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Pixelworks Reports Fourth Quarter 2006 Financial Results
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Conference Call at 2 p.m. PST, January 30, 2007 - Pixelworks will host a conference call at 2 p.m. PST, January 30, 2007, which can be accessed at 719-457-2634 and using pass code 367281. The conference call will be Web broadcast and can be accessed by visiting the investor section at www.pixelworks.com. For those unable to listen to the live Web broadcast, it will be archived through February 28, 2007. A replay of the conference call will also be available through February 2, 2007, and can be accessed by calling 719-457-0820 using pass code 4367281.
TUALATIN, Ore.--(BUSINESS WIRE)--Jan. 30, 2007--Pixelworks, Inc. (NASDAQ:PXLW), an innovative provider of powerful video and pixel processing technology for advanced televisions and digital projectors, today announced financial results for the fourth quarter ended December 31, 2006.
Revenue for the fourth quarter of 2006 came in at the high end of the company's revised revenue outlook for the quarter at $29.8 million, an 18 percent decrease from revenue of $36.3 million in the third quarter of 2006 and a 31 percent decrease from revenue of $43.3 million in the fourth quarter of 2005. As expected, the sequential decrease was the result of several factors including inventory build up ahead of the holiday buying season, a decline in shipments of older legacy advanced television products and seasonality in the projector portion of the business.
Fourth quarter 2006 GAAP gross profit margin was 31.5 percent compared to 37.5 percent in the third quarter of 2006 and 35.1 percent in the fourth quarter of 2005. Included in cost of sales during for the fourth quarter of 2006 was approximately $2.1 million in restructuring charges consisting primarily of the write-off of intellectual property (IP) and tooling, along with $751,000 for the amortization of acquired intangible assets and stock-based compensation. Excluding these costs, non-GAAP gross profit margin improved 150 basis points to 41.1 percent in the fourth quarter of 2006 compared to 39.6 percent in the third quarter of 2006 as a result of improved product mix and lower inventory reserves and scrap charges of $950,000 in the fourth quarter compared with $2.0 million in the third quarter. The fourth quarter inventory and scrap charges reduced GAAP and non-GAAP gross profit margin by approximately 300 basis points.
GAAP operating expenses were $31.9 million in the fourth quarter of 2006 compared to $24.3 million in the third quarter of 2006 and $24.4 million in the fourth quarter of 2005. Included in GAAP operating expenses in the fourth quarter of 2006 were $10.6 million of restructuring charges related to the write-off of certain IP, costs related to space consolidation and severance costs. GAAP operating expenses in the third quarter of 2006 and the fourth quarter of 2005 included restructuring charges of $1.9 million and $1.2 million, respectively.
Non-GAAP operating expenses, which exclude amortization of acquired intangible assets, stock-based compensation and restructuring charges were down 5 percent to $19.1 million in the fourth quarter of 2006 from $20.2 million in the third quarter of 2006. Compared to the fourth quarter of 2005, non-GAAP operating expenses were down 15 percent from $22.6 million primarily due to lower compensation and rent expense resulting from restructuring efforts.
Fourth quarter 2006 GAAP net loss of ($15.5) million, or ($.32) per diluted share, included expenses totaling $15.6 million for stock-based compensation, amortization of acquired intangible assets and restructuring charges, offset by a net gain of $4.8 million for the settlement of an Equator escrow account arbitration claim. This compares to a GAAP net loss of ($10.1) million or ($.21) per diluted share in the third quarter of 2006 which included expenses totaling $4.9 million for stock-based compensation expense, the amortization of acquired intangible assets and a restructuring charge. Fourth quarter 2005 GAAP net loss was ($35.9) million, or ($.75) per diluted share and included $5.6 million for stock-based compensation expense, the amortization of acquired intangible assets and a restructuring charge, as well as a $27.1 million income tax provision which was recorded primarily for the creation of a valuation allowance against deferred tax assets.
Fourth quarter 2006 non-GAAP net loss was ($4.7) million or ($.10) per diluted share compared to a non-GAAP net loss of ($5.2) million or ($.11) per diluted share in the third quarter of 2006 and non-GAAP net loss of ($32.1) million or ($.67) per diluted share in the fourth quarter of 2005. Non-GAAP net losses exclude the effects of amortization of acquisition related items, stock-based compensation and restructuring charges. A detailed reconciliation of non-GAAP financial measures to comparable GAAP measures is included in the accompanying financial schedules.
Cash and marketable securities, consisting of cash and cash equivalents, short-term marketable securities and long-term marketable securities increased by $3.0 million during the quarter to $134.6 million at December 31, 2006. This increase resulted primarily from the settlement of the Equator escrow claim of $4.8 million offset by payments on long term obligations.
Restructuring Update
In late November, the company announced an additional restructuring plan designed to further reduce operating expenses. The company expects the annualized benefit from fourth quarter 2006 run rates will be approximately $16 million to $18 million with a quarterly operating expense target of $15 million by the end of third quarter of 2007. This restructuring plan will further consolidate North American operations to achieve reductions in compensation and rent expense over the course of the next several quarters.
At CES in early January, the company presented an overview of strategic changes it is making to focus on maximizing video quality and pixel performance. As a result of these strategic changes, the company wrote off capitalized IP and tooling assets that have no future use. Accordingly, the company recorded restructuring charges in the fourth quarter of 2006 totaling $12.7 million of which $2.1 million was included in cost of sales and $10.6 million was included in operating expenses. Of the total $12.7 million, $10.6 million related to the write-off of certain assets including IP and tooling, $1.4 million related to severance and retention benefits and $700,000 related to the consolidation of leased space. In addition, approximately $3.5 million to $4.0 million of restructuring charges will be recognized over the course of the next several quarters as headcount is reduced and space is vacated.
"We have embarked on a new strategy which is being embraced by the market as evidenced by several new design wins that will ramp over the course of 2007. We continue to make progress and I am confident we have the plans in place to create a successful business model focused on increasing shareholder value," said Hans Olsen, President and CEO of Pixelworks. "We are obviously not satisfied with our results and 2006 was a challenging year for Pixelworks by any measure. We remain focused on product execution and our restructuring efforts to return the company to profitability," concluded Olsen.
Business Outlook for First Quarter 2007
The following Business Outlook statements are based on the company's current expectations. These statements are forward-looking, subject to risks and uncertainties, and actual results may differ materially. These statements do not include the potential impact of any investments outside the ordinary course of business, or mergers or acquisitions that may be completed after December 31, 2006. Readers are cautioned not to place undue reliance on the forward-looking statements, which speak only as of the date of this press release. The inclusion of any Business Outlook statement in this release does not constitute a suggestion by the company or any other person that the events or circumstances described in such statements are material. The company does not undertake to publicly update or revise these forward-looking statements even if experience or future changes make it clear that any projected results expressed or implied in this release will not be realized.
The company estimates net loss per diluted share in the first quarter of 2007 to be ($0.19) to ($0.25) on a GAAP basis and ($0.13) to ($0.19) on a non-GAAP basis, based on the following estimates:
About Pixelworks, Inc.
Pixelworks, headquartered in Tualatin, Oregon, is an innovative provider of powerful video and pixel processing technology for manufacturers of advanced televisions and digital projectors. Pixelworks' flexible design architecture enables our unique technology to produce outstanding image quality in our customers' display products in a range of solutions including system-on-chip ICs, co-processor ICs and discrete chips. At design centers in Shanghai and San Jose, Pixelworks engineers relentlessly push pixel performance to new levels for leading manufacturers of consumer electronics and professional displays worldwide.
For more information, please visit the company's Web site at www.pixelworks.com.
Pixelworks is a trademark of Pixelworks, Inc. All other trademarks and registration marks are the property of their respective corporations.
Non-GAAP Financial Measures
This press release makes reference to non-GAAP gross margins, operating expenses and net loss which exclude acquisition-related items, intangible asset impairments, restructuring charges and stock-based compensation expense all of which are required under GAAP. The company believes these non-GAAP measures provide a meaningful perspective on its underlying cash flow dynamics, but cautions investors to consider these measures in addition to, not as a substitute for, its consolidated financial results presented in accordance with GAAP. A reconciliation between GAAP and non-GAAP financial measures is included in the company's quarterly earnings releases and is also available in the investor relations section of the company's website.
Safe Harbor Statement
This release contains statements, including the statements in the "Business Outlook for First Quarter 2007" section above, that are forward-looking statements within the meaning of the "Safe Harbor" provisions of the federal Securities Litigation Reform Act of 1995. Such statements are based on current expectations, estimates and projections about the company's business. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions that are difficult to predict. Actual results could vary materially from the description contained herein due to many factors including those described above and the following: changes in growth in the advanced television, multimedia projector, digital media streaming device and flat panel monitor industries; changes in consumer confidence and spending, changes in customer ordering patterns or lead times; the success of our products in expanded markets; success in achieving operating efficiencies from our restructuring efforts; competitive factors, such as rival chip architectures, introduction or traction by competing designs, or pricing pressures; insufficient, excess or obsolete inventory and variations in inventory valuation; our product mix; new product yield rates, changes in regional demand for our product, non-acceptance of the combined technologies by leading manufacturers; changes in the recoverability of intangible assets and long lived assets; and other risk factors listed from time to time in the company's Securities and Exchange Commission filings.
The forward-looking statements we make today, speak as of today, and we do not undertake any obligation to update any such statements to reflect events or circumstances occurring after today. Please refer to our Annual Report on Form 10-K for the year ended December 31, 2005 and subsequent SEC filings for a description of factors that could cause actual results to differ materially from the preliminary results announced.
PIXELWORKS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
Three Months Ended Year Ended
December 31, December 31,
------------------- ---------------------
2006 2005 2006 2005
--------- --------- ---------- ----------
Revenue, net $ 29,829 $ 43,334 $ 133,607 $ 171,704
Cost of revenue (1) 18,328 28,145 84,057 108,748
Impairment loss on acquired
developed technology - - 21,330 -
Restructuring 2,119 - 2,119 -
--------- --------- ---------- ----------
Gross profit 9,382 15,189 26,101 62,956
Operating expenses:
Research and development (2) 13,045 14,644 57,019 51,814
Selling, general and
administrative (3) 8,169 8,216 35,053 30,616
Impairment loss on goodwill - - 133,739 -
Impairment loss on acquired
intangible assets - - 1,753 -
Restructuring 10,565 1,162 13,316 1,162
Amortization of acquired
intangible assets 89 334 602 1,084
--------- --------- ---------- ----------
Total operating
expenses 31,868 24,356 241,482 84,676
--------- --------- ---------- ----------
Loss from operations (22,486) (9,167) (215,381) (21,720)
Interest income 1,592 1,219 5,833 5,658
Interest expense (680) (663) (2,721) (2,637)
Settlement proceeds, net 4,800 - 4,800 -
Gain on repurchase of long-
term debt, net - - 3,009 -
Realized loss on sale of
marketable securities - - - (779)
Amortization of debt issuance
costs (165) (178) (667) (710)
--------- --------- ---------- ----------
Interest and other
income, net 5,547 378 10,254 1,532
--------- --------- ---------- ----------
Loss before income
taxes (16,939) (8,789) (205,127) (20,188)
Provision (benefit) for
income taxes (1,489) 27,125 (949) 22,422
--------- --------- ---------- ----------
Net loss $(15,450) $(35,914) $(204,178) $ (42,610)
========= ========= ========== ==========
Net loss per share - basic
and diluted $ (0.32) $ (0.75) $ (4.23) $ (0.90)
========= ========= ========== ==========
Weighted average shares
outstanding - basic and
diluted 48,626 47,692 48,289 47,337
========= ========= ========== ==========
-----------------------------
(1)Includes:
Amortization of acquired
developed technology $ 705 $ 1,972 $ 4,087 $ 4,515
Amortization of acquired
inventory mark-up - 1,888 26 5,217
Amortization of acquired
backlog - - - 600
Stock-based compensation 46 13 208 60
(2)Includes stock-based
compensation 796 174 3,884 758
(3)Includes stock-based
compensation 1,292 77 5,464 307
PIXELWORKS, INC.
RECONCILIATION OF GAAP AND NON-GAAP FINANCIAL INFORMATION (a)
(In thousands, except per share data)
(Unaudited)
Three Months Ended Year Ended
December 31, December 31,
------------------- --------------------
2006 2005 2006 2005
--------- --------- ---------- ---------
Reconciliation of GAAP and
non-GAAP gross profit
GAAP gross profit $ 9,382 $ 15,189 $ 26,101 $ 62,956
Reconciling items included in
cost of revenue:
Impairment loss on acquired
developed technology - - 21,330 -
Amortization of acquired
developed technology 705 1,972 4,087 4,515
Amortization of acquired
inventory mark-up - 1,888 26 5,217
Amortization of acquired
backlog - - - 600
Restructuring 2,119 - 2,119 -
Stock-based compensation 46 13 208 60
--------- --------- ---------- ---------
Total reconciling items
included in cost of revenue 2,870 3,873 27,770 10,392
--------- --------- ---------- ---------
Non-GAAP gross profit $ 12,252 $ 19,062 $ 53,871 $ 73,348
========= ========= ========== =========
Non-GAAP gross profit margin 41.1% 44.0% 40.3% 42.7%
========= ========= ========== =========
Reconciliation of GAAP and
non-GAAP net loss
GAAP net loss $(15,450) $(35,914) $(204,178) $(42,610)
Reconciling items included in
cost of revenue 2,870 3,873 27,770 10,392
Reconciling item included in
research and development:
Stock-based compensation 796 174 3,884 758
Reconciling item included in
selling, general and
administrative:
Stock-based compensation 1,292 77 5,464 307
Impairment loss on goodwill - - 133,739 -
Impairment loss on acquired
intangible assets - - 1,753 -
Restructuring 10,565 1,162 13,316 1,162
Amortization of acquired
intangible assets 89 334 602 1,084
Settlement proceeds, net (4,800) - (4,800) -
Gain on repurchase of long-
term debt, net - - (3,009) -
Realized loss on sale of
marketable securities - - - 779
Tax effect of non-GAAP
adjustments (98) (1,761) - (5,058)
--------- --------- ---------- ---------
Non-GAAP net loss $ (4,736) $(32,055) $ (25,459) $(33,186)
========= ========= ========== =========
Non-GAAP net loss per share -
basic and diluted $ (0.10) $ (0.67) $ (0.53) $ (0.70)
========= ========= ========== =========
Non-GAAP weighted average
shares outstanding - basic
and diluted 48,626 47,692 48,289 47,337
========= ========= ========== =========
----------------------------------------------------------------------
(a) - Our non-GAAP gross profit, non-GAAP net loss and non-GAAP net
loss per share differs from GAAP gross profit, GAAP net loss and GAAP
net loss per share due to the exclusion of acquisition-related items,
goodwill and intangible asset impairments, restructuring charges,
stock-based compensation expenses and gain on repurchase of long-term
debt. Pixelworks' management believes the presentation of non-GAAP
gross profit, non-GAAP net loss and non-GAAP net loss per share
provides useful information to investors regarding Pixelworks'
results of operations allowing investors to better evaluate
underlying cash flow dynamics. Pixelworks' management also uses each
of these non-GAAP measures internally to better evaluate underlying
cash flow dynamics. Pixelworks, however, cautions investors to
consider these non-GAAP financial measures in addition to, and not as
a substitute for, our GAAP financial measures.
PIXELWORKS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
December 31,
-------------------
2006 2005
--------- ---------
ASSETS
Current assets:
Cash and cash equivalents $ 63,095 $ 68,604
Short-term marketable securities 53,985 59,888
Accounts receivable, net 9,315 19,927
Inventories, net 13,809 26,577
Prepaid expenses and other current assets 6,374 7,277
--------- ---------
Total current assets 146,578 182,273
Long-term marketable securities 17,504 17,145
Property and equipment, net 21,931 29,029
Other assets, net 9,287 18,277
Debt issuance costs, net 2,922 3,780
Acquired intangible assets, net 9,549 37,321
Goodwill - 133,731
--------- ---------
Total assets $207,771 $421,556
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 5,738 $ 7,206
Accrued liabilities and current portion of long-
term liabilities 21,674 26,269
Income taxes payable 10,997 9,507
--------- ---------
Total current liabilities 38,409 42,982
Long-term liabilities, net of current portion 7,414 13,357
Long-term debt 140,000 150,000
--------- ---------
Total liabilities 185,823 206,339
Shareholders' equity 21,948 215,217
--------- ---------
Total liabilities and shareholders' equity $207,771 $421,556
========= =========
CONTACT: Pixelworks, Inc.
Investor Inquiries:
Michael Yonker, 503-454-4515
myonker@pixelworks.com
www.pixelworks.com
or
Media Inquiries:
Chris Bright, 503-454-1770
cbright@pixelworks.com
SOURCE: Pixelworks, Inc.