Steven Moore - CFO Todd DeBonis - President and CEO.

Suji Desilva - ROTH Capital Richard Shannon - Craig-Hallum Charlie Anderson - Dougherty.

Good day, ladies and gentlemen, and welcome to Pixelworks First Quarter 2018 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 Pixelworks CFO, Mr. Steve Moore..

Good afternoon and thank you for joining us today. With me on the call is Todd DeBonis, Pixelworks' 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 2018.

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, Wednesday, May 2, 2018, 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, 2017, 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 income loss, and net income loss per share.

These non-GAAP measures exclude deferred revenue fair value adjustment, inventory step-up and backlog amortization, amortization of acquired intangible assets, acquisition and integration-related costs, stock-based compensation expense, restructuring expenses, fair value adjustment on convertible debt conversion option, discount accretion on convertible debt fair value, extinguishment of convertible debt and a tax benefit related to tax reform.

With the exception of stock-based compensation and the tax benefit related to tax reform, all of these adjusting items are related to the acquisition and integration of ViXS Systems. 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 income loss, and GAAP net income loss to adjusted EBITDA, which provide additional details. With that said, I will now turn the call over to Todd for his opening remarks..

Thank you, Steve, and good afternoon to those joining us on today's call. As reported in today's press release, our first quarter financial results were at or above the high end of our guidance range that we provided in mid-February.

Revenue for the quarter was $15.3 million with a sequential decline reflecting the typical first quarter seasonality in our core projector business. Gross margin and operating expenses both came in slightly better than expected in the first quarter and as a result we achieved breakeven EPS on a non-GAAP basis.

Also during the quarter, we successfully converted or paid off all remaining convertible debt that we acquired as part of that ViXS transaction last August. Before walking to our end markets and recent customer traction, I want to make a few brief comments on operations.

Over the last two years we’re taking numerous actions to streamline our product portfolio and successfully implement initiatives to drive increased efficiencies across the organization.

As part of our ongoing effort to position Pixelworks deliver long-term sustainable growth and increased profitability, in late April we implemented a relatively small restructuring to further improve the operational efficiencies and prioritize the allocation of resources for near-term revenue growth.

As part of this plan, we anticipate recognizing charges in the second and third quarters totaling approximately $2 million. Note, these actions will have no impact on our strategy, prospective growth opportunities or any of our current customer engagements. With that I'll turn to an update on our end markets a projector video delivery in mobile.

Beginning with our core projector business revenue was sequentially lower but in line with the typical first quarter seasonality. As a reminder, Pixelworks SoCs represent a large majority of the three LCD market share.

Many of our largest projector customers are based in Japan and had fiscal years ending in March and these OEMs are incentivized to close out their fiscal year-end with as little inventory as possible. This in addition to consumer buying patterns is what drives seasonally lower demand and revenue in our calendar first quarter.

As such our projector business performed as expected and we anticipate solid sequential growth in the second quarter. During the quarter, we continue to make good progress on our co-development of a next-generation SoC for a large projector customer.

This project remains on schedule and we recorded an approximately $2 million offset to R&D during the first quarter associated with the achievement of specific development milestones. We are on track to release this new chip for production by the end of the year.

Notably although this SoC is being developed with a specific large customer, we expect to quickly leverage the resulting intellectual property in the development of similar chips for other projector customers. More broadly, the projector market looks to be healthy and Pixelworks’ remains well positioned.

We continue to have good near-term visibility with our customers in both channel inventories and backlog are consistent with expected seasonal patterns. Given what we believe is normalized demand environment, we expect the projector market to be flat to slightly up in 2018.

Finally, bookings for the current quarter are solidly higher and this is reflected in our second quarter guidance. Turning to video delivery.

This portion of our business performed largely as expected in the first quarter and revenue was consistent with the normalized annual run rate of roughly $10 million exiting 2017, which we outlined on our previous conference call.

Following our completed integration of the video delivery business in the fourth quarter, we are increasing focus on two meaningful market opportunities, the first is the consumer electronics market in Japan, and the second is Over-the-Air streaming or OTA streaming primarily here in the U.S.

In Japan we continue to see healthy traction for our XCode family of advanced decoding and transcoding SoCs which enabled HD and UHD Blu-ray playback and recording in branded set-top box devices. Unlike in the U.S. where were dedicated equipment issued to the consumer by a service provider such as Comcast or Charter Communications.

Many Japanese consumers purchased their own set-top boxes that support Over-the-Air terrestrial broadcast signals. This market is predominantly served by four consumer electronics suppliers. Japan has been trialing a new advanced standard called ADSP Dashti that will support terrestrial broadcasting in 4K and HDR quality.

The service is expected to go live in December of 2018 and we currently have multiple programs that are scheduled to be released in advance of this rollout.

In OTA streaming a combination of current market dynamics and consumers consumer’s desire for more control over the video content is increasingly driving more traditional pay TV customers to cut the cord.

According to video trends report published by Tivo in March of this year 87% of cord cutters canceled their pay TV service because it was too expensive.

Growing number of these consumers are embracing cheaper OTT alternatives that offer all cord or skinny bundles and many cord cutters combined these OTT services with an OTA antenna to access their local HD broadcast channels for free.

Pixelworks Transcoded chips enable the streaming of live HD broadcast television to wireless device throughout the home, including Smart TVs, streaming media players, smartphones and tablets. Today our transcoders can be found in several single, dual and quad channel OTA solutions that are being shipped by several OEMs.

We continue to believe that OTA represents a significant growth opportunity as consumers increasingly embrace alternatives to traditional pay TV and we are actively working with both our existing customers as well as other ecosystem partners to develop a more seamless and integrated solution for Cordcutters.

Looking forward we remain excited about the emerging opportunities across our video delivery business. We continue to have significant activity in expanding customer engagements in both the consumer electronics market in Japan and OTA in North America.

Near-term our anticipated growth in video delivery is most likely to be weighted towards the end of 2018, coinciding with the launch of the product supporting a new broadcast standard in Japan.

Shifting to our mobile business, although contribution was still relatively modest, mobile revenue increased sequentially and year-over-year in the first quarter as we began shipping volume production orders in support of an April launch of Blackshark’s gaming smartphone.

Notably at Xiaomi Blackshark's official launch event in Beijing, Pixelworks was one of only two components suppliers mentioned during the Blackshark CEO on stage introduction of the phone. The launch event received a significant amount of media coverage resulting in great visibility for both the smartphone itself and Pixelworks’ display technology.

Our third generation Iris chip provides the innovative smartphone for mobile gamers with a full suite of advanced display technologies, including high dynamic range, sophisticated color mapping and contrast management as well as Pixelworks’ proprietary and industry leading motion estimation motion compensation.

Collectively the capabilities provided by Iris processor enables Xiaomi Blackshark's gaming smartphone to deliver advanced display processing that matches today's leading flagship smartphones. Early indications suggest there has been strong demand for the Blackshark phone.

Additionally, today we formally unveiled the full feature set of our fourth-generation Iris mobile display processor, which we begin sampling to customers in the fourth quarter of last year and subsequently released for production in early 2018.

Not intended to be an upgrade or replacement for the third-generation Iris chip, our fourth generation Iris provides a distinctly different feature set, and it was specifically designed to lower the barriers of adoption for mobile OEMs.

The fourth generation Iris has a smaller physical profile that requires 45% less board space, and it consumes 40% less power than its predecessor.

While still delivering an unparalleled suite of advanced video capabilities including mobile HDR video for both OLED and LCD displays, are auto-adaptive True View technology, that adjust the display based on ambient lighting as well as industry leading color accuracy.

In addition to having a significantly lower cost point, the fourth generation Iris also features real-time conversion of SDR or Standard Dynamic Range video content to HDR quality video. Given that our focus is predominantly on Asian handset OEMs, we received a number of questions about our about the U.S.

Department of Commerce’ recent actions related exports to a specific OEM in China. First, I want to remind investors that our existing pipeline of mobile engagement spanned four different regions in Asia and not just China.

That said, we do have multiple programs with the OEM in question, that we anticipated to launch in the second and third quarter of this year and we’re hopeful that the customer reaches a quick resolution with the U.S. Department of Commerce.

However, regardless of the outcome related to this customer I want to emphasize that our expectation for a meaningful ramp in mobile revenue from our collective engagements is still intact though it may ultimately be more pronounced in the back half of 2018.

With that said, as demand for advanced display processing grows so of our customer engagements and active programs.

Since the beginning of the year the number of customer programs have noticeably increased to the level that we needed to adjust support resources and the sales force is now rigorously pre-qualifying all new engagements to align with our objectives.

Given the significant product traction and customer activity just outlined across our mobile business, we remain confident that we will experience a meaningful ramp in mobile revenue in 2018 which will accelerate further in 2019 as OEMs launch an increasing number of smartphones that incorporate Pixelworks display processing technology.

Before providing my concluding remarks, there is one additional area that I'd like to highlight. As indicated on previous calls a portion of our ongoing research and development activity is dedicated to cultivating complimentary market opportunities.

These are areas where we believe Pixelworks can leverage its industry leading display processing and video delivery technology. As part of one of these ongoing development initiatives earlier this week we announced a collaboration with Wanda Film Group, to establish a film innovation and ecosystem lab in China.

This lab extends Pixelworks existing R&D efforts with the objective of creating new tools and technology for cinema displays.

Note while we do not expect a direct monetary benefit from this collaboration in the near term, we do believe this development lab represents longer term potential to offer new technology and commercial solutions for movie production and theatrical presentation. In summary, the first quarter reflected a solid start to the year.

The relevance of Pixelworks advanced display processing and video delivery technology is growing rapidly with the prevailing demand for high quality displays and associated content. We are well-positioned with innovative products in each of our target end markets.

Within mobile customer interest in the number of programs that we engaged in has increased dramatically over the last six months and we continue to anticipate the meaningful ramp of mobile revenue in 2018.

Equally important, we continue to drive operational efficiencies and optimize the allocation of resources in order to capitalize on the multiple growth opportunities, while also remaining cognizant of our near-term bottom line results.

With that, I'll turn this call over to Steve to review our first quarter financials and guidance for the second quarter in more detail.

Steve?.

Thank you, Todd. Revenue for the first quarter 2018 was $15.3 million, which reflected the expected first quarter seasonality in our digital projection business. This compared to $18.4 million in the fourth quarter of 2017 and revenue of $22.7 million in the first quarter of 2017.

Revenue in the comparative periods included approximately $1 million and $9.2 million of legacy end-of-life product revenue respectively. The breakdown of revenue during the first quarter was as follows.

Revenue from digital projector was approximately $12.3 million, mobile revenue was approximately $430,000 and revenue from video delivery was $2.4 million. Additionally, we recorded approximately $144,000 of legacy TV and panel products sold.

Non-GAAP gross profit margin was 54.2% in the first quarter of 2018 compared to 56.9% in the fourth quarter of 2017 and 54.8% in the first quarter of 2017. Non-GAAP operating expenses were $7.8 million in the first quarter of 2018 compared to $10.6 million in the fourth quarter of 2017 and $8.3 million in the first quarter of 2017.

Lower operating expenses in the first quarter of 2018 were primarily due to the recognition of approximately $2 million offset to R&D associated with our co-development project with a large projector customer.

Adjusted EBITDA was $1.3 million for the first quarter of 2018 compared to $778,000 in the fourth quarter of 2017 and $5 million in the first quarter of 2017. The reconciliation of adjusted EBITDA to GAAP net income and loss may be found in today's press release.

We reported non-GAAP net income of $38,000 or breakeven on a per share basis in the first quarter of 2018 as compared with a non-GAAP net loss of $379,000 or loss of a $0.01 per share in the prior quarter and non-GAAP net income of $3.8 million or $0.12 per diluted share in the first quarter of 2017.

Moving to the balance sheet, we ended the first quarter with cash and cash equivalents of approximately $20.6 million, a decrease of $6.9 million from the end of 2017, primarily reflecting a combination of cash used in operations and the payoff of all remaining convertible debt that was acquired as part of ViXS Systems.

Other balance sheet metrics include days sales outstanding of 26 days at quarter end compared with 23 days at the end of the fourth quarter 2017. Inventory turns during the first quarter of 2018 were 12 times compared to 10.6 times in the prior quarter.

Before turning to guidance as Todd mentioned the Board of Directors approved a restructuring plan at the end of April to further streamline our operations and improve efficiencies.

We expect its relatively small restructuring to be substantially completed by the end of the third quarter and we expect to record charges in the second and third quarter of 2018, totaling approximately $2 million. Our guidance for the second quarter of 2018 is as follows. We expect revenue to be in the range of between $18 million and $19 million.

We expect non-GAAP gross profit margins between 53% and 55%. For operating expenses, we expect the second quarter to range between $9.5 million and $10.5 million on a non-GAAP basis.

Note, unlike in the first quarter of 2018, our expectation for operating expenses in the second quarter do not anticipate any offsets to R&D related to our co-development project with a large digital projector customer.

And finally, we expect second quarter non-GAAP EPS to be in the range of between a loss of $0.04 per basic share and income of $0.02 per diluted share. With that, we will now open the call for questions.

Operator?.

[Operator Instructions] Our first question comes from the line of Suji Desilva with ROTH Capital. Your line is now open..

Just a quick housekeeping question.

Steven, were there any end-of-life revenues in the first quarter 2018?.

There were, but they were de minimis..

And then Todd maybe on the Iris product, I mean the engagements have accelerated in the last six months.

I wanted to get a sense of whether you think it's more the market force is exsanguinous or whether it's the products you have the Gen 4 coming out, that have been driving value, I'd love to kind of get a sense of you know which is more of a factor?.

I think they both contributed - I think clearly the push to higher quality displays which had nothing to do with us coming out with the fourth generation, peaked interest, and the leading flagship phone manufacturers, highlighting features and functionality that are included in the fourth generation health, but we've been out pushing hard at let's say a dozen customers, and I think we're being hurt..

And then can you help us quantify perhaps in 2018 how much you think video and mobile will grow to give us some kind of ballpark ranges there?.

What kind of timeframe are you talking about?.

By 2018, calendar 2018?.

Well, we haven't given any specific guidance for the full year on broken out. We do expect growth in both areas particularly in mobile. The actions that we're now seeing the designs that are going into production clearly will mean a growth here for mobile. Not sure that, I can give you an exact percentage at this point though..

We’re not putting annual guidance out there, Suji. I mean clearly if I had given you an annual guidance three months ago and then the Department of Commerce would have went forward with what they did I’d probably would have been wrong with that guidance. And so if I give you a guidance today who knows what can happen in the future.

So we just don't give annual guidance, we're going to give a quarter out. We still have - what I want to do is just give color that we have multiple programs active. Many of them still targeted launched this year or early next year and even if there is a launch early next year, the phone manufacturers today start building production prior to launch..

I would add to that though that within mobile, it's clear even with the - even if one were to take out the - an effect from our commerce department, we're expecting meaningful growth and meaningful revenues in mobile..

And that I came across in the call.

Last question from me, you talked about the Japan projected development project, can you update us on the other projects you have them?.

So specifically in the video delivery we talked about a development we have with the lead customer in Japan also just happens to be that our projector co-development is with our large customer in Japan. So they’re both Japanese customers and they’re both funding developments for their respective markets..

A little more color on that the projector co-development is a true co-development where we're both providing technology and working on a chip and that is accounted for as a offset or a credit to expense. In video delivery, there that's entirely our development and the customer is contributing to that development, the cost of that development.

And therefore that is treated as revenue with an intended cost..

Our next question comes from the line of Richard Shannon with Craig-Hallum. Your line is now open..

Let's see, a quick question on the second quarter guide here. Just trying to fit things together via segments here, obviously, projector seasonality points you upwards to some degree. Your commentary about video delivery suggested minimal growth more back-end weighted to the year.

And so if we try to fit that together it might suggest that mobile would grow substantially percent wise and even dollar wise.

How close you might have fitting this well, I mean could mobile be well greater than a million dollars in the second quarter?.

Well, we don't break out the specifics of them until we've actually accomplished them, but we do expect some growth in mobile in the quarter. I think as Todd alluded, we had actually expected it to be somewhat greater, but we are seeing a seasonal increase in projector that should be expected and has occurred..

Following down the income statement here, implemented a small restructuring here, obviously, it seems to be there’d be an impact on I would guess on OpEx here.

How should we think about in a magnitude and would we see the full effect of that starting when like third quarter or beyond that?.

Well, the restructuring really is about efficiency. So we are placing resources in the areas where we think we'll get the most impact. I’d say a good chunk of this about a little more than half of it is related to facilities that we are either abandoning or reducing and all of that will likely be complete by the end of third quarter.

However, the total impact on overall OpEx may be offset or expected to be offset as we add our resources to areas, particularly the growth in mobile to support that growth..

All we won't go through. Some of that will be reallocated to other areas..

Todd a question for you, I think last quarter you talked about in the Mobile area having 10 engagements with 8 OEMs total, based on your prepared remarks that sounds like it's improved dramatically.

I don't know if you still include the potential ones, whatever ones you had with, ZTE is still a part of that but can you further clarify and quantify what the pipeline looks like now?.

If I was going to put numbers, John, I would have put them in the prepared remarks. I want to get away from that. I think we're at a point now I think the reason I started including numbers was just to give some magnitude that I feel that company’s at critical mass.

And this is a company that for four years was pitching technology to the market and felt there was a need for the market to utilize that technology. We had a little pool but not enough to justify the development, okay. What I'm trying to communicate is I believe we have enough pool to justify the development from here on out.

We'll see how long it lasts but right now it feels, it's a busy time at Pixelworks..

Last question for me, I will jump out of line.

Your press release today and your remarks regarding Wanda Group which I'm not particularly familiar with, you said you're not expecting any near-term monetary outcomes from this but wondering maybe you can describe a little bit more how you expect to see benefit from this over what timeframe and in what manner?.

Well, I mean, I figured this was probably going to catch you guys off guard. So cinema display technology, it’s developing- it's actually evolving. And today you can go into China and there's a couple of leading edge cinemas from Wanda that include both 4K laser HDR projectors and full LED emissive displays, a giant LED display that displays 4K HDR.

So these are capable of much higher resolution, higher dynamic range and higher frame rates than the current content was developed to be displayed on.

And so what this collaboration or one of the main purposes of this collaboration is develop new production and presentation technologies that allow movie makers to take advantage of the displays that are now emerging.

And so we've been working on algorithms that can help a movie post-production houses and directors understand the capabilities of the screen that they're going to be displayed on and work at formatting their original content to be seen on those displays, the way they want it to be seen on those displays. And so that what this collaboration is about.

I mean, Wanda, if you know anything about this development what Wanda did is Wanda invested quite a bit of money, I mean billions of dollars to create the largest movie production house in China if not the world in Qingdao and their grand opening of this large facility it has the largest underwater film stage, it has multiple other film stages, it has post-production capabilities on-premise, it has hotels and restaurants et cetera, but within this same grand opening of this large facility, we announced this collaboration with Wanda for the Ecosystem Lab..

Very interesting, I'm sure we'll follow-up, but this is feature sounds very leading edge. So congratulations on that. I think that's all the questions from me. Thanks, guys..

Our next question comes from the line of Charlie Anderson with Dougherty. Your line is now open..

Todd, you released the specs of the fourth generation Iris, I think after holding back for a little while. I wonder maybe you could give us a little bit of the context of the timing of given the specs now and maybe what you want to highlight in those specs to the market? And then I got a follow up..

Well, I think the timing is when we release publicly our device, part of it is for the customer base although most didn’t seen it and a big part of it is for the investment community or ecosystem partners. So that may not understand all the details and want it.

So we felt the timing was right to announce it, most of the pipeline of programs that we allude to in this call are for the fourth generation. So I thought it was important to get out what the specs and the benefits of that device were..

And the on OTA, I know a lot of us have asked about mobile in the pipeline but maybe if you could just lend some color on what you're seeing as far as the OTA pipeline is concerned? Thanks..

OTA is still developing. I think it's work in progress. We've got a large customer who sees the value proposition in bundling an OTA appliance, an OTA stream appliance with a skinny bundle linear TV service. They are in the - still in the midst of developing their launch plans and how they're going to go about it.

And so that I would say that's a little bit fluid and unpredictable sort of like this all OTT linear services. And then we have a half dozen open market customers that are going out with their own software, bundled software and pushing the emerging customer base to adopt the technology. And we're trying a couple of different things.

We're still working with the large guy that we think will help to find the space and working on roadmap technology with that customer. And then we're trying to develop an ecosystem for a ground up approach..

I'm showing no further questions in queue at this time. I’d like to turn the call back to management for closing remarks..

No closing remarks today. As you might have heard, I'm going with the cold. So I think we'll shorten it up today. Thanks for joining..

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program and you may now disconnect. Everyone have a great day..