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No. of Recommendations: 3

Its been a while and now we stray into the wonderful world of tech(quite a stretch for me)

The Business Briefly

Pixelworks is a designer, developer and marketer of semiconductors and
software for the advanced display industry. Pixelworks' system-on-chip
semiconductors process and optimize video, computer graphics and Web
information for display on a wide variety of devices used in business and
consumer markets, including flat-panel monitors, digital televisions and
multimedia projectors.The product line is used by manufacturers of consumer electronics and computer display products to enhance image quality and ease of use. Clients include Dell, EPSON, HP,LG Electronics, NEC-Mitsubishi, Philips, Samsung, SANYO, Sony, ViewSonic, Hitachi, InFocus Corporation, Seiko Epson, and,Sharp.

Pixelworks' newest generation of system-on-chip ICs is Photopia.It is designed for use in the advanced television and digital projector markets and is intended to enhance video quality and cost-effective performance, including offering the first widely available solution for deinterlacing 1920-by-1080 resolution HDTV content and showing one billion-color 10-bit processing.

Photopia ImageProcessor ICs are currently sampling to customers and will begin production shipments in the first half of 2004 ramping to volume shipments in the second half of 2004.

Recent Earnings Update

Pixelworks recently updated its business outlook for the fourth quarter as the company experienced strong growth across each of its market segments.

Fourth-quarter GAAP earnings-per-share outlook is 3 cents a share compared to a previous projection of 3 cents to 4 cents. On a pro forma basis, to exclude merger, restructuring and noncash expenses, PixelWorks estimated it will earn 9 cents, compared to its original estimate of 6 cents to 7 cents.

Analysts polled by Thomson First Call expect the company to earn 7 cents in the fourth quarter. In last year's fourth quarter, the company earned a penny on a GAAP basis and pro forma earnings reached 5 cents a share.

In a recent press release, PixelWorks also said fourth-quarter revenue is expected to reach $40.5 million, up from its previous range of $37 million to $ 38.5 million.

Potential Market Demand For Flat Panel and DigitalTVs

According to estimates from Stanford Resources and DisplaySearch the market for Digital Television will increase from 6.7 million units in 2002 to 30.3 million units in 2005, a compound annual growth rate of 65%. The US will institute Digital only signal transmission in 2005. This deadline has been imposed before and missed, but this particular deadline has a greater chance of being firm. Cathode ray tube analog sets will still work, but they will require an interface to translate the digital signal to analog. The picture will be as poor as the analog signal is currently.If digital HD TVs, including the flat panel sets, become cheaper, it may encourage viewers to make the switch at this time rather than stay with the analog signal.

DisplaySearch estimates that the market for flat panel monitors will increase from 32.1 million units in 2002 to 92.3 million units in 2005, a compound annual growth rate of 42%. They also estimate that the market for flat panel televisions including LCD TVs and plasma displays will increase from 3.4
million units in 2002 to 18.5 million units in 2005, a compound annual
growth rate of 75%.
Pacific Media Associates estimates that the market for
multimedia projectors will increase from 1.6 million units in 2002 to 4.8
million units in 2005, a compound annual growth rate of 45%.

Price Ranges for PXLW

Fiscal 2001 high low

First quarter $26.750 $ 10.000
Second quarter $35.740 $ 8.313
Third quarter $34.300 $ 10.040
Fourth quarter $19.000 $ 9.410

Fiscal 2002 high low

First quarter $17.150 $ 10.510
Second quarter $12.560 $ 7.170
Third quarter $ 8.020 $ 4.500
Fourth quarter $ 9.340 $ 3.915

Financial Statements and Ratios

Years Ended December 31,
2002 2001 2000 1999 1998

Revenue $102,641 $ 90,808 $ 52,593 $12,812 $ 978
Cost of revenue 51,736 46,539 31,412 8,376 22
Gross profit 50,905 44,269 21,181 4,436 956
Operating expenses:
Research and
development 23,730 18,096 10,225 4,805 1,446
Selling, general and
administrative 21,865 16,373 9,708 4,366 1,314
Amortization of
goodwill and
assembled workforce 242 15,982 -- -- --

In-process research
and development
expense 24,342 32,400 -- -- --

Total operating
expenses 73,151 91,272 26,168 9,729 2,760
Loss from operations (22,246) (47,003) (4,987) (5,293) (1,804)
Interest and other
income, net 2,275 4,444 4,420 409 215
Loss before income
taxes (19,971) (42,559) (567) (4,884) (1,589)
Provision for income
taxes 880 -- -- 3 14
Net loss (20,851) (42,559) (567) (4,887) (1,603)

Net loss per share:
Basic and diluted $ (0.48)$ (1.05)$ (0.50)$ (1.53)$ (0.61)
Weighted average
shares 43,397 40,662 25,573 5,971 2,660

Gross Profit 50% 49% 40% 34% 102%
Operating Margin -22% -52% -10% -41% -174%
Net Margin -20% -47% -1% -38% -164%
Growth in Revenue 13% 73% 311% 1209% --
Growth in Net Income 51% 7000% -88% 206% --
Growth in COGS 11% 48% 274% 38282% --

**Revenue increased $11.8 million from $90.8 million for the year
ended December 31, 2001 to $102.6 million for the year ended December 31,
2002. This increase resulted from an 82% increase in units shipped offset
in part by a 38% decline in average selling prices. Revenue from shipments
to multimedia projector manufacturers, which represented 57% of total
revenue for the year ended December 31, 2002, increased $7.3 million, or
14%. The increase was related to growth in the overall multimedia
projector market, and in particular, to growth in shipments to projector
manufacturers in Japan. Revenue from shipments to advanced television
manufacturers, which represented 16% of total revenue for the year ended
December 31, 2002, increased $13.6 million, or 458%.The digital flat panel market has already provided PXLW with a 458% increase in 2002 and this is expected to grow dramatically in the next two years(see discussion above under markets). They are being squeezed a bit on margins, but are compensating with increased volume. That appears to be paying off so far and if volume increases further, they may become net earnings positive in the future.

** In particular, shipments to television manufacturers in China increased from $0 to $6.1 million. This may be a very important market, as China perfects manufacture of flat panel display TVs at affordable prices. They have already shown that they are competitive, but are not yet distributing to the US. The LCD monitor market showed a loss. In this particular segment of PXLWs business, higher volume could not make up for lower margins. Revenue from shipments to LCD monitor manufacturers, which represented 23% of total revenue for the year ended December 31, 2002, decreased $10.4 million, or 31%. The decrease resulted from a 20% increase in unit shipments being more than offset by a 42% decline in average selling prices.

**Improvement in gross profit margin resulted primarily from a greater
percentage of revenue from products sold into advanced televisions, which
carry higher average gross profit margins, reductions in product costs and
the fixed components of cost of goods sold being spread over a higher
revenue base. Even though they are still negative, they have improved by about 50%.In process R&D as well as increasing inhouse R&D are contributing to negative margins. If PXLW can expand markets and become a leading supplier of chips to the markets, this R&D may pay off.

Balance Sheet Data

Cash and cash
equivalents $ 62,152 $ 53,288 $ 49,681 $12,199 $ 6,119
Working capital 95,776 98,820 100,371 12,770 4,427
Total assets 227,212 202,839 120,294 18,394 7,676
obligations, net of
current portion -- -- -- 591 --

Total shareholders'
equity (deficit) 214,816 193,633 106,453 (9,295) (1,908)

Current ratio 8.73 11.74 8.28 4.76
Quick Ratio 8.18 11.28 8.04 4.35
AR growth 62.50% -3.03% 164.00% 2400.00%

DSO 37.00 80.65 138.01 336.02 36.74
Days Inventory on hand 54.91 36.41 41.68 71.97
ROA -9.20% -21.01% -0.50% -26.63%
ROE -9.73% -22.00% -0.56% 52.69%
ROIC 0.93% -7.59% -0.75% 72.00%
Fixed asset turnover 2.34 2.16 1.06 1.04 6.62
Debt to equity 0.00% 0.00% 0.00% -19.35% -68.42%
Debt to capitalization 0.00% 0.00% 0.00% -24.00% -216.67%
Book value 4.88 4.68 2.89 -0.94
Cash per share 1.41 1.29 1.35 1.23
Working capital 95.8 98.8 100.4 12.8 4.5
Non Cash
Working Capital 33.6 45.5 50.7 1.8 -0.3

**Assets are high due to high levels of goodwill
**They address the rise in inventory and acknowledge they have purposely increased it due to potential increasing demand for products
**DSO has improved significantly
**Not turning inventory as rapidly. This is explained by the company's decision to increase inventory.
**Returns are negative, but improving.
**No debt
**Lots of cash puts them in a strong position in spite of negative earnings. They have sold stock to raise money.
**Increasing shareholder equity

Cash Flow Statement
2002 2001 1999
Cash flows from operating activities:
Net loss $(20,851)$(42,559)$ (567)

Depreciation and amortization 6,045 4,435 2,418
Deferred income taxes (646) (2,256) --
Write-off of property and equipment and
other assets 87 -- 516
Provision for doubtful accounts 7 -- 57
Income tax benefits from disqualifying
dispositions 1,357 2,256 --
Amortization of acquisition related assets 726 15,982 --
Amortization of deferred stock compensation 2,993 8,461 2,227
In-process research and development expense 24,342 32,400 --

Accounts receivable (3,840) 230 (4,128)
Inventories (1,788) (896) (1,876)
Prepaid expenses and other current assets 1,222 (1,618) (571)
Accounts payable 394 (7,070) 8,408
Accrued liabilities (2,477) 2,094 3,203
Other non-current assets (891) (1,052) --

Net cash provided by operating activities 6,680 10,407 12,433

**Positive operating cash is not a result of positive net income. It is allowances for R&D expense, depreciation and stock option amortization. Otherwise, they would not be free cash flow positive.

**They continue to invest in capex and make acquisitions. They also continue to spend in R&D. This is making net income negative, but may eventually propel growth.

2002 2001 2000 1999 1998
Cash Flow Ratios

Total shares 44 41.4 36.8 9.9
Revenue -20.9 -42.6 -0.6 -4.9
Growth in Capex 12.00% 19.05% 147.06% 30.77%
Capex to
operating cash flow 83.58% 48.08% 33.87% -34.00% -144.44%
Free cash flow 1.1 5.4 8.2 -6.7 -2.2
Free cash flow per share 0.03 0.13 0.22 -0.68
Operating cash/Revenue -0.32 -0.24 -20.67 1.02
Growth in Cash Flow 79.63% 34.15% 222.39% 204.55%

The following is a summary of stock option activity:


Number exercise
of shares price

Options outstanding as of
December 31, 1999 2,914,256 $ .992
Granted at market 256,500 28.864
Granted below market 399,175 5.422
Exercised (604,563) .740
Canceled (132,487) 5.405
Options outstanding as of
December 31, 2000 2,832,881 3.988
Granted at market 1,414,325 15.668
Options exchanged in acquisition 777,042 .214
Exercised (784,694) 1.093
Canceled (137,116) 7.818
Options outstanding as of
December 31, 2001 4,102,438 7.726
Granted at market 2,231,102 10.621
Granted below market 729,500 10.250
Options exchanged in acquisition 118,858 2.067
Exercised (635,766) .761
Canceled (731,438) 8.226
Options outstanding as of
December 31, 2002 5,814,694 $ 9.736

They have a dilution of ESOs to common stock of about 11%. This is a little high. There has been a lot of insider selling since November.Since earnings are negative, its difficult to evaluate just how much less the earnings are worth with addition of the cost of these shares. Any help would be appreciated.


On March 17, 2003, the Company announced the execution of a definitive
merger agreement with Genesis Microchip. This company was a direct competitor and concentrated on television applications also. Genesis will merge with a subsidiary of Pixelworks and each outstanding share of Genesis common stock will be converted into a right to receive 2.3366 shares of Pixelworks common stock. Pixelworks will also assume all outstanding options to purchase Genesis common stock. Genesis Microchip Inc. designs, develops and markets integrated circuits (ICs) that receive and process digital video and graphic images. The Company also supplies reference boards and designs that incorporate its proprietary ICs. It is targeting flat-panel computer monitor, flat-panel television and progressive scan cathode ray tube (CRT) television applications and other potential high-volume applications. In addition, Genesis Microchip sells finished systems primarily to the high-end video market under the Faroudja brand. The Company markets and sells its products through authorized distributors and directly to customers with the support of regional sales representatives.

Jaldi Semiconductor Corporation

On January 30, 2001, Pixelworks made an investment of $7,500,000 in Jaldi
Semiconductor Corporation, a development stage semiconductor company. On September 6, 2002, Pixelworks acquired the remaining equity interest in
Jaldi in exchange for an undertaking to issue 1,731 shares of Pixelworks'
common stock upon the exchange of Jaldi shares plus the assumption of all
outstanding Jaldi stock options.

The total purchase price was $24,988,000 and was allocated to assets acquired and liabilities assumed based on management's analysis and estimates of fair
values. Assets acquired included in-process research and development valued at $20,142 and an assembled workforce valued at $2,909,000. Since the date of the acquisition, both of the products in development have been completed.

nDSP, Inc.

On January 14, 2002, Pixelworks acquired all of the outstanding shares of nDSP, Inc. , a fabless semiconductor company, in exchange for 1,186 shares of
Pixelworks' common stock. The acquisition was accounted for by the purchase
method of accounting and the results of nDSP's operations are included in
Pixelworks' financial statements beginning on January 14, 2002.

The total purchase price was $20,971,000 and was allocated to assets acquired and liabilities assumed based on management's analysis and estimates of fair
values. Assets acquired include IPR&D valued at $4,200,000 and acquired developed technology valued at $3,700,000. Two of the products in development have been completed. Development of the third product was discontinued, however the video and de-interlacing technology from this product was integrated into another Pixelworks product.

The excess purchase price over the identifiable tangible and intangible assets
was $14,371,000 and was allocated to goodwill.
Pixelworks has a great deal of goodwill on the books.

Heiserman recommends a ratio less than 20%.
Intangible assets ratio = (Goodwill + Other Intangibles) / Total Assets

The ratio ideally should be 20% or less, so this is quite high.Did Pixelworks overpay for acquisitions and this goodwill may become impaired and have to be taken as a charge? This high level could become a problem and further delay profitability.

Revenue by geographic region, attributed to countries based on the domicile of
the customer, was as follows:


Three Months Nine Months Ended
Ended September 30,
September 30,
2003 2002 2003 2002
Japan $ 18,004 $ 13,786 $ 44,188 $ 35,116
Taiwan 7,280 2,849 23,241 11,276
Korea 2,515 2,620 11,184 8,690
China 3,949 2,790 9,954 5,877
United States 618 990 1,472 1,648
Other countries 3,150 3,827 10,041 10,905
$ 35,516 $ 26,862 $ 100,080 $ 73,512

I included this because I am interested in seeing Pixelworks penetrate the Chinese Flat panel display market. They have increased business there about 70%. This is going to be an important source of revenue and contribute greatly to their eventual profitability.

Final Thoughts
A lot of pluses and minuses as with all companies

*PXLW is a little more speculative than I like
*Negative earnings
*Too many options
*Too much goodwill on the books
*Price too high for what you get
*Perhaps on the threshold of huge business
*Digital TV is going to be the norm in 1 to 2 years
*Flat panel displays are going to get a lot cheaper thanks to China and the US market will be ready to buy
*PXLW is already in China
*No debt
*Some cash
*Decent balance sheet
*Focused business on digital HD TV giving them an edge if the market takes off.
*Not wasting money and time on fields they are not competent in
*Good acquisition sense. Genesis was a major competitor. Other acquisition's products have been mostly completed and brought to market. They are efficient

So while maybe a watch and wait to see what develops candidate, they are definitely very interesting.

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