Pixelworks, Inc. (PXLW) Q4 2014 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Pixelworks Fourth Quarter 2014 Financial Results Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct the question-and-answer-session, and instructions will be given at that time. [Operator Instructions] As a reminder, today's conference is being recorded. I would now like to turn the call over to Steve Moore. Please go ahead, sir.

Good afternoon, and thank you for joining us. This is Steve Moore, Chief Financial Officer of Pixelworks. With me today is Bruce Walicek, 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 fourth quarter ended December 31, 2014. 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 belief as of today, Thursday, February 5, 2015, 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, 2013, 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's statements during this conference call will include discussion of certain measures and financial information in GAAP and non-GAAP terms, including gross margin, operating expenses, net income and loss, and net income loss per share. And these non-GAAP measures exclude stock-based compensation expense and an additional amortization of a prepaid royalty. We use these non-GAAP measures internally to assess our operating performance. The company believes 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 loss to adjusted EBITDA, which provide additional details. Bruce will begin today's call with a strategic update on the business, after which, I will review our fourth quarter financial results and then provide our outlook for the first quarter of 2015.

Thanks, Steve. Good afternoon, everyone, and thank you for joining us today. 2014 was an outstanding year of progress and strong growth for Pixelworks as overall revenues came in at 61 million, up 27% year-over-year, driven by product revenues which increased 44% over 2013. It was also a key year for confirming our thesis of the growing need for video processing technology as trends driving our business accelerated, and we entered 2015 with significant momentum and an exciting set of opportunities. During the year, we completed key milestones that advanced our progress and moved the company forward as we completed out co-development partnership with to develop a highly integrated next-generation SoC. We delivered initial prototype samples right on schedule and ramped a mass production version into high-volume production in Q3 with on-time execution. We successfully executed and delivered on our licensing partnership engagements, which are a major validation of our innovation, technology, and expertise. And we launched our first product line of mobile video processors targeted at laptop, Ultrabooks, Tablets, and Smartphones with screen sizes from 5.5 inches to 14.9 inches, and delivered initial silicon samples in the second half of the year. And finally, we strengthened our Board of Directors with the addition of David Tupman, who brings extensive experience in management and advisory roles at leading consumer electronics companies. Turning to the results for the quarter, Q4 2014 was in line with guidance as revenues of 15 million were down sequentially, but we had outstanding product revenue growth which increased 27% over Q4 2013. All other non-GAAP metrics came within the range of guidance, and despite seasonality at year end, we expect to see solid double-digit growth in our core business in 2015. Steve will review the results of the quarter and provide the outlook for Q1 2015, later in this call. At the Consumer Electronics Show in Las Vegas this quarter, we demonstrated the range and breadth of our current and future generation technology across large and small displays from 5.5 inches to large projected images. And we introduced our True Clarity branding concept, which is our brand name with a totality of Pixelworks display technology enhancements such as smooth motion video, daylight viewing, and color accuracy as it applies across all screens. What is remarkable is that True Clarity brings out the fullest capabilities of the display. This means that every display can now deliver its optimum performance in order to show whatever is on the screen to its best advantage and provide the best visual user experience. Next-generation displays are requiring innovative video solutions as companies begin to recognize the importance of visual experience to the differentiation and positioning of their products. And as products merge and become not only productivity devices, but content consumption devices as well, True Clarity provides a framework for positioning their products. At the show, we also demonstrated the power and capability of Pixelworks technology for all displays across our product lines from Vue Magic collaboration applications running on Topaz chip-based projectors to Iris Mobile Video Processor silicon running on the Intel and Qualcomm platforms. Iris brings the cinematic experience of large screens to mobile screens, while enhancing system performance and lowering power consumption. Iris represents several years of research to leverage Pixelworks technology for large screen applications to create the best video quality in smaller mobile displays, and our first product included the full array of advanced video processing techniques. Iris technology not only optimizes all aspects of the display that affect video quality, but it also works at the system level, improving battery life and freeing up valuable system resources to create the optimal viewing experience. The PX3883 is the first device in the product line of Iris chips on our roadmap based on our video display processing technology, and we have an aggressive roadmap that will expand the Iris product line in the first half of 2015. We will be previewing our next-generation Iris technology at the upcoming Mobile World Congress Conference in Barcelona later this quarter. The value propositions of Iris are resonating with customers and partners alike -- interest in Iris, in our customer base and partner ecosystem has never been stronger. And we are seeing design win traction at new and existing customers as well as a wide range of licensing opportunities for Pixelworks video technology. Increasing mobile video consumption is a key driving factor of the need for next-generation video solutions as customers increasingly view their content on their Ultrabooks, Tablets, and Smartphones. China, in particular, is an explosive opportunity for mobile video as China's smartphone users are expected to exceed 700 million in 2018 and video is expected to reach 50% the mobile traffic by 2019. Another driving factor is the on-going progress in new display technology as the industry accelerates advancements with no end sight. The entire video ecosystem will upgrade to 4K resolutions in the coming years, and we are just at the beginning of a multiyear transition to more capable displays across all streams. Delivering great video quality is an art as well a science, and it takes many years to develop the expertise necessary to provide solutions that are tested by the industry's most demanding customers. Leveraging the portfolio of 130 patterns and over 15 years of TV industry experience in the marketplace solving the more difficult video problems, we have now brought that expertise and innovation to mobile screens as well. And our large screen projected and panel display applications; at CES, we showed our latest Vue Magic connectivity application running on Vue Magic Mate and projectors based on Topaz chips that allow up to four devices to connect and share their displays with a projector. Unlike traditional screen sharing solutions such as Miracast, Vue Magic allows interaction and collaboration with the content. And during the quarter, we announced the BenQ licensed Vue Magic for their Q presenter line of projectors. BenQ reviewed all solutions and Vue Magic was adopted due to its multi-screen and annotate features that make it easy to interact with content making it ideally suited for education and collaborative meetings. During the quarter, we also delivered high volume production of the advanced SoC we developed under co-development partnership and expect this project to continue to ramp into 2015 and drive year-on-year growth in our overall product business for large screen applications. Design win momentum remained strong, and we continue to see outstanding adoption for our Topaz family of SoCs for projectors, and we continue to see opportunities across our families of video co-processors for wide screen panels as 4K applications broaden out to include monitor, digital signage, and projector displays in addition to large screen TVs. In summary, 2014 was a great year of growth driven by product revenues, which were up 44% and overall revenues that increased 27% over 2013. Q4 was a solid quarter of product growth increasing 27% year-over-year and we expect to see solid double-digit growth in our core business in 2015. During the quarter, we shipped high volume production of the advanced SoC for large screen applications we developed under our co-development partnership, and we will be demoing our current and latest technology end products for mobile displays at the upcoming Mobile World Congress Conference later this quarter. Now, I'd like to turn the call over to Steve to review the financial results of the quarter.

Thank you, Bruce. Revenue for the fourth quarter of 2014 was $15.1 million, which compares with $17.1 million in the prior quarter. Q4 total revenue was flat compared with total revenue from the fourth quarter of 2013, but revenue from chip sales was up 27% compared with the prior year quarter. The split of our fourth quarter chip revenue by market was 89% digital projection and 11% TV and panel. Digital projection revenue was increased $13.4 million compared to $14.9 million in the third quarter and revenue from TV and panel totaled $1.6 million in the fourth quarter compared to $2.2 million in the prior quarter. Sequential revenues declined due to seasonality and inventory adjustments in our customer base. Licensing revenue was approximately $200,000 in the fourth quarter compared to a negligible contribution in the prior quarter and we continue to expect the recognition of licensing revenue to be lumpy in future quarters. Non-GAAP gross profit margin was 50.3% in the fourth quarter compared to 50.4% in the third quarter. Pixelworks gross margin is subject to variability based on changes in revenue levels, recognition of the license revenues, product mix, service cost, and the timing and execution of manufacturing allowances, as well as other factors. Non-GAAP operating expenses were $8.8 million in the fourth quarter compared to $9.3 million in the prior quarter. Adjusted EBITDA was a negative $137,000 in the fourth quarter compared to a positive $423,000 in the third quarter. A reconciliation of adjusted EBITDA to GAAP net loss maybe found in today's press release. On a non-GAAP basis, we recorded a net loss of $1.4 million or a loss of $0.06 per share in the fourth quarter 2014 as compared to a non-GAAP net loss of $950,000 or loss of $0.04 per share in the prior quarter. Moving to the balance sheet, we ended the fourth quarter with cash and cash equivalents of approximately $17.9 million compared to $19.3 million at the end of the third quarter. The company has no long-term debt and similar to the previous quarters, the company had a balance of $3 million on its working capital line of credit. Other balance sheet metrics include days sales outstanding of 28 days at the quarter end compared to 32 days at the end of the third quarter and inventory churns picked upped just to over 13 times from approximately 12 times last quarter. Guidance for the first quarter of 2015, we expect revenues to be in a range of between $14 million and $16 million. We expect gross profit margins for the quarter to range between 48% to 50% on a non-GAAP basis and 47% to 49% on a GAAP basis. In terms of operating expenses, we expect the first quarter to range between $8.5 million and $9.5 million on a non-GAAP basis, and $9.5 million to $10.5 million on a GAAP basis. And finally, we expect non-GAAP first quarter net loss of between $0.03 and $0.13 per share and we expect a GAAP net loss of between $0.08 and $0.18 per share. This concludes my comments. We will now open the call for your questions.

[Operator Instructions] The first question comes from Charlie Anderson from Dougherty and Company.

Yes, good afternoon; thanks for taking my questions. I want to start maybe with the core business. I'm wondering sort of what you're implying between projection and TV and panel in Q1 and -- TV and panel had been a little drag on your growth rate in the last couple of quarters, what are your expectations kind of the rest of the year in that portion of the business?

Well, we expect it to continue to contribute, but we don't see it as a growth driver in 2015.

Okay. And then in terms of the projection business, I wonder if you could give us any sort of rough sense of -- you said double-digit growth, I wonder if you'd go maybe beyond that on the year at all?

I think we're comfortable saying double-digit growth in the core business which we would classify as large panel and projection. And that's a yearly outlook, we only guide one quarter out so -- but overall we see growth north of double-digits -- I mean double-digit growth.

Perfect, and then just to switch to mobile, in the commentary you talked about design win traction, licensing opportunities, I wonder maybe, Bruce, you could just expand on that a little bit; are you in the process of being qualified for anything? Do you have a design win just -- roughly help us with where you guys are out right now?

Sure. To kind of frame this for you the last time we said in terms of adoption horizon, it could range anywhere from six to nine months all the way up to a year plus, depending on the product, depending on what type of product is the customer and also what kind of platform it is. Keep in mind that our first Iris product to market is fairly broad. It has all the video enhancements, a wider array of video enhancements integrated into it, and it addresses anywhere from 5.5 inches all the way up to, I would call a 14.9 laptop. So that sort of Intel Core platforms and the Ultrabook and Tablet and PC world and then there's a host of different providers of the platforms for the mobile world as well. We're seeing some good early traction. We have some early wins. I would keep in mind always the disclaimer, "Design wins do not necessarily result in production." But we're very encouraged with the design win traction we're getting right now. And with that six to nine months adoption horizon, if you do the math on that, we're right in there for some early traction and some early design commits. I will say that we're pursuing designs across all segments with Iris. As mentioned, you can imagine over time, Iris becoming a product line and branching out for different value propositions and different market segments over time as well.

And last one from me, the $200K of licensing revenues, could you maybe specify that was licensing or if that was royalties and maybe what end market perhaps?

No, we haven't gone into a breakout of our licensing revenue. As far as end market, it is related to a previously booked license and services contract. So it is a combination.

Perfect. Thank you so much.

Thanks, Charlie.

[Operator Instructions] The next question comes from Krishna Shankar from Roth Capital.

Yes. As you look at the mobile video market for Iris, would you expect revenues from the Iris product line to begin in the second half of this year? Can you give us some sense for how mobile revenues may ramp through the year?

Sure, Krishna. If you do, kind of look at the adoption horizons, sort of adoption and then our customers, it takes them time to get their product to market and ramp it into market; ramp it into production. You can do the timelines there. A reasonable assumption is to the timelines. Again, we're dependent on our customers, when we get design wins on the timing and the ramp and all those sorts of things in terms of getting those products in market. But I think that that's -- if that was to happen that would be a reasonable assumption into how that would rollout in 2015.

So, potentially may be some revenues in the second half of 2015?

I'm betting again. Yes.

Okay. And then -- I was just saying does that imply maybe some revenues in the second half of 2015 for the mobile Iris product line?

Yes, potentially.

Yes, we certainly think that's a reasonable call, yes.

Okay. And then what is the visibility on the projector business? I know that was a big contributor to Q4 growth, so can you talk about the momentum and cadence of that continuing into 2015, broadening out to different platforms other customers, just visibility on the projector business?

Sure. I think what we said last quarter was we saw seasonality a little earlier than normal in the normal pattern for that business and large panel business as well as it's seasonally weak in Q1. And normally we see 10% plus or minus down in Q1. I think we experienced that more in Q4 so you can say we had a flattish outlook going into Q1 whereas we'd normally would experience seasonality going into Q1. I think given where the market is it's sort of in a -- it is normal environment going in the first part of the year which tends to be the weakest part of the year. A lot of the customers -- a number of the customers in this segment are Japan based which has a March 31 fiscal year. And then they tend to pick up quite a bit going in to Q2 and so forth. So that's the normal historical pattern, history doesn't always repeat itself but nevertheless, that's typically what we've seen from seasonal stand point in this business. I think what we're saying overall is for our overall core business we're feeling good about double-digit growth for the full year 2015 based on the market and then of course based on the ramping of our co-development projects.

Okay. And then in the TV panel, you said that that maybe -- it could contribute just modestly to growth if any in 2015. We are seeing some pretty adoption in terms of price points for 4K TVs. Can you talk about your activity in the 4K TV market and also the usage of your technology in 4K monitors digital signage, how that's going?

Yes. I think what we said on the call was you're starting to see 4K broaden out into projection at the very high-end, monitors at the high-end, some digital signage applications, those sorts of other type of applications where they're transitioning the 4K we're seeing good opportunities and interaction on those markets as well. I think we -- what we said about TV it will be a contributor in 2015, but not especially a large growth driver. As we mentioned in our -- the other half of the business and our co-development which is continuing to ramp throughout 2015 would be the core driver in our overall core business.

Okay. And then my final question is on the IP licensing, any comments on how that might shape up to 2015? What types of assuming you folks continue to have different IP deals in the pipeline, so can you give us some sense for what kind of growth you might see there and the cadence of IP licensing over the next several quarters?

That seems to be very lumpy. And since there tend to be some of them strategic in nature, those are -- in terms of predicting we don't outlook those, and we don't guide to those like in the near-term basis as well. So it's a little tough to predict. We will say that we have a good pipeline of these opportunities. And I think it's a testament to the growing need and torque to this technology, because we're seeing a wide range of opportunities that we're working on. We have goals to do this in 2015, but certainly don't provide that any kind of outlook or guidance.

Okay, thanks.

Thanks, Krishna.

The next question comes from Jaeson Schmidt from Lake Street Capital.

Hey, guys, thanks for taking my questions. I'm wondering if you could comment on your thoughts on current channel inventory, both in the projector market and then the TV market as well.

Well, for our products -- certainly, we've seen some overbuilding in both of those products in Q3, and that just continued to be worked down in Q4 and through Q1. So it's not across the board. It's actually pretty spotty. There are certain customers where that has taken place, and other customers which had a more normal, a more steady order pattern, but we have certainly seen it in a couple of customers in both of the TV and projector markets.

Okay. And given the number of opportunities that seems you guys have in front of you, how should we look at OpEx ramping this year? And could you remind me what your breakeven revenue run rate is?

Sure. OpEx, year-over-year will be up by inflation in compensation. We're not adding headcounts in any meaningful way within the company, and our developments program is similar to the 2014 development program. So they would be comparable, but somewhat up because of inflation. Breakeven on an operating income basis is approximately $17.5 million to $18.5 million, in that range depending on again what is happening in a given quarter for development expenses.

Okay, great. Thanks, guys.

Thanks, Steve.

I'm showing no further question. I would now like to turn the call back over to management for any closing remarks.

Thanks everyone for joining us today, and we look forward to talking to you at our next conference call for our Q1 2015 results. And if you're going to Mobile World Congress, please stop by and see some of our demos. Thank you.