreement with Qualcomm to provide smartphone OEMs with a seamless solution to implement Pixelworks' Visual Enhancement technology on mobile devices based on the Snapdragon 855 platform. This first win and commercial launch of a smartphone incorporating Soft Iris in less than five months is a significant accomplishment and a testament to the team's commitment to advancing our mobile growth initiatives.

As we discussed on last quarter's conference call, I want to reemphasize that Soft Iris provides only a subset of the visual processing enhancement offered by our Iris processors. Additionally, our Soft Iris solution requires an existing high quality display pipeline and currently that high quality display pipeline is exclusively available on Qualcomm's flagship Snapdragon 855 platform. These two distinguishing factors are important because they demonstrate why Soft Iris is complementary to our Iris family of mobile solutions and expands our total mobile TAM versus cannibalizing our Iris visual processors.

Turning to an update on TrueCut, our innovative end-to-end solution for cinematic motion in HDR that we introduced in early Q2, as a result of close and ongoing collaboration with our lead customer YouKu, today our TrueCut solution is now enabling what's arguably, the single most comprehensive ecosystem for creation, delivery and viewing of high quality HDR video on mobile devices in China. The following metrics demonstrate our significant early progress on extending TrueCuts reach since our introduction of this innovative video delivery platform in April. As of quarter end, there were over 2,500 hours of video content available in the TrueCut format and we expanded the number of TrueCut enabled smartphones to over 70 existing models from six different mobile OEMs, making TrueCut content available to over 100 million mobile device users.

As part of our previously announced agreement YouKu is committed to re-mastering a significant percentage of its existing library, as well as developing new high quality HDR content mastered in original TrueCut format. Concurrently, Pixelworks' is committed to qualifying additional existing mobile devices to enable streaming of high quality HDR video content exclusively through the YouKu app. We are also increasingly focused on direct engagements with mobile and TV OEMs to offer TrueCut certification on their next generation devices. As part of our broader TrueCut licensing model, these entirely independent and device-specific certifications enable TrueCut quality content to be experienced on the device across all TrueCut enabled content as opposed to only allowing the content to be viewed via the YouKu app.

Although our early focus has primarily been on smartphones and mobile video ecosystems TrueCut was fundamentally designed to expand the boundaries for high quality, cinematic motion and HDR content creation, while also maintaining the content creators original intent regardless of the display in which it's viewed. As such TrueCut's value proposition and total market opportunity extends beyond mobile to include home entertainment systems and cinematic theaters as well as the associated software tools used for content creation and mastering. On a related note, I want to take this opportunity to acknowledge our team following the recently announced Hollywood Professional Associations' Engineering Excellence Award for Pixelworks' TrueCut motion grading tools. This prestigious and merit-based award is a testament to the impressive technology capabilities of the Pixelwork team.

Turning to our video delivery business. We recorded another solid quarter and although revenue from video delivery moderated slightly from Q1, revenue grew more than 70% year-over-year. Our video delivery revenue during the first half of this year and back half of 2018 has largely been driven by demand for our highly integrated and low power xCode family of processors utilized in ADSB-compatible in-home media devices in Japan. More specifically, early adopter demand for our Japanese customer set-top converter boxes was a key contributor to the several consecutive quarters of year-over-year growth. As anticipated and indicated on our last call, demand began to subside in Q2 and now meaning -- now has meaningfully shifted following the initial ramp. From higher volume set-top box converter devices towards our leading Japanese customers advanced Personal Video recorders.

Although they represent lower unit volumes due to their significantly higher price, these 4K PVR devices typically incorporate two or more xCode processors compared to converter boxes that utilize a single-chip solution. While we anticipate continued steady demand for our xCode decoder and transcoder solutions on existing 4K PVR designs, this will be more than offset in Q3 by a steep decline in end market demand for the set-top box converter devices. Looking now beyond Q3 as price for both ADSB-compatible converter boxes and PVRs has come down over time, and additional high quality broadcast content becomes available. We remain well positioned with key customers to benefit from a combination of renewed market demand and incremental market share gains.

Touching briefly on digital projector, the business performed as expected during the second quarter with revenue growing just over 20% sequentially. Yet down year-over-year as we came off a seasonally lower Q1 that was also further weakened by the inventory correction discussed last quarter. As our projector customers successfully worked down inventory at their fiscal end in March, channel inventories began to normalize in the second quarter. However, consistent with our expectations and commentary earlier in the year, the macroeconomic backdrop, particularly in China has softened -- has continued to soften the profile of the end market demand in the projector market. As a result and combined with our large co-development customer's anticipated transition to our next generation SoC beginning in late 2019, we continue to expect lower than normal seasonal demand in our digital projector business.

To close out my opening remarks, I want to first reiterate the team's strong execution as well as emphasize our focus on meaningfully advancing our mobile initiatives. Our expanded portfolio of hardware and software based digital processing solutions has helped to advance a number of existing engagements, while also accelerating new mobile engagement opportunities. In order to deliver on the opportunities in our pipeline, we are consistently up leveling the quality of our engagements and prioritizing those with the highest probable return on our sales efforts and engineering resources. This includes placing increased priority on strategic platform engagements that offer the potential for Iris solutions to be designed into multiple models on multiple generations.

Another benefit of these larger platform engagements is the opportunity to negotiate and leverage co-marketing resources and the marketing budgets of our strategic customers and partners. As we consider the progress we've made to-date, we are very pleased with the depth of our current pipeline of engagements. We are ramping our hiring for program support and focused on the execution of active programs. We believe that, if successful, these programs will reach a relevant inflection point as we approach year end resulting in a meaningful acceleration of mobile revenue exiting 2019 and extending well into 2020.

With that, I'll turn the call over to Steve for a more detailed review of our second quarter financial results and guidance for the third quarter.

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Steven L. Moore, Pixelworks, Inc. - VP, CFO, Treasurer & Secretary [4]

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Thank you, Todd. Revenue for the second quarter of 2019 was $18 million compared to $16.6 million in the first quarter of 2019 and revenue of $19.3 million in the second quarter of 2018. Revenue for the second quarter of 2019 reflects continued growth in the Company's mobile and video delivery businesses offset by below normal seasonal demand in the digital projector market. The breakdown of second quarter revenue by end market was as follows. Revenue from digital projector was approximately $13.6 million, video delivery revenue was approximately $3.6 million, and revenue from mobile was approximately $820,000. Non-GAAP gross profit margin was 54.1% in the second quarter of 2019 compared to 53.3% in the first quarter and 52.7% in the second quarter of 2018.

Non-GAAP operating expenses were $9.6 million in the second quarter of 2019, compared to $10.3 million in the first quarter of 2019 and $10 million in the second quarter of 2018. Adjusted EBITDA was a positive $1 million for the second quarter of 2019 compared to a negative $464,000 in the first quarter of 2019 and a positive $1.1 million in the second quarter of 2018. A reconciliation of adjusted EBITDA to GAAP net income loss may be found in today's press release. We reported a non-GAAP net loss of $97,000 or breakeven on a per share basis in the second quarter of 2019 compared to non-GAAP net loss of $1.5 million or loss of $0.04 per share in the prior quarter and non GAAP net income of $31,000 or breakeven on a per diluted share basis in the second quarter of 2018.

Moving to the balance sheet, we ended the second quarter with cash and cash equivalents in short term investments of approximately $23.3 million, a decrease of approximately $700,000 from the year-end 2018. Other balance sheet metrics include days sales outstanding of 37 days a quarter end, compared with 32 days at the end of the first quarter. Inventory returns during the second quarter of 2019 were 11x compared to 10.1x in the prior quarter.

Our guidance for the third quarter of 2019 is as follows. We expect revenue to be in the range of between $17.5 million and $18.5 million, primarily reflecting it's sequential in year-over-year growth in our mobile business combined with lower than normal seasonal demand in the digital projection market. We expect non-GAAP gross profit margins of between 53% and 55%. For operating expenses, we expect the third quarter to range between $9.5 million and $10.5 million on a non-GAAP basis. And finally, we expect third quarter non-GAAP EPS to be in the range of between earnings of $0.01 and a loss of $0.03 per share.

With that we will now open the call for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) First question cousins Sujeeva Desilva with Roth Capital.

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Sujeeva Desilva, Roth Capital Partners, LLC, Research Division - Senior Research Analyst [2]

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On the video delivery business in Japan, just understand what are the puts and takes -- they're absorbing the initial ramp of product? And then we'll move forward and does that gives you the confidence of growth recovers in a couple of quarters, any color that would be helpful?

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Todd A. DeBonis, Pixelworks, Inc. - President, CEO & Director [3]

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Right now, we anticipate growth recovering -- first of all, we don't see that big of a downtick in Q3, but we are having some headwinds, one. And so I would say that what you're seeing is continued strength in the 4K PVR that is offset by effectively a digestion of the set-top box inventory that got shipped over the first two quarters. We expect growth to continue actually in the fourth quarter and really, that is just looking at the PVR market and then actually what we didn't mention in the prepared remarks is, the OTA market is starting to heat up a little bit as well. So a combination of those two things we expect to resume growth in the fourth quarter.

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Sujeeva Desilva, Roth Capital Partners, LLC, Research Division - Senior Research Analyst [4]

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And now that you've had -- on the Iris side, now that you had Soft Iris out there for a couple of months, at least. What are you seeing from customers and new design when about their decision by going with Iris hardware versus the Soft Iris? Any color on what customers are -- which way customers are leading toward and trending? Do they have the choice between the two?

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Todd A. DeBonis, Pixelworks, Inc. - President, CEO & Director [5]

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I mean somewhat complicated further Sujeeva. We have several customers that are designing both into a single phone. So, remember, we're not really just adding a chip. This is -- and we're not really just adding a chip and software. This is -- when you make a commitment to -- Soft Iris, I think you can make a commitment to just the features of Soft Iris and it's an easier integration. And so we're seeing a broad demand for that and probably more than we have the resources to engage with. So we're being picky. But when you engage with our visual processor, it is really a commitment to do a full system engineering effort with the display that you've picked and the AP that you've picked and us. And then optimizing that -- that phone for the visual experience for the consumer. When do you use MEMC? When do you not use MEMC? When do you use our tone mapping? When do you not? And in some cases, there is a power consumption, experience trade off, and by combining our visual processers with our software solutions, you get -- under certain conditions, you get a very low power consumption using just a Soft Iris, and then putting our processor in a state -- a sleep state effectively, right. But there are many different experiences where the only way you get the improvement and it's a bang, is it to have our visual processor on. And in fact, in some -- in the gaming environment, when you turn our processor on, the total system power goes down dramatically, the power consumption. And I'm not going to get into the specifics on how we do that, but I wanted to articulate the complexity of this type level of engagement. So the bottom line to get back to your answer by integrating software and hardware together, the customers can maximize that profile and that experience for the customer, I mean for their end customer.

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Sujeeva Desilva, Roth Capital Partners, LLC, Research Division - Senior Research Analyst [6]

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Last quick question, congratulations on the progress with YouKu and TrueCut product, sounds like it's gaining traction there. How soon do you anticipate the conversion of YouKu's library and all to cause incremental Iris hardware sales? Do you kind of see "A" leads to "B" kind of relationship there or is it not that clean cut in terms of how it translates?

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Todd A. DeBonis, Pixelworks, Inc. - President, CEO & Director [7]

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Well, I'll take your question at face value. We've already seen it dramatically. Now, what you're asking me is, when is it going to show up in my financials. I'm not going to answer that one.

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Operator [8]

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(Operator Instructions) Our next question comes from Charlie Anderson with Dougherty & Company.

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Charles Lowell Anderson, Dougherty & Company LLC, Research Division - VP and Senior Research Analyst [9]

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Just on the sub-seasonal guide for projector. I'm wondering if you could maybe talk about what's happening out there on a kind of a sell through basis. Are you just sort of reflecting end demand or lead time is changing down a degree in the industry? And then I've got a follow up.

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Todd A. DeBonis, Pixelworks, Inc. - President, CEO & Director [10]

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That projector you're asking, I'm sorry, I missed it?

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Charles Lowell Anderson, Dougherty & Company LLC, Research Division - VP and Senior Research Analyst [11]

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Yes on projector, correct.

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Todd A. DeBonis, Pixelworks, Inc. - President, CEO & Director [12]

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Now we're just seeing I mean, what we're seeing is consistent feedback from our customers that both tenders and general business in China have subsided considerably. And you know some impact the rest of the world. I can probably dig into a little color of that. I mean, part of it is demand. I would say, to some degree projectors up tick when a couple of things happen. When the infrastructure is getting built out, you move into a new office, you are loaded up with new projector technology, right, or new auditorium or a new school et cetera. There is clearly a slowdown in that environment.

Secondly, the RMB to Japanese Yen has moved quite a bit and it's making Japanese exports to China more expensive. You put the two together and I think you're seeing a lack of demand coming out of there. To some degree, we have one customer, one Japanese customer that manufactures some product in China and so they're a little worried about tariffs coming this way up until today that wasn't an issue, if you get my reference to our President's tweet.

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Charles Lowell Anderson, Dougherty & Company LLC, Research Division - VP and Senior Research Analyst [13]

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No, absolutely. Okay, perfect and then as it relates to the mobile pipeline, Todd, I wonder if you maybe just shed any qualitative light on how the pipeline is looking today versus three months ago and of the ways that you're going to market a mobile?

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Todd A. DeBonis, Pixelworks, Inc. - President, CEO & Director [14]

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Well, I thought I articulated it quite well. I mean, I don't think I've ever mentioned a Tier 1 engagement prior to today's call, one. Two, the quality of the pipeline is the best it's ever been. Three, the level of the pipeline is at a point that it has clearly outstripped our resources to respond and so I have finally let go with the hiring and we are hiring.

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Charles Lowell Anderson, Dougherty & Company LLC, Research Division - VP and Senior Research Analyst [15]

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And then just last one from me, I noticed -- I think media that came out with a new SoC with some HDR 10 support, anything change in competitive environment from your standpoint?

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Todd A. DeBonis, Pixelworks, Inc. - President, CEO & Director [16]

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No, they supported HDR tone mapping previously. I'm sure they came out with a new one to support it such as Qualcomm. But we do way more than just tone mapping. Our solution is really, you got to buy into all the features and functionality. We don't compete just on tone mapping. We will go compete on our tone mapping versus somebody else's on a straight up benchmark. And so far, we win those benchmarks. But that's not why people are using us. They are using this for a whole -- even our Soft Iris even though it's a reduced subset, one of them being HDR tone mapping, they're buying into the highly efficient calibration is probably the primary reason. And then once you've done that, you probably want the best HDR tone mapping you can put on the phone, so they use ours.

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Operator [17]

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Thank you. I'm not showing any further questions at this time. I'd now like to turn the call back over to Todd DeBonis for closing remarks.

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Todd A. DeBonis, Pixelworks, Inc. - President, CEO & Director [18]

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All right, well, quick call today, only a few questions. Thanks for your time. I don't know if you can tell in the tone of my voice, but we're extremely excited here. Things are really moving forward and the strategy is unveiling itself and we're very excited. So hopefully you as investors you're also excited. Thank you.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. You may now disconnect. Everyone have a wonderful day.