Steve Moore - Chief Financial Officer Bruce Walicek - President and Chief Executive Officer.

Charlie Anderson - Dougherty & Company Krishna Shankar - ROTH Capital Jason Smith - Lake Street Capital.

Welcome to Pixelworks, Inc. Second 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 will now 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 second quarter ended June 30, 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, July 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.

Also 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 second quarter financial results and then provide our outlook for the third quarter 2015..

Thanks, Steve. Good afternoon and thanks for joining us on our Q2 2015 conference call. Q2 results came in within the range of guidance with revenues of $15.1 million, representing a 15% increase in product revenue over the first half of 2014 as revenues from chips continued to drive year-over-year growth.

All other non-GAAP metrics came within the range of guidance and the book-to-bill was greater than 1 as order patterns normalized during the quarter. And despite the sluggish macro environment, we continue to target double-digit growth in our product business for 2015.

Q2 was an outstanding quarter of progress as we achieved several important milestones. During the quarter, we announced that ASUS selected Iris for their next-generation flagship tablet.

This is an important customer validation and we are seeing strong pull from the market for the value propositions of Iris and market acceptance is on track as our mobile initiative unfolds. And as noted on our last conference call, we introduced the next device in the Iris family of mobile display processors at Computex in June.

We achieved outstanding results on this project and delivered right on schedule in record time and this product is now sampling to customers. Our second Iris chip is targeted for mobile products with high resolution displays with screen sizes ranging from 5.5 inches to 10 inches with up to 2K resolutions.

These products specifically are geared for power-hungry compute-intensive multimedia applications and as a result have more stringent power and performance requirements.

This chip includes the full suite of True Clarity features, so manufacturers can offer new products that deliver an enhanced mobile viewing experience and differentiate their offerings, while at the same time address power and performance bottlenecks at the system level.

Our latest product extends the breadth of the Iris family giving OEMs more options to optimize their offerings in a range of different product segments. Future members of the Iris product line will offer a range of features and price points to cover the entire spectrum of mobile devices.

Also in Computex, we announced that ASUS selected Pixelworks’ Iris mobile display processor for its new flagship, ZenPad tablet. The new ASUS Hero ZenPad is the world’s first tablet to incorporate True Clarity features based on Pixelworks’ mobile display processing technology.

ASUS is setting the standard in realism with their true to life display technology that enables a rich, incredibly realistic visual experience on a mobile device. We are the first to incorporate the latest image processing technology found in high-end TVs that delivers incredibly realistic images with accurate contrast, sharpness and detail.

ASUS selected Iris because it’s the world’s first mobile display processor that incorporates the most advanced display processing available providing superior picture quality, while at the same time addressing system bottlenecks.

Iris’ True Clarity features provide blur-free, smooth motion video for better viewing experience, advanced color management, and sharpness for clear lifelike images and enhance contrast that they like doing for better gaining outdoor viewing and enhanced usability.

ASUS is an established leader across the spectrum of mobile products and has a long track record of bringing the most exciting and innovative products to market first and we are proud to partner with such a leading company.

For the same reasons ASUS selected Iris, we are seeing increasing market pull and the value propositions of Iris are resonating across customers as they look for ways to address system bottlenecks and differentiate their products.

Momentum continues to build with an increasing number of customer engagements, evaluations and design wins as the Iris product family expands to address more specific applications looking into larger mobile markets.

We are in the right place at the right time with first mover advantage to attack a large fast growing market of hundreds of millions of units that is undergoing rapid change as the confluence of key trends drives a critical inflection point.

The accelerating growth in high-resolution content and over-the-top video is driving the need for solutions that can help systems adapt to the massive growth in a number of pixels that next generation systems need to capture, process and display.

And rapid advances in display technology are putting serious strain on today’s solutions driven by increasing resolutions, frame rates, color capability and panel technology system requirements for next-generation displays are changing faster than SoC integration cycles, which are 2 to 3 times longer than display innovation cycles.

Processing pixels is a compute-intensive task as more and more applications are competing for CPU performance on a next-generation mobile system. More pixels processed means more performance needed and more power consumed and these trends combined with customers need for differentiate their product are creating a performance power bottleneck.

Increasing demands on systems are causing critical pain points driving architectural change as mobile systems adapt. Today’s solutions are struggling to address this bottleneck and deliver efficient display processing and the best picture quality at the same time and our Iris family of mobile display processors address this need.

In our large screen projected and panel display applications, our co-development program continues on track and is ramping as expected. Execution on this project has been outstanding and we continue to gain market share and drive year-on-year growth.

And in the InfoComm trade show last quarter, we demonstrated our latest technology for connectivity on our VueMagic platform, the MediaPro. The VueMagic platform, which includes software downloads and downloadable apps provides wireless connectivity for mobile devices to projectors based on Topaz chips.

This new addition to the VueMagic platform addresses the needs of schools and businesses to support interactive multimedia presentations. Education applications are a key driver of the projector market and represent about one half of the worldwide business. There are 41 million classrooms serving 1.5 billion K-12 students and teachers globally.

And education hardware spending is growing, along with the interactive display market as classrooms around the world shift to digital technologies. Our VueMagic technology and Topaz platform plays well into this trend as wireless access to displays moves into the mainstream and the VueMagic platform plus Topaz offers the best value.

Design and production cycles are long in the projector business and the VueMagic platform suite of software adds value to our customers and provides speediness and longevity to our products as well as ongoing value to our customers.

Design win momentum remained strong for our Topaz family of SoCs for projectors and we continue to see opportunities across our families of video processors for large-screen panels as 4K applications broaden.

In summary, Q2, 2015 was an outstanding quarter as we announced that ASUS, who is a leader in innovative mobile products, selected Iris for their next generation tablet, which is an important customer validation milestone. Market adoption is on track and is going as planned as momentum continues to build.

And we expect to begin initial mass production of Iris this quarter. We launched our next device in the Iris mobile display processors and samples are available now.

And overall the team at Pixelworks has delivered outstanding execution performance with on-time delivery of our new products right on schedule and our recent performance on our second Iris chip is just the latest example. Now, I would like to turn the call over to Steve to review the financial results in the quarter..

Thank you, Bruce. Revenue for the second quarter of 2015 was $15.1 million which compares to $14.4 million in the prior quarter. The 5% sequential increase in Q2 revenue was driven by continued market share gains in the projector market. For the first half of 2015, product revenue with the sale of chips increased 15% compared to the first half of 2014.

The split of our second quarter revenue by market was 90% digital projection and 10% TV and panel. Digital projection revenue was $13.6 million, compared to $12.5 million in first quarter of 2015. And revenue from TV and panel totaled $1.5 million in the second quarter compared to $1.8 million in the prior quarter.

Similar to the prior quarter, licensing revenue was negligible in the second quarter. Non-GAAP gross profit margin was 48.3% in the second quarter compared to 48.8% in the first quarter of 2015.

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

Non-GAAP operating expenses were $8.8 million in the second quarter compared to $9.2 million in the prior quarter. Adjusted EBITDA was a negative $521,000 for the second quarter compared to a negative $1.1 million in the first quarter. As previously mentioned the reconciliation of adjusted EBITDA to GAAP net loss maybe found in today’s press release.

On a non-GAAP basis, we have recorded a net loss of $1.9 million or a loss of $0.08 per share in the second quarter of 2015 as compared to a non-GAAP net loss of $2.3 million or a loss of $0.10 per share in the prior quarter.

Moving to the balance sheet, we ended the second quarter with cash and cash equivalents of approximately $14.4 million compared to $15.6 million in the end of the first 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 at quarter end.

Other balance sheet metrics include, days sales outstanding of 28 days at quarter end compared to 30 days at the end of the first quarter and inventory turns were approximately 10 times increasing slightly over the prior quarter. Guidance, for the third quarter of 2015, we expect revenues to be in the range of between $16 million and $18 million.

This range largely reflects seasonal strength in the projector market and also includes a mass amount of mobile revenue in line with our expectation of beginning next production shipments of Iris chips during the third quarter.

We expect gross profit margins for the quarter to range between 48% to 50% on a non-GAAP basis and 48% to 50% on a GAAP basis. In terms of operating expenses, we expect the third 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 third quarter non-GAAP EPS of between $0.10 loss per share and $0.01 earnings per share and we expect a GAAP net loss of between $0.14 and $0.04 per share. That concludes our prepared remarks. We will now open the call for your questions..

[Operator Instructions] And our first question comes from Charlie Anderson of Dougherty & Company, your question please..

Yes. Thanks for taking my questions and congrats on the ASUS win.

I wonder Bruce, if you could speak to you are saying modest volumes in Q3, just kind of roughly where that build cycle is for that product, is it just a month or so, how should we think about going into Q4 and next year? And then just generally speaking on Iris with some of the design win activity, how should we think about that progression into next year in terms of that business ramping?.

Sure. Yes, it is the initial production ramp and I think that is – into the quarter, its beginning. So, we are seeing the first stages of it and it should build from there. I think overall, we are very excited about this announcement. I think this is a key milestone in terms of customer validation and adoption for our mobile initiative here.

To put this in perspective, we really only started in this market. This is a new market. We have first-mover advantages in new segment. It really only began sort of late 20, late last year, in the second half of last year and we are just seeing the momentum build. So, this is a big milestone for us.

ASUS is an important partner and we would expect to expand our business further with ASUS as well. So, in terms of we saw a lot of great design win traction and pipeline building. So, we think it will build from there..

Can you speak to what types of products you are seeing traction with in Iris?.

So, we have it pretty much across the board. I think we have kind of characterized this when we entered the market with the first product, which was pretty broad from 5.5 inch screens to 15 inch. And I think we are in design engagements, evaluations or opportunities in our pipeline across all those segments..

Great, thanks so much for that color. And then just moving to the projector business, you had kind of a hiccup in the quarter as I recall because customer moving factories.

I wonder if you could just update us on how that went to resolve itself, are we back online with that customer and then just generally how is the projector mark if you look from a sell-through basis than sort of inventory basis?.

Yes, the projector market I think is back on a more normal scale. We are looking at sort of normal seasonality into Q3. It seemed to be across the board. As far as your last part of your question, the projector business is certainly macro-driven, but right now it looks to be normal and pretty strong..

Great, thanks so much for taking my questions..

Thanks, Charlie..

Thank you. Our next question comes from the line of Krishna Shankar from ROTH Capital. Your question please..

Yes, Bruce and Steve congratulations on solid results.

Given the initial design wins for Iris, would you expect – I guess your multiple design wins in the hopper, so would you expect pretty significant revenue growth in calendar year 2015 for Iris and you sort of bracket for us what the growth potential might be in 2015 for the Iris product line?.

So, we don’t guide one year out, but I think to characterize it, I think we will be looking for growth certainly coming from our mobile product line in 2016.

I think we have always sort of characterized as if you kind of look at adoption cycles, design cycles for customers, I have always pretty much characterized that as under best case scenario a 9-month cycle, which we are pretty much on with our first significant announcement.

And it can range from 9 to 12, 18 depending on the customer of the product that the cycle of their products as well. So, I think we are pretty much on track certainly with the engagements that we have, with the wins we have in the pipeline that we have building to see excellent growth in 2016 and overall this was driven by mobile..

Okay. And then any updates on the licensing business whether can you talk about sort of what you have in the pipeline and any opportunities to license any, all in the midst of the mobile video processors, technology as IP.

Can you talk about the growth prospects in IP and licensing?.

Sure. Yes, we are seeing a very good IP pipeline. I think it even grew from the last quarter. So, I think really putting some perspective and color on that, the kind of trends that we talk about, the kind of need for video processing, the demand for video, the performance required by systems to meet video and display, display technology advances.

I think that’s all being reinforced and validating our thinking there and I keep pipeline deals that we had or the IT deals that we had coming into the pipeline. So we have seen incremental opportunities from last quarter. So we feel pretty excited about that. I will position that these are strategic in nature for us, they are very lumpy.

And we have to thoughtfully engage in these. And we really use them to drive not only licensing opportunities but also strategic engagement with key partners. Pixelworks, we pretty much almost formally deal with Tier 1 partners whether they would be chip companies or Tier 1 OEMs, whether they would be systems companies as well.

And whether that’s on their product side or on their semiconductor side a lot of customers we deal with or we are targeting or we are getting engagements with. In a lot of cases, they have internal semiconductor operations as well.

So the key component of our business and I would say that we have seen continued increasing interest and demand produced since the last quarter..

And finally on the projector business, would you say that they are still early in terms of ramping the new platform and 2016 should be a pretty solid growth year for the projector business given that those life cycles extends for at 2 years to 3 years?.

You mean growth for projection in 2016, is that – I am sorry Krishna your question..

Yes, that’s right.

The growth for the projection business in 2016, can you talk about the drivers there, since we are early in terms of adoption of this new platform?.

Yes. We have some new products especially on our VueMagic platform that are driving incremental tool cast designs. I think we talked about our co-development platform or co-development engagement has been driving market share gains and growth here in 2015 and we are still seeing that.

I think going into 2016, I think we would expect to at least grow at the level of projection business or better based on a lot of the initiatives that we have going on.

So the projector business and I would call it the looking of the large panel and large screen business it’s a fairly overall from overall standpoint fairly stable business, designs in the last 3 years, 4 years, 5 years and the cycles are long. It’s driven by education largely and growth in business and things like that around the world.

So we would expect a solid growth here for that business in 2016..

Great, thank you..

Thank you. [Operator Instructions] Our next question comes from the line of Jason Smith from Lake Street Capital, your question please..

Hey guys. Thanks for taking my questions.

Wondering if you could talk about the interest in customer engagements, you are seeing on the mobile side, is it primarily just coming from the high end or are you also seeing some interest coming from the middle range of the market?.

That’s a good question, Jason. We are definitely to high end, I men but we are all seeing a mid-range opportunities as well. Interestingly enough, I think there are some parallels to drop on the graphics business to what we do.

Graphics coprocessors exist next to largely Intel platforms these days, still after it’s a 20-year old business and that’s because their horsepower on CPU is detailed from a GPU to do high performance graphics.

We are seeing something similar with mid range platforms and lower powered SOCs that potentially want to use our chip to enhance the video capabilities of a mid range platform. So I think there are two cases. There is that case which process mid range, but there is also of course as you mentioned the high end case as well..

Okay, thanks. That’s really helpful.

And then looking at the TV and large panel segment would you expect that to be up sequentially in Q3?.

Well, we don’t break out our product lines in our guidance, but we have said that our TV business would be sort of on the flat side through the year. In fact we have seen it’s declined somewhat, but we are not expecting any significant declines from here..

Okay.

And then lastly Steve can you remind us what your breakeven revenue run rate is?.

Breakeven run-rate is 17.5 approximately, 17.5 to 18..

Okay, perfect. Thanks a lot guys..

Thank you. This does conclude the question-and-answer session of today’s program. I would like to hand the program back to management for any closing remarks..

Thanks for joining us today and we will look forward to talking with you again on our Q3 2015 conference call..

Thank you, ladies and gentlemen for your participation in today’s conference. This does conclude the program. You may now disconnect. Good day..