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Pixelworks Reports First Quarter 2018 Financial Results

Quarterly Revenue, Gross Margin and EPS at or above High-End of Guidance Range

Expects Sequential Revenue Growth of 17% to 24% in Second Quarter

SAN JOSE, Calif., May 02, 2018 (GLOBE NEWSWIRE) -- Pixelworks Inc. (NASDAQ:PXLW), a leading provider of power efficient visual processing solutions, today announced financial results for the first quarter ended March 31, 2018.

First Quarter and Recent Highlights

President and CEO of Pixelworks, Todd DeBonis, commented, “First quarter revenue was at the high-end of our guidance range, reflecting solid performance across our business and expected seasonality in the digital projection market. Favorable product mix contributed to better than anticipated gross margin, and our continued focus on operational efficiencies helped to drive lower than expected operating expenses. As a result, we delivered sequential bottom-line improvement despite the first quarter traditionally being a seasonally soft quarter.

“Since the start of the year, we have made notable progress on our mobile initiative, as highlighted by our recent win for Pixelworks 3rd generation Iris display processor in the Xiaomi Blackshark smartphone. Additionally, today we formally unveiled the full features and advanced video capabilities of our 4th generation mobile display processor, for which we already have multiple active customer engagements. During the first quarter, we also continued to advance the development project with our video delivery customer in Japan, where we are seeing increased traction for consumer electronics applications that leverage Pixelworks XCode family of advanced decoding and transcoding SoCs.

“The relevance of Pixelworks advanced display processing and video delivery technology continues to grow with the prevailing demand for higher quality displays, and we are experiencing increased customer interest across all of our end markets. In addition to our extensive efforts to capitalize on this momentum and drive further adoption of our existing solutions, we are continuing to make meaningful investments in product development as part of cultivating potential expanded opportunities. As a result of our ongoing efforts and progress, we are increasingly confident that Pixelworks is well positioned to deliver sustainable growth and increased profitability in the coming quarters.”

First Quarter 2018 Financial Results

Revenue in the first quarter of 2018 was $15.3 million, compared with revenue of $18.4 million in the prior quarter and $22.7 million in the first quarter of 2017. The fourth and first quarters of 2017 included approximately $1.0 million and $9.2 million of legacy end-of-life (EOL) product revenue, respectively. The sequential decrease in first quarter 2018 revenue reflects typical seasonality in the Company’s digital projection business.

On a GAAP basis, gross profit margin in the first quarter of 2018 was 51.0%, compared with 49.7% in the fourth quarter of 2017 and 54.6% in the first quarter of 2017. First quarter 2018 GAAP operating expenses were $9.1 million compared with $12.2 million in the fourth quarter of 2017 and $9.0 million in the year-ago quarter.

For the first quarter of 2018, the Company recorded a GAAP net loss of $598,000, or $(0.02) per share, compared with a GAAP net loss of $3.6 million, or $(0.10) per share, in the prior quarter and GAAP net income of $2.8 million, or $0.09 per diluted share, in the first quarter of 2017.

On a non-GAAP basis, first quarter 2018 gross profit margin was 54.2%, compared with 56.9% in the fourth quarter of 2017 and 54.8% in the year-ago quarter. First quarter 2018 non-GAAP operating expenses were $7.8 million, compared with $10.6 million in the prior quarter and $8.3 million in the first quarter of 2017. First quarter 2018 operating expenses, on both a GAAP and non-GAAP basis, included the recognition of approximately $2 million of offsets to R&D related to the Company’s ongoing co-development project with a large digital projector customer.

For the first quarter of 2018, non-GAAP net income was $38,000, or $0.00 per diluted share, compared to a non-GAAP net loss of $379,000, or $(0.01) per share, in the previous quarter and non-GAAP net income of $3.8 million, or $0.12 per diluted share, in the first quarter of 2017. Adjusted EBITDA in the first quarter of 2018 was $1.3 million, compared to $778,000 in the fourth quarter of 2017 and $5.0 million in the first quarter of 2017.

Business Outlook

Pixelworks expects revenue to be between $18.0 million and $19.0 million for the second quarter of 2018. Additional guidance will be provided as part of the Company’s earnings conference call.

On April 27, 2018, Pixelworks’ Board of Directors approved a restructuring plan to further streamline the Company’s operations and increase efficiencies in certain areas of the business. The Company expects this restructuring to be substantially completed by the end of the third quarter ending September 30, 2018, and anticipates related charges totaling approximately $2.0 million to be recorded during the second and third quarters of 2018.

Conference Call Information

Pixelworks will host a conference call today, May 2, 2018, at 2:00 p.m. Pacific Time, which can be accessed by calling 877-359-9508 and using passcode 5398377. A Web broadcast of the call can be accessed by visiting the Company's investor page at www.pixelworks.com. For those unable to listen to the live Web broadcast, it will be archived for approximately 30 days. A replay of the conference call will also be available through Thursday, May 10, 2018, and can be accessed by calling 855-859-2056 and using passcode 5398377.

About Pixelworks, Inc.

Pixelworks creates, develops and markets high efficiency visual display processing and advanced video delivery solutions for the highest quality display and streaming applications. The Company’s 20 year history of Image Processing innovation has yielded 500+ patents covering Display Processing and Video Delivery. The Company is headquartered in San Jose, CA. For more information, please visit the Company’s web site at www.pixelworks.com.

Note: Pixelworks and the Pixelworks logo are registered trademarks of Pixelworks, Inc.

Non-GAAP Financial Measures
This earnings release makes reference to non-GAAP gross profit margins, non-GAAP operating expenses, non-GAAP net income (loss) and non-GAAP net income (loss) per share, which exclude amortization of deferred revenue fair value adjustment, inventory step-up and backlog amortization, amortization of acquired intangible assets, acquisition and integration related costs, stock-based compensation expense, restructuring expenses, fair value adjustment on convertible debt conversion option, discount accretion on convertible debt fair value, gain on extinguishment of convertible debt and a tax benefit associated with new tax treatment under the tax reform, which are all required under GAAP as well as the tax effect of the non-GAAP adjustments. The press release also makes reference to and reconciles GAAP net income (loss) and adjusted EBITDA, which Pixelworks defines as GAAP net income (loss) before interest expense and other, net, income tax provision, depreciation and amortization, as well as the specific items listed above.

Pixelworks management uses these non-GAAP financial measures internally to understand, manage and evaluate the business and establish its operational goals, review its operations on a period to period basis, for compensation evaluations, to measure performance, and for budgeting and resource allocation. Pixelworks management believes it is useful for the Company and investors to review, as applicable, both GAAP information and non-GAAP financial measures to help assess the performance of Pixelworks’ continuing businesses and to evaluate Pixelworks’ future prospects. These non-GAAP measures, when reviewed together with the GAAP financial information, provide additional transparency and information for comparison and analysis of operating performance and trends. These non-GAAP measures exclude certain items to facilitate management’s review of the comparability of our core operating results on a period to period basis.

In calculating the above non-GAAP results, management specifically adjusted for certain items related to the acquisition of ViXS Systems, Inc., including amortization of acquired intangible assets, impact of inventory step up and deferred revenue both related to fair valuing the items, acquisition and integration related costs such as accounting and legal fees and CEO severance, restructuring expenses related to a reduction in workforce, accretion on convertible debt of ViXS fair value adjustments on embedded derivative features of such convertible debt and extinguishment of such convertible debt. Management considers these items as either limited in term or having no impact on Pixelworks’ cash flows, and therefore has excluded such items to facilitate a review of current operating performance and comparisons to our past operating performance.

Because the Company’s non-GAAP financial measures are not calculated in accordance with GAAP, they may not necessarily be comparable to similarly titled measures employed by other companies. These non-GAAP financial measures should not be considered in isolation or as a substitute for the comparable GAAP measures, and should be read only in conjunction with the Company’s consolidated financial results as presented in accordance with GAAP. A reconciliation between GAAP and non-GAAP financial measures is included in this earnings release which is available in the investor relations section of the Pixelworks' website.

Safe Harbor Statement
This release contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements may be identified by use of terms such as “begin,” “continue,” “will,” “expect”, “believe,” “anticipate” and similar terms or the negative of such terms, and include, without limitation, statements about the Company’s digital projection, mobile and OTA businesses, including market movement and demand, customer engagements, and growth in the mobile and video delivery markets, synergies and additional guidance. All statements other than statements of historical fact are forward-looking statements for purposes of this release, including any projections of revenue or other financial items or any statements regarding the plans and objectives of management for future operations. Such statements are based on management's current expectations, estimates and projections about the Company's business. These statements are not guarantees of future performance and involve numerous risks, uncertainties and assumptions that are difficult to predict. Actual results could vary materially from those contained in forward looking statements due to many factors, including, without limitation: whether the Company will be able to implement the restructuring program as planned, whether the expected amount of the costs associated with the restructuring program will differ from or exceed the Company's estimates and whether the Company will be able to realize the full amount of estimated savings from the restructuring program or within the timeframe expected; our ability to execute on our strategy, including the integration of ViXS; competitive factors, such as rival chip architectures, introduction or traction by competing designs, or pricing pressures; the success of our products in expanded markets; current global economic challenges; changes in the digital display and projection markets; seasonality in the consumer electronics market; our efforts to achieve profitability from operations; our limited financial resources and our ability to attract and retain key personnel. More information regarding potential factors that could affect the Company's financial results and could cause actual results to differ materially from those discussed in the forward-looking statements is included from time to time in the Company's Securities and Exchange Commission filings, including our Annual Report on Form 10-K for the year ended December 31, 2017 as well as subsequent SEC filings.

The forward-looking statements contained in this release speak as of the date of this release, and the Company does not undertake any obligation to update any such statements, whether as a result of new information, future events or otherwise.

[Financial Tables Follow]

 
PIXELWORKS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
 
 Three Months Ended
 March 31, December 31, March 31,
 2018 2017 2017
Revenue, net (1) $  15,292  $  18,448  $  22,710 
Cost of revenue (2)   7,490    9,288    10,318 
Gross profit   7,802    9,160    12,392 
Operating expenses:      
Research and development (3)   4,463    6,695    4,906 
Selling, general and administrative (4)   4,614    5,068    4,139 
Restructuring   19    439    — 
  Total operating expenses   9,096    12,202    9,045 
  Income (loss) from operations   (1,294)   (3,042)   3,347 
Interest income (expense) and other, net (5)   972    (919)   (93)
  Income (loss) before income taxes   (322)   (3,961)   3,254 
Provision (benefit) for income taxes (6)   276    (409)   433 
  Net income (loss) $  (598) $  (3,552) $  2,821 
Net income (loss) per share:      
Basic $  (0.02) $  (0.10) $  0.10 
Diluted $  (0.02) $  (0.10) $  0.09 
Weighted average shares outstanding:      
Basic   35,183    34,359    29,283 
Diluted   35,183    34,359    31,146 
——————      
(1) Includes deferred revenue fair value adjustment $  —  $  68  $  — 
(2) Includes:      
Amortization of acquired intangible assets   298    298    — 
Inventory step-up and backlog amortization   122    949    — 
Stock-based compensation   66    64    53 
(3) Includes stock-based compensation   595    527    314 
(4) Includes:      
Stock-based compensation   539    556    422 
Amortization of acquired intangible assets   101    101    — 
Acquisition and integration   —    (45)   — 
(5) Includes: 
Gain on debt extinguishment   (1,272)   (29)   — 
Discount accretion on convertible debt fair value   69    124    — 
Fair value adjustment on convertible debt conversion option   —    621    — 
(6) Includes benefit related to tax reform   —    (343)   — 
 

 

  
PIXELWORKS, INC.
RECONCILIATION OF GAAP AND NON-GAAP  FINANCIAL  INFORMATION *
(In thousands, except per share data)
(Unaudited)		 
  
 Three Months Ended 
 March 31, December 31, March 31, 
 2018 2017 2017 
Reconciliation of GAAP and non-GAAP gross profit       
GAAP gross profit $  7,802  $  9,160  $  12,392  
Amortization of acquired intangible assets   298    298    —  
Inventory step-up and backlog amortization   122    949    —  
Stock-based compensation   66    64    53  
Deferred revenue fair value adjustment   —    68    —  
Total reconciling items included in gross profit   486    1,379    53  
Non-GAAP gross profit $  8,288  $  10,539  $  12,445  
Non-GAAP gross profit margin  54.2%  56.9%  54.8% 
        
Reconciliation of GAAP and non-GAAP operating expenses       
GAAP operating expenses $  9,096  $  12,202  $  9,045  
Reconciling item included in research and development:       
Stock-based compensation   595    527    314  
Reconciling items included in selling, general and administrative:       
Stock-based compensation   539    556    422  
Amortization of acquired intangible assets   101    101    —  
Acquisition and integration   —    (45)   —  
Restructuring   19    439    —  
Total reconciling items included in operating expenses   1,254    1,578    736  
Non-GAAP operating expenses $  7,842  $  10,624  $  8,309  
        
Reconciliation of GAAP and non-GAAP net income (loss)       
GAAP net income (loss) $  (598) $  (3,552) $  2,821  
Reconciling items included in gross profit   486    1,379    53  
Reconciling items included in operating expenses   1,254    1,578    736  
Reconciling items included in interest expense and other, net   (1,203)   716    —  
Tax effect of non-GAAP adjustments   99    (157)   155  
Benefit related to tax reform   —    (343)   —  
Non-GAAP net income (loss) $  38  $  (379) $  3,765  
Non-GAAP net income (loss) per share:       
Basic $  0.00  $  (0.01) $  0.13  
Diluted $  0.00  $  (0.01) $  0.12  
Non-GAAP weighted average shares outstanding:       
Basic   35,183    34,359    29,283  
Diluted   37,306    34,359    31,146  
        
*Set forth above are reconciliations of the non-GAAP financial measure to the most directly comparable GAAP financial measure. The non-GAAP financial measure disclosed by the company has limitations and should not be considered a substitute for, or superior to, the financial measure prepared in accordance with GAAP, and the reconciliations from GAAP to Non-GAAP actuals should be carefully evaluated. Please refer to "Non-GAAP Financial Measures” in this document for an explanation of the adjustments made to the comparable GAAP measures, the ways management uses the non-GAAP measures, and the reasons why management believes the non-GAAP measures provide useful information for investors.
 
 

 

  
PIXELWORKS, INC.
RECONCILIATION OF GAAP AND NON-GAAP  EARNINGS PER SHARE *
(Figures may not sum due to rounding)
(Unaudited)		 
  
 Three Months Ended 
 March 31, December 31, March 31, 
 2018 2017 2017
 
  Dollars per share Dollars per share Dollars per share 
  Basic Diluted Basic Diluted Basic Diluted 
Reconciliation of GAAP and non-GAAP net income (loss)             
GAAP net income (loss) $  (0.02) $  (0.02) $  (0.10) $  (0.10) $  0.10 $  0.09 
Reconciling items included in gross profit   0.01    0.01    0.04    0.04    —   — 
Reconciling items included in operating expenses   0.04    0.03    0.05    0.05    0.03   0.02 
Reconciling items included in interest expense and other, net   (0.03)   (0.03)   0.02    0.02    —   — 
Tax effect of non-GAAP adjustments   —    —    —    —    0.01   — 
Benefit related to tax reform   —    —    (0.01)   (0.01)   —   — 
Non-GAAP net income (loss) $  0.00  $  0.00  $  (0.01) $  (0.01) $  0.13 $  0.12 
              
*Set forth above are reconciliations of the non-GAAP financial measure to the most directly comparable GAAP financial measure. The non-GAAP financial measure disclosed by the company has limitations and should not be considered a substitute for, or superior to, the financial measure prepared in accordance with GAAP, and the reconciliations from GAAP to Non-GAAP actuals should be carefully evaluated. Please refer to "Non-GAAP Financial Measures” in this document for an explanation of the adjustments made to the comparable GAAP measures, the ways management uses the non-GAAP measures, and the reasons why management believes the non-GAAP measures provide useful information for investors.
 
 

 

 
PIXELWORKS, INC.
RECONCILIATION OF GAAP AND NON-GAAP  GROSS PROFIT MARGIN *
(Figures may not sum due to rounding)
(Unaudited)
 
 Three Months Ended
 March 31, December 31, March 31,
 2018 2017 2017
Reconciliation of GAAP and non-GAAP gross profit margin      
GAAP gross profit margin    51.0 %    49.7 %    54.6 %
Amortization of acquired intangible assets 1.9% 1.6 % —%
Inventory step-up and backlog amortization 0.8% 5.1 % —%
Stock-based compensation 0.4% 0.3 % 0.2%
Amortization of deferred revenue fair value adjustment 0.0% 0.4 % —%
Total reconciling items included in gross profit 3.2 % 7.4 % 0.2 %
Non-GAAP gross profit margin 54.2 % 56.9 % 54.8 %
       
*Set forth above are reconciliations of the non-GAAP financial measure to the most directly comparable GAAP financial measure. The non-GAAP financial measure disclosed by the company has limitations and should not be considered a substitute for, or superior to, the financial measure prepared in accordance with GAAP, and the reconciliations from GAAP to Non-GAAP actuals should be carefully evaluated. Please refer to "Non-GAAP Financial Measures” in this document for an explanation of the adjustments made to the comparable GAAP measures, the ways management uses the non-GAAP measures, and the reasons why management believes the non-GAAP measures provide useful information for investors.
 

 

 
PIXELWORKS, INC.
RECONCILIATION OF GAAP AND NON-GAAP  FINANCIAL  INFORMATION *
(In thousands)
(Unaudited)
 
  Three Months Ended
  March 31, December 31, March 31,
  2018 2017 2017
Reconciliation of GAAP net income (loss) and adjusted EBITDA      
GAAP net income (loss) $  (598) $  (3,552) $  2,821
Gain on debt extinguishment   (1,272)   (29)   —
Stock-based compensation   1,200    1,147    789
Amortization of acquired intangible assets   399    399    —
Tax effect of non-GAAP adjustments   99    (157)   155
Inventory step-up and backlog amortization   122    949    —
Discount accretion on convertible debt fair value   69    124    —
Restructuring   19    439    —
Fair value adjustment on convertible debt conversion option   —    621    —
Benefit related to tax reform   —    (343)   —
Amortization of deferred revenue fair value adjustment   —    68    —
Acquisition and integration   —    (45)   —
Non-GAAP net income (loss) $  38  $  (379) $  3,765
EBITDA adjustments:      
Depreciation and amortization $  826  $  863  $  839
Interest expense and other, net   231    203    93
Non-GAAP provision for income taxes   177    91    278
Adjusted EBITDA $  1,272  $  778  $  4,975
       
*Set forth above are reconciliations of the non-GAAP financial measure to the most directly comparable GAAP financial measure. The non-GAAP financial measure disclosed by the company has limitations and should not be considered a substitute for, or superior to, the financial measure prepared in accordance with GAAP, and the reconciliations from GAAP to Non-GAAP actuals should be carefully evaluated. Please refer to "Non-GAAP Financial Measures” in this document for an explanation of the adjustments made to the comparable GAAP measures, the ways management uses the non-GAAP measures, and the reasons why management believes the non-GAAP measures provide useful information for investors.
 

 

  
PIXELWORKS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)		 
  
 March 31,
2018		 December 31,
2017		 
ASSETS    
Current assets:    
Cash and cash equivalents$  20,611 $  27,523 
Accounts receivable, net  4,451   4,640 
Inventories  2,589   2,846 
Prepaid expenses and other current assets  3,736   1,328 
 Total current assets  31,387   36,337 
Property and equipment, net  5,871   5,605 
Other assets, net  1,341   1,338 
Acquired intangible assets, net  5,457   5,856 
Goodwill  18,407   18,407 
 Total assets$  62,463 $  67,543 
LIABILITIES AND SHAREHOLDERS’ EQUITY    
Current liabilities:    
Accounts payable$  3,092 $  1,436 
Accrued liabilities and current portion of long-term liabilities  12,574   16,387 
Current portion of income taxes payable  355   445 
 Total current liabilities  16,021   18,268 
Long-term liabilities, net of current portion  1,173   1,487 
Income taxes payable, net of current portion  2,353   2,282 
Convertible debt  —   6,069 
 Total liabilities  19,547   28,106 
Shareholders’ equity  42,916   39,437 
 Total liabilities and shareholders’ equity$  62,463 $  67,543 
 

Contacts:

Investor Contact
Shelton Group
Brett Perry
P: +1-214-272-0070
E: bperry@sheltongroup.com

Company Contact
Pixelworks, Inc.
Steven Moore
P: +1-408-200-9221
E: smoore@pixelworks.com

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