Pixelworks, Inc.

Good day, ladies and gentlemen, and welcome to Pixelworks' second quarter 2020 and earnings conference call. I will be your operator for today's call. At this time, all participants are in listen-only mode. After the speaker's remarks, there will be a question-and-answer session. And to ask a question during that time, please press star 1 on your cell phone keypad. This conference call is being recorded for replay purposes. I would like to turn the call over to Pixelworks CFO, Mr. Elias Nader.

Thank you. Good day, ladies and gentlemen, and welcome to Pixelworks Inc. second quarter 2021 earnings conference 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 second 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, August 10, 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 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 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. I'm looking forward to walking through the significant developments that we announced as part of our AK filing yesterday. But first, I'll provide a brief recap of our results for the second quarter. Total revenue came in just above the midpoint of guidance at $14.1 million. representing over 50% growth on both a sequential and year-over-year basis. Revenue from mobile set another quarterly record of $4.5 million, and we benefited from a recovery in our projector business, which more than doubled over the previous quarter. Gross margin was also in line with the midpoint of our guidance, improving to nearly 53% as we began passing through higher material costs to customers and realized the benefit of increased unit volumes. Additionally, we did a good job of managing operational expenses in the second quarter, all of which contributed to sequential and year-over-year improvement on our bottom line results. As announced in our 8K filing yesterday, we have completed a series of actions as part of a broader strategic plan designed to accelerate Pixelworks' future growth and success by transforming our existing Shanghai R&D center, Pixelworks Shanghai, into a profit center. This will enable us to enhance the focus of our mobile, projector, and video delivery businesses on their global center in Asia, increasing our ability to access capital, ecosystem partners, customers, and key talent. As part of this strategic plan to establish greater prominence in Asia, we realigned our mobile, projector, and video delivery resources and established our existing subsidiary, Pixelworks Shanghai, to operate as a profit center. This does not represent a fundamental shift from our previous product strategies, but rather an optimization of our operating structure to accelerate the growth of the company. The new structure provides the following benefits. Direct equity ownership by employees through a newly established ESOP in the Shanghai-based subsidiary enhances our ability to attract and retain key talent. we had approximately 75% participation from our existing employees reporting into Pixelworks Shanghai. Two, provides access to a new source of capital that's aligned with strategic relationships and opens adjacent markets for our industry-leading visual processing technology. Three, addresses specific qualification requirements for for our Pixelworks Shanghai subsidiary to pursue an initial public offering and listing of shares on the star market in China. Four, further aligns our resources closer to our key customers, ecosystem partners, and end markets. And five, allows Pixelworks US to increase the focus on its Truecut business as well as other licensing opportunities. In addition to the realignment of resources, Pixelworks entered into an agreement with a private equity fund and other strategic investors that are based in China, as well as with entities owned by approximately 75% of the Pixelworks Shanghai employees, under which committed investments will be made in exchange for equity interest in Pixelworks Shanghai. The private equity funds are affiliates of M2M, to which the company sold common stock in December of 2020. and the strategic investors are funds owned by Verisilicon, Canon, and ChipOne Technology. In aggregate, the capital increase agreements consist of the commitment by employee entities to pay the amounts in RMB equating to approximately $12.3 million in exchange for total equity interest of 5.95% interest in Pixelworks Shanghai. reflecting a pre-money valuation of approximately $173 million. And then by non-employee investors to pay amounts equating to approximately $30.8 million in exchange for total equity interest of 10.45% in Pixelworks Shanghai, reflecting a pre-money valuation of approximately $247 million. Following the closing of these transactions, Pixelworks would continue to hold an 83.6% equity interest in Pixelworks Shanghai. Specific to pursuing a listing of the Pixelworks Shanghai subsidiary on the Star Exchange, we would like to emphasize that this is a lengthy process that is comprised of meeting certain regulatory criteria and multiple periods of review. As such, we currently intend to qualify the subsidiary and apply for its listing as early as Q3 2022, but no later than June of 2023. Longer term, we believe listing the Pixelworks Shanghai subsidiary in China will provide expanded access to future potential capital at what could be more competitive valuations. Coming back to our second quarter results and updates on our end markets. In our mobile business, we continue to gain increased traction across an expanding number of OEMs and launch smartphone models. And in Q2, we delivered the fourth consecutive quarter of sequential revenue growth. Mobile revenue for the first half of 2021 grew by nearly 200% compared to the first half of 2020. Year to date, our visual processing and enhancement technologies have been incorporated into more than a dozen models across a half a dozen different OEMs, including two first-time mobile customers, and two Tier 1 mobile OEMs. A number of these launch phones, using Pixelworks technology, set new industry records for display performance, and several have been ranked by independent third-party reviews as delivering visual quality on par with the industry's ultra-flagships, while selling at a fraction of the price. Even more important has been the very positive feedback from end-user consumers on the display features and functionality enabled by PixWorks across these launch devices. This market validation has reinforced the value proposition of our technology and ability to influence customers' buying decisions, resulting in OEMs coming back and incorporating our solutions into more of their future devices. Further supporting our realignment to directly operate our mobile business from within Asia, We recently recruited Leo Shen to join the company in a newly created role of Senior VP and General Manager of our mobile business. Leo is a seasoned mobile industry executive with over 20 years of mobile experience. In the last 10 years in various roles for Qualcomm China. He is based in Shanghai and he will lead our team's mobile growth and expansion initiatives throughout Asia. During the quarter, we secured several new design-ins for X5 Pro and i6 visual processors, with multiple phones scheduled to launch in the second half of the year as well as in early 2022. In addition, we believe we are close to securing our third Tier 1 mobile OEM customer on a device targeted for launch later this year. We've also continued to secure additional wins for our soft iris solution, which is serving a strategic benefit in the current hardware-constrained environment. In addition to continuously increasing the value proposition of our software-only solution, our mobile team has been actively working to expand soft iris' compatibility for use with a new family of application processors. Pixelworks' mobile value proposition remains well aligned with the most prominent market trends, including mainstream adoption of OLED displays, higher refresh rates on those displays, and 5G-enabled mobile gaming. As OEMs continue to confront the non-trivial challenges of combining these three attributes into their next-generation smartphones, they are increasingly coming to Pixelworks for solutions. While higher frame rates are fundamental to providing the most immersive and realistic gaming experience, The need to render high resolution at ever-increasing frame rates creates a challenging system engineering problem. When not addressed properly, it results in reduced battery life and overheating that impact device performance and the mobile gaming experience. Our visual processors utilize a distributed visual architecture to offload this intensive processing and upscaling both resolution and frame rate from the app's processor. enabling less power drain, lower operating temperature, even during sustained high frame rate gaming, providing a unique mobile gaming experience. According to recent third-party estimates, revenue from mobile gaming in 2020 exceeded $90 billion and represented just over half of the total global video game market. With the growing popularity of mobile gaming in China... an improved gaming experience has become one of the highest priorities for mobile OEMs on their next-generation devices. Our newest and most advanced seventh-generation visual processor, which we taped out last month, is specifically designed to address the fundamental challenges associated with delivering high-performance gaming on a mobile device. I'll defer a full review of the specs and industry-first features until we formally unveil the chip to the market later this year. However, we will begin sampling this visual processor to select customers later this month. We already have an alpha customer committed to use this chip in a device scheduled for mid-next year. Shifting to the projector business. Following initial improvement in order patterns that begin early in the year, we realized a significant recovery in shipments and bookings during Q2, with revenue more than doubling sequentially and increasing 30% year over year. A number of factors contributed this outsized rebound, including channel inventories that were unsustainably low after having adjusted to the weaker sell-through in 2020 due to the pandemic, coupled with improving end-market demand in China and parts of the U.S. During the quarter, our operations team worked with our supply chain partners to eliminate a large majority of the supply gap going into the quarter and meet a significant portion of the customer demand in Q2. As a result of the ongoing supply-constrained environment, we have continued to extend our required lead times on orders and customers are placing orders through early next year. As notable for our projector business, in late July, we finalized a $10.6 million multi-year agreement to develop an advanced SOC for a large existing customer's planned next-generation product family. As part of this co-development agreement, the customer will effectively fund a significant portion of the research and development expenses related to the new product, which we, in turn, expect to deliver and ramp into production at the beginning of 2023. Keeping in mind this relatively long life cycles of our solutions in the projector market, our successful execution of this new SOC that can be repurposed and targeted to the broader projector market represents an opportunity to solidify and extend Pixelworks' market-leading position through the majority of this decade. Regarding the broader supply-constrained environment across the semiconductor industry, and more specifically what we're doing to mitigate the impact on Pixelworks and our ability to meet customer demand in all end markets, our customers have responded favorably to our extending of lead times across all product lines, resulting in increased backlog and visibility for the second half of the year. We've also been making progress with our supply partners to mostly meet anticipated demand throughout the rest of this year. Our operations team, whose focus is on all elements of our supply chain, has been doing an incredible job at successfully backfilling customer demand in Q1 and Q2 and securing supply during the second half of the year. These focused efforts also include back-end assembly and tests where we recently qualified two additional testing houses for projector to give us multiple sources of testing. While we currently have very good visibility into future demand, we expect supply constraints to remain an ongoing challenge and element of uncertainty. Our ability to support further upside demand in mobile and sustained recovering projector beyond Q3 will continue to be contingent on mitigating the prevailing supply constraints in the latter part of this year. Turning to a brief update on True Cut. Following an industry-wide halt of more than a year on theatrical production due to COVID, the major studios have started to reopen and production activity is ramping up again in Hollywood. While progress has been slower during this period, our team's ongoing efforts have been very productive over the last few months, especially as it relates to building out a supporting ecosystem for True Cut adoption. Today, we are focused on a narrow group of existing engagements and in-depth technology evaluations with a combination of prospective Truecut ecosystem partners. We are increasingly optimistic about securing our first breakthrough partners for Truecut North America before year-end. In summary, we've been extremely busy. We are executing well during a dynamic and supply-constrained environment, and we had a solid second quarter with significant growth and improved operating results. Our team continues to be aggressive and focused on securing supply from both our foundry and back-end packaging partners to support growing product demand from our customers. Entering the second half of the year, we have strong bookings from a combination of mobile and projector customers with orders extending into 2022. This includes a healthy pipeline of mobile design-ins on next-generation smartphones across both existing and new Tier 1 mobile OEMs. We are also on track to begin sampling our recently taped out seventh generation visual processor in the third quarter. With the implementation of the strategic plan introduced today, we have repositioned the company to fully align with our customers in Asia and accelerate Pixelworks growth trajectory. Although the magnitude of our growth in the near term will depend in a large part on our ability to secure incremental support from the supply chain, I am confident we will deliver sustained solid revenue growth through the remainder of the year. With that, I'll hand the call over to Elias to review the second quarter financials and provide our guidance for the third quarter.

Thank you, Todd. Revenue for the second quarter of 2021 was $14.1 million compared to $9.3 million in the first quarter of 2021 and compared to revenue of $9.3 million in the second quarter of 2020. As Todd previously highlighted, The sequential and year-over-year revenue increase of over 50% reflected a combination of continued strong growth and record revenue in the mobile market and a solid recovery of demand in the projector market. The breakdown of revenue in the second quarter was as follows. Revenue from mobile increased to approximately $4.5 million, representing 32% of total revenue, driven by strong growth in sales of both visual display processors and software solutions. Revenue from digital projector increased to approximately 8.5 million. Video delivery revenue was approximately 1.1 million. Non-GAAP gross profit margin increased by over 900 basis points sequentially to 52.7% in the second quarter of 2021, from 43.7% in the first quarter of 2021, and compared to 59.2% in the second quarter of 2020. As we indicated last quarter, the lower than historical gross margin in Q1 was primarily the result of product mix and temporary pricing extended to a new mobile customer. We anticipate gross margin will remain near a historical range for the remainder of 2021, while continuing to trend higher from Q2 levels as mobile revenue expands and demand stabilizes in the projector market. Non-GAAP operating expenses were $10.1 million in the second quarter of 2021, compared to $10.2 million last quarter and $9.3 million in the same period last year. On a non-GAAP basis, second quarter 2021 net loss was $2.6 million, or loss of $0.05 per share, compared to a net loss of $6.4 million, or loss of $0.12 per share in the prior quarter, and a net loss of $3.9 million. or loss of 10 cents per share in the second quarter of 2020. Adjusted EBITDA for the second quarter of 2021 was a negative 1.8 million compared to a negative 5.2 million in the first quarter of 2021 and a negative 2.9 million in the second quarter of 2020. Moving to the balance sheet, we ended the second quarter of 2021 with cash and cash equivalents of approximately 23.6 million. In terms of other balance sheet metrics for the second quarter, day sales outstanding were 41 days at quarter end, compared to 54 days at the end of the first quarter. Inventory returns were 16 times in the second quarter, up from 10 times in the prior quarter. Now turning to our guidance for the third quarter of 2021. Based on recent Other trends in our current backlog, we expect another quarter of very strong year-over-year revenue growth in the third quarter, driven by sustained solid demand in both mobile and projector. We expect to remain supply constrained in Q3 for both mobile at 22 nanometers and projector at 40 nanometers. And we are working with our suppliers to resolve all delinquencies by the end of the year. Specifically, we currently anticipate total revenue in the third quarter to range from between 14 million and 16 million. Consistent with my previous comments, we anticipate gross margin to remain near a historical range in the third quarter, supported by sustained trends in mobile and projector, as well as the benefits of better overhead absorption associated with higher total revenues. More specifically, we expect non-GAAP gross profit margin in the third quarter of between 52 and 55%. We anticipate operating expenses in the third quarter to range between 10 and 11 million on a non-GAAP basis. Finally, we expect third quarter non-GAAP EPS to be in the range of between a loss of seven cents and a non-GAAP loss of two cents per share. That concludes our prepared remarks. We will now open the call for questions. Operator, please proceed with managing the Q&A question. Thank you, everyone.

Thank you, presenters. At this time, for the participants to ask a question, please press star 1 on your telephone keypad. Again, that's star 1 on your telephone keypad, and we will pause for just a moment to compile the Q&A roster. We have our first question from Suri De Silva from Roth Capital. Your line is open.

Hi, Todd. Hi, Elias. Congratulations on the strong recovery here and obviously the restructuring announcement. Very exciting for the company. Thank you. Yeah, no problem. So the mobile, Todd, I kind of caught in your remarks, you talked about expecting additional growth from existing and new customers. I want to get a sense of the statement about new mobile customers, if that is an expanding opportunity versus what we might have expected or whether that's just kind of sweeping across the China OEMs that we're familiar with? Just wanted to get some color there.

It's a new tier one. They're going through some particular changes where they're spending a lot of energy on a new family of flagship processors. It looks like they're going to use Pixelworks across their flagship processors. Not done yet, but That's what I'm referring to.

Okay. And would you care, Todd, to provide some timing, time frame of when that might come to market, or is that still to be?

The first of the family of phones would be launched at the latter part of this year. Okay. Late 21. Great.

Okay. And then the restructuring, we're all trying to get a handle on it. So is there any longer-term operating expense impact of this restructuring, and would you be able to provide Shanghai standalone operating metrics profitability? Is that a meaningful... data point to help us with?

Well, we'll probably not provide that here. I mean, we'll have it because at some point in time, you know, we're preparing an operating entity that will be filing to go public on the Star Exchange, and the regulators in China will want to see financials just for that entity. So we clearly – probably the only thing that I would say – Short term, nothing's going to change from an operating expense standpoint, right? Longer term, we will have some added cost in finance because we'll be doing both audit in China and in the U.S., and we'll have finance teams supporting that audit in both locations. I wouldn't say it's a complete duplication, but there's added cost there. And then just the added operational cost of growth. You know, we do expect – right now we're planning for fairly significant growth next year and into 2023, and we'll have to expand the organization to support the growth. Okay, that's helpful.

I'll look for that as that plays out. And then lastly on the projector business, I know, Todd, you gave a lot of color in the prepared remarks, but just kind of the key essence kind of elements of the driver of the sharp recovery here, and more importantly – your comfort with the sustainability of this recovered level of demand. Any help there would be appreciated.

So, Smith, specific to projector, you're talking about the recovery? Correct, correct. I call it a snapback when it comes back 100%. I don't think their end demand went up 100%. Their sell-through didn't go up 100%. Clearly, it's starting to pick up for them, but they were at very low... There's a very big whip, and a lot of it's finished good projectors around the world at distributors and resellers of their equipment. As we went into... the pandemic last year, we saw an overcompensating because if you have this expanded whip of material throughout the process, so raw good materials like semiconductors from us, finished goods that they hadn't shipped out to distributors and VARs yet, and then inventories around the world at distributors and VARs, it contracts. And so we went through the contraction last year, and what you just saw was a bounce back. Now, The business, the actual end business of the projector customers, I would say is at, oh, maybe 70% of what they expect to be normalized when we completely come out of the pandemic. And so it's snapping back to not a full utilization, okay? It's snapping back to the 70% level. And so we would expect probably over, you know, it really depends on a global reopening. You know, the U.S. is fairly open. At least let's hope it stays open. Europe is reopening. Most of Asia, you know, China is even going through some closures right now. And Southeast Asia is going through fits and starts. So... I would suggest that we're probably going to see another year of fits and starts. So we'll see gentle recovery from the rejector market during that year. And then as we go into latter part of 2022 and 2023, you know, I expect then we're going to get up to full recovery. Appreciate the help.

Thanks, guys.

We have our next question from Richard Shannon from Craig in Harlem. Your line is open.

Great. Thanks, Tom and Elias. I'll add my congratulations on a nice bounce back and very fascinating announcements on strategic initiatives here. I think I'm going to follow up on Suji's first question regarding the Tier 1 and ask for a little bit more context here. Obviously, that's the new Tier 1. I'd actually like to step back and get a sense of how the existing Tier 1s are expecting to expand their usage of Pixelworks. I know you've had one that's been in place for a while and a new one, I think, earlier this year. What sense are you getting that they're going to be deploying in greater breadth? And then how would you compare that to the promise of this new Tier 1 here in size relative, you know, if you look a year or two out? How should we think about that?

Yeah. Well, so I'm not going to go into too much specifics about our Tier 1s because a lot of it's confidential. But what I'll say is, of the two Tier 1s, both are still utilizing Pixelworks technology across a broader swath of phones. I would say that the existing Tier 1s we have, we're launching between a half a dozen to ten models each. you know, with various products from Pixelworks between soft iris and, you know, our iris 5 or X5 processor. And then our, you know, they are both focused on the new 7th generation device. And the new OEM, I would say, is, you know, they're starting off very consistent to where we started off with the first two.

Okay, that's fair perspective. Second question, I think, Todd, you announced you're going to work with a new applications processing partner. I wonder if you could, you know, help us understand the drivers of that. Is this driven by particular customers, like potentially this new Tier 1 customer or not? And maybe just kind of give us a sense of when that will happen and when you start seeing benefit from that.

So this was a collaboration that's been going on between the other apps processing company and ourselves for a while. But we needed a catalyst to really, you know, we're all short on resources, right? Even large modem application companies are short on resources. And so as much as the two parties thought it was in both their best interest to collaborate, you need that first program to put a sense of urgency behind it. And so we have one customer that put a sense of urgency behind that work.

Okay, that's fair. Let's see here. A question on, I guess it relates to the third quarter and potentially beyond here, but you're talking about supply constraints. Any way that you could quantify how much you think you could shift this quarter if you didn't have these supply constraints?

I could, but I'm not going to. But I'll try to give you a little bit of color. I'll try to give you a little bit of color. So when you say this quarter, do you mean the quarter we just closed and announced?

Third quarter.

Oh, you're talking about the quarter we're in. Because we definitely left... You know, the revenue that we recorded for Q2 was short of demand, okay? And the revenue in Q3... with the guidance we just gave, is short of demand. And the revenue, not so much in Q2 because that, you know, this really started to, we weren't really, we were a little bit affected in Q1, more affected in Q2, but beginning that it was, you know, for us it was sort of the beginning stages of constraint. We didn't turn any programs down. So I wouldn't say, you know, that's of revenue. When I say we were short of revenue, that's to backlog, right? And the way that backlog exists is it just rolls over to the next quarter of backlog. You know, we're pretty much on a go-forward basis getting... secured orders from customers out in time. So not only are we getting longer lead time, we're getting binding orders, right, that they can't back out of. So if we can't ship it, it doesn't go away. It rolls over. But also in Q3, I would say there was a program, as we started this year and we understood the constraints, there were at least one high-volume program we had to walk away from because we couldn't anticipate enough capacity to support it. That's a little harder to quantify what that would be. I mean, we have forecasts for what it would be, but, you know, so if I really got down and said, you know, how much did supply constraints affect the guidance in Q3, you know, reasonable for backlog that's rolling over to Q4, and considerably more that we probably turned away in new design and activity.

Okay. That is helpful. One last question for me on your funding agreement with the projector customer. I think the last time we did this a few years ago, it had a It provided a step down in ASPs but an increase in gross margins. I'm wondering if you're expecting similar dynamics. And then when do we see the offsets to OpEx here? Does that start later this year or next year? How do we think about that?

Okay. So you're asking me that as mobile increases, will we see a downward trajectory in margins? Is that what you're asking me?

No, it was related to the funding agreement that I think was with the projector customer.

Oh, the funding agreement. Okay. Okay. So this particular development has a lot of outside IP that we bring in for the system of CHIP in addition to our own IP. A lot of the upfront money, you know, we secured I think about half of that contract was paid upfront by the customer or invoiced upfront. Okay. Most of that is going to go right out the door to, you know, design tools, IP providers, third-party support, right? So there will be no offset that hits this year. I would call it neutral to slightly negative for us. We may absorb more costs this year than we actually take in. Next year it will reverse. Next year we'll have offset.

Okay. That is fair enough. That's all from me, guys. Thank you. Thanks, Richard. Okay. Thanks, Richard.

We have our next question from Derek Soderberg from Collier Securities. Your line is open.

Hi, guys. Thanks for taking my questions. I did have a question on mobile. Just want to get a sense of, you know, customer response to Iris. I think for the most part, you guys continue to resign Iris onto the next generation device. or the refreshed version of the device. Are you seeing more discussions with your customers to move from, you know, maybe those higher-end phones to the mid-tier with higher volumes? Any update on that or detail on some of the discussions you're having would be great.

Well, so with the first tier one, they've kept most of the solutions ready. that they use Pixelworks on, I would say, on higher ASP phones, you know, maybe $600 and up. For the second tier one, they're actually the first family of products that they launched Iris, you know, or X5 Pro on, I think ranged from just around $300 to $450, right? So that's new for us, and it was reasonable volume. They're following up with launches that will be announced very shortly. Those are probably a little bit higher-end phones. But on a go-forward basis, we do expect that our solutions will get down to, let's call it the upper mid-range, right? You know, we've had Tier 2 phone companies launch Iris, you know, our solutions down into the $250 price range, you know, with several Tier 2 OEMs. What I found is that those companies... They're struggling with volume for two reasons. One, they're struggling at securing other capacity outside of Pixelworks, mainly AP capacity. And then two, during this environment, it seems to me that, you know, we still have some markets that are service provider markets where the customers are service providers and other markets that are direct-to-consumer markets. And it seems to me in both cases, the customers, whether they be service provider customers or direct-to-consumer models, are migrating to larger OEMs. And I think the market data you can see out there, the top five, top six mobile OEMs in the world, or regionally, whether you look at Europe data or China-only data or the Americas data, It's consistent data, which is the top six have all grown market share and significant year-over-year growth, with maybe the exception of Huawei. The other category, which is where the tier twos fall in, and there's a lot of them, have shrank market share and are about flat year-over-year, and last year was not a very good year So the question was, will this trend continue, and will there be more consolidation at the top six or seven OEMs or not? And in some cases, these Tier 2s spend a lot of money to try to break through and ship a reasonable amount of volume to support their efforts. I would say over the last two years, they haven't got a return on their investments. So the question is, do they continue to do that, or do we see further consolidation over the next two years? I'm not going to answer that. Maybe the market pundits will answer it. I have my own views. Anyway, so with that said, for us, it clearly would – the more we move down – into lower priced phones, whether we use lower ASP solutions from Pixelworks or not, the more volume that would be obtained. But I would also say, you know, we are taking, we treat silicon in a little more revered and access to capacity in a little more revered way this year and next than we probably did in the past. And so, it does affect our roadmap and it will affect If we have an opportunity to significantly grow the top line by selling higher ASP solutions but maybe lower volume because we secure more capacity that way or we use the capacity we have on higher ASP solutions that differentiate higher end phones more. If we can grow the top line and the margin line in a better fashion by going there with our roadmap versus going down, we will do that. And so all of the things we just talked about, Derek, are probably affecting how we go forward, who we pursue as our customers, our ecosystem partners, and the solutions that are focused on our roadmaps.

Got it. Got it. And my apologies if some of this has been covered. I've been jumping around multiple calls.

No, that was a new one. That was a good one.

That was a new one. Okay. And then just quickly on Truecut, I think in the past you guys have spoken about some large potential customers there. I'm just curious how those conversations are progressing. And I'm wondering if you can maybe size that opportunity in some sense, providing sort of pricing details there. But just generally, how are you feeling about you know, TrueCut and some of the opportunities there?

So, you know, the conversation with the customers are going quite well. And so remember, when we say – it's hard for me to say customers because it's a combination. The way we are trying to bring this technology to market is not a pure tools provider, which would go to content creators and post-production houses only. But we do have to go start there and get the content creators and the post-production houses bought in to the value proposition that we bring. I mean, they're a key advocate. If Truecut's going to be adopted, it's because the content creators demanded it, pretty much. So if they don't come along and see the value of what we can bring to their movie-making process and what the end product would look like on all screens that they deliver to, whether theatrical or device, True Cut will not be a success if they don't buy in. So it's very key that we get the content creators and the post-production houses bought in. And I would suggest that we're doing okay there. A lot of interest. A lot of interest. Then another element is you have the distributors of that content. And in some cases, the content creators have more power over the distribution of their content than others. But in the end, if you wanted it to be really successful, the distributors would also have to see the value proposition of the technology. I would say those conversations are still going. They are... It's clear to me that the distributors are busy doing a lot of things. And they're way more focused right now coming out of the pandemic on quantity of content. And there is a lack of talent out there creating content. And just like there's a semiconductor shortage, there is a shortage of new content coming out that they can put on their formats. There are more streaming formats that need content than there is new content coming. And for those of us that subscribe to all these new offerings, whether you let it be Disney or Paramount or Netflix or Amazon, Apple, you name it, Warner, I would suggest that I haven't seen near the quantity of content come on new to these platforms as we saw pre-pandemic. So there's a big pull from them. They're focused elsewhere doing that, right? And we're trying to market technology innovation to them at a time when their number one focus is quantity for quality content. So that's a harder discussion to have. The content people we're having discussion with really see the value proposition. If they see the value proposition enough, they may push the distributors to prioritize what we're doing. And then the third element of the ecosystem is the device manufacturers and licensing. And there we're having positive conversations. And in fact, we have a very large device at OEM that's engaged with us, trying to go back and convince the other ecosystem partners that this is the way to solve some problems. And they want to solve those problems. And they want to solve those problems with Pixelworks. So I think this is the first time publicly, and Derek, thank you for teeing it up, that I've got that detailed about where we're at. What we're trying to do is not easy, but we are making good progress. And as far as the fight, you know, scoping the overall market, you know, the goal would be, you know, long-term. And I'm going to paint long-term. Like, let's just say, you know, five to seven years out. The goal would be that we would have licensees from device manufacturers around the world you know, licensing on their devices the ability to show true-cut mastered technology. And then to have content creators around the world use our tools to create content as part of their post-production process. to deliver a premium experience to all those device manufacturers. And the value would be, put it this way, for a company our size, the opportunity is quite large.

Yep. Got it. No, I really appreciate the color. If I could squeeze another quick one in, just on the Star Exchange. I'm not too familiar with the process. So what are sort of the next steps for that listing and how would that impact sort of the stock trading on the U.S. markets? And, you know, are you guys going to trade on both exchanges? You know, what does sort of the listing mean for your engagements in China? Any benefits there? Just any additional detail on that announcement would be great. Good question.

That's a tough one to answer. On the listing, assume we are successful with the listing, you know, so we apply. and we are approved, and we go and have a listed, our subsidiary listed on the Star Exchange. We have no intention of not keeping our listing in the U.S., right? So both listings will exist. Dual listed. Not quite a dual listed because it's not an ADR or something like that. It's a subsidiary listing in China. And once again, go back to your previous question of TrueCut, depending on how big our licensing business is here, you would own investors in Pixelworks on the NASDAQ would own the forward-looking cash flow capability of that licensing business plus have the majority ownership in the subsidiary that's listed on the Star Exchange. So that's the value of to holding the U.S. shares. And then for the value in China, the fact that we go do this listing, one of the key value propositions, and I'm glad you asked this question because I think it's important for people to understand, is if you're in the semiconductor business like we are, And we're not pushing the process technology envelope, but we are pushing display system engineering envelope and how to do it in a very low-power way. And so we need very good talent. And most of our organization working on that was already in Shanghai. That is a much larger talent pool. as far as electrical engineers, software engineers that work on display, and people with display experience. There's a much larger talent pool there than there is here. And so it's very important that we have the ability for that talent pool to feel like they have a vested interest in the company they're working for. And they do now. I mean, not that our employees previously didn't have... incentive stock in Pixelworks USA. They did. But it's very difficult for local people over there to own it long term and keep it and truly value it. They understand the value of a local listed company. And so once we announced that we were going to go do this internally and we set up the ESOP and we went out and polled our employees, we saw incredibly strong demand for us to go do this, to make this change. And the participation level we saw by the way we did it, that should make any investor in this company feel very good. When you have 75% participation, these people wrote their own checks to invest in Pixelworks Shanghai at a pre-money $173 million valuation at a time when our market cap was probably running at $150 million dollars. And then the ability to retain new talent that we compete every day over there for is much easier when you're set up and organized the way we are and we have the promise of this star listing. So really, to me, the biggest benefit is the retention and access to talent. The secondary benefit is capital. There's a lot of capital over there and There's a lot of capital here. For a small semiconductor company, it is hard for us to get the attention sometimes of the capital markets here in North America. For a large semiconductor company, maybe not. But for a small semiconductor company, yes. For a small semiconductor company in China, it is not hard to get the attention. So hopefully that helped answer your question.

Thanks for the color again. Thanks, guys.

Thanks, Derek.

We have a follow-up question from Suji De Silva from Roth Capital. Your line is open.

Hi, Todd. Thanks for indulging me for the follow-up. There's a lot going on this quarter here. On the U.S. business, when you do the restructuring, you mentioned true cut and licensing. I just want to make sure If the mention of licensing along with Truecut was purposeful in that there's a pipeline potentially of patent-type opportunities that have been dormant and underserved because you've been busy, is that the case, or is that just meant to be a generic label for Truecut?

It was purposeful. Most things I put in, I spent a lot of time on these prepared remarks. Okay? I'm glad you caught it, Suzy. It is not about our patents. I mean, when you license IP, if you license IP, let's say IP that would be integrated on somebody else's system on a chip, part of what they want is the patent protection for the IP you license them, you know, the methodology that you want. Part of what they want is your system know-how and your support, et cetera. I would say that's referring to that we've always had opportunities to license, you know, we have a, We have a lot of intellectual property. We used to be in the TV chipset business. We're not in it anymore, but we have very good IP there, right? We have some general display IP that we apply to all of our solutions, whether they be in the projector space, mobile, elsewhere. And then we have some very specific IP for our target markets. We've been approached on all the above to license the IP. Up to this point, I felt it would defocus the company on trying to get the momentum going in mobile and in Truecut. I feel like we are now at a time where we're sort of off and running, and we're hiring, and it may be okay to go out, especially if they're in adjacent markets that are non-competitive, what we feel our core businesses are, to go out and pursue some of those. And so I think that's what it was in reference to.

Great. And the other one, I'll try to make it quick, is in the 8K yesterday, you mentioned some new investors, which were very interesting, Verisilicon, Cayden, and Chipon. I don't know the other two, but I know Verisilicon pretty well. They're good at pumping out chips. Could this increase the velocity and the cadence of your product introductions going forward, or was there any specific sort of thought in that investor base, or any color that would be helpful?

There was specific thought of every one of those. We've been in dialogue prior to the investment with every one of those companies. I'll give a little context. You know who Verisilicon is. For those on the call that don't know who Verisilicon is, they're a turnkey ASIC and IP provider that recently went public about nine months ago on the Star Exchange themselves. And they're doing very well. Then there's Canaan, who's also went public, and they're a Chinese-based ASIC provider that has done both Bitcoin mining ASICs and recently they announced a very neat Edge AI processor. And so we're in discussions with them about some adjacent markets and collaboration. And then ChipOne is a display company. but not a display processing company. They're more in the very front end, DDICs, T-cons, analog front ends, devices for large displays that you would see a lot in Asia, like advertising displays all over. And then, of course, they're getting into the mobile phone market, et cetera, and so we're in discussions with them about some adjacent markets. And so all of those investments, it was more than money at a reasonable valuation. It was also about collaboration. Okay, thanks, Todd.

There are no further questions set this time. I will hand the call over back to the presenters.

All right, well... I'll let Elias finish in a minute, but I just wanted to say, listen, a lot to digest. I hope this was helpful for everybody, and thanks for your attendance today.

Yeah.

Anything else?

No, just to say thank you for participating, and we are excited about this ride we're taking. We want you guys on the same train. Take care. Thank you.

Ladies and gentlemen, this concludes today's presentation. Thank you for participating. You may now disconnect.