Pixelworks, Inc.

Good day, ladies and gentlemen, and welcome to Pixelworks Incorporated's second quarter 2023 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, with Shelton Group Investor Relations. Please go ahead.

Thank you, Benny. Good afternoon and thank you for joining us on today's call. With me on the call are Pixelworks President and CEO Todd DeBonis and Chief Financial Officer Hailey Aman. The purpose of today's conference call is to supplement the information provided in Pixelworks press release issued earlier today announcing the company's financial results for the second quarter of 2023. Before we begin, I'd like to remind you that 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, Tuesday, August 8, 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, the company's annual report on Form 10-K for the year ended December 31, 2022, and subsequent SEC filings for a description of factors that could cause forward-looking statements to differ materially from actual results. Additionally, the company's press release and management statements during this conference call will include discussions of certain measures and financial information in GAAP and non-GAAP terms, including gross margin, operating expense, net loss, and net loss per share. Non-GAAP measures exclude amortization of acquired intangible assets and stock-based compensation expense, as well as the tax effect of these non-GAAP adjustments. 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 substitute for nor superior to the company's consolidated financial results as presented in accordance with U.S. GAAP. Also note throughout the company's press release and management statements during this conference, we refer to net loss attributable to Pixworks Inc. as simply net loss. For additional details and reconciliations of GAAP to non-GAAP net loss, and gap 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 Pixelworks CEO, Todd DeBonis. Please go ahead.

Todd DeBonis Thank you, Brett, and good afternoon and welcome to all of you joining us on today's call. As reported in today's press release, our top and bottom line results for the quarter were within guidance and reflected the rebound from a uniquely challenging first quarter. Our 37 percent sequential revenue growth in the second quarter was primarily driven by increased shipments of our mobile ICs, resulting in mobile revenue more than doubling and reaching a record 50 percent of our total revenue. Combined with a moderate sequential increase in home and enterprise attributable to stabilization in the projector market, Q2 marked the end of a smartphone inventory correction for Pixelworks, which gives us confidence in resuming our growth trajectory. Before jumping into commentary on our end markets, I believe it would be helpful to first provide some brief high-level perspective on what we're generally expecting in terms of the rest of the year. First, we believe our sequential revenue growth in Q2 was not a one-quarter event. Even though it was coming off an unusually low base in the first quarter, we expect continued sequential growth in mobile for the balance of the year. Looking at our internal forecast for the second half of the year, which today is largely booked, we also anticipate mobile revenue to reflect significant top-line growth over the first half of 2023. With that as a background context, I'll start a review of our mobile business. As widely reported, many component suppliers that sell into the smartphone market are continuing to experience weaker demand as distributors and smartphone OEMs continue to work down previously overbuilt inventories. This, combined with a more sluggish recovery than expected and in demand, has contributed to a prolonged market weakness, with prevailing consensus suggesting that current inventory correction in the smartphone supply chain will likely extend into next year. As reflected by the sequential increase in mobile revenue for the second quarter and our current expectation for continued sequential growth in the second half, the trend we are experiencing is meaningfully different than those of the broader smartphone market. While Pixelworks certainly experienced the impact from a correction of mobile inventory during the fourth quarter of last year and the first quarter of this year, Since April, we've effectively been completely clear on inventory of our mobile ICs, both within the channel and held by current customers. In fact, as mentioned on our prior call, we experienced multiple instances of mobile OEM customers requesting upside orders due to better than anticipated sell-through on several smartphone models incorporating our X5 and X7 visual processor ICs. This has continued into the current quarter as many of the programs we are participating on have experienced upside demand post-launch. In addition to closely managing inventories, we sustained our aggressive mobile product and ecosystem development efforts throughout the downturn. A significant portion of these efforts have been centered around cultivating and leveraging a robust mobile gaming ecosystem. Our team has and continues to execute well on this strategy. And our growth in an otherwise weak demand environment is evidence of our mobile strategy is working. In July, we expanded upon our existing mobile ecosystem initiatives with the announcement of the formal introduction of Pixelworks IRX gaming experience branding. IRX referencing image rendering accelerator. In a first for Pixelworks, our new IRX gaming experience brand directly targets smartphone end users. The brand itself is underpinned by Pixelworks' extensive portfolio of proprietary mobile visual processing solutions, coupled together with our unique and in-depth game tuning services. In conjunction with the IRX brand, we are also establishing and supporting IRX certification program that will comprise both of mobile device both a mobile device incorporating Pixelworks Mobile Visual Processor, as well as a certified list of top mobile games that meet our minimum visual quality performance standards after tuning these games for play on IRX-certified smartphones. Concurrent with the launch of IRX Gaming Experience Brand, we published the initial pre-certified list of 20 top mobile games, which we will continue to expand over time. We are also engaged with multiple OEM customers to incorporate the IRX device certification on their next-gen models. In advance of the phone officially being launched, a press briefing held last week, the Redmi K60 Ultra smartphone was preannounced in collaboration with MediaTek, Xiaomi, and Pixelworks Shanghai. This announcement With our fourth tier one mobile customer, Xiaomi, also revealed that the Redmi K60 Ultra smartphone will be the first ever IRX certified phone when it is officially launched later this month. Also last week, Opal affiliate OnePlus previewed the scheduled launch of its OnePlus Ace 2 Pro flagship smartphone, reminding consumers of OnePlus' groundbreaking multi-year partnership with Pixelworks and featuring simultaneous super frame rate and super resolution functionality enabled by Pixelworks X7 visual processor. As additional mobile games and devices are certified, we believe the IRX gaming experience will contribute to higher consistency and quality mobile gaming for end users while also bringing increased consumer awareness to Pixelworks and our content and OEM partners. Turning to a brief update on our TrueCut Motion platform. TrueCut Motion has now been established as the only commercially validated scalable and filmmaker endorsed end-to-end solution for creating and delivering premium experience through the cinematic high frame rate content. Today, though most of us are accustomed to new technology seemingly being adopted and proliferating overnight, the professional film industry is different. Despite all the technological advancements, including most of device display systems capable of high frame rate and high resolution output, Hollywood-centric content production has continued to utilize 24 frames per second since the early commercialization of motion pictures. While there are multiple reasons behind historical the historical aversion to embracing higher frame rates, there is growing evidence that the adoption of higher frame rates is necessary to deliver high-resolution HDR content without artifacts. Most prominently, the future of motion pictures was foreshadowed by the theatrical release of James Cameron's Avatar the Way of the Water, as well as re-releases of Avatar and Titanic, all three of which were released globally to theaters in 4K HDR and featured cinematic high frame rate enabled by Pixelworks TrueCut motion platform. The box office success of these three titles instilled a new motivation among multiple industry participants to not only accept change, but also pivot towards increased releases of premium large format content. Specific to Pixelworks and our True Cut Motion platform, we believe that we are making significant progress toward broader commercialization. I want to reemphasize that True Cut Motion is a full ecosystem play, and the opportunity for True Cut Motion is bigger than any one customer or partner announcement. We do, however, expect that we'll be making additional announcements before year-end that will serve as tangible proof points of Truecut Motion's value proposition and continued adoption. Continuing with an update on our home and enterprise business, which now predominantly consists of visual processor SOCs for the digital projector market. Revenue was up sequentially over the first quarter, however, continued to reflect subdued orders from the projector OEMs in response to macro-related uncertainty and softer in-market demand, particularly in China. Additionally, our largest projector OEM customer is still working to normalize their internal inventories and lead times followed by the prolonged period of supply constraints and demand imbalances. With that said, order patterns have stabilized in recent months, and we currently expect a slow recovery in customer demand during the second half as the ongoing inventory correction continues to run its course. During the second quarter, we delivered initial samples of our next-generation SOC as part of our co-development project with our largest projector customer. As a result, we recognized an anticipated milestone payment as an R&D credit that reduced total OPEX for the quarter. We continue to expect this new SOC to achieve volume production and contribute to overall revenue growth beginning in 2024. Finally, an update on the progress related to our Pixelwork Shanghai subsidiary and the status of our progress towards a listing on the Star Exchange. As briefly highlighted in our last call, we've retained CITIC Securities as our advisor and sponsor to support Pixelwork Shanghai throughout the application and underwriting process. During the quarter, we submitted the application to formally begin the tutoring process, which is now well underway. The tutoring process is a prerequisite for any company seeking to apply for a new listing, and it's anticipated to take roughly two or three to four months. The team is concurrently compiling a draft of the prospectus and supporting the associated multi-year audit for the subsidiary. I'm very pleased with our continued preparation and advancement toward a local listing, and today we remain on track to formally file before year end. In conclusion, I continue to be inspired by our team's execution of strategic initiatives and our renewed growth and momentum in mobile in spite of the current environment. Although the ultimate recovery in the end market demand specifically in China is slower than most had anticipated, we are optimistic about our positioning and growth prospects for the second half of the year. Specific to the third quarter, we are fully booked to achieve sequential top-line growth coupled with expected improvement in gross margins as the projector market continues to gradually recover, and we further ramp mobile shipments in support of customers' upcoming launches of new smartphone models. With that, I'll hand the call to Haley to review financials and provide guidance for the third quarter.