Steven Moore - Chief Financial Officer and Vice President Bruce Walicek - President, Chief Executive Officer and Director.

Charlie Anderson - Dougherty and Company Krishna Shankar - ROTH Capital Jaeson Schmidt - Lake Street Capital.

Good day, ladies and gentlemen, and welcome to Pixelworks, Inc. first quarter 2015 earnings conference call. I will be your operator for today's call. At this time, all participants are in a listen-only mode. Following management's prepared remarks, we will conduct a question-and-answer-session. This conference call is being recorded for replay purposes.

I would now like to turn the call over to Mr. 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, 2015.

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 belief as of today, Thursday, April 30, 2015, 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, 2014, and subsequent SEC filings for a 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 discussions of certain measures and financial information in GAAP and non-GAAP terms, including gross margin, operating expenses, net loss and net loss per share.

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

The company believes 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 loss and GAAP net 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 second quarter of 2015..

Thanks, Steve. Good afternoon, everyone, and thanks for joining us today. Q1 2015 results came in within the range of guidance, with revenues of $14.4 million, representing a 35% increase in chip product revenue versus Q1 2014, as product momentum continued to drive strong year-on-year growth.

All other non-GAAP metrics came in within the range of guidance, and we had great execution on our co-development project, which is right on schedule. We made significant progress with our mobile initiative, and we saw increasing market pull and design win traction.

And while we expect to see double-digit growth in our product business in 2015, the overall environment remains cautious. Steve will review the results of the quarter and provide the outlook for Q2 2015, later in this call. Q1 was a great quarter of progress, as we enjoyed a very successful CES and Mobile World Congress.

We showed how Iris brings value to mobile devices with its True Clarity suite of display technology enhancements to improve the overall user experience, and address the major issues of mobile device picture quality, the clearest sharpest motion image, the richest color and deepest blacks, enhanced usability, which includes backlight controls for the best viewing in any light, and power saving system management.

Iris adjusts the characteristics of the content to the capabilities of the display and the way we perceive images. Displays using Iris can deliver their optimum performance in order to show whatever is on the screen to its best advantage, and provide the best visual user experience.

This drastically improves the clarity of the image, the device's ease-of-use and enjoyment of the user. But just as critically, it also works at the system level, improving battery life and freeing-up valuable system resources to create the optimal viewing experience, a concept that has been verified with customers.

In the second half of last year, we introduced the first device in our family of Iris chips, and it includes a complete set of features that enable Pixelworks' full array of True Clarity display enhancements.

Additionally, it also supports multiple interfaces, making it compatible with today's leading mobile applications processors as well as PC platforms, based on Intel processors. Iris will become a family of products that will cover the range of features and price points to cover the entire spectrum of mobile displays.

The market is beginning to see specialization around dimensions such as audio quality, camera and display resolution, as manufacturers struggle for differentiation. And the display experience is playing an increasingly important role, as mobile devices are becoming the primary screen for viewing content.

To address the expanding need for differentiation and segmentation, later this quarter, we will be sampling our next device in the Iris family of mobile video display processors. This device is targeted for high-resolution 2K Quad HD displays based on leading mobile applications processors.

It includes features specifically targeted for small form-factor displays in order to achieve a lower price point, while also providing lower power and next-generation interface support.

Our next chip brings True Clarity front of screen differentiation advantages, so manufactures can offer new devices to deliver an enhanced mobile viewing experience, and can differentiate their offerings on that basis.

These products typically have higher-end resolution screens and are geared for power-hungry applications, such as video streaming and music, and as a result have more stringent power requirements.

This latest chip will extend the reach of the Iris product family, and give OEMs more options than ever to optimize their offerings in a range of different product segments. And we will be launching this product at the upcoming Computex trade show in Taipei, Taiwan, later this quarter.

In terms of the market acceptance we are seeing, the value propositions of Iris are resonating across customers and partners, as the need for differentiation intensifies. During the quarter, we saw increasing customer traction with an expanding set of design wins.

Customer engagements and evaluations multiplied, as our pipeline of design opportunities expanded substantially, and we anticipate entering mass production later this year.

Delivering great image quality is an art as well as a science, and it takes many years of providing solutions that are tested in mass production by the industry's most demanding TV customers to develop the expertise and know-how necessary.

Leveraging a portfolio of more than 130 patents in over 15 years of experience in the marketplace solving the most difficult video problems, we have now brought that expertise and innovation to mobile screens as well.

In our large screen projected and panel display applications, during the quarter we released the latest version of our VueMagic software, which offers enhanced connectivity features. In this quarter, we will be adding support for 64-bit iOS applications as well as a new release for Android 5.

VueMagic software provides wireless connectivity from mobile displays to Topaz-based projectors or dongles based on Topaz chips, and add features such as advanced content sharing capabilities. There are now over 76 VueMagic-enabled Topaz based projector models available, with new ones coming from Hitachi, Panasonic and Vivitek.

In this quarter BenQ is set to release QPresenter Pro based on our VueMagic reference platform. QPresenter Pro will allow any existing projector to wirelessly connect to smartphones, tablets and laptops.

BenQ reviewed all solutions and VueMagic was adopted due to its multi-screen and annotate features, making it ideally suited for education and collaborative meetings. Our co-development program is on track and ramping as expected, and we anticipate this product will continue to ramp into 2015 and drive year-on-year growth.

Design win momentum remains strong for our Topaz family of SoCs for projectors, and we continue to see opportunities across our families of video coprocessors for large screen panels, as 4K applications broaden. In summary, Q1 2015 was a solid quarter of chip product growth, which increased 35% over Q1 2014.

Our co-development program for the advanced SoC for large screen applications is on track and ramping as expected. And while the environment remains cautious, we expect to see double-digit growth in our product business in 2015.

We had a great CES and Mobile World Congress and significant progress on our mobile initiative, and saw increasing design traction for our Iris family for mobile video processors. And we will be launching our next device in the Iris family of mobile display processors at the upcoming Computex show in Taipei, Taiwan.

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

Thank you, Bruce. Revenue for the first quarter of 2015 was $14.4 million, which compares to $15.1 million in the prior quarter. Q1 total revenue was down 5% sequentially, reflecting somewhat muted demand compared to the fourth quarter of 2014. However, total revenue in the first quarter was up 6% year-over-year, led by 35% growth in chip revenue.

The split of our first quarter chip revenue by market was 87% digital projection and 13% TV and panel. Digital projection revenue was $12.5 million compared to $13.4 million in the fourth quarter of 2014, and revenue from TV and panel totaled $1.8 million in the first quarter compared to $1.6 million in the prior quarter.

Licensing revenue was negligible in the first quarter compared to approximately $200,000 in the prior quarter. Non-GAAP gross profit margin was 48.8% in the first quarter compared to 50.3% in the fourth quarter of 2014.

As a reminder, Pixelworks' gross margin is subject to variability, based on changes in revenue levels, recognition of the license revenue, product mix, startup costs, and the timing and execution of manufacturing ramps as well as other factors.

Non-GAAP operating expenses were $9.2 million in the first quarter compared to $8.8 million in the prior quarter. Adjusted EBITDA was a negative $1.1 million for the first quarter compared to a negative $137,000 in the fourth quarter. A reconciliation of adjusted EBITDA to GAAP net loss maybe found in today's press release.

On a non-GAAP basis, we recorded a net loss of $2.3 million or a loss of $0.10 per share in the first quarter of 2015 as compared to a non-GAAP net loss of $1.4 million or a loss of $0.06 per share in the prior quarter.

Moving to the balance sheet, we ended the first quarter with cash and cash equivalents of approximately $15.6 million compared to $17.9 million at the end of the fourth quarter. The company has no long-term debt. And similar to previous quarters, the company had a balance of $3 million on its working capital line of credit.

Other balance sheet metrics include, days sales outstanding of 30 days at quarter end compared to 28 days at the end of the fourth quarter; and inventory turns were approximately 9.5x compared to just over 13x in the prior quarter. Guidance. For the second quarter of 2015, we expect revenues to be in the range of between $14 million and $16 million.

This range reflects the continued ramp of shipments for our co-development chip, largely offset by what we believe will be a temporary shift in order patterns at other projector customers. We expect gross profit margins for the quarter to range between 48% to 50% on a non-GAAP basis and 47% to 49% on a GAAP basis.

In terms of operating expenses, we expect the second quarter to range between $8.5 million and $9.5 million on a non-GAAP basis, and $9.5 million to $10.5 million on a GAAP basis. And finally, we expect non-GAAP second quarter net loss of between $0.04 and $0.14 per share and we expect a GAAP net loss of between $0.09 and $0.19 per share.

That concludes my comments. And we will now open the call for your questions..

[Operator Instructions] And your first question comes from Charlie Anderson from Dougherty and Company..

I wonder if you could address that last comment you made about the guidance and the projector customers outside of the co-development deal.

Just roughly what's going on there? How temporary is it? What's the magnitude of it? If not for maybe an inventory correction, where would you have shook out? What would be normal? Just any added color would be helpful?.

Sure. As most of our customers have Asian ODMs manufacturing their projectors, and one of those significant, one of our top five customers is moving their ODM products back in house, and that's caused some disruption in the normal order patterns. We do expect them to have sort of a normal pattern by Q3.

And we don't expect any share loss from that, but it has changed the direction in the quarter..

Any way to size the magnitude of it, Steven, and the length of it?.

From a length standpoint, again, we think it will be back on track sort of in their normal patterns by Q3. Order magnitude, again, it is a large customer, so it did have a significant effect. I'm not sure that I can put an exact dollar on it.

But we're working with that customer to get them up and running in their own facilities, the products that they were manufacturing with the ODM..

Charlie, these are self-sourced devices. We have a really big market share, so it's just a question of shifting production builds from outsourced to bringing it back in house for their own manufacturing facilities..

And to be clear nothing has changed in the projector end-markets as far as sell-through or anything like that, Bruce?.

No, but I would only add to comments. The customer still remain kind of cautious just because, I think they're seeing the same sort of macroeconomic backdrop that a lot of others are seeing. And projection tends to be somewhat macro-economically sensitive, and customers just get a little more cautious, but other than that everything's pretty stable.

That you look at the sell-through in the end-markets, we kind of watch that data as well, and that it looks fairly stable, but customer behavior is cautious..

And then my last question, you did mentioned I think both in the press release and your script sort of enhanced design win activity or something to that effect on Iris.

So it sounds like you picked up maybe an incremental design win or so? Wondered if you can just give a little bit more color there, if that's what you meant? And kind of, what types of products are you seeing the pull for Iris?.

Yes, we did. I think we're pretty excited about the progress since the last time we talked. And yes, we kind of said that we had early design wins last quarter, and I think that incrementally that expanded this quarter.

But I think those are important metrics, but I think as important is sort of how our pipeline is building, the level of acceptance we're beginning to see in the market, I think we're seeing -- uniformly there is problems out there that customers really needs to solve.

It's interesting just this week, there was an article out that Lenovo and Acer just launched two phones that had batteries that are a third larger then you might normally see in a phone, and that's because of so much more video content being consumed, and especially driven by 4G networks.

So we're feeling pretty excited about traction we're seeing, and the progress..

And your next question comes from Krishna Shankar from ROTH Capital..

Just following up on the Iris product line, Bruce, can you sort of segment for us how you view the first generation Iris 1, if you will in terms of end-markets, and where Iris 2 is targeting? And do you see coexistence between both of those products as they ramp production?.

Sure. As we mentioned, Iris was our first device was sort of one size fits all.

It has interfaces to cover everything from Intel-based PC platforms to supporting the mobile apps processor world as well, and it has the full range of robust features for what we called True Clarity, but that's various video processing features that drive that sort of True Clarity position we talked about.

Over the last couple of months, we have seen over the last quarter or two as we've been marketing on this, it's pretty much across platforms from 5.5 to 14.9. And I think there is customers adopting that and they're still in evaluations. They're designing.

And this next product really targets down further specifically for what we call smaller phone factor devices that only have only one interface that would support the mobile app, the leading mobile apps processors, and with some of the latest technology for that interface.

Also, it's a more efficient product, so that the cost profile is lower, and we're always going to be driving the power consumption down for our next-generation devices as well. So it does offer lower power.

So I think as this broadens out, we're going to see -- there is segmentation in customers, not only sort of by screen size, but also by market segments, from high-end to mid range to low end. So we were able to address the mid-range as well as the high-end. So I think they're complementary in many respects..

And then you mentioned that you are planning to enter mass production in the latter part of this year.

So would that suggest that you have or you are likely to get production orders both for the original generation Iris and Iris 2, and likely significant revenues for those in the second half of this year?.

So I think what's incremental here is that we'll be seeing mass -- we're anticipating mass production for this family later this year. So I think you can conclude that, we'll see some products if -- if our outlook continues then you'll see products based on our technology in the market.

So I think that's defiantly incremental than I think the last time we talked to you guys. So I think we're feeling pretty good about the traction that we're seeing..

And then on IP licensing, can you talk about the IP licensing opportunity in the mobile market and any updates for us?.

I think I've been talking about this. And I think that we continue to have active opportunities in the IP licensing. The thing always to keep in mind, these are pretty strategic in nature. They tend to be -- I wouldn't characterize them as maybe like an off-the-shelf core from ARM or something like that.

They tend to be in relationships that are strategic in nature, and we still have active opportunities that we're working on. I'd also say that, I think I've reported this a couple of times, but I think the need for this, kind of what we do, this video processing pipeline, definitely continues to be very robust.

And a lot of the companies, thinking about products to solve these video challenges that we've been discussing here..

And your next question comes from Jaeson Schmidt from Lake Street Capital..

Bruce, I was wondering if you could comment on some of the market dynamics you're seeing in the TV market?.

I think I made a comment that 4K is kind of broadening out to other type of applications. And we are seeing what I would characterize more as niche-type applications for 4K that we have a good opportunity set for, that's the digital signage monitors, high-end monitors, those types of things.

These tend to be sort of more niche markets, but long-tail type of markets..

And then outside the shift going on within the projector industry, could you comment a little bit about channel inventory, both on the TV side and the projector side?.

I don't think there is a big inventory build up per se. I think they remain relatively balanced from our perspective. I'd just say that in terms of visibility, when customers get cautious, they kind of have a little bit less visibility into what they're thinking in the future that translates into sort of visibility for us..

We have very good visibility into what our customers have of our inventory. What we don't necessarily see is their supply chain, which can get pretty granular into their distribution chain.

With the macro environment of little growth in United States over last quarter and sort of a less than robust China, I think we're hearing our customers be just a little more cautious than they might otherwise do..

But we get -- the sell-through numbers look fairly stable..

They do..

[Multiple speakers] is a customer behavior, that you kind of see when the backdrop of macro is a little weak..

And Steve, how should we look at OpEx trending this year and next?.

On an annual basis, it will grow modestly from '14 to '15. We're not adding to headcount in '15 at all. And to the extent that we can see into '16, we're not expecting any real increase in headcount of any significance. The development expenses have gone up somewhat from year-over-year.

They were a little bit low in '14 relative to '15, and that's the majority of what increase we'll see, but the increase is not great. We believe that we're very scalable at our current OpEx levels..

And that concludes today's Q&A session. I would now like to turn the call back to management for closing remarks. End of Q&A.

Thanks everyone. And we'll look forward to talking to you on our Q2 2015 conference call..

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. You may all disconnect. Everyone have a great day..