Pixelworks, Inc.

Good day, ladies and gentlemen, and welcome to Pixelworks Incorporated's first quarter 2021 earnings conference call. I will be your operator for today's call. At this time, all participants are in the 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 Pixelworks CFO, Mr. Elias Nader. Thank you, sir. Please go ahead.

Thank you. Good afternoon, everyone, and thank you for tuning in to today's call. 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 Pixelworks' press release issued earlier today announcing the company's financial results for the first quarter of 2021. 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, Tuesday, May 4th, 2021. 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, our annual report on Form 10-K for the year ended December 31, 2020, 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 expenses, net loss, and net loss per share. Non-GAAP measures exclude amortization of acquired intangible assets, stock-based compensation expense, and restructuring expense. The company uses these non-GAAP measures internally to assess our operating performance. We believe these non-GAAP measures provide a meaningful perspective on our 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 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. With that said, I will now turn the call over to Todd for his opening remarks. Thank you.

Thank you, Elias, and good afternoon to those joining us on today's call and webcast. As outlined in today's press release, our first quarter financial results were in line with our expectations and with all metrics coming in at or above the midpoint of guidance. While anticipated Q1 seasonality in the projector market resulted in lower consolidated revenue sequentially, with weakness largely offset by record revenue from mobile. which expanded to 44% of total revenue. Consistent with our guidance, gross margin in Q1 was lower than historical average due to a combination of higher supply chain costs, product mix, and a new mobile OEM that ramped during the quarter. This anomaly is now behind us, and we are positioned for gross margin to return to our historical range in the second quarter. Starting in Q2, we have passed on higher material costs to customers while also benefiting from increased unit volumes and improved product mix. Coming off a challenging global demand environment in 2020 due to the pandemic, we saw improving order patterns during the first quarter that will have a positive impact on our guidance for Q2. Additionally, we have seen a positive response to our increased lead times across all product lines and now have better visibility on product demand through 2021. Most importantly, we sustained all fundamental R&D efforts over the past year, which was critical to securing the new wins we've announced year to date and the expanded opportunity pipeline we have today. Specific to the mobile business in the first quarter, revenue grew 91% sequentially and was up 58% year over year to a quarterly record. This marked the third consecutive quarter of 50% plus sequential growth in mobile. We believe the mobile market is primed for growth in 2021 as the industry and end market demand recovers. Third-party research firms are forecasting global smartphone units to grow 7% to 8% this year, with OEMs returning to their more traditional seasonal launch cycles for next-generation phones. A significant portion of the expected growth this year will come from China, where consumer demand has fully recovered. According to research from Cowen, total unit shipments of smartphones in China were up an estimated 100% year-over-year in Q1 over the first quarter of 2020. Additionally, they projected the penetration of 5G-enabled smartphones shipped in China was a record 76% of units in the month of March. All these data points and current market dynamics bode well for Pixelworks in the mobile segment. where we have focused a large majority of the company's resources. More broadly, the ongoing global adoption of 5G technology will continue to be an important trend this year, as it enables the efficient delivery of higher quality video and gaming content to mobile devices. Research firms, including Gartner and CounterPoint, project the global mix of 5G-enabled devices to more than double year over year and represent at least one-third of total smartphone unit shipments in 2021. As 5G expands and becomes mainstream, the high associated value proposition of our leading visual processing technology becomes applicable to an increasing share of total smartphone units. Another prominent and favorable trend is the growing shift by OEMs to more advanced and OLED displays that support higher refresh rates of 90 to 144 Hz. The primary benefit of these higher refresh rates are smoother scrolling and animation, with the early adoption largely concentrated in flagship and gaming-centric phones. Today, adoption of higher frame rates by mobile OEMs is still in the early ends, as smartphones supporting 90 plus Hz likely accounted for less than 10% of the market in 2020. While the penetration will be much higher in 2021, there are two existing drawbacks for consumers. The first is limited available content that supports being displayed at higher frame rates, and the second is the increased power consumption associated with refreshing the screen at higher rates. Our visual processors address both challenges, providing the ability to upscale low frame rate content to higher rates while reducing the load on the app's processor. resulting in significant improvements in visual quality and power efficiency. Also specific to OMOLED displays, they create the need for additional color management in order to display colors accurately, an area that Pixelworks excels and we have been actively promoting for many years. While some degree of color management is frequently offered in the applications processor, our solutions take color accuracy to another level, providing both meaningful differentiation as well as high-efficient color calibration. Third-party tests have consistently proven Pixelworks delivered the best color accuracy in the industry. With the availability of OLED displays expanding beyond Tier 1 flagships and the cost coming down, more OEMs are adopting these displays and thus paying more attention to delivering accurate color. The increased focus on color accuracy only makes sense when implemented together with color calibration due to the frequent manufacturing variances inherent in OLED displays. Pixelworks' patented color calibration, which can be integrated using our soft iris solution or with our visual processors, is extremely efficient and reduces the time required to calibrate a mobile device across all standard color gamuts during the manufacturing process to under 30 seconds. I also want to emphasize a few important elements of our soft iris solution or software-only solutions to address certain common misconceptions. First, our soft iris solution could only be applied on platforms with relatively high-end application processor that has certain video display pipeline capabilities. Although simpler and less expensive to incorporate into our smartphone than a chip, the requirement for soft iris to run on a reasonably robust video display pipeline prevents it from being a solution for most lower-end smartphones. Perhaps most important, our soft iris solution is not feature static and, in fact, is currently in its third generation. We continue to upgrade the solution with new and optimized capabilities to deliver incremental value to OEMs. As we add functionality, we're also able to gradually increase the price of soft iris when used as a standalone solution. At a more macro level, one of the fastest growing use cases is mobile gaming. The combination of more powerful GPUs, ultra-low latency 5G, and Wi-Fi 6 is enabling multiple very popular interactive games that previously could only realistically be played on a console or a PC to now be played on a mobile device. In addition to the gaming phones announced in recent months that incorporate Pixelworks technology, we have strong indications from multiple mobile OEMs that gaming will be a lasting and growing trend. They are focused on optimizing the gaming use case in both their premium and flagship phones. Higher frame rates are fundamental to providing the most immersive and realistic gaming experience, yet also create several pain points in a mobile environment. Our family of visual processors provide a distributed visual architecture that solves multiple challenges, such as motion clarity, color depth, and contrast and eye comfort. However, the single largest pain point for mobile gaming is battery life and heat dissipation. Rendering and displaying dynamic content, whether gaming or video, consumes battery life faster than all other use cases combined. Distributing or offloading the visual processing to our processor and upscaling the frame rate of the displayed content with Pixelwork's smart motion processing algorithms decreases the workload of the AP, reducing overall system power consumption. We've demonstrated that this distributed visual architecture with Pixelworks coprocessor results in up to a 30% less battery drain and up to 10 degrees Celsius lower phone temperature during sustained high frame rate gaming. Beyond solving key pain points, we provide a path to higher frame rate modes that fully utilize the capabilities of the display. This includes providing advanced features such as AI-optimized picture quality, real-time SDR to HDR conversion, dark noise suppression, and smooth auto-adaptive brightness control. As highlighted on our previous call, we introduced our most recent sixth-generation i6 visual processor in Q4, which is the first to incorporate AI-adaptive picture quality. The dedicated AI engine in our i6 processor utilizes power-efficient inferencing that augments Pixelworks' extensive knowledge base and industry-leading display processing algorithms with numerous real-time inputs from content, sensors, display, user preferences, and the environment. This enables increased adaptability of the overall picture quality in real-time, including color depth, contrast, and sharpness, while adaptively preserving viewing clarity in any lighting environment. Looking at mobile wins we've announced year-to-date, Pixelworks visual processors and software solutions have been incorporated into a total of 11 models launched by six different mobile OEMs, including our second Tier 1 Vivo, as well as another first-time customer, Lenovo. Brief highlights from the recent wins include our long-time customer and consistent early adopter, Asus, became the first OEM to incorporate Pixelworks' sixth-generation i6 visual processor with its launch of the ASUS ROG Phone 5. Featuring a 6.78-inch OmaLED capacitive touchscreen display and supporting up to 144 Hz refresh rate, this ultra-high performance gaming phone leverages the full suite of advanced features in our i6 chip, including AI-based adaptive picture quality as well as AI-enhanced real-time SDR to HDR conversion. Also during the quarter, OPPO extended the use of our proprietary and industry-leading color calibration and flesh tone management in the launch of the OPPO Find X3 and Find X3 Pro series, while also retroactively incorporating Pixelworks software solution via a firmware upgrade into the Reno5 Pro Plus. In mid-March, we are pleased to have announced the second Tier 1 mobile OEM, Vivo, in conjunction the launch of the iQOO Neo5 smartphone, designed to deliver an unmatched 5G gaming experience. The iQOO Neo5 incorporates our X5 Pro processing solution to enable a unique gaming experiencing mode, while also leveraging Pixelwork's patented motion estimation and motion compensation technology that optimizes content for power-efficient HDR gaming at refresh rates up to 120 Hz. Also unique to the iQOO Neo5 is a dedicated optimization in close collaboration with Pixelworks that boosts the device's display performance while playing a select group of popular mobile games, including Game for Peace, Honkai Impact 3, and Perfect World. Subsequent to the launch of the Neo5, iQOO released a derivative and renamed version of this smartphone in India, the iQOO 7 5G, which also incorporates the X5 visual processor. Additionally, OnePlus incorporated Pixelworks technology across its flagship OnePlus 9 series of phones following the success of the highly acclaimed display performance of its 8 series in 2020. The OnePlus 9 Pro features a 6.7-inch fluid OLED display with WQHD Plus resolution supporting 120 Hz coupled with our X5 Pro. Leveraging Pixelworks' patented dual-motion engine technology optimized for variable high refresh rates, the OnePlus 9 Pro can deliver superior visual quality across a wide range of content, video formats, frame rates, and apps, while simultaneously optimizing power consumption. As previously mentioned, Lenovo became a new mobile customer in early April with the launch of the Lenovo Legion Phone Dual 2. Utilizing Qualcomm Snapdragon 888 5G mobile platform and featuring a 6.9-inch OLED display that supports 144 Hz refresh rate, the Legion Phone Dual 2 incorporates our i6 processor to provide an immersive HDR experience with multiple levels of content-optimized color depth, contrast, and screen adaptiveness. Most recently announced was the TCL 20 Pro 5G, which also incorporates our i6 processor with AI-enhanced picture quality. Featuring TCL's new Next Vision 2.0 display and positioned as a more affordable flagship, the TCL 20 Pro 5G is targeted at disrupting the premium tier of the smartphone market. Also notable, a recent third-party report published by DxOMark ranked the TCL 20 Pro 5G as having one of the highest ever overall display scores across top-performing smartphones. Collectively, these announced wins demonstrate expanding adoption across a series of new and existing customers that are turning to Pixelworks mobile displays as solutions and expertise to differentiate their next-generation devices with industry-leading display performance. We continue to have a robust pipeline of design-ins on smartphones with planned launches in the coming months and quarters. Looking at our current pipeline, we are on track with our goal for 2021 to to double the number of devices launched by customers in 2020. This includes a healthy mix of phones incorporating our i6, X5, and soft iris. We expect the growth trajectory in 2021 to be strong for both our hardware and software solutions. Shifting to the projector business. As anticipated, we saw a decline in orders for Q1, which is consistent with the seasonally weak first quarter of Japanese OEMs managed down inventory prior to the fiscal year end. However, during the quarter, we started to receive upside orders from projector customers for Q2 and extending into the second half of the year. Improving order patterns have been driven in part by stronger demand in China, where the recovery continued a solid and steady recovery of demand from education and consumer segments in the U.S. Another contributing factor to the increased orders we are seeing is that the projector customers recognize the broadly reported supply constraints across the semiconductor industry. Lead times on orders have extended to 20 weeks, with some customers now willing to place orders as far out as Q4 of this year. As a result, we have bookings in support of a meaningful uptick in projector revenue in Q2. We've also put in place dedicated and aggressive initiatives focused on securing supply from our foundry and assembly and test partners to close the gap between supply and demand. That said, the magnitude and pace of the continued recovering projector beyond Q2 is likely to be partly contingent on successfully mitigating the ongoing supply constraints in the second half of the year. More specifically, to comment on supply constraints, we are seeing gaps to meeting 100% of our demand across all our product lines, but have made significant progress with the help of our supply chain partners in closing those gaps to meet approximately 90% of our Q2 demand. Similar to other semiconductor companies, we expect these constraints to remain a headwind throughout 2021. Turning to a brief update on TrueCut. As discussed on previous conference calls, the growth and sustained trend of direct consumer video significantly increases the value proposition for our TrueCut solution. As part of our ongoing effort to break through and secure our first TrueCut customer in North America, We are continuing to work closely with high-profile creatives and leveraging key influencers in Hollywood. We've also continued to narrow our focus on advancing existing engagements and evaluations that are ongoing with a select group of leading U.S. studios and streaming service providers. Each of these prospective engagements recognize the challenges associated with streaming UHD content to high frame rate capable smart TVs and Truecut's unique ability to mitigate those challenges. The remaining gating question is how high of a priority do they put on addressing the problem? While it is still too premature to model or forecast the exact timing, we remain optimistic about securing the first commitment for Truecut in the U.S. in the coming quarters. In summary, coming off a challenging year in 2020, I'm very pleased with the progress we have made across our business and expect strong growth from both mobile and projector in the second quarter. While the supply constraints I just discussed could moderate the trajectory of Projector's continued recovery, as well as limit the full potential of our rapid growth in mobile, we are confident that we've reached an inflection point from the impacts of the pandemic. As a result, we expect to achieve strong top-line growth, expanded gross margins, and improved operating results over the coming quarters. The value proposition of Pixelwork's visual processing solutions and display expertise in mobile is poised for continued growth commensurate with the mainstream adoption of advanced OLED displays, higher refresh rates, and 5G-enabled mobile gaming. Today, we have a solid and growing pipeline of new mobile customer design-ins for the remainder of 2021, and we remain on track with our goal to double the number of new smartphone models launched. With that, I'll hand the call over to Elias to review first quarter financials and provide guidance for the second quarter. Elias?