Steve Moore - CFO Bruce Walicek - President and CEO.

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Good day ladies and gentlemen and welcome to the Pixelworks First Quarter 2014 Financial Results Conference Call. At this time, all participants will be in a listen-only mode, but later there will be a chance to ask questions and instructions will be given at that time.

(Operator Instructions) And as a reminder, today’s conference call is being recorded. And now, I would now like to turn it over your host, Steve Moore..

Good afternoon and thank you for joining us. This is Steve Moore, Chief Financial Officer of Pixelworks. With me today is Bruce Walicek, President and CEO.

The purpose of today’s conference call is to supplement the information provided in our press release issued earlier today announcing the Company’s financial results for the first quarter ended March 31, 2014.

Before we begin, I would like to remind you that various remarks we make on this call, including those about our projected future financial results, economic and market trends and our competitive position constitute forward-looking statements.

These forward-looking statements and all other statements made on this call that are not historical facts are subject to a number of risks and uncertainties that may cause actual results to differ materially.

All forward-looking statements are based on the Company’s beliefs as of today Thursday, May 8, 2014, and we undertake no obligation to update any such statements to reflect events or circumstances occurring after today.

Please refer to today’s press release, our Annual Report on Form 10-K for the year ended December 31, 2013, and subsequent SEC filings for description of factors that could cause forward-looking statements to differ materially from actual results.

Additionally, the Company’s press release and management’s statements during this conference call will include discussion of certain measures and financial information in GAAP and non-GAAP terms including gross margin, operating expenses, net income loss and net income loss per share.

These non-GAAP measures exclude stock-based compensation expense and additional amortization of a pre-paid royalty. We use these non-GAAP measures internally to assess our operating performance.

The Company believes that these non-GAAP measures provide a meaningful perspective on our core operating results and underlying cash flow dynamics, but we caution investors to consider these measures in addition to, not as a substitute for, nor superior to, the Company’s consolidated financial results as presented in accordance with GAAP.

Included in the Company’s press release are definitions and reconciliations of GAAP to non-GAAP net income loss and GAAP net income loss to adjusted EBITDA, which provide additional details. Bruce will begin today’s call with a strategic update on the business.

After which, I will review our first quarter financial results and then provide our outlook for the first quarter of 2014..

Thanks Steve. Good afternoon everyone and thanks for joining us today. Q1 2014 came in above the midpoint of guidance and was another solid quarter as revenues of $13.5 million or 64% year-over-year driven by growth in our product business which grew 28% year-over-year as well as the continued successful execution of our licensing partnerships.

All other non-GAAP metrics came within the range of guidance, and we generated positive EBITDA and cash flow for the quarter.

2014 is up to a good start as overall book-to-bill was greater than one, reflective of a good visibility going into Q2 driven by strong product demand due to an improving overall environment at our customers and a ramping of new products.

More importantly though Q1 was a key quarter of progress as we completed a number of critical milestones during the quarter that advanced progress on our key initiatives; first, we we’ve developed the mass production version of the advanced SOC for large screen applications we developed under our co-development partnership and during the quarter we received mass production qualification from our customer.

This is a major milestone on this project and we are on track for volume production to begin in the current quarter and ramp it in the second half of this year, which we believe will result in significant market share gains in 2014 and beyond.

Also in our projection product line, we’ve released the latest version of our VueMagic software which provides wireless connectivity for mobile device to Topaz-based projectors and adds features such as live video and virtual remote access as well as advanced content sharing capabilities.

Topaz continues to receive wide adoption, and we have an exciting road map of features and capabilities coming in 2014 for VueMagic that will continue to enhance and expand the Topaz platform and provide value to our customers.

We also made significant progress on our initiative for mobile market as we take out our device for low power to mobile application and we’ll be launching this product in sampling devices this quarter. This will be the industries first video display processor that brings the video quality of large screens to mobile screens.

Typically, this type of dedicated video processing pipeline has only been applied to large screens, but we believe the time has come to apply this technology to all displays.

Pixelworks has a long track record of delivering innovative video processing solutions for large screens and we’re now bringing that expertise and innovation to mobile screens as well.

The large display applications we continue to ship volume production of the PA168 during the quarter, which includes our patented halo free technology and tackles the most demanding ultra HD video quality problems.

Sixth generation PA168 level technology, is just one of the technologies we have in our expanding video IP portfolio, and we continue to experience a robust licensing pipeline to all of our technology.

Building on a 15-year legacy in video and a portfolio over a 120 issued patents, our latest technology represent the combination of many generations of video processing innovation.

And in 2014, we will continue to drive an aggressive technology road map focusing on the critical areas of next generation video processing especially for low power applications.

Key trends from this year’s Mobile World Congress in February confirmed our theses of the growing importance of mobile displays as a number of new products with increasing screen and resolution were introduced.

Smartphone with screen size greater than 5 inches and full HD resolution were launched as well as high definition Ultrabook and Tablets with 2K products on the horizon and initial 4K Ultra HD demos at this year. 4K video capture was a key trend among manufactures with products introduced from Samsung, Sony and others.

The increasing availability of 4K capture devices is adding to the floor of high resolution content beginning to enter the video eco-system. And as an indication of things to come in the future, display search predicts that 2015 will be the first year, the 4K Ultra HD Smartphone will become available to customers.

All of this statistics pointing to the fact that we are just at the beginning of a multi-year trend of increasing display sizes, resolutions and video consumption across all screens.

After show in February, we provided demonstrations of technology design to improve the video quality of high resolution mobile displays to key industry partners and customers.

We provided a number of compelling side-by-side comparisons but to illustrate the power savings performance and video quality benefits of our technology from mobile video and we will be delivering our first product based on this technology this quarter.

These high resolutions screen have two to four times more pixels than today’s full high definition displays, resulting in exponential increase in the number of pixels to be processed.

And it’s clear that high resolution mobile displays suffer from the same problem as large screen it’s higher resolution magnifies video quality issues, in addition to the added performance and power consumption burden on the system.

Video consumption on mobile devices is growing rapidly as consumers increasingly view their favorite video content on their Ultrabook, Tablet or Smartphone which are rapidly becoming the first screen consumers reach for to view their video content.

Recent studies pointed a trend towards increasing video consumption on mobile devices, according to a newly released add reaction study, daily current special mobile devices this is now outpacing TV in the U.S. for the first time.

And demographics increasingly favor video consumption on mobile devices as well, born out by a new study from Deloitte, they find teens and young 20 something spend more time watching movies and TV shows on their computers, Smartphones and Tablets than they do on their screens.

Videos is a crucial element driving the transformation of an increasing number of mobile devices, as more video is created, more devices are capable of displaying video and more people are consuming video on a growing number and variety of displays.

With the increase of resolutions and media consumption growing across all screens, users are demanding the best visual experience for their content, regardless of the screen they're viewing it on.

Screen resolution and display quality are key product features that increasingly drive brand and product differentiation, as manufacturers compete for market share. In a recent study by strategy analytics noted that the drivers of increased mobile video viewing are video quality along with larger screens and 4G bandwidth.

Pixelworks has a long track record of solving most difficult video quality problems for large screens and because this is our senior work focus and we do it better than anyone, we are in the best position to deliver the innovative solutions customers need for next generation high resolution mobile displays.

In closing, 2014 is off to a good start with strong Q1 revenues up 64% in a year-to-year with significant momentum for our products, our technology and an expanding set of opportunities.

During the quarter, we achieved a number of critical milestones that advanced our key initiatives and we have positioned the company to address a large fast growing market opportunity as we demonstrated our latest generation technology for mobile applications and are on track to introduce products in the current quarter.

Now, I'd like to turn the call over to Steve to review the financial results of the quarter..

69% digital projection and 31% TV and panel. Please note the beginning of this quarter, we will no longer be breaking out embedded video display as a separate end market, as it represents less than $1 million of revenue in the fourth quarter of 2013.

For the first quarter and going forward we will be reclassifying all chip revenue as either digital projection or TV panel revenue. Digital projection revenue was $7.3 million in the first quarter compared to $8.3 million in the prior quarter, it was in line with typical seasonality.

Revenue from TV and panel which also includes Ultra HD monitors totaled $3.3 million in the first quarter compare to $3.5 million in the prior quarter. Licensing revenue was $2.9 million in the first quarter compared to approximately $3.2 million during the prior.

Non-GAAP gross profit margin was 60.1% in the first quarter, compared to 57.8% in the prior quarter. The sequential increase in gross margin was primarily driven by a more favorable mix. Non-GAAP operating expenses were $8.8 million in the first quarter, compared to $7.1 million in the prior quarter.

As a reminder, operating expenses for the prior quarter included a credit to research and development expense as the result of achieving the final payment milestones related to a previously announced customer co-development agreement. Adjusted EBITDA was positive $464,000 for the first quarter, compared to $2.7 million in the prior quarter.

A reconciliation of adjusted EBITDA to GAAP net loss may be found in today’s press release. On a non-GAAP basis, we recorded a net loss of $786,000, or loss of $0.04 per share, in the first quarter of 2014. This compares with non-GAAP net income of $1.3 million, or $0.05 per diluted share in prior quarter.

Moving to the balance sheet, we ended the first quarter with cash and marketable securities of approximately $21.9 million, up $1.1 million from $20.8 million at yearend.

The company has no long-term debt and as of the end of both the first quarter of 2014 and the fourth quarter of 2013, the Company had a balance of $3 million on its working capital line of credit.

Other balance sheet metrics include day sales outstanding of 29 days at March 31, unchanged compared to 29 days at the end of the prior quarter, and inventory turns of 12 times in the first quarter compared to 13 times in the prior quarter.

Guidance; looking ahead to the second quarter of 2014, we expect revenue to increase to the range of $14 million to $16 million driven by increased product sales. At the midpoint, this would represent over 10% sequential growth and growth of over 50% compared to the year-ago second quarter.

We expect gross profit margin in the quarter to range between 50% to 52% on a non-GAAP basis and 49% to 51% on a GAAP basis. In terms of operating expenses, we expect the second quarter to range between $8 million and $9 million on a non-GAAP basis, and $9 million to $10 million on a GAAP basis.

Similar to the first quarter, we will not record any R&D reimbursement credits in the second quarter of 2014. And finally, we expect a non-GAAP second quarter net income of between breakeven and $0.11 loss per share and we expect a GAAP net loss of between $0.05 and $0.15 per share. That concludes my comments.

We will now open the call for your questions..

(Operator Instructions) And our first question is coming from Krishna Shankar from Roth Capital. Krishna your line is open..

Yes, Bruce and Steve congratulations on the good first quarter results.

With your guidance for the June quarter are you anticipating growth both in projector chip revenues and TV chip revenues? And you’ve mentioned the healthy pipeline of licensing and royalty opportunities, can you talk about how that may shape up for the rest of the year in terms of new deals or additions to existing deals?.

Well, as I have mentioned Krishna, I think we’re continuing to see opportunities and demand for our technology. I think that some of the trends that we’ve noted of this type of processing and this type of requirements across the lot of systems we’re seeing a lot of very good opportunities and continuing interest on the licensing front.

I think as we’ve noted as well, this year 2014 is off to a pretty solid start. I think we’re seeing really good trends across our businesses. I think really -- it’s a couple of things as we’ve mentioned, we have some new product ramping and we have a good economic backdrop and customer backdrop in terms of overall demands.

So we’re seeing a good momentum going into Q2 so as it opposed to last year where it was extremely weak in the first half of the year. We’re seeing a strong start to the year..

Okay so basically we’ll see growth I guess in both major products areas of projector and the TV chip business in Q2?.

We don’t breakout those details by market. Clearly the projection market is remarkably strong. The uptick on 4K is continues to be good in both televisions and ultra high definition monitors. We continue to work on new design wins in all areas..

We’re checking our breakout by product category to guidance historically Krishna, so I mean generally we’re seeing strong trends across, across our business in general..

And then you’ve said you’ll be I guess -- you’re sampling your mobile video processor chip this quarter, can you give some sense for the design and momentum there and how that might ramp in the second half of this year?.

I think as we’ve been reporting for the last couple of quarters as we’ve gone through our sort of introduction process in the market, typically there’s technology demonstrations to customer where, there’s side-by-side comparison of the technology against current solutions and then ultimately that technology ends up in a chip.

And so we are at that probe, what we were saying is that this quarter we will sampling that chip we will be introducing this product formally, although had a better complete understanding of the chip it’s capabilities but the analogy you can think of its kind of much like sort of core process or it’s due for large screen, this is a very similar sort of process, except that it’s really focused on low power, it’s focused on multiple systems and a lot of the specific thing and innovation that we’ve had to do to take sort of technology that’s appropriate for large screen and really target that to specific requirement of mobile systems.

So we will be sampling that chip this quarter and dealing it to our customers and I think that based on the feedback and the interest we had so far we’re very excited and optimistic about potential design win momentum, once we get the product into the market..

And would you anticipate initial adoption of this mobile video processor chip in tablets and Ultrabooks or Hybrid notebook tablet over the Smartphone can you talk about the initial target markets for this mobility leader processor chip?.

Well, the initial target market is sort of across all mobile platform, I think, the value proposition is largely the same across all those, of course each one of those products has a different profile from volume, cost and adoption and so forth, but generally as a start we are targeting from mobile systems, we can think of it in terms of screen size, 5 -- in resolutions sort of 5.5 inches and above up to, your top-end Ultrabook/Tablet and then you know HD resolutions and above as well, although any video processing this will enhance the efficiency of the video processing.

So there’s multiple value propositions in terms of the video quality there are sort of power consumption and of course there’s processing efficiency to help just the system have more cycles to process video..

Great. And then my final question is, I guess that the completion of the March quarter you have completed the multi quarter licensing to $10.5 million licensing deal that was first announced in Q2 of last year.

Can you give us some sense for I guess the deal is kind of done now and can you give us a sense for what kind of milestone we achieve there and the potential for ongoing business there or any other updates?.

With regards to the deal that we announced in the AK (ph) back in Q3 we certainly, we can’t say anymore than like we said. And that release, did give me the framework for sort of the horizon and timeline of the projects and it’s configuration as announced, but that’s about all we can say about it.

Okay. And that does conclude our Q&A for today. I’d like to turn it back to management for any closing remarks..

Thanks for joining us today. And we'll look forward to talking to you on our Q2 2014 conference call. Thank you..

Okay. Ladies and gentlemen this does conclude your conference. You may now disconnect. And have a great day..