Pixelworks, Inc.

Good day, ladies and gentlemen, and welcome to Pixelworks Inc's fourth 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, Andrew. Good afternoon, and thank you for joining today's call. With me on the call are Pixelworks President and CEO Todd DeBonis and Chief Financial Officer Haley Amon. 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 2022. Before we begin, I'd like to remind you of the various remarks we make on this call, including those about projected future financial results, economic and market trends, and 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, Thursday, February 9, 2023. 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, 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, net loss per share, Non-GAAP measures exclude amortization of acquired intangible assets and stock-based compensation expense, as well as the tax effect of the non-GAAP adjustments and the impact of non-GAAP adjustments to redeemable non-controlling interests. The company uses these non-GAAP measures internally to assess 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, 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 referred to net loss attributable to Pixworks Inc. as simply net loss. For additional details and a reconciliation of GAAP and 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.

Thank you, Brett, and good afternoon to those participating on the call. I'm pleased to be joining you today from a morning in Shanghai. I've recently been catching up with the team and our customers. Let me start with a few observations that I've made over the last two weeks here in China. First, with the rollback of China's strict COVID policies in mid-November, What many might not realize is that a majority of people here, including nearly all of the employees throughout China, our employees, spent December at home with COVID and then recovering, making it a very weak month in terms of productivity. It wasn't until the turn of the calendar year that real normalization began and increased productivity and the return of the consumer engagement. And having personally witnessed the tail end of the recent Chinese Lunar New Year holiday, It is readily apparent that people are enthusiastic about getting back to normal, traveling locally, and spending again. At a high level, these are encouraging and positive signs not only for our China-based employees and their families, but also for Pixawork's overall business as well as the global macroeconomic environment. Turning to a recap of our financial results. For the fourth quarter, both top and bottom line were slightly lower than the midpoint of our guidance. Total revenue was up 2% year over year as our team continued to execute well in the face of growing macro and end market specific challenges. Looking at the full year, we delivered double digit growth across each of our target end markets and total revenue growing 27% over the prior year. And this was following our annual growth of 35% in 2021. During what has been a challenging period for most of the semiconductor industry, this solid growth combined with Pixelworks history of technology leadership and visual processing has served us well in the local private capital markets here in China. In late December, we completed the agreement to take in another strategic investment in our Shanghai subsidiary, which was fully closed and funded in early February. The latest capital investment, which was funded by two previous investors, as well as Pixelworks Shanghai employees generated proceeds equivalent to approximately $15.7 million in exchange for just over 3% equity interest in the subsidiary. Recalling that some U.S. investors were skeptical when we announced the first private placement in Pixelworks Shanghai in October of 2020, I would highlight that this third round of strategic investment valued the subsidiary at more than $500 million. And today, Pixelworks Inc. continues to hold a majority equity interest of approximately 78%. Collectively, these strategic investments are a testament to the recognized value of Pixelworks technology in China, as well as the future growth opportunity of the business. These transactions have also served to fund our ongoing growth initiatives, as well as properly capitalized Pixelworks Shanghai in advance of applying for a local listing later this year. shifting to the end markets and starting with mobile. The industry-wide inventory correction in smartphones, coupled with softer consumer demand in China, continued to play out as expected, resulting in lower mobile revenue in the fourth quarter. As discussed on our last conference call, we've kept internal inventory of our visual processor ICs lean, while reducing our channel inventory back to normal levels. For Pixelworks and Q4, the impact is largely a derivative of the current market dynamics, with mobile OEMs slowing the pace of new smartphone launches, rescheduling various other models, and canceling certain programs as they prioritize working down excess component inventory. Although the gap in OEM launches of next-gen smartphone models has temporarily paused our quarterly growth, Our mobile business still had a very solid year in spite of the weaker overall smartphone market. For the full year, mobile revenue was up 17% over 2021, which was up 200% over 2020. With our visual processing solutions incorporated in 20 newly launched smartphone models in 22, our mobile customers continue to include nearly all of the tier one handset OEMs and their affiliate premium brands in China. And despite taking a little longer than originally targeted, I'm confident we will announce models from the fourth tier one for our visual processor lineup in 2023. Underpinning or expanded penetration of these tier ones has been our commitment to maintaining a deep level of engagement with the customers and deliver uniquely differentiated visual performance, as well as our ongoing strategic initiatives to cultivate a more collaborative mobile display ecosystem. As highlighted on previous calls, we've made multiple groundbreaking achievements over the last year in our efforts to champion a comprehensive and engaged ecosystem for mobile gaming. This included our first ever direct collaboration with multiple leading gaming engine platforms and design studios, which we expect to yield the release of a series of additional top mobile games over the coming year that are specifically designed to support the rendering accelerator in our X7 visual processor. As the most recent example of our broader ecosystem efforts, in November we announced an expanded collaboration with MediaTek to incorporate Pixelworks Visual Processing Pro software into their latest Dimensity 9200 5G smartphone chipset. This new cooperation specifically targeted the enabling of precision color and high frame rate displays, ensuring that smartphones built on the Dimensity 9200 platform are capable of delivering a true next-gen flagship gaming experience. This ongoing technical collaboration will serve to further improve the gaming experience and encourage broader market adoption of high frame rate mobile gaming models and content. Briefly highlighting a few recent announced mobile wins. In late December, The Honor 80GT and iQOO Neo 7 Racing Edition smartphones were both launched incorporating Pixwork's upgraded X5 Plus visual processor. Each of these phones are built on Qualcomm's recently released Snapdragon 8 Plus Gen 1 mobile platform, and they support 120 Hz refresh rate while leveraging Pixwork's X5 series of our patented motion engine technology. HDR enhancement, and multiple other dimensions of visual effect enhancement, all of which are tailored to provide a superior high frame rate gaming experience. In January, OnePlus launched its latest flagship smartphone, the OnePlus 11, incorporating Pixelworks X7 visual processor. As one of the first phones launched with our newest generation X7 series, The OnePlus 11 redefines the meaning of visual excellence for mobile gaming. Built on the Snapdragon 8 Gen 2 mobile platform, this smartphone sports an eye-catching 6.7-inch 2K curved display with the real LTPO 3.0 technology while simultaneously supporting refresh rates of up to 120 Hz. Following the first of its kind in-depth collaboration with OnePlus on this flagship, this smartphone leverages the core technologies in our X7 chipset and features our new ultra-low latency motion engine for high frame rate together with low power super resolution for simultaneous display in 2K resolution. Earlier this week, OnePlus followed up with the launch of the OnePlus Ace 2 smartphone, also incorporating our X7 chipset. The OnePlus Ace 2 is built on a Snapdragon 8 Plus Gen 1 mobile platform and comes with a 1.5K AMOLED screen supporting refresh rates up to 120 Hz. This model similarly features RX7's new ultra-low latency motion engine and low power super resolution, together with always-on HDR and industry-leading color calibration. Also noteworthy is that Pixelwork's ultra-low latency motion engine technology in both the OnePlus 11 and the OnePlus Ace 2 smartphones have now been optimized for over 100 of the most popular mobile games. Turning to the latest developments of our TrueCut Motion platform, following the release of Lightstorm Entertainment's Avatar in September, I can now confirm that Pixelwork's TrueCut Motion grading was also utilized in James Cameron's newly released Avatar The Way of the Water. This long-awaited sequel, frequently referred to as Avatar 2, was distributed globally to theaters by 20th century in 4K HDR high frame rate and uniquely shown in cinematic high frame rate. When I first looked, the film had surpassed gross box office sales of $2.1 billion, ranking it among the top five highest grossing movies of all time in less than two months. Equally amazing, whether they realize it or not, is that tens of millions of people from around the world have now personally experienced True Cut Motion. Most importantly, this extremely successful and highly praised release proves that there is a global ecosystem in place capable of supporting cinematic high frame rate, paving the way for expanded industry adoption. As previously announced, True Cut Motion will also be featured in the re-release of Titanic, remastered in 4K HDR later this month. These three high profile titles have significantly heightened the interest and awareness of our True Cut Motion platform. We aim to continue building on the strong momentum in 2023 by assembling a critical mass of theatrical titles together while growing a global home entertainment ecosystem. Shifting to our projector business, demand remained relatively steady through the back half of the year, with revenue in the fourth quarter increasing more than 13% year over year. For the full year, revenue was up 23% as projector customers placed significant orders in response to very tight supply environment. Generally speaking, projector OEMs have continued to see the gradual improvement in their supply chains. However, supply lead times and pricing on certain components have yet to fully normalize. Combined with two consecutive years of roughly 20% growth, the current consensus among these customers has been to moderate their orders and expectations entering 2023 until they have better visibility into the global macro trends and end market demand. More specific to Pixelworks and the fourth quarter, I'm pleased to report that the team successfully completed a significant milestone on our co-development project with our largest projector customer. As a result of this milestone, we recognized an R&D credit, reducing our OpEx for the quarter. All remaining activity associated with this co-development project remains on track, and we currently expect this new SOC chip to be available for production at the end of this year. Briefly following on my comments last quarter related to end of life, we implemented a group of legacy IC products. We have historically sold in the very niche video delivery applications. As previously discussed, these applications typically require unique packaging and lower unit volumes, making them increasingly difficult to source materials for and supply efficiently. We received solid customer response on the last-time purchase orders for the fourth quarter, which contributed to a sizable one-time increase in revenue. The EOL of these non-strategic products will lower the quarterly revenue contribution from video delivery going forward. However, it will also eliminate operational inefficiencies and enable a more productive reallocation of our team and resources. Although going forward, we will address a relatively small legacy market in which we will continue to market and sell a selective series of our transcoder ICs for consumer applications in Japan and as well as OTA devices in the US. In summary, the team has done a good job of mitigating impacts of both the macro and industry-specific headwinds over the past couple of quarters. Although we expect market conditions to remain challenging in the current quarter, the entire organization is now well capitalized to continue executing on our longer-term strategic initiatives. This includes ongoing efforts to further expand the ecosystem in support of mobile gaming, including an aggressive visual processor roadmap and our TrueCut Motion platform, while we continue to prepare our Pixelworks Shanghai subsidiary to apply for a star market listing. We believe we are well positioned for the market recovery in mobile, and are currently seeing channel inventories and design activities support this with a growing pipeline of design-ins for our X7 visual processor. In addition, we are in target to introduce a new mobile visual processor in the second half of this year and sample our new projector SOC in Q2 of this year. Lastly, We also continue to field significant inbound interest and are evaluating multiple prospective strategic license engagements that represent the potential for expanded growth opportunities, spanning both our existing and new adjacent end markets. Taking all together, I firmly believe that we can achieve renewed momentum and resume our recent growth trajectory in the coming quarters of 2023. With that, I'll hand the call to Haley to review the financials and provide our guidance for the first quarter.