Pixelworks, Inc.

Welcome to Pixelworks' fourth call in fiscal year 2021 earnings conference call. I will be your operator for today. My name is Carmen. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question in the next session. To ask a question during the session, you will need to press star 1 on your telephone. This conference call is being recorded for replay purposes. I would now like to turn the call over to Brett Perry with Investor Relations. The floor is yours.

Thank you, Carmen. Good afternoon and thank you for joining today's conference call. With me on the call is Pixelworks President and CEO Todd DeBonis and Chief Financial Officer Haley Iman. 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 fourth quarter of 2021. Before we begin, I'd like to remind you that various remarks we make on this call, including those about our projected future financial results, economic and market trends, our competitive positions constitute forward-looking statements. These forward-looking statements and all other statements made on this call that are not historical facts are subject to a number of risks and uncertainties that may cause actual results to differ materially. All forward-looking statements are based on the company's belief as of today, Thursday, February 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, annual report 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, restructuring expense, and gain on loan extinguishment. The company uses these non-GAAP measures internally to assess our operating performance. We believe the non-GAAP measures provide a meaningful perspective on core operating results and underlying cash flow dynamics. We caution investors to consider these measures in addition to, not as a substitute for, but 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 to adjusted EBITDA, we would refer you to the 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.

Thank you, Brett, and good afternoon or morning to everyone on the phone and webcast. As reported in today's press release, we closed out the year with another consecutive quarter of growth and increasing momentum entering 2022. Total revenue in the fourth quarter was up 72% year over year, and mobile revenue was another record, growing 29% sequentially and 194% over the year-ago quarter. For the full year, total revenue increased 35% with mobile revenue growing 203%. In addition to strong top line growth, gross margin expanded throughout the year as a result of improved overhead absorption as well as our ability to pass on a majority of the higher semiconductor material cost to customers. Gross margin was particularly strong in the fourth quarter. due to product mix and recognition of licensed revenue from a mobile customer for our soft iris solution that covers several phone models. With regards to our progress with our China-based subsidiary, Pixelworks Shanghai, we are continuing to build out a strong local leadership team. Earlier this week, we announced the appointment of two highly experienced executives to our Shanghai organization. The first is our new Senior VP of Operations, Mr. Frank Liu. who brings extensive experience from similar prior roles at Dialog Semiconductor, MSTAR, TSMC, and Skyworks Solutions. We also appointed Lena Liu as CFO and Senior Vice President of Finance of the Pixelworks Shanghai subsidiary. Most recently, Lena served as the Interim CFO and General Manager for NTT Data Systems and prior was the Global CFO of Chemtechs Chemical Engineering. Together with the restructuring and financing of our Shanghai subsidiary, these most recent appointments are an important element to establishing independence for our Pixelworks Shanghai subsidiary. We remain on track to be positioned to submit our application as early as the latter part of this year. Turning to a review of activity across our primary end markets. Our mobile business had another strong quarter with revenue increasing 29% sequentially and and over 190% year-over-year. Q4 represented the sixth consecutive quarter of sequential growth, with record revenue contribution from both our visual processors and software-only solutions. Briefly highlighting several announced wins since our prior conference call. Two multi-year customers, Oppo and OnePlus, both introduced new models incorporating our soft iris solutions. OPPO launched the brand's first ever foldable phone, the OPPO Find N, leveraging our patented high-efficiency color and brightness calibration technology. Then OnePlus launched the 10 Pro smartphone using our latest Pro software solution, including features such as absolute color accuracy, professional brightness calibration, and ambient color correction. On the visual processor hardware side, Vivo launched three next-gen series of its iQOO smartphones. In December, Vivo launched the iQOO Neo 5S as a refresh of the Neo 5, which was our first-ever win with Vivo in early 2021. The iQOO Neo 5S incorporates our X5 Pro visual processor, coupled with Qualcomm's Snapdragon 888 platform, enabling overall high performance and an ultra-premium 120 Hz visual display experience for gaming. In January, Vivo launches iQOO 9 and iQOO 9 Pro, each also incorporating our X5 Pro visual processor. Specific to the 9 Pro flagship model, it features a 6.78-inch curved flexible OLED screen with LTPO controller capable of 1 to 120 Hz variable frame rate adjustments. at a maximum resolution of 1400x3200 pixels. Potentially even more distinguishing in terms of the uniquely high performance of this smartphone. The iQOO 9 series has been designated as the official smartphone partner of the King Premier League, KPL, which is dedicated competition for the single most popular game in China, Honor of Kings. Acknowledging this doesn't have a lot of meaning for those of us here in the U.S., I don't believe there's ever been an equivalent. The game, Honor of Kings, is estimated to have over 100 million active daily users. As discussed on previous calls, mobile gaming has become a dominant market trend on which nearly all OEMs are keenly focused and attempting to capitalize. However, when combined with the industry's ongoing rapid adoption of more advanced display panels capable of HDR, higher resolution, and higher frame rates, mobile gaming introduces a series of system level and display optimization challenges, most notably resulting in undesirable power consumption and excessive heat. Even the newest premium applications processors do not overcome these challenges. Just consider the IQOO smartphones that I just mentioned. The solution is a distributed visual processing architecture utilizing Pixelworks dedicated visual processors that offload intensive high frame rate processing and upscaling from the APU and GPU. While we've convincingly proven the benefits of our solution through a growing number of design wins for our X5 visual processor, we are constantly driving to challenge perceived limitations and raise the bar on the leading edge of display innovation and high-quality, high-efficient visual processing. Our advanced algorithm team's effort and our visual processor roadmap reflect this ambition. As such, we formally introduced our X7 mobile visual processor, which we believe will redefine the immersive visual performance for gaming on a mobile device. Our X7 visual processor incorporates significant upgrades to the visual enhancement features we've offered in previous generations and also adds several completely new game-changing capabilities. Low power super resolution and our new ultra-low latency motion engine technology, which provides additional ultra-low latency and HFR modes while improving the overall picture quality. The low power resolution feature leverages advanced and proprietary algorithms to boost content resolution from low resolution to high resolution, yet while allowing the mobile device to remain in a low power consumption state. This provides users with a significantly enhanced visual quality for what are frequently low resolution games and simultaneously extends the length of time a game can be played before requiring recharging. Then the ultra-low latency motion engine in our X7 processor is the most innovative and advanced feature that we've introduced in a chip to date. Based on Pixelwork's fundamental industry-leading motion estimation motion compensation technology, or MIMIC, our latest motion engine is specifically designed and optimized for increasing the frame rate of gaming content. In addition to producing superior high frame rate motion, we've coordinated with Unity's game engine platform on an integrated solution to provide the X7 with a unique ability to dramatically reduce the latency during HFR conversion while improving the overall PQ. Unlike streaming of video, processing frames with low latency is critical for competitive gaming, where user interaction frequently and rapidly influences the next frame of content. Notably, the X7's offloading of processing from the GPU can also dramatically lower power consumption, extending the length of time a user can enjoy a sustained high frame rate gaming experience on their mobile device. Our X7 visual processor enables dramatically improved video and image quality on both LCD and OLED screens, with the support of refresh rates of up to 180 frames per second. We are on track to release our X7 for commercial production in the current quarter and expect the first models incorporating the processor to be launched in the Q3 timeframe. Our mobile growth strategy has evolved over the years and is now focused around three key objectives. First, cultivating and expanding an ecosystem that positions Pixelworks technology as the default solution. Second, the expansion of programs, customers, and applications, and third, providing unique capabilities and differentiation to each of our strategic customers. We've made consistent progress in all three of these areas in the recent quarters. Related to ecosystems, we continue to actively collaborate with Unity and its Game Engine platform on the integration and testing of our gaming SDKs that enables gaming customers to target the utilization of our X7 motion engine. Another element of our cooperation with Unity has been joint outreach and engagement of leading mobile game creators and studios in support of our shared goal, which is to bring an immersive gaming experience to the mobile environment. Separately, in December we announced a new cooperation and ISV agreement with MediaTek. This is a meaningful milestone. Historically, our visual processing technology had been exclusively incorporated into mobile devices built on a Qualcomm platform. The cooperation with MediaTek represents an opportunity for significant expansion of our mobile SAM as it will extend the availability of Pixelworks' advanced visual display processing to mobile products based upon MediaTek's Dimensity 5G open resource architecture. Thus far, our team's initial collaboration efforts have been progressing well and at a relatively fast pace. We expect several new models from multiple customers to be announced this year. More broadly, with respect to expansion of mobile programs and customers, our current pipeline of active mobile engagements is the strongest it has ever been. Our initial win with the third tier one mobile OEM that we had previously mentioned is currently slated for launch in the current quarter. Additionally, we believe we can secure engagements with four Tier 1 mobile customers and expand into adjacent, unique personal display markets by the end of this year. Shifting to Truecut, which, as most of you know, has been in development for several years. In mid-December, we formally launched the Truecut Motion Platform. While the underlying fundamental motion grading technology and algorithms for TrueCut have existed and innovated upon for years, have been innovated upon for years, our announced launch marks the availability of a commercially ready platform capable of providing a true end-to-end solution. This includes both a new content delivery format and structure for implementing device-based certification. For those who would like to better understand what TrueCut Motion is all about, we recently published a new TrueCut section of our website and I would encourage you to visit. In conjunction with the Consumer Electronics Show in early January, we announced another significant milestone in announcing our collaboration with TCL. TCL is the first device manufacturer to join and publicly endorse the TrueCut Motion ecosystem. In addition to being one of the world's largest and fastest growing TV manufacturers, TCL has demonstrated a track record of technology firsts, including the first TV brand to introduce quantum dot displays, the first to introduce mini-LED backlight technology, and the first TV brand to incorporate Roku TV. Today, we are both actively promoting and co-marketing with the intent to expand the TrueCut ecosystem, while simultaneously supporting plans to bring the TrueCut motion platform to TCL TVs in North America. As an end-to-end platform technology, realizing Truecut's potential relies on firm acceptance from an ecosystem of partners, from content creators to post-production to content distributors and device manufacturers, many of which are focused on or motivated by different objectives, but with one consistent belief, that high frame rate immersive content needs to be created in order to take advantage of of the technology that currently exists in display devices. This ecosystem collaboration will be able to deliver enhanced high-resolution HDR video with incredible motion while consistently preserving the artistic intent of the filmmaker regardless of the type of size of the screen and all without the consumer having to manually adjust display settings on his or her device. Today and throughout 2022, Our primary focus with TrueCut is on building out the supportive ecosystem. TCL is simply the first partnership that has agreed to be named publicly. However, we continue to be in various stages of discussions and evaluations with several market leaders as part of the building out of the TrueCut motion ecosystem. As we make progress, new ecosystem partners will be announced. In the projector business, we've continued to see further extension of the recovery in both customer and end market demand. Although revenue was down single digits sequentially following a strong snapback in Q2 and 3Q, our fourth quarter projector business was up over 38% year over year. For a full year, projector revenue grew 20%, which understates demand and largely reflects a function of supply limitations. Pixelworks' ability to supply projector SOCs has remained tight, but we've continued to be successful in mitigating any major impacts to our customers. The more prevalent real-time constraints in the fourth quarter and entering 2022 primarily relate to the broader supply chain and our customers' ability to source adequate supplies of other required components. Given this backdrop, we expect Q1 to be consistent with Q4 demand, bucking the traditional seasonality of the projector business. Looking beyond Q1, we have good visibility and strong indications from customers, including existing bookings that extend throughout the end of 2022. We also have a healthy pipeline of design and activity while simultaneously working to migrate certain customers away from legacy SOCs to a smaller number of newer products. Although supply chain dynamics will dictate the pace, we believe the projector business will continue to recover with year-over-year growth in 2022. In summary, the Pixelworks team did an outstanding job during a challenging year with exceptionally strong growth in our mobile business and a recovery in our projector business. The realignment of our Pixelworks Shanghai subsidiary and continued progress in preparation for a local listing was also a significant accomplishment. Our organization has executed well. as we continue to expand our executive team and bring on exceptional new talent at Pixelworks Shanghai in support of our mobile and other adjacent opportunities. Pixelworks is in a great position to execute our growth initiatives this year. Before handing the call over, I want to briefly introduce and welcome Haley Amon as our recently appointed CFO. Haley has been with Pixelworks for more than a decade and served in various financial roles during her tenure. most recently as the leader of our finance and accounting team. She has also been integral to spearheading several of the organizational transitions we've undertaken as part of the realigning our Pixelworks Shanghai subsidiary. It is great to have her as a member of the executive leadership team, and with that, I will turn the call over to Haley.