Good day, ladies and gentlemen, and welcome to Pixelworks, Inc. Second Quarter 2022 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, instructions will be given for the question-and-answer session.

This conference call is being recorded for replay purposes. I would now like to turn the call over to Brett Perry of Shelton Group, Investor Relations..

Thank you, Elizbeth. Good afternoon, and thank you for joining us on today's call. With me on the call is Pixelworks' President and CEO, Todd DeBonis; and Chief Financial Officer, Haley Aman.

The purpose of today’s conference call is to supplement the information provided in Pixelworks’ press release issued earlier today announcing the company’s financial results for the second quarter of 2022.

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, Wednesday, August 10, 2022.

The company undertakes no obligation to update any such statements to reflect events or circumstances occurring after today.

Please refer to today’s press release, the company’s annual report on Form 10-K for the year ended December 31, 2021, 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 statements during this conference call will include discussions of certain measures and financial information in GAAP and non-GAAP terms, including gross margin, operating expense, net loss, and net loss per share.

Non-GAAP measures exclude amortization of acquired intangible assets, and stock-based compensation expense. The company uses these non-GAAP measures internally to assess our operating performance. We believe these non-GAAP measures provide a meaningful perspective into core operating results and underlying cash flow dynamics.

We caution investors to consider these measures in addition to, and not as a substitute for, nor superior to the company's consolidated financial results as presented in accordance with GAAP. Also note throughout the company's press release and management statements during this conference call, we refer to net loss attributable to Pixelworks, Inc.

as simply net loss. For additional details and reconciliations of GAAP to non-GAAP net loss and GAAP net loss to adjusted EBITDA, please refer to the company's press release issued earlier today. With that, it's now my pleasure to turn the call over to Todd for his opening remarks. Please go ahead..

content creation, content distribution, and device manufacturers. Early this year, TCL became the first foundational ecosystem partner on the device side. And then in April, we announced Pixelogic as a certified services partner for providing TrueCut Motion post-production services.

The consistent feedback we received from other interested device and streaming ecosystem partners, going back more than a year, was that the content creators needed to get behind the technology first. Following a longstanding and formal engagement, in July, we announced a multi-title license agreement with James Cameron's Lightstorm Entertainment.

As part of this latest ecosystem milestone, Pixelworks TrueCut Motion platform is being used to remaster both Avatar and Titanic in cinematic high frame rate 4K HDR for theatrical release.

Notably, these respective titles rank as having the Number 1 and Number 3 highest grossing global box office sales of all-time, which together with James Cameron's public endorsement, we expect to significantly elevate the awareness and interest for TrueCut Motion platform.

We cannot comment on what comes next specific to these two theatrical releases with Lightstorm. However, I can highlight our prevailing thesis related to the broader content distribution in general.

A large portion of the TV is currently in people living rooms and effectively all new TVs for manufacturers like TCL have a dramatically higher luminance than what you would experience in a movie theater.

This increased brightness when combined with HDR and larger screen sizes further accentuates motion issues such as strobing, judder and deblur, all of which the TrueCut Motion platform solves without the viewer having to adjust any settings on their TV.

Therefore, the value proposition absolutely extends beyond the theater and into every living room, which we believe is one of the primary opportunities to monetize our TrueCut Motion platform technology. Shifting to our Projector business.

Revenue increased 20% sequentially and 12% year-over-year, reflecting the highest quarterly revenue in more than two years. The post-pandemic recovery in the end market demand has continued to exceed our customers' ability to source supply of various projector components, including timing controllers and panels.

Due to the longer lead times for the other components, order patterns for our projector SOCs have remained very healthy as projector OEMs work to backfill end demand, as well as build certain levels of buffer inventory of all critical components.

While we've largely been successful at securing the requisite supply each quarter to meet customer demand for our projector SOCs, available capacity has continued to be extremely tight. As of today, we are effectively fully booked through the end of the year in our projector business.

To summarize, we delivered another quarter of strong top line growth, although a large portion of our team and customers were subject to lockdowns for multiple months. We were able to grow revenue in the first half of 2022 by more than 50% year-over-year.

We've also continued to execute on our strategic initiatives, including the cultivation of expanded synergistic ecosystems that further support our anticipated long-term growth of both the mobile business and the TrueCut Motion platform. And over the last six months, we've achieved a series of notable milestones.

Additionally, we continue to make progress on preparing our Pixelworks Shanghai subsidiary for a local listing in China. We've taken the necessary steps to convert to a joint stock corporation, which we expect to complete in the next couple of months.

And for the next step, we'll apply to begin what the [CRSC] [ph] calls the tutoring period, which is a key prerequisite for submitting the subsidies application for a new listing. More broadly related to the second half of the year, there's obviously increased uncertainty with respect to the macroeconomic environment and consumer end demand.

With that said, we feel good about our pipeline of new and expanding opportunities and I'm confident that we have a very sound strategy in place to achieve our intermediate and long-term growth objectives. Regardless of the prevailing environment, as we've done in the past, we will remain focused on execution and the variables we can control.

With that, I'll hand the call to Haley to review the financials and provide our guidance for the third quarter..

revenue from mobile increased sequentially and year-over-year to approximately 7.5 million, which represented nearly 40% of total revenue in the second quarter of 2022.

Revenue from digital projector was approximately $9.5 million, increasing 20% sequentially and up 12% year-over-year, reflecting the sustained recovery of both end market demand and order patterns from projector customers. Video Delivery revenue was approximately $2.1 million in the second quarter.

Non-GAAP gross profit margin was 49.3% in the second quarter of 2022, compared to 53.2% in the first quarter of 2022, and compared to 52.7% in the second quarter of 2021. As anticipated, gross margin in the second quarter reflected the results of expected product mix.

Non-GAAP operating expenses were $12.9 million in the second quarter, compared to $11.6 million last quarter and $10.1 million in the second quarter of 2021.

On a non-GAAP basis, second quarter 2022 net loss was $3.3 million or a loss of $0.06 per share, compared to a net loss of $3.5 million or a loss of $0.06 per share in the prior quarter and a net loss of $2.6 million or a loss of $0.05 per share in the second quarter of 2021.

Adjusted EBITDA for the second quarter of 2022 was a negative $2.4 million, compared to a negative $2.2 million in the first quarter of 2022 and a negative $1.8 million in the second quarter of 2021. Turning to the balance sheet. We ended the quarter with cash and cash equivalents of $49.6 million.

Shifting to our current expectations and guidance for the third quarter of 2022. We anticipate third quarter total revenue to be in a range of between $16 million and $19 million. At the midpoint of this range, total revenue would represent growth of 15% year-over-year. Non-GAAP gross margin in the third quarter is expected to be between 49% and 51%.

We expect operating expenses in the third quarter to range between $12 million and $13 million on a non-GAAP basis. Lastly, we expect third quarter non-GAAP EPS to be in a range of between a loss of $0.09 per share and a loss of $0.05 per share. That completes our prepared remarks and we look forward to taking a few of your questions.

Operator, please proceed with the Q&A session. Thank you..

[Operator Instructions] Our first question comes from the line of Rajvindra Gill with Needham. Your line is now open..

Yes. Thanks for taking my questions. I appreciate it. Just on the guidance for September indicating [17.5] [ph], understandable in terms of what's going on in the macro and the Chinese handset market, but I'm curious on how you're thinking about the, kind of individual segments as we go into the third quarter.

Should we be expecting, kind of mobile to be down sequentially as we, kind of clear out this excess inventory situation is happening in the market or any comments there in terms of the dynamic in the mobile phone market? We appreciate it..

Yes. So, I'll take this one, Haley. So, yeah, I mean, so what we're seeing is, we don't – and I've been listening to many of the semiconductor calls that are targeting the mobile consumer space.

And there is clearly a lot of inventory out in the market right now, both at the OEMs in finished goods or with, at the channel, probably the biggest issue is channel inventory and then of course at the semiconductor manufacturers themselves. For ourselves, we have no inventory.

We were pretty prudent when, you know, we clearly had strong demand six months ago when most of this capacity was booked. And well beyond what we could secure from a foundry standpoint.

So, we were pretty disciplined in taking – we changed our order methodology to fix non-cancelable, non-returnable, non-changeable orders with 26-week lead times and pretty much stacked it. And most of those terms and conditions were passed on to the OEMs from our distributors. So, there’s a bit of channel inventory.

There's no inventory at our facility because some of the phones that they expected to sell well didn't excel as much as they thought. So, there is some X5 channel inventory that probably will take a quarter or two. And what is going to – what would happen is it goes to our customers they have to go actually pick a new model to put the X5 in.

To some degree, we're competing against our old inventory for X7 models. So, I think that's probably – there's still a lot of churn. That's why we gave the wide variance on the revenue guidance. There's some things that could happen for the upside.

There's also things that could happen on the downside, but I would say that for us, it's going to take a quarter, quarter plus before we start seeing burn through that, I see other vendors that are going to take 6 months to 9 months to burn through their channel and own inventory. So, I think for us, we're in a pretty good shape.

And, you know, the features and functionality of the X7 are desirable, let's say..

Yes. Appreciate all that good insight.

Do we – when we're thinking about the attach rate then for X7, given all the, kind of the dynamics you described in the handset market in China, is there any push-out of the attach rates or the adoption or that's still on course?.

We have strong interest for X7. I will say that a wave of X7 press releases, which is really where the market will find out what phone were designed in with who because we usually don't announce it until it's out in the market. That wave is going to get pushed out.

You might see [indiscernible] tail-end of the Q4, but predominantly it's going to get pushed out to Q1 2023..

Thank you..

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

Hi guys. Thanks for taking my question. I'm going to complete the question here on the guidance, clearly mobile is coming down, want to get your take on projector not only for the third quarter, which I think typically is maybe flattish in a normal environment, which clearly this isn’t, but also get your thoughts on the fourth quarter.

[Are we going] [ph] to see seasonally normal end of the year or something different Todd?.

I would say, if you go back pre-pandemic, what you usually saw was fiscal Q1 was our – which is our calendar, was our lowest quarter and Q3 was our highest quarter. I think what you're seeing this year is a return to somewhat of that seasonality.

So, we do expect Q3 to be slightly higher in projector than what we saw in Q2 and then a slight settling in Q4..

Okay. Fair enough. Let's jump over to mobile here. Sounds like based on the last answers here, we're expecting to see fourth quarter not a great mobile environment either while OEMs, kind of figure out their forward plans and start to take up X7 here.

I just want to – I guess confirm if that’s the message you're trying to convey here, [indiscernible], is that right, Todd?.

Well, let me be clear. The message in my in my prepared remarks and what I want to convey is, we have a lot of activity with X7. It is being weak. So, we hit waves of designs. And in the China market, there's usually two large waves of designs.

There's sort of some sub waves that happen, right? And but the large waves of designs happen right before or during Chinese New Year, right? So, let's just say, very end of December, you'll see it launch a start and it'll run till early February, right, which was traditionally towards [Mobile World Congress] [ph]. That's a big way of phone designs.

Then you see a secondary large wave of designs in the second half of the year, right. We had expected with – when we launched X7, it was tight to get into a large portion of 2022 second half of the year designs.

We expect it to see a good number of models, but we knew some of the design activity would push it out to the wave that is December to February wave of 2023. So that was always the plan.

What you're seeing with the downturn is some of the models that could have been used for X7 that may have been on a short leash with the excess X5 Plus inventory in the market, some of those models have switched over to X5 Plus.

So, we're not losing sockets, we're just – it’s taking a little more time for X7 to get into the market, but the design activity is still pretty strong, okay. So that's the message I want to say..

Okay.

And I guess to that last point here, along with your comment that all four of the Tier 1s in China have started to evaluate X7 at its introduction here, how should we think about the breadth and ultimately the volumes across all their portfolios as we get a good distance into 2023, is it looking better, a lot better in-line with what they've done so far with the X5 generation?.

It depends on the OEM. Some OEMs want to fully embrace the mobile gaming. I mean, the demographic for mobile gaming is a [20 something to mid-30 something] [ph] demographic. Okay. It's more male than female, but there's a lot of female gamers out there.

There are brands, sub-brands and families of models that are targeting that demographic at various different price points.

If you're going to target that, what I think we've accomplished is, we have a [Technical Difficulty] if you want to be serious in marketing into a phone, a device in China and in Southeast Asia that has premium mobile gaming experience and you don't have Pixelworks inside, one would question why? So, this is the segment we're targeting.

There's a portion of that segment that's a lower ASP. They're challenged at putting the cost of an X7 in there. Sometimes they put not very good displays in there, which we need a certain level of quality of display to achieve the results we achieve.

But, you know, I'm confident that the market we are targeting, which is, let's say, [$400] [ph] and up all the way to flagship phones that are targeting that demographic. We're seriously engaged with all models and sub-brands that are targeting that demographic in that price point in China..

That's helpful..

The question will be, when is the next big expansion will be? Do they just put Pixelworks inside? Because they want to have these features in a demographic they're targeting that's outside that demographic I just talked about..

Okay. Okay. That's helpful. I'll ask one more question and get a line here and that's on TrueCut. Obviously, it's been a few weeks here since you had that great announcement last month here of Lightstorm Entertainment adopting the technology.

Can you talk a little bit about the [halo effect] [ph] of this and the rest of the industry since then? What's been the outreach to you, any way you'd characterize the conversations with others as after that's announced?.

Well, I mean, it's been a very positive [halo] [ph]. I guess, let me start with that. The team's very busy. In fact, the team's meeting with some potential ecosystem partner right now in the other room as we speak. So, I would say the activity levels increase dramatically.

But the most notable event is, I mean, because we were in discussion with many of these parties already anyway. But there's a difference when you're in discussion with somebody and you're educating them, you know, this is something new.

It's not something that's in the market and what we deliver from Pixelworks is better than what else has already been in the market. We're bringing some to the market than nobody's ever seen, right? So, we're having to educate the market what it is and the value proposition and why you should do it.

By having somebody like Cameron and Lightstorm Entertainment come out and endorse it enthusiastically like he has and like the group has, the attention, you know, the level of people are standing up at attention and saying, okay, this is something I need to strongly consider.

They're not looking at it as just something that Pixelworks is trying to pitch and sell. This is something that is being adopted by an innovator in the motion picture technology space. And so, I think it's changed the dynamic of the conversation we were having with people already..

Okay. That's helpful perspective, Todd. I'll jump in the line. Thank you..

Our next question comes from the line of Suji Desilva with ROTH. Your line is now open. .

Hi, Todd. Hi, Haley. Congrats on the growth here. Todd, if I heard the last few questions that we've answered smartphone questions [correctly] [ph]. I'm trying to get into the, kind of heads of the OEMs here.

Given the downturn, are they seeing this as a cyclical downturn, or are they thinking about repositioning to go after the smartphone – the gaming smartphone niche that maybe smaller companies have previously been going after that? So that would – I assume put you guys into a much more strategic, sort of position with you guys.

Is that what I kind of heard you saying?.

Well, I think that trend had started. First of all, there is a cyclical downturn. That's just a fact.

Okay? I mean, I've heard all kinds of numbers, right? Such as total China phones shipped, most people were planning six months ago between 300 million and 330 million phones shipped into China or shipped to Chinese consumers is maybe how we should put it. Today, I've heard numbers as low as 250 million to 280 million.

Now within that, it looks like the premium segment's holding up a little bit better than the mid-range segment. Mid-range segment is struggling. Low-end segment is doing okay. Consumers will pull back. Consumers will pull back in China for different reasons than they have here or starting to happen here in the U.S. but they're pulling back.

This is happening at the same time that all the suppliers into the industry, had, we're trying to fulfill an order backlog from exuberant customers six months ago. And there were many LPAs signed, supply agreements, etcetera. you're going to have to – the problem is, there's a boatload of supply, not by us, but by other people in the market.

And so that, given the cyclical downturn being exacerbated by all this material in the market, the phone OEMs are having to make decisions, how do we digest all these obligations we already have and all this inventory we have? And so, there's some shift in what, kind of models they do and what components they put in those models.

This is an industry that likes to move quickly to the next greatest chip, the next greatest display, the next greatest networking, whatever it may be. It is now having to deal with the fact that it has to sell a lot of phones with older technology. So, we are selling newer technology. We don't have a lot of inventory, but into that environment.

Okay? I think prior to that cyclical downturn, there was a trend for the large Tier 1s, we're all trying to start to adopt a sub brand like IQ brand in vivo's case or a model, like the realme gaming series models coming out of Xiaomi. All of the large phone manufacturers were starting to adopt, you know, I wouldn't call it a gaming phone.

I would call it a product line that accentuated gaming performance under a certain portion of their product portfolio. And that's helpful for us. I think that trend is continuing, but it's continuing in the midst of this broader cyclical downturn and a group of people trying to digest a lot of AP inventory, display inventory, CMOS sensor inventory. .

Okay..

You [name it] [ph]. RF inventory. There's a lot RF inventory out in the market right now. .

Yeah. Familiar with that. And so there's a lot of very helpful background, Todd.

And then on TrueCut, very exciting announcement this quarter, can you just update us or remind us, kind of how the revenue model evolves here, or the incremental opportunity for TrueCut revenue in the next one to two years?.

Well, we don't break out TrueCut revenue. We haven't given guidance on it. Today, we have revenue. We're getting revenue. Let me just remind the model of revenue to everybody in the call.

So, our goal is to be very reasonable with our tools, services, and support to the content creators like Lightstorm and others, but we do charge for our technology and our support and services to help them create content that is TrueCut Motion certified. So, there's some revenue there.

In some cases, we negotiate a deal with those content creators so that they have theatrical rights of that content so they can distribute it in theaters, right? They may not have the streaming rights.

So, if that content that has now been created and shown in theaters and the distributors that want to stream that same content to your homes, to devices that in the secondary market, the tertiary market, they would have to license the streaming rights from us if they want to use that high frame rate version of the content.

And in addition, the devices that it would be shown on would have to be TrueCut certified devices. So, there's revenue from device royalties from TrueCut mobile certified devices. So, that's the model. Our expectation is, we still have a lot of work to do. We're very focused on, I would say, the streaming portion of the ecosystem right now.

We're continuing to be very focused on the content creation portion. We're convinced that as those two elements of the ecosystem get onboard. The device manufacturers are – they want this, they want something to help solve these problems, differentiate their devices, and compel people to go out and buy new devices. So, we don't feel that's the issue.

The issue is, more content and then having that content strained in TrueCut Motion. And so as that all happens, we expect that the licensing revenue that would come in addition to the service and support revenue would start to make a meaningful impact on our aggregate financials..

Okay. Appreciate the color..

As that started to happen, we'll break it out. But it's – we're a long ways from that..

Alright. Okay. Got it. Alright. Great. Thanks Todd..

That concludes today's question-and-answer session. I'd like to turn the call back to management for closing remarks..

Alright. Thanks to everybody on the call. I think we do have a series of financial conferences coming up, so there'll be more opportunity for any investors that if you're attending those conferences, we can chat more than. Thank you for attending..

This concludes today's conference call. Thank you for participating. You may now disconnect..