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Pixelworks Reports Second Quarter 2021 Financial Results and Announces Realignment Plan and Strategic Equity Investments Into Pixelworks Shanghai

pixelworks

Pixelworks, Inc., a leading provider of innovative video and display processing solutions, announced financial results for the second quarter ended June 30, 2021.

Second Quarter and Recent Highlights

  • Mobile revenue increased sequentially and year-over-year to a record, driven by expanded adoption of both hardware and software-based visual processing solutions across a growing number of launched smartphones
  • ASUS launched Zenfone 8 and Zenfone 8 Flip flagship smartphones incorporating Pixelworks’ leading color calibration, DC Dimming and HDR tone mapping technology
  • Projector revenue increased over 100% sequentially and 30% year-over-year, reflecting a recovery in customer and end market demand
  • Secured $10.6 million co-development agreement with existing Japanese OEM customer to develop an advanced SoC for a planned next-generation product family for the 3LCD Projector market
  • Appointed Mr. Lei (Leo) Shen, a seasoned mobile industry executive, to the newly created position of Senior VP & General Manager to lead continued growth and expansion of Mobile business in China
  • Announced a strategic plan to transform Pixelworks’ Shanghai subsidiary (“PWSH”) from an R&D center into a profit center for the Mobile, Projector, and Video Delivery businesses, including the positioning of that subsidiary to qualify and seek an initial public offering on the STAR Market in China
  • Signed agreements for funding commitments into PWSH from private equity and strategic investors, with our existing partner MTM contributing amounts in RMB equivalent to approximately $20.0M and new investors Verisilicon, Canaan, and Chipone Technology contributing amounts in RMB equivalent to approximately $3.1M, $3.1M, and $4.6M, respectively
  • Signed agreements for funding commitments into PWSH by employee stock ownership platforms representing approximately 75% of PWSH employees and totaling amounts in RMB equivalent to approximately $12.3M.

“We had a solid and very busy second quarter, highlighted by revenue growth of over 50% on both a sequential and year-over-year basis,” stated Todd DeBonis, President and CEO of Pixelworks. “Mobile revenue set another quarterly record, as we continued to gain increased traction across an expanded number of OEMs and launched models during the first half of the year. Also in the second quarter, our projector business benefited from a significant market recovery as well as increased demand, with revenue more than doubling from the first quarter. Consolidated gross margin also expanded significantly in the quarter to above 50% and contributed to sequential and year-over-year improvement in our bottom-line results.

“Additionally, as announced today we have completed a series of actions as part of a broader strategic plan designed to accelerate Pixelworks’ future growth and success by transforming our existing Shanghai R&D center (PWSH) into a profit center. This will enable us to enhance the focus of our mobile, projector, and video delivery businesses on their global center in Asia, increasing our ability to access capital, ecosystem partners, customers, and key talent. In conjunction with these efforts, we have secured commitments for significant capital investments in PWSH from a combination of private equity, strategic partners and our current employees in China. Longer-term, we intend to continue to take steps to qualify PWSH for an initial public offering on the STAR Market in China. We believe a listing in China will provide expanded access to future potential growth capital at what could be meaningfully higher valuations than what Pixelworks trades at today in the U.S. This plan will also allow Pixelworks to increase the focus on its TrueCut business, as well as other licensing opportunities.

“Overall, we have executed well during a dynamic and supply-constrained environment. Our team’s aggressive and ongoing efforts to secure committed capacity from both our foundry and backend packaging partners has been effective and enabled us to support a large majority of the product demand from our customers. We’ve also expanded our pipeline of mobile design-ins on next-generation smartphones across both existing and new tier-one mobile OEMs. In July, we taped-out our seventh-generation visual processor for Mobile, which we will be sampling with select customers in the third quarter. Looking to the second half of the year and into the first half of 2022, we have strong bookings from a combination of mobile and projector customers. The magnitude of our growth will depend on continued execution from all areas of the organization and support from our supply chain partners.”

Strategic Plan and Pixelworks Shanghai Subsidiary

The Company has been engaged in a strategic plan to transform its existing subsidiary, Pixelworks Semiconductor Technology (Shanghai) Co., Ltd (“PWSH”) into a profit center for its mobile, projector, and video delivery businesses. The global center of those businesses continues to be in Asia, and the steps taken by the Company to date and going forward are intended to improve its ability to access capital, customers, and talent. The Company has operated PWSH as its primary R&D center in Asia for over 15 years and feels that the time is right to take advantage of that existing footprint and develop PWSH as a full profit-and-loss center underneath the Company for the mobile, projector, and video delivery businesses. Most of these steps have been completed or will be completed before the end of 2021.

This plan will further enable PWSH to seek qualification to file an application for an initial public offering on the Shanghai Stock Exchange’s Sci-Tech innovAtion boaRd, known as the STAR Market (the “Listing”). The Company believes that the Listing will have many benefits, including improved access to new capital markets and the funding of its growth worldwide. The Company presently intends to qualify PWSH to apply for the Listing so that the Listing is consummated in the first half of 2023.

In support of its strategic plan, Pixelworks entered into an agreement with a private equity fund and other strategic investors that are based in China, as well as with entities owned by approximately 75% of PWSH employees, under which committed investments will be made in exchange for equity interest in PWSH. The private equity funds are affiliates of MTM, to which the Company sold common stock in December of 2020, and the strategic investors are funds owned by Verisilicon, Canaan, and Chipone Technology.

In aggregate, the capital increase agreements consist of the commitment by employee entities to pay amounts in RMB equating to approximately $12.3 million in exchange for total equity interest of 5.95% in PWSH, reflecting a pre-money valuation of the RMB equivalent of approximately $172.7 million, and by non-employee investors to pay amounts in RMB equivalent to approximately $30.8 million in exchange for total equity interest of 10.45% in PWSH, reflecting a pre-money valuation of the RMB-equivalent of approximately $246.8 million. Following the closing of these transactions, Pixelworks would continue to hold an 83.6% equity interest in PWSH.

The Company will continue to maintain its global headquarters in the United States and operate its TrueCut business, as well as other licensing businesses, out of that headquarters. The Company is committed to maintaining its listing on the Nasdaq Global Market.

Additional information related to the strategic plan and associated capital increase agreements can be found in the Company’s Securities and Exchange Commission filings, including the Form 8-K filed August 9, 2021.

Second Quarter Fiscal 2021 Financial Results

Revenue in the second quarter of 2021 was $14.1 million, compared to $9.3 million in the first quarter of 2021 and $9.3 million in the second quarter of 2020. The over 50% sequential and year-over-year increase in second quarter revenue reflected a significant rebound in demand in the projector market combined with continued strong growth and record revenue in the mobile market.

On a GAAP basis, gross profit margin in the second quarter of 2021 was 50.6%, compared to 40.2% in the first quarter of 2021 and 54.6% in the second quarter of 2020. Second quarter 2021 GAAP operating expenses were $11.6 million, compared to $11.6 million in the first quarter of 2021 and $11.5 million in the year-ago quarter.

On a non-GAAP basis, second quarter 2021 gross profit margin was 52.7%, compared to 43.7% in the first quarter of 2021 and 59.2% in the year-ago quarter. Second quarter 2021 non-GAAP operating expenses were $10.1 million, compared to $10.2 million in the second quarter of 2020 and $9.3 million in the year-ago quarter.

For the second quarter of 2021, the Company recorded a GAAP net loss of $4.4 million, or ($0.08) per share, compared to a GAAP net loss of $8.1 million, or ($0.16) per share, in the first quarter of 2021 and a GAAP net loss of $6.6 million, or ($0.17) per share, in the year-ago quarter.

For the second quarter of 2021, the Company recorded a non-GAAP net loss of $2.6 million, or ($0.05) per share, compared to a non-GAAP net loss of $6.4 million, or ($0.12) per share, in the first quarter of 2021, and a non-GAAP net loss of $3.9 million, or ($0.10) per share, in the second quarter of 2020.

Adjusted EBITDA in the second quarter of 2021 was a negative $1.8 million, compared to a negative $5.2 million in the first quarter of 2021 and a negative $2.9 million in the year-ago quarter.

Cash, cash equivalents and short-term investments at the end of the second quarter of 2021 were $23.6 million, compared to $25.4 million at the end of the first quarter of 2021.

Business Outlook

The Company’s current business outlook, including guidance for the third quarter of 2021, will be provided as part of the scheduled conference call.

Conference Call Information

Pixelworks will host a conference call today, August 10, 2021, at 2:00 p.m. Pacific Time, which can be accessed by calling 1-877-359-9508 and using passcode 5398425. A live audio webcast of the call can also be accessed by visiting the Company’s investor page at www.pixelworks.com. For those unable to listen to the live webcast, it will be archived for approximately 90 days. A replay of the conference call will also be available through Tuesday, August 17, 2021, and can be accessed by calling 1-855-859-2056 and using passcode 5398425.

About Pixelworks, Inc.

Pixelworks provides industry-leading content creation, video delivery and display processing solutions and technology that enable highly authentic viewing experiences with superior visual quality, across all screens – from cinema to smartphone and beyond. The Company has a 20-year history of delivering image processing innovation to leading providers of consumer electronics, professional displays, and video streaming services. Pixelworks is headquartered in San Jose, CA.

PIXELWORKS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)



Three Months Ended

Six Months Ended


June 30,

March 31,

June 30,

June 30,

June 30,


2021

2021

2020

2021

2020

Revenue, net

$ 14,051

$ 9,270

$ 9,253

$ 23,321

$ 23,027

Cost of revenue (1)

6,940

5,545

4,204

12,485

11,203

Gross profit

7,111

3,725

5,049

10,836

11,824

Operating expenses:






Research and development (2)

6,671

6,785

6,314

13,456

12,581

Selling, general and administrative (3)

4,896

4,854

5,156

9,750

10,349

Restructuring

592

Total operating expenses

11,567

11,639

11,470

23,206

23,522

Loss from operations

(4,456)

(7,914)

(6,421)

(12,370)

(11,698)

Interest income (expense) and other, net

181

56

(24)

237

30

Total other income (expense), net

181

56

(24)

237

30

Loss before income taxes

(4,275)

(7,858)

(6,445)

(12,133)

(11,668)

Provision for income taxes

107

217

107

324

283

Net loss

$ (4,382)

$ (8,075)

$ (6,552)

$ (12,457)

$ (11,951)

Net loss per share – basic and diluted

$ (0.08)

$ (0.16)

$ (0.17)

(0.24)

(0.31)

Weighted average shares outstanding – basic and diluted

52,283

51,673

39,444

51,980

39,156

——————






(1) Includes:






Amortization of acquired intangible assets

218

245

298

463

596

Stock-based compensation

76

79

127

155

228

(2) Includes stock-based compensation

610

581

806

1,191

1,454

(3) Includes:






Stock-based compensation

820

772

1,310

1,592

2,383

Amortization of acquired intangible assets

53

60

76

113

152

PIXELWORKS, INC.
RECONCILIATION OF GAAP AND NON-GAAP FINANCIAL INFORMATION *
(In thousands, except per share data)
(Unaudited)



Three Months Ended

Six Months Ended


June 30,

March 31,

June 30,

June 30,

June 30,


2021

2021

2020

2021

2020

Reconciliation of GAAP and non-GAAP gross profit






GAAP gross profit

$ 7,111

$ 3,725

$ 5,049

$ 10,836

$ 11,824

Amortization of acquired intangible assets

218

245

298

463

596

Stock-based compensation

76

79

127

155

228

Total reconciling items included in gross profit

294

324

425

618

824

Non-GAAP gross profit

$ 7,405

$ 4,049

$ 5,474

$ 11,454

$ 12,648

Non-GAAP gross profit margin

52.7 %

43.7 %

59.2 %

49.1 %

54.9 %







Reconciliation of GAAP and non-GAAP operating expenses






GAAP operating expenses

$ 11,567

$ 11,639

$ 11,470

$ 23,206

$ 23,522

Reconciling item included in research and development:






Stock-based compensation

610

581

806

1,191

1,454

Reconciling items included in selling, general and administrative:






Stock-based compensation

820

772

1,310

1,592

2,383

Amortization of acquired intangible assets

53

60

76

113

152

Restructuring

592

Total reconciling items included in operating expenses

1,483

1,413

2,192

2,896

4,581

Non-GAAP operating expenses

$ 10,084

$ 10,226

$ 9,278

$ 20,310

$ 18,941







Reconciliation of GAAP and non-GAAP net loss






GAAP net loss

$ (4,382)

$ (8,075)

$ (6,552)

$ (12,457)

$ (11,951)

Reconciling items included in gross profit

294

324

425

618

824

Reconciling items included in operating expenses

1,483

1,413

2,192

2,896

4,581

Tax effect of non-GAAP adjustments

4

(20)

18

(16)

(7)

Non-GAAP net loss

$ (2,601)

$ (6,358)

$ (3,917)

$ (8,959)

$ (6,553)







Non-GAAP net loss per share – basic and diluted

$ (0.05)

$ (0.12)

$ (0.10)

$ (0.17)

$ (0.17)







Non-GAAP weighted average shares outstanding – basic and diluted

52,283

51,673

39,444

51,980

39,156







*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


Six Months Ended



June 30,


March 31,


June 30,


June 30,


June 30,



2021


2021


2020


2021


2020



Dollars per share


Dollars per share


Dollars per share


Dollars per share


Dollars per share



Basic


Diluted


Basic


Diluted


Basic


Diluted


Basic


Diluted


Basic


Diluted

Reconciliation of GAAP and non-GAAP net loss





















GAAP net loss


$ (0.08)


$ (0.08)


$ (0.16)


$ (0.16)


$ (0.17)


$ (0.17)


$ (0.24)


$ (0.24)


$ (0.31)


$ (0.31)

Reconciling items included in gross profit


0.01


0.01


0.01


0.01


0.01


0.01


0.01


0.01


0.02


0.02

Reconciling items included in operating expenses


0.03


0.03


0.03


0.03


0.06


0.06


0.06


0.06


0.12


0.12

Non-GAAP net loss


$ (0.05)


$ (0.05)


$ (0.12)


$ (0.12)


$ (0.10)


$ (0.10)


$ (0.17)


$ (0.17)


$ (0.17)


$ (0.17)






















*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


Six Months Ended



June 30,


March 31,


June 30,


June 30,


June 30,



2021


2021


2020


2021


2020

Reconciliation of GAAP and non-GAAP gross profit margin











GAAP gross profit margin


50.6 %


40.2 %


54.6 %


46.5 %


51.3 %

Amortization of acquired intangible assets


1.6 %


2.6 %


3.2 %


2.0 %


2.6 %

Stock-based compensation


0.5 %


0.9 %


1.4 %


0.7 %


1.0 %

Total reconciling items included in gross profit


2.1 %


3.5 %


4.6 %


2.6 %


3.6 %

Non-GAAP gross profit margin


52.7 %


43.7 %


59.2 %


49.1 %


54.9 %












*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

Six Months Ended


June 30,

March 31,

June 30,

June 30,

June 30,


2021

2021

2020

2021

2020

Reconciliation of GAAP net loss and adjusted EBITDA






GAAP net loss

$ (4,382)

$ (8,075)

$ (6,552)

$ (12,457)

$ (11,951)

Stock-based compensation

1,506

1,432

2,243

2,938

4,065

Amortization of acquired intangible assets

271

305

374

576

748

Tax effect of non-GAAP adjustments

4

(20)

18

(16)

(7)

Restructuring

592

Non-GAAP net loss

$ (2,601)

$ (6,358)

$ (3,917)

$ (8,959)

$ (6,553)

EBITDA adjustments:






Depreciation and amortization

$ 906

$ 1,016

$ 871

$ 1,922

$ 1,893

Non-GAAP interest expense (income) and other, net

(181)

(56)

24

(237)

(30)

Non-GAAP provision for income taxes

103

237

89

340

290

Adjusted EBITDA

$ (1,773)

$ (5,161)

$ (2,933)

$ (6,934)

$ (4,400)







*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)



June 30,
2021


December 31,
2020

ASSETS




Current assets:




Cash and cash equivalents

$ 23,624


$ 31,257

Short-term marketable securities


250

Accounts receivable, net

6,351


4,672

Inventories

1,577


2,445

Prepaid expenses and other current assets

1,888


1,010

Total current assets

33,440


39,634

Property and equipment, net

3,900


5,103

Operating lease right of use assets

6,013


6,606

Other assets, net

992


1,081

Acquired intangible assets, net

631


1,207

Goodwill

18,407


18,407

Total assets

$ 63,383


$ 72,038

LIABILITIES AND SHAREHOLDERS’ EQUITY




Current liabilities:




Accounts payable

$ 2,664


$ 995

Accrued liabilities and current portion of long-term liabilities

8,745


9,452

Current portion of income taxes payable

140


147

Total current liabilities

11,549


10,594

Long-term liabilities, net of current portion

569


1,007

Operating lease liabilities, net of current portion

4,178


5,088

Income taxes payable, net of current portion

2,673


2,479

Total liabilities

18,969


19,168

Shareholders’ equity

44,414


52,870

Total liabilities and shareholders’ equity

$ 63,383


$ 72,038