Pixelworks Reports Second Quarter 2018 Financial Results

News Release

Revenue increased 26% Sequentially Driven by Growth in Projector and Mobile; Expects Sequential Growth in Projector, Video Delivery and Mobile in the Third Quarter

SAN JOSE, Calif., Aug. 02, 2018 (GLOBE NEWSWIRE) -- Pixelworks, Inc. (NASDAQ: PXLW), a leading provider of power efficient visual processing solutions, today announced financial results for the second quarter ended June 30, 2018.

Second Quarter Highlights

Digital Projector revenue grew 31% sequentially
Mobile revenue grew 66% sequentially and 29% year-over-year, on increased production volume shipments of both 3^rd and 4^th generation Iris processors to smartphone OEM customers
Secured multiple new wins and increased pipeline of customer engagements in both mobile and video delivery

President and CEO of Pixelworks, Todd DeBonis, commented, “Second quarter revenue of $19.3 million was above the high-end of our guidance range, reflecting strong sequential growth in both the digital projector and mobile markets. Additionally, consolidated revenue in the second quarter grew more than 20 percent year-over-year after adjusting for the end-of-life revenue we recognized in 2017. Operating expenses were in-line with our expectations, and we achieved breakeven bottom-line results on a non-GAAP basis.

“Complementing our solid financial results, we announced several notable wins during the second quarter. In mobile, we shipped increased volumes of 3^rd and 4^th generation Iris processors in support of announced wins on Xiaomi Blackshark’s gaming smartphone and ASUS’ flagship ROG Phone. In our video delivery business, we announced our XCode transcoding SoCs were selected to enable multiple leading OTA devices, including AirTV and Nuvyyo’s Tablo Dual-Lite DVR.

“Prevailing video consumption trends among consumers are continuing to drive increased momentum for the incorporation of Pixelworks’ advanced display technologies in next-generation devices. As evidence, today we have the largest pipeline of customer and program engagements in recent history, and we anticipate being able to announce multiple new wins in mobile during the second half of the year. Specific to the third quarter, we expect to report healthy sequential and year-over-year consolidated revenue growth, with our video delivery business anticipated to be accretive and contribute to our improvement in overall profitability.”

Second Quarter 2018 Financial Results

Revenue in the second quarter of 2018 was $19.3 million, compared to $15.3 million in the first quarter of 2018. The sequential increase reflects a combination of seasonal growth in the Company’s digital projector business and expanded shipments of Iris mobile processors in support of new product launches at multiple smartphone customers. Revenue in the second quarter of 2017 was $20.7 million, which included $5.1 million of legacy end-of-life product revenue.

On a GAAP basis, gross profit margin in the second quarter of 2018 was 49.5%, compared to 51.0% in the first quarter of 2018 and 54.1% in the second quarter of 2017. Second quarter 2018 GAAP operating expenses were $12.0 million compared to $9.1 million in the first quarter of 2018 and $9.2 million in the year-ago quarter.

For the second quarter of 2018, the Company recorded a GAAP net loss of $2.6 million, or $(0.07) per share, compared to a GAAP net loss of $598,000, or $(0.02) per share, in the first quarter of 2018 and GAAP net income of $1.3 million, or $0.04 per diluted share, in the year-ago quarter.

On a non-GAAP basis, second quarter 2018 gross profit margin was 52.7%, compared to 54.2% in the first quarter of 2018 and 54.4% in the year-ago quarter. Second quarter 2018 non-GAAP operating expenses were $10.0 million, compared to $7.8 million in the first quarter of 2018 and $7.6 million in the year-ago quarter. Operating expenses in both the first quarter of 2018 and second quarter of 2017 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 second quarter of 2018, the Company recorded a non-GAAP net loss of $140,000, or $(0.00) per share, compared to non-GAAP net income of $38,000, or $0.00 per diluted share, in the first quarter of 2018 and non-GAAP net income of $3.2 million, or $0.10 per diluted share, in the year-ago quarter. Adjusted EBITDA in the second quarter of 2018 was $1.1 million, compared with $1.3 million in the first quarter of 2018 and $4.7 million in the year-ago quarter.

Business Outlook

For the third quarter of 2018, Pixelworks expects revenue to be in a range of between $21 million and $22 million. Additional guidance will be provided as part of the Company’s earnings conference call.

Conference Call Information

Pixelworks will host a conference call today, August 2, 2018, at 2:00 p.m. Pacific Time, which can be accessed by calling 877-359-9508 and using passcode 8078505. 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, August 9, 2018, and can be accessed by calling 855-859-2056 and using passcode 8078505.

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 has a 20-year history of delivering image processing innovation to providers of leading edge consumer electronics and professional displays. Pixelworks is headquartered in San Jose, Calif. 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 inventory step-up and backlog amortization, amortization of acquired intangible assets, stock-based compensation expense, restructuring expenses, discount accretion on convertible debt fair value and gain on extinguishment of convertible debt, 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 both related to fair valuing the items, restructuring expenses related to a reduction in workforce, accretion on convertible debt of ViXS. 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, mobile wins and the timing thereof, 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.

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,
		2018			2018			2017			2018			2017
Revenue, net	$	19,251		$	15,292		$	20,721		$	34,543		$	43,431
Cost of revenue (1)		9,717			7,490			9,520			17,207			19,838
Gross profit		9,534			7,802			11,201			17,336			23,593
Operating expenses:
Research and development (2)		6,423			4,463			4,501			10,886			9,407
Selling, general and administrative (3)		4,959			4,614			4,660			9,573			8,799
Restructuring		602			19			—			621			—
Total operating expenses		11,984			9,096			9,161			21,080			18,206
Income (loss) from operations		(2,450	)		(1,294	)		2,040			(3,744	)		5,387
Interest income (expense) and other, net (4)		(131	)		972			(107	)		841			(200	)
Income (loss) before income taxes		(2,581	)		(322	)		1,933			(2,903	)		5,187
Provision for income taxes		32			276			669			308			1,102
Net income (loss)	$	(2,613	)	$	(598	)	$	1,264		$	(3,211	)	$	4,085
Net income (loss) per share:
Basic	$	(0.07	)	$	(0.02	)	$	0.04			(0.09	)		0.14
Diluted	$	(0.07	)	$	(0.02	)	$	0.04			(0.09	)		0.13
Weighted average shares outstanding:
Basic		35,704			35,183			29,766			35,445			29,526
Diluted		35,704			35,183			31,974			35,445			31,601
——————
(1) Includes:
Amortization of acquired intangible assets		298			298			—			596			—
Inventory step-up and backlog amortization		239			122			—			361			—
Stock-based compensation		78			66			69			144			122
(2) Includes stock-based compensation		627			595			362			1,222			676
(3) Includes:
Stock-based compensation		682			539			519			1,221			941
Amortization of acquired intangible assets		101			101			—			202			—
Acquisition and integration		—			—			730			—			894
(4) Includes:
Gain on debt extinguishment		—			(1,272	)		—			(1,272	)		—
Discount accretion on convertible debt fair value		—			69			—			69			—

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,
		2018			2018			2017			2018			2017
Reconciliation of GAAP and non-GAAP gross profit
GAAP gross profit	$	9,534		$	7,802		$	11,201		$	17,336		$	23,593
Amortization of acquired intangible assets		298			298			—			596			—
Inventory step-up and backlog amortization		239			122			—			361			—
Stock-based compensation		78			66			69			144			122
Total reconciling items included in gross profit		615			486			69			1,101			122
Non-GAAP gross profit	$	10,149		$	8,288		$	11,270		$	18,437		$	23,715
Non-GAAP gross profit margin		52.7	%		54.2	%		54.4	%		53.4	%		54.6	%

Reconciliation of GAAP and non-GAAP operating expenses
GAAP operating expenses	$	11,984		$	9,096		$	9,161		$	21,080		$	18,206
Reconciling item included in research and development:
Stock-based compensation		627			595			362			1,222			676
Reconciling items included in selling, general and administrative:
Stock-based compensation		682			539			519			1,221			941
Amortization of acquired intangible assets		101			101			—			202			—
Acquisition and integration		—			—			730			—			894
Restructuring		602			19			—			621			—
Total reconciling items included in operating expenses		2,012			1,254			1,611			3,266			2,511
Non-GAAP operating expenses	$	9,972		$	7,842		$	7,550		$	17,814		$	15,695

Reconciliation of GAAP and non-GAAP net income (loss)
GAAP net income (loss)	$	(2,613	)	$	(598	)	$	1,264		$	(3,211	)	$	4,085
Reconciling items included in gross profit		615			486			69			1,101			122
Reconciling items included in operating expenses		2,012			1,254			1,611			3,266			2,511
Reconciling items included in interest expense and other, net		—			(1,203	)		—			(1,203	)		—
Tax effect of non-GAAP adjustments		(154	)		99			270			(55	)		425
Non-GAAP net income (loss)	$	(140	)	$	38		$	3,214		$	(102	)	$	7,143
Non-GAAP net income (loss) per share:
Basic	$	(0.00	)	$	0.00		$	0.11		$	(0.00	)	$	0.24
Diluted	$	(0.00	)	$	0.00		$	0.10		$	(0.00	)	$	0.23
Non-GAAP weighted average shares outstanding:
Basic		35,704			35,183			29,766			35,445			29,526
Diluted		35,704			37,306			31,974			35,445			31,601

*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,
		2018						2018						2017				2018						2017
	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 income (loss)
GAAP net income (loss)	$	(0.07	)	$	(0.07	)	$	(0.02	)	$	(0.02	)	$	0.04	$	0.04	$	(0.09	)	$	(0.09	)	$	0.14	$	0.13
Reconciling items included in gross profit		0.02			0.02			0.01			0.01			—		—		0.03			0.03			—		—
Reconciling items included in operating expenses		0.06			0.06			0.04			0.03			0.05		0.05		0.09			0.09			0.09		0.08
Reconciling items included in interest expense and other, net		—			—			(0.03	)		(0.03	)		—		—		(0.03	)		(0.03	)		—		—
Tax effect of non-GAAP adjustments		—			—			—			—			0.01		0.01		—			—			0.01		0.01
Non-GAAP net income (loss)	$	(0.00	)	$	(0.00	)	$	0.00		$	0.00		$	0.11	$	0.10	$	(0.00	)	$	(0.00	)	$	0.24	$	0.23

*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,
	2018		2018		2017		2018		2017
Reconciliation of GAAP and non-GAAP gross profit margin
GAAP gross profit margin	49.5	%	51.0	%	54.1	%	50.2	%	54.3	%
Amortization of acquired intangible assets	1.5	%	1.9	%	—	%	1.7	%	—	%
Inventory step-up and backlog amortization	1.2	%	0.8	%	—	%	1.0	%	—	%
Stock-based compensation	0.4	%	0.4	%	0.3	%	0.4	%	0.3	%
Total reconciling items included in gross profit	3.2	%	3.2	%	0.3	%	3.2	%	0.3	%
Non-GAAP gross profit margin	52.7	%	54.2	%	54.4	%	53.4	%	54.6	%

*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,
		2018			2018			2017		2018		2017
Reconciliation of GAAP net income (loss) and adjusted EBITDA
GAAP net income (loss)	$	(2,613	)	$	(598	)	$	1,264	$	(3,211	)	$	4,085
Stock-based compensation		1,387			1,200			950		2,587			1,739
Restructuring		602			19			—		621			—
Amortization of acquired intangible assets		399			399			—		798			—
Inventory step-up and backlog amortization		239			122			—		361			—
Tax effect of non-GAAP adjustments		(154	)		99			270		(55	)		425
Gain on debt extinguishment		—			(1,272	)		—		(1,272	)		—
Discount accretion on convertible debt fair value		—			69			—		69			—
Acquisition and integration		—			—			730		—			894
Non-GAAP net income (loss)	$	(140	)	$	38		$	3,214	$	(102	)	$	7,143
EBITDA adjustments:
Depreciation and amortization	$	923		$	826		$	975	$	1,749		$	1,814
Interest expense and other, net		131			231			107		362			200
Non-GAAP provision for income taxes		186			177			399		363			677
Adjusted EBITDA	$	1,100		$	1,272		$	4,695	$	2,372		$	9,834

*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, 2018		December 31, 2017
ASSETS
Current assets:
Cash and cash equivalents	$	17,443	$	27,523
Short-term marketable securities		2,726		—
Accounts receivable, net		6,589		4,640
Inventories		2,890		2,846
Prepaid expenses and other current assets		2,097		1,328
Total current assets		31,745		36,337
Property and equipment, net		5,299		5,605
Other assets, net		1,341		1,338
Acquired intangible assets, net		5,058		5,856
Goodwill		18,407		18,407
Total assets	$	61,850	$	67,543
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	2,932	$	1,436
Accrued liabilities and current portion of long-term liabilities		13,526		16,387
Current portion of income taxes payable		379		445
Total current liabilities		16,837		18,268
Long-term liabilities, net of current portion		985		1,487
Income taxes payable, net of current portion		2,326		2,282
Convertible debt		—		6,069
Total liabilities		20,148		28,106
Shareholders’ equity		41,702		39,437
Total liabilities and shareholders’ equity	$	61,850	$	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

Source: Pixelworks, Inc.