UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 8-K

CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934

PIXELWORKS, INC.

(Exact name of registrant as specified in its charter)

OREGON (State or other jurisdiction of incorporation)		000-30269 (Commission File Number)		91-1761992 (I.R.S. Employer Identification No.)

8100 SW Nyberg Road
Tualatin, Oregon 97062
(503) 454-1750
(Address, including zip code, and telephone number, including
area code, of registrant’s principal executive offices)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:

o   Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

o   Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

o   Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

o   Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

 

 

PIXELWORKS, INC. AND SUBSIDIARIES

Item 2.02 RESULTS OF OPERATIONS AND FINANCIAL CONDITION.

On July 27, 2006, Pixelworks, Inc. (the “Company”) issued a press release announcing the financial results for the three and six month periods ended June 30, 2006. The press release contains forward-looking statements regarding the Company, and includes cautionary statements identifying important factors that could cause actual results to differ materially from those anticipated.

The press release issued July 27, 2006 is furnished herewith as Exhibit 99.1 to this Report, and shall not be deemed filed for purposes of Section 18 of the Exchange Act.

Item 9.01 FINANCIAL STATEMENTS AND EXHIBITS.

(d) Exhibits.

	99.1		Press Release issued by Pixelworks, Inc. dated July 27, 2006.

SIGNATURE

     Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

Exhibit 99.1

Financial News Release

For Immediate Release

Contact Information:		Investor Inquiries		Media Inquiries
		Michael Yonker		Chris Bright
		Pixelworks, Inc.		Pixelworks, Inc.
		Tel: (503) 454-4515		Tel: (503) 454-1770
		E-mail: myonker@pixelworks.com		E-mail: cbright@pixelworks.com
		Web site: www.pixelworks.com

Conference Call at 2 p.m. PDT, July 27, 2006 – Pixelworks will host a conference call at 2 p.m. PDT, July 27, 2006, which can be accessed at (719) 457-2733 and using pass code 1035114. The conference call will also be available through a Web broadcast that can be accessed by visiting the Investor Relations section at www.pixelworks.com. A replay of the conference call will be available through August 5, 2006, and can be accessed by calling (719) 457-0820 using pass code 1035114. A replay of the Web broadcast will be available through August 27, 2006.

Pixelworks Reports Second Quarter 2006 Financial Results

     Tualatin, Ore., July 27, 2006 — Pixelworks, Inc. (NASDAQ:PXLW), a leading provider of system-on-chip ICs for the advanced display industry, today announced financial results for the second quarter ended June 30, 2006.

     Revenue for the second quarter was $30.9 million, a 16 percent decrease from revenue of $36.6 million in the first quarter, and a 25 percent decrease from revenue of $41.3 million in the second quarter of 2005. The second quarter decrease resulted primarily from weakness in the European and China advanced television markets as the company transitioned to new product designs. Customer order activity in the second quarter was robust. This resulted in the company’s estimated run-rate book-to-bill ratio increasing to 1.15 to 1, excluding orders for end-of-life products.

     GAAP gross profit margin was 37.5 percent in the second quarter compared to 35.1 percent in the first quarter (excluding the impairment loss on acquired developed technology) and 39.2 percent in the second quarter of 2005. Non-GAAP gross profit margin was 40.0 percent in the second quarter, compared to 40.8 percent in the first quarter and 40.6 percent in the second quarter of 2005. In addition, both GAAP and non-GAAP cost of sales in the second quarter included $2.0 million for inventory related write-offs and reserves that were recorded primarily for excess and obsolete inventory which includes parts containing lead that can no

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Pixelworks Reports Second Quarter 2006 Financial Results
July 27, 2006
Page 2

longer be sold due to regulations imposed by the European Union’s Restriction of Hazardous Substance Directive.

     During the second quarter, the market value of the company dropped below book value. Therefore, the company performed an impairment analysis on the recoverability of its goodwill in accordance with SFAS No. 142, Goodwill and Other Intangible Assets. As a result, the company concluded all of the goodwill on the balance sheet was impaired and recorded a non-cash charge of $133.7 million to operating expense in the second quarter. In addition, the company recorded a $900,000 charge relating to the restructuring plan it announced in late April. Accordingly, GAAP operating expenses were $157.5 million in the second quarter compared to $27.8 million in the first quarter.

     Excluding the non-cash expense for the impairment of goodwill, stock-based compensation and the restructuring charge, non-GAAP operating expense in the second quarter was $20.4 million, down 11 percent from $23.0 million in the first quarter primarily due to lower compensation costs and discretionary spending as a result of the restructuring plan announced in late April. Compared to the second quarter of 2005, non-GAAP operating expense was up from $18.5 million primarily due to increased depreciation on new electronic design flow tools purchased in late 2005.

     The second quarter GAAP net loss was ($145.6) million, or ($3.02) per diluted share. This loss included non-cash expenses totaling $137.9 million for the impairment of goodwill, stock-based compensation, the amortization of acquired intangible assets and the restructuring charge. This compares to a net loss of ($33.1) million or ($.69) per diluted share in the first quarter which included non-cash expenses totaling $28.2 million for the impairment loss on certain acquired intangible assets, stock-based compensation expense and the amortization of acquired intangibles and a net loss of ($2.3) million, or ($0.05) per diluted share in the second quarter of 2005.

     Excluding the non-cash expenses and restructuring charge, the second quarter net loss on a non-GAAP basis was ($7.7) million or ($.16) per diluted share compared to a net loss of ($7.8) million or ($.16) per diluted share in the first quarter and net loss of ($1.6) million or ($0.03) per diluted share in the second quarter of 2005.

     Cash and marketable securities, consisting of cash and cash equivalents, short-term marketable securities, and long-term marketable securities, were $126.1 million a decrease of $4.5 million from a balance of $130.6 million at the end of the first quarter. The decrease in cash came primarily from the loss from operations, a use of cash from a decrease in accounts

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Pixelworks Reports Second Quarter 2006 Financial Results
July 27, 2006
Page 3

payable and long-term liabilities offset by cash provided from lower accounts receivable and inventory.

     “As we enter the second half of 2006, we remain squarely focused on three primary initiatives; to grow revenue through new design wins with key Tier 1 and ODM customers, to improve the execution of our new global product development process, and to reduce operating expenses and improve cash flow,” said Allen Alley President, CEO and Chairman of Pixelworks. “We made good progress against these initiatives in the second quarter and our strong run-rate book-to-bill ratio of 1.15 to 1 indicates that customers are preparing to ramp projects into production beginning in the third quarter. Holding our costs in line as we continue to focus on new product development and market execution will be critical to rebuilding and sustaining our momentum,” concluded Alley.

Business Outlook for Third Quarter 2006

     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 June 30, 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 third quarter of 2006 to be ($0.19) to ($0.27) on a GAAP basis and ($0.9) to ($0.14) on a non-GAAP basis, based on the following estimates:

§

Revenue of $33 to $35 million. Revenue is highly dependent on a number of factors including, but not limited to, consumer confidence and spending, seasonality in the consumer electronics market, general economic conditions, the company’s ability to secure additional design wins, timely customer transition to new product designs, new product introductions, production yields, growth rates in the advanced television,

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Pixelworks Reports Second Quarter 2006 Financial Results
July 27, 2006
Page 4

			front projector, flat panel monitor and digital streaming media markets, levels of inventory at distributors and customers, and increased supply of products from the company’s third party foundries.
	§		GAAP gross profit margin of 40 to 42 percent. Non-GAAP gross profit margin of 42 to 44 percent, which excludes an estimated $800,000 in non-cash expenses for the amortization of acquired intangible assets and stock-based compensation. Gross profit margin may be higher or lower than expected due to many factors including, but not limited to, competitive pricing actions, changes in estimated product costs, revenue levels and product mix, new product yields, and inventory and warranty reserve changes.
	§		GAAP operating expenses of $24.5 million to $26.5 million and non-GAAP operating expenses of $20.0 million to $21.0 million. Excluded from non-GAAP operating expenses are an estimated $2.5 to $3.0 million in non-cash expenses for stock-based compensation and amortization of acquired intangible assets and $2.0 million to $2.3 million in anticipated restructuring charges primarily associated with leased office space the company expects to vacate as part of the space consolidation portion of its previously announced restructuring plan.
	§		Interest income, net of approximately $450,000.
	§		A tax provision of approximately $100,000 per quarter on a GAAP and non-GAAP basis. Both the GAAP and non-GAAP effective tax rates are subject to significant variation on an ongoing basis due to changes in the level of loss or income before taxes, deferred tax assets, research and development tax credits, and other factors.

About Pixelworks, Inc.

     Pixelworks, headquartered in Tualatin, Oregon, is a leading provider of system-on-chip ICs for the advanced display industry. Pixelworks’ solutions provide the intelligence for advanced televisions, multimedia projectors, digital streaming media devices and flat panel monitors by processing and optimizing video and computer graphics signals to produce high quality images. Many of the world’s leading manufacturers of consumer electronics and computer display products utilize our technology to enhance image quality and ease of use of their products.

     For more information, please visit the company’s Web site at www.pixelworks.com.

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Pixelworks Reports Second Quarter 2006 Financial Results
July 27, 2006
Page 5

#####

     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 earnings which exclude certain non-cash acquisition related amortization expenses, certain intangible assets impairment, goodwill impairment, restructuring charges and stock-based compensation expenses 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 as presented in accordance with GAAP. A complete 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 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, front projector, digital media streaming device and flat panel monitor industries; changes 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 Reports Second Quarter 2006 Financial Results
July 27, 2006
Page 6

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

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2006				2005				2006				2005
Revenue, net		$	30,910			$	41,315			$	67,469			$	81,576
Cost of revenue (1)			19,322				25,113				43,035				48,456
Impairment loss on acquired developed technology			—				—				21,330				—
Gross profit			11,588				16,202				3,104				33,120
Operating expenses:
Research and development (2)			14,300				11,720				29,993				21,173
Selling, general and administrative (3)			8,489				6,959				18,493				14,032
Impairment loss on goodwill			133,739				—				133,739				—
Impairment loss on acquired intangible assets			—				—				1,753				—
Restructuring			893				—				893				—
Amortization of acquired intangible assets			90				177				423				298
Total operating expenses			157,511				18,856				185,294				35,503
Loss from operations			(145,923	)			(2,654	)			(182,190	)			(2,383	)
Gain on repurchase of long-term debt, net			—				—				3,009				—
Interest income			1,396				1,693				2,720				3,408
Interest expense			(676	)			(660	)			(1,374	)			(1,317	)
Realized loss on sale of marketable securities			—				(779	)			—				(779	)
Amortization of debt issuance costs			(165	)			(178	)			(336	)			(355	)
Interest and other income, net			555				76				4,019				957
Loss before income taxes			(145,368	)			(2,578	)			(178,171	)			(1,426	)
Provision for (benefit of) income taxes			201				(303	)			453				13
Net loss		$	(145,569	)		$	(2,275	)		$	(178,624	)		$	(1,439	)
Net loss per share — basic and diluted		$	(3.02	)		$	(0.05	)		$	(3.72	)		$	(0.03	)
Weighted average shares outstanding — basic and diluted			48,160				47,101				48,054				47,064
(1) Includes:
Amortization of acquired developed technology		$	705			$	439			$	2,677			$	571
Amortization of acquired inventory mark-up			—				85				26				85
Amortization of acquired backlog			—				19				—				19
Stock-based compensation			61				11				119				11
(2) Includes stock-based compensation			1,026				149				2,257				160
(3) Includes stock-based compensation			1,336				59				2,847				64

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Pixelworks Reports Second Quarter 2006 Financial Results
July 27, 2006
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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,								June 30,
		2006				2005				2006				2005
Reconciliation of GAAP and non-GAAP gross profit
GAAP gross profit		$	11,588			$	16,202			$	3,104			$	33,120
Impairment loss on acquired developed technology			—				—				21,330				—
Amortization of acquired developed technology			705				439				2,677				571
Amortization of acquired inventory mark-up			—				85				26				85
Amortization of acquired backlog			—				19				—				19
Stock-based compensation			61				11				119				11
Non-GAAP gross profit		$	12,354			$	16,756			$	27,256			$	33,806
Non-GAAP gross profit margin			40.0	%			40.6	%			40.4	%			41.4	%
Reconciliation of GAAP and non-GAAP net loss
GAAP net loss		$	(145,569	)		$	(2,275	)		$	(178,624	)		$	(1,439	)
Reconciling items included in cost of revenue:
Impairment loss on acquired developed technology			—				—				21,330				—
Amortization of acquired developed technology			705				439				2,677				571
Amortization of acquired inventory mark-up			—				85				26				85
Amortization of acquired backlog			—				19				—				19
Stock-based compensation			61				11				119				11
Reconciling item included in research and development:
Stock-based compensation			1,026				149				2,257				160
Reconciling item included in selling, general and administrative:
Stock-based compensation			1,336				59				2,847				64
Impairment loss on goodwill			133,739				—				133,739				—
Impairment loss on acquired intangible assets			—				—				1,753				—
Restructuring			893				—				893				—
Amortization of acquired intangible assets			90				177				423				298
Gain on repurchase of long-term debt, net			—				—				(3,009	)			—
Realized loss on sale of marketable securities			—				779				—				779
Tax effect of non-GAAP adjustments			22				(1,086	)			60				(1,086	)
Non-GAAP net loss		$	(7,697	)		$	(1,643	)		$	(15,509	)		$	(538	)
Non-GAAP net loss per share — basic and diluted		$	(0.16	)		$	(0.03	)		$	(0.32	)		$	(0.01	)
Non-GAAP weighted average shares outstanding — basic and diluted			48,160				47,101				48,054				47,064

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Pixelworks Reports Second Quarter 2006 Financial Results
July 27, 2006
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PIXELWORKS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)

		June 30,				December 31,
		2006				2005
ASSETS
Current assets:
Cash and cash equivalents		$	64,142			$	68,604
Short-term marketable securities			51,746				59,888
Accounts receivable, net			15,418				19,927
Inventories, net			20,212				26,577
Prepaid expenses and other current assets			5,304				7,277
Total current assets			156,822				182,273
Long-term marketable securities			10,244				17,145
Property and equipment, net			28,422				29,029
Other assets, net			20,191				18,277
Debt issuance costs, net			3,253				3,780
Acquired intangible assets, net			11,138				37,321
Goodwill			—				133,731
Total assets		$	230,070			$	421,556
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	1,969			$	7,206
Accrued liabilities and current portion of long-term liabilities			24,261				26,269
Income taxes payable			9,773				9,507
Total current liabilities			36,003				42,982
Long-term liabilities, net of current portion			10,977				13,357
Long-term debt			140,000				150,000
Total liabilities			186,980				206,339
Shareholders’ equity			43,090				215,217
Total liabilities and shareholders’ equity		$	230,070			$	421,556