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MarketScreener Homepage  >  Equities  >  Nasdaq  >  Pixelworks, Inc.    PXLW

PIXELWORKS, INC. (PXLW)
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2016PIXELWORKS, INC. : quaterly earnings release
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PIXELWORKS : Management's Discussion and Analysis of Financial Condition and Results of Operations. (form 10-Q)

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08/10/2018 | 10:19pm CET
Forward-looking Statements
This Quarterly Report on Form 10-Q contains "forward-looking statements" that
are based on current expectations, estimates, beliefs, assumptions and
projections about our business. Words such as "may," "will," "appears,"
"predicts," "continue," "expects," "anticipates," "intends," "plans,"
"believes," "seeks," "estimates" and the negative or other variations of such
words and similar expressions are intended to identify such forward-looking
statements. These forward-looking statements include, but are not limited to,
statements regarding: the anticipated features, benefits and market
opportunities for our products; our technologies and intellectual property; our
international operations; our strategy, including with respect to our
intellectual property portfolio, research and development efforts and
acquisition and investment opportunities; our gross profit margin; our
restructuring programs, including estimates, timing and impact thereof, as well
as any future restructuring programs; our liquidity, capital resources and the
sufficiency of our working capital and need for, or ability to secure,
additional financing and the potential impact thereof; our research and
development costs and related offsets and reimbursements related to our
co-development agreement; our contractual obligations, exchange rate and
interest rate risks and off balance sheet arrangements; our income taxes,
including our ability to realize the benefit of net deferred tax assets, our
uncertain tax position liability and the impact of the tax cuts and Jobs Act;
accounting policies and use of estimates and potential impact of changes
thereto; our internal controls and the integration of ViXS into our internal
controls; timing of the amortization of certain costs related to inventory and
backlog; our revenue, the potential impact on our business of certain risks,
including the concentration of our suppliers, risks of technological change,
concentration of credit risk, changes in the markets in which we operate, our
international operations, including in Asia and our exchange rate risks, our
indemnification obligations and litigation risks. These statements are not
guarantees of future performance and involve certain risks and uncertainties
that are difficult to predict and which may cause actual outcomes and results to
differ materially from what is expressed or forecasted in such forward-looking
statements. A detailed discussion of risks and uncertainties that could cause
actual results and events to differ materially from such forward-looking
statements is included in Part II, Item 1A of this Quarterly Report on Form
10-Q. These forward-looking statements speak only as of the date on which they
are made, and we do not undertake any obligation to update any forward-looking
statement to reflect events or circumstances after the date of this Quarterly
Report on Form 10-Q. If we do update or correct one or more forward-looking
statements, you should not conclude that we will make additional updates or
corrections with respect thereto or with respect to other forward-looking
statements. Except where the context otherwise requires, in this Quarterly
Report on Form 10-Q, the "Company," "Pixelworks," "we," "us" and "our" refer to
Pixelworks, Inc., an Oregon corporation, and its wholly-owned subsidiaries.

Overview

Pixelworks designs, develops and markets visual display processing
semiconductors, intellectual property cores, software and custom application
specific integrated circuits ("ASIC") solutions for high-quality energy
efficient video applications. In addition, we offer a suite of solutions for
advanced media processing and the efficient delivery and streaming of video.
We enable worldwide manufacturers to offer leading-edge consumer electronics and
professional display products, as well as video delivery and streaming solutions
for content service providers. Our core visual display processing technology
intelligently processes digital images and video from a variety of sources and
optimizes the content for a superior viewing experience. Pixelworks' video
coding technology reduces storage requirements, significantly reduces bandwidth
constraint issues and converts content between multiple formats to enable
seamless delivery of video, including over-the-air (OTA) streaming, while also
maintaining end-to-end content security.
The rapid growth in video-capable consumer devices, especially mobile, has
increased the demand for visual display processing and video delivery technology
in recent years. Our technologies can be applied to a wide range of devices from
large-screen projectors to low-power mobile tablets, smartphones, high-quality
video infrastructure equipment and streaming devices. Our products are
architected and optimized for power, cost, bandwidth, and overall system
performance, according to the requirements of the specific application. Our
primary target markets include digital projection systems, tablets, smartphones,
and OTA streaming devices.
As of June 30, 2018, we had an intellectual property portfolio of 401 patents
related to the visual display of digital image data. We focus our research and
development efforts on developing video algorithms that improve quality, and
architectures that reduce system power, cost, bandwidth and increase overall
system performance and device functionality. We seek to expand our technology
portfolio through internal development and co-development with business
partners, and we continually evaluate acquisition opportunities and other ways
to leverage our technology into other high-value markets.




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Results of Operations
Revenue, net
Net revenue for the three and six month periods ended June 30, 2018 and 2017,
was as follows (dollars in thousands):
                    Three Months Ended                    Six Months Ended
                         June 30,                             June 30,
               2018        2017      % Change      2018        2017       % Change
Revenue, net $ 19,251$ 20,721      (7 )%     $ 34,543$ 43,431      (20 )%


Net revenue decreased $1.5 million, or 7%, in the second quarter of 2018 compared to the second quarter of 2017 and decreased $8.9 million, or 20% in the first half of 2018 compared to the first half of 2017.


Revenue recorded in the first quarter of 2018 consisted of $18.6 million in
revenue from the sale of integrated circuit ("IC") products and $0.7 million in
revenue related to engineering services. Revenue recorded in the first half of
2018 consisted of $33.1 million in revenue from the sale of IC products and $1.4
million in revenue related to engineering services. Revenue recorded in the
second quarter of 2017 and in the first half of 2017 all related to the sale of
IC products, of which $5.1 million and $14.3 million, respectively, was
attributable to end-of-life products.

The decrease in IC revenue in both of the periods presented was primarily due to
a decrease in units sold into the digital projector and the TV and panel
markets, primarily the result of the end-of-life implemented in the beginning of
2017 for our legacy products, which was substantially complete by June 30, 2017.
This decrease in IC revenue was partially offset by an increase in revenue
contribution from the video delivery market, a market we sold into following the
acquisition of ViXS (the "Acquisition") in the second half of 2017.
Cost of revenue and gross profit
Cost of revenue and gross profit for the three and six month periods ended June
30, 2018 and 2017, was as follows (dollars in thousands):
                                        Three Months Ended June 30,                        Six Months Ended June 30,
                                             % of                     % of                     % of                     % of
                                 2018       revenue       2017       revenue       2018       revenue       2017       revenue
Direct product costs and
related overhead 1            $  9,177       48  %     $  9,535       46  %     $ 16,193       47  %     $ 19,643        45 %
Amortization of acquired
developed technology               298        2               -        0             596        2               -         0
Inventory step-up and backlog
amortization                       239        1               -        0             361        1               -         0
Stock-based compensation            78        0              69        0             144        0             122         0
Inventory charges 2                (75 )      0             (84 )      0             (87 )      0              73         0
Total cost of revenue         $  9,717       50  %     $  9,520       46  %     $ 17,207       50  %     $ 19,838        46 %
Gross profit                  $  9,534       50  %     $ 11,201       54  %     $ 17,336       50  %     $ 23,593        54 %


1 Includes purchased materials, assembly, test, labor, employee benefits and

royalties.

2 Includes charges to reduce inventory to lower of cost or market and a benefit

for sales of previously written down inventory.



Gross profit margin was 50% in the second quarter of 2018 and in the first half
of 2018 compared to 54% in the second quarter of 2017 and in the first half of
2017. The decrease in gross profit margin was primarily due to amortization of
acquired developed technology, backlog and inventory step-up, which were all
generated following the Acquisition in the second half of 2017.
Direct product costs and related overhead was 48% of revenue in the second
quarter of 2018 compared to 46% of revenue in the second quarter of 2017 and 47%
of revenue in the first half of 2018 compared to 45% of revenue in the first
half of 2017. The increase in direct product costs and related overhead as a
percentage of revenue in the 2018 periods compared to the 2017 periods was
primarily due to shipments in the 2017 periods related to an end-of-life for our
legacy products. Many of these legacy products have lower direct product costs
compared to our other products. This increase contributed to the overall
decrease in gross profit margin in the 2018 periods compared to the 2017
periods.

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We expect the remaining inventory step-up of $0.1 million and the remaining
backlog asset of $0.1 million to amortize to cost of goods sold over
approximately the next 3 months.
Pixelworks' gross profit margin is subject to variability based on changes in
revenue levels, product mix, average selling prices, startup costs,
restructuring charges, amortization related to acquired developed technology,
inventory step-up and backlog, and the timing and execution of manufacturing
ramps as well as other factors.
Research and development
Research and development expense includes compensation and related costs for
personnel, development-related expenses, including non-recurring engineering
expenses and fees for outside services, depreciation and amortization, expensed
equipment, facilities and information technology expense allocations and travel
and related expenses.

Co-development agreement
During the first quarter of 2017, we entered into a best efforts co-development
agreement (the "Co-Development Agreement") with a customer to defray a portion
of the research and development expenses we expect to incur in connection with
our development of an integrated circuit product to be sold exclusively to the
customer. We expect our development costs to exceed the amounts received from
the customer, and although we expect to sell units of the product to the
customer, there is no commitment or agreement from the customer for such sales
at this time. Additionally, we retain ownership of any modifications or
improvements to our pre-existing intellectual property and may use such
improvements in products sold to other customers.
Under the Co-development Agreement, $4.0 million was payable by the customer
within 60 days of the date of the agreement and two additional payments of $2.0
million are each payable upon completion of certain development milestones. As
amounts become due and payable, they are offset against research and development
expense on a pro rata basis. We recognized offsets to research and development
expense of $2.0 million and $2.7 million during the first six months of 2018 and
2017, respectively.
We anticipate recognizing the final $2.0 million offset to research and
development expense in the second half of 2018, upon the completion of the
remaining development milestone related to the Co-Development Agreement.
Research and development expense for the three and six month periods ended June
30, 2018 and 2017, was as follows (dollars in thousands):
                                Three Months Ended                   Six Months Ended
                                     June 30,                            June 30,
                           2018        2017      % Change      2018       

2017 % Change Research and development $ 6,423$ 4,501 43 % $ 10,886$ 9,407 16 %



Research and development expense increased $1.9 million, or 43% in the second
quarter of 2018 compared to the second quarter of 2017 and increased $1.5
million, or 16% in the first half of 2018 compared to the first half of 2017.
The increase in both periods presented was primarily due to an increase in
compensation expense due to an increase in headcount and an increase in rent
expense, both a result of the Acquisition. The increase was also due to an
increase in stock-based compensation expense due to the timing of awards
granted.
The second quarter and first half of 2017 included a benefit related to the
co-development agreement which was largely offset by non-recurring engineering
expense which was largely related to the Co-development Agreement.



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Selling, general and administrative
Selling, general and administrative expense includes compensation and related
costs for personnel, sales commissions, facilities and information technology
expense allocations, travel, outside services and other general expenses
incurred in our sales, marketing, customer support, management, legal and other
professional and administrative support functions.
Selling, general and administrative expense for the three and six month periods
ended June 30, 2018 and 2017, was as follows (dollars in thousands):
                                             Three Months Ended                      Six Months Ended
                                                  June 30,                               June 30,
                                       2018         2017       % Change    

2018 2017 % Change Selling, general and administrative $ 4,959$ 4,660 6 % $ 9,573$ 8,799 9 %



Selling, general and administrative expense increased $0.3 million, or 6% in the
second quarter of 2018 compared to the second quarter of 2017 and increased $0.8
million, or 9% in the first half of 2018 compared to the first half of 2017. The
increase in the 2018 periods compared to the 2017 periods was primarily due to
an increase in compensation expense due to an increase in headcount as a result
of the Acquisition and an increase in stock-based compensation expense due to
the timing of awards granted. These increases were partially offset by a
decrease in acquisition and integration costs associated with the Acquisition.
Restructurings
In April 2018, we executed a restructuring plan ("the 2018 Plan") to make the
operation of the Company more efficient. The 2018 plan includes an approximately
5% reduction in workforce, primarily in the areas of development, marketing and
administration. The plan also includes closing the Hong Kong office and reducing
the size of the Toronto office.
In September 2017, in connection with the Acquisition, we executed a
restructuring plan ("the 2017 Plan") to secure significant synergies between
ViXS and Pixelworks. The 2017 Plan included an approximately 15% reduction in
workforce, primarily in the area of development, however, it also impacted
administration and sales.
Restructuring expense for the three and six month periods ended June 30, 2018
and 2017, was as follows and was included in operating expenses (dollars in
thousands):
                                               Three Months Ended               Six Months Ended
                                                    June 30,                        June 30,
                                               2018            2017           2018            2017
Employee severance and benefits           $        602     $        -     $       621     $        -
Total restructuring expense               $        602     $        -     $       621     $        -


During the second quarter and the first half of 2018, we incurred expenses of
$0.6 million related to the 2018 Plan, which consisted of costs associated with
employee severance and benefits. As we continue to implement the 2018 Plan, we
expect to incur additional restructuring charges of $0.6 million over the
remainder of 2018, $0.5 million of which relates to the consolidation of leased
space and $0.1 million of which relates to costs associated with employee
severance and benefits. Through June 30, 2018, the cumulative amount incurred
related to the 2018 plan is $0.6 million, none of which is included in cost of
revenue.
We incurred negligible expenses in the first quarter of 2018 related to the 2017
Plan. The 2017 Plan was completed in the first quarter of 2018 and we did not
incur any further restructuring charges related to the 2017 Plan during the
second quarter of 2018.
Provision for income taxes
The provision for income taxes during the 2018 and 2017 periods is primarily
comprised of current and deferred tax expense in profitable cost-plus foreign
jurisdictions, accruals for tax contingencies in foreign jurisdictions and
benefits for the reversal of previously recorded foreign tax contingencies due
to the expiration of the applicable statutes of limitation. We recorded a
negligible benefit for the reversal of previously recorded foreign tax
contingencies during the first half of 2018 and a benefit of$0.2 million for the
reversal of previously recorded foreign tax contingencies during the first half
of 2017.

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Liquidity and Capital Resources
Cash, cash equivalents and short-term marketable securities
Total cash and cash equivalents decreased $10.1 million to $17.4 million at June
30, 2018 from $27.5 million at December 31, 2017. Short-term marketable
securities was $2.7 million at June 30, 2018 and zero at December 31, 2017. The
net decrease in cash, cash equivalents and short-term marketable securities of
$7.4 million during the first half of 2018 was the result of $3.4 million used
in operating activities, $2.2 million used in payments on convertible debt, $1.3
million used for purchases of property and equipment and $0.6 million used in
payments on other asset financings. These decreases were partially offset by
$0.2 million in proceeds from the issuances of common stock under our employee
equity incentive plans.
As of June 30, 2018, our cash, cash equivalents and short-term marketable
securities balance consisted of $14.5 million in cash equivalents held in U.S.
dollar denominated money market funds, $2.4 million in cash, $1.7 million in
commercial paper and $1.5 million in corporate debt securities. Our investment
policy requires that our portfolio maintain a weighted average maturity of less
than 12 months. Additionally, no maturities can extend beyond 24 months and
concentrations with individual securities are limited. At the time of purchase,
the short-term credit rating must be rated at least A-1 / P-1 / F-1 by at least
two Nationally Recognized Statistical Rating Organizations ("NRSRO") and
securities of issuers with a long-term credit rating must be rated at least A or
A2 by at least two NRSRO. Our investment policy is reviewed at least annually by
our Audit Committee.
Accounts receivable, net
Accounts receivable, net increased to $6.6 million as of June 30, 2018 from $4.6
million as of December 31, 2017. The average number of days sales outstanding
increased to 31 days as of June 30, 2018 from 23 days as of December 31, 2017.
The increase in accounts receivable and days sales outstanding was due to normal
fluctuations in the timing of sales and customer receipts within the second
quarter of 2018, compared to the fourth quarter of 2017.
Inventories
Inventories increased to $2.9 million as of June 30, 2018 from $2.8 million as
of December 31, 2017. Inventory turnover increased to 13.7 as of June 30, 2018
from 10.6 as of December 31, 2017 primarily due to lower average inventory
balances and higher cost of good sold during the second quarter of 2018 compared
to the fourth quarter of 2017. Inventory turnover is calculated based on
annualized quarterly operating results and average inventory balances during the
quarter.
Capital resources
Short-term line of credit
On December 21, 2010, we entered into a Loan and Security Agreement with Silicon
Valley Bank (the "Bank"), which was amended on December 14, 2012, December 4,
2013, December 18, 2015, December 15, 2016, July 21, 2017 and December 21, 2017
(as amended, the "Revolving Loan Agreement"). The Revolving Loan Agreement
provides a secured working capital-based revolving line of credit (the
"Revolving Line") in an aggregate amount of up to the lesser
of (i) $10.0 million, or (ii) $1.0 million plus 80% of eligible domestic
accounts receivable and certain foreign accounts receivable. The Revolving Line
has a maturity date of December 28, 2018. In addition, the Revolving Loan
Agreement provides for non-formula advances of up to $10.0 million which may be
made solely during the last five business days of any fiscal month or quarter
and which must be repaid by us on or before the fifth business day after the
applicable fiscal month or quarter end. Due to their repayment terms,
non-formula advances do not provide us with usable liquidity.
The Revolving Loan Agreement, contains customary affirmative and negative
covenants as well as customary events of default. The occurrence of an event of
default could result in the acceleration of our obligations under the Revolving
Loan Agreement, and an increase to the applicable interest rate, and would
permit the Bank to exercise remedies with respect to its security interest. As
of June 30, 2018, we were in compliance with all of the terms of the Revolving
Loan Agreement.
As of June 30, 2018 and December 31, 2017, we had no outstanding borrowings
under the Revolving Line.
Liquidity
As of June 30, 2018, our cash and cash equivalents balance of $17.4 million was
highly liquid. We anticipate that our existing working capital will be adequate
to fund our operating, investing and financing needs for at least the next
twelve months. We may pursue financing arrangements including the issuance of
debt or equity securities or reduce expenditures, or both, to meet our cash
requirements, including in the longer term. There is no assurance that, if
required, we will be able to raise additional capital or reduce discretionary
spending to provide the required liquidity which, in turn, may have an adverse
effect on our financial position, results of operations and cash flows.

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From time to time, we evaluate acquisitions of businesses, products or
technologies that complement our business. For example, on August 2, 2017 we
closed the Acquisition and issued 3,708,263 of our shares of common stock as
consideration. Any additional transactions, if consummated, may consume a
material portion of our working capital or require the issuance of equity
securities that may result in dilution to existing shareholders. Our ability to
generate cash from operations is also subject to substantial risks described in
Part II, "Item 1A., Risk Factors." If any of these risks occur, we may be unable
to generate or sustain positive cash flow from operating activities. We would
then be required to use existing cash and cash equivalents to support our
working capital and other cash requirements. If additional funds are required to
support our working capital requirements, acquisitions or other purposes, we may
seek to raise funds through debt financing, equity financing or from other
sources. If we raise additional funds through the issuance of equity or
convertible debt securities, the percentage ownership of our shareholders could
be significantly diluted, and these newly-issued securities may have rights,
preferences or privileges senior to those of existing shareholders. If we raise
additional funds by obtaining loans from third parties, the terms of those
financing arrangements may include negative covenants or other restrictions on
our business that could impair our operating flexibility, and would also require
us to incur interest expense. We can provide no assurance that additional
financing will be available at all or, if available, that we would be able to
obtain additional financing on terms favorable to us.
Contractual Payment Obligations
Our contractual obligations for 2018 and beyond are included in our Quarterly
Report on Form 10-Q for the quarter ended March 31, 2018, filed with the
Securities and Exchange Commission on May 10, 2018. Our obligations for 2018 and
beyond have not changed materially as of June 30, 2018.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that have, or are reasonably
likely to have, a material current or future effect on our financial condition,
results of operations, liquidity, capital expenditures or capital resources.

© Edgar Online, source Glimpses

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