Pixelworks, Inc.

Good day, ladies and gentlemen, and welcome to Pixelwork Inc.' 's third 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.

Thank you, Andrea. Good afternoon, and thank you for joining us on today's conference 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 third quarter of 2023. Before we begin, I'd like to remind you that various remarks we make on the call, including those about 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, November 7, 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 amortized, amortization of acquired intangible assets and stock-based compensation expense, as well as the tax effect of the 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 our core operating results and underlying cash flow dynamics. We caution investors to consider these measures in addition to and not as a substitute for nor superior to the company's consolidated financial results as presented in accordance with U.S. 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 reconciliation of gap to non-gap 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, please go ahead.

Thank you, Brett, and good afternoon, and welcome to everyone joining us on today's call. Consistent with the preliminary third quarter revenue we announced in early October, we had a solid third quarter results with all financial metrics coming in at or better than the midpoint of guidance. Total revenue increased 18% sequentially, driven by record quarterly revenue in our mobile business, as well as seasonally stronger demand in the home and enterprise market. As planned during the quarter, we began passing through previously absorbed supplier across our end markets, which contributed to gross margin expanding 260 basis points sequentially. We also successfully managed OpEx for the quarter, especially given the significant number of product and ecosystem initiatives we currently have underway to support future growth. Turning to our end markets, mobile revenue increased 20% sequentially and 37% year over year, achieving new quarterly record and contributing a record 52% of total revenue. During the quarter, we received positive responses to our newly introduced IRX gaming experience branding and certification program. The launch of the first IRX certified smartphone models were well received by the market with demand for these models exceeding customers' expected unit volumes. Among these were two new smartphones that had just been pre-announced and which we previewed on our previous conference call. As a reminder, these were Xiaomi's Redmi K60 Ultra and the OnePlus Ace 2 Pro. Both of these premium smartphones incorporate Pixelworks X7 visual processor and have contributed to our recent revenue growth. Also launched during the quarter, incorporating both our X7 visual processor and IRX certification, was the Realme GT5 smartphone. Built on Qualcomm Snapdragon 8 Gen 2 platform, the Realme GT5 features a 6.74 inch flat display with narrow bezels supporting up to 144 hertz refresh rate and 2K dimming. With its integration of our X7 processor, this phone leverages all of Pixelworks core visual processing technology, including our ultra low latency motion engine, low power super resolution, and always on HDR. resulting in enhanced visual performance and optimized picture quality for both gaming and video content. As part of our ongoing strategic initiative to facilitate a cooperative mobile gaming ecosystem, we recently disclosed our latest collaborations with two of the world's largest mobile game studios. In August, we announced Perfect World Games had incorporated the Pixelworks Rendering Accelerator SDK in the mobile game Persona 5, the Phantom X, more commonly referred to as P5X. Then in September, we announced our partnership with NetEase Game Studio, Thunder Fire Business Group, and the integration of the release of Revolution Mobile, based upon the original flagship game, Revolution. When played on a smartphone equipped with one of the X7 series visual processors, the integration of our SDK rendering accelerator serves as a connecting bridge enabling these games to be played at the display's full resolution of 120 frames per second, while significantly lowering system power over native rendering. More recently, in October, we completed two notable milestones with the formal launch of our latest X7 Gen2 mobile visual processor, which we unveiled as it works hosted mobile visual computing event in Shenzhen, China. In addition to being an opportunity to promote the launch of our latest mobile visual processor, the event itself was centered around what we believe to be the future of mobile visual processing and advanced mobile gaming. Endorsing and adding to the event, the vice president of Perfect World Games was a keynote speaker. This was followed by customer acknowledgements and then members of the Pixelworks team presenting the benefits of our ecosystem-based distributed processing architecture. Attendees of this inaugural event also had the opportunity to experience live demos of five announced IRX-certified mobile games. With regards to our new X7 Gen 2, this latest visual processor takes picture quality to a new level. In order to achieve this performance, we incorporated newly internally developed AI-based that utilizes our self-developed neural network processing. Our X7 Gen2 enables more accurate upscaling and rendering of gaming content while maintaining power efficiency. The overall feature set of our new Gen2 processor is different from the X7 predecessor. However, both chips incorporate Pixelwork's industry-leading ultra-low latency motion engine, MIMIC, as well as other core visual and picture quality enhancement capabilities. Looking ahead to the fourth quarter and into next year, There are three primary drivers that underpin our current expectations for sustained year over year growth in mobile. The first is to quickly scale the growth of the gaming ecosystem that we've established with leading mobile gaming studios. We're working with new and existing studios and are targeting a 400% increase in announced games by the end of 2024. Test for launch of our IRX gaming brand and certification. which is designed to increase awareness as well as simplify the evaluation and purchase decision of consumer gamers, Pixelworks is positioned to drive expanded adoption of our mobile visual processing solutions. The second growth for mobile is our expanded product portfolio and roadmap. Our new X7 Gen2 visual processor, when combined with Pixelworks rendering accelerator SDK, provides a unique value proposition in the form of rendering efficiency and superior cinematic gaming experience. The first production volume shipments are scheduled to begin this month in support of a customer-planned phone launch in the first quarter of 2024. Lastly, another growth opportunity our team has been focused on is the expansion within the existing Tier 1 handset customers into international models sold outside. We have secured our first design on an existing customers planned international model that is scheduled to be launched early next year. To the extent we can leverage this win into additional international models with one or more tier one customers would represent continued to later half of next year. Turning to an update on Truecut Motion Platform. Our focus throughout much of this year has been securing a select group of commercial engagements to complete the initial foundation for bringing together a larger supportive ecosystem. As an ecosystem takes time and is a dynamic process. Despite the distraction of recent Hollywood strikes for many industry executives and decision makers, we have continued to demonstrate our true cut motion platform to influential creatives across the filmmaking community, including a growing number of directors, cinematographers, and colorists. Additionally, we're seeing increased interest from global theatrical exhibitors with business strategies centered around delivering a premium experience. This not only includes growing demand for new premium large format content, but also the re-release of remastered classic and catalog tiles in superior formats. With this push towards premium experiences featuring higher resolution and HDR content, there is strong and growing acceptance that the adoption of cinematic high frame rate is neat with PLF theatrical and home entertainment content without undesirable artifacts. Next in our home and the enterprise business, which as a reminder now predominantly consists of our visual processor SOCs for the digital projector market. Revenue increased sequentially as expected. primarily reflecting typical positive seasonality for the projector business and their order shipments in the third quarter. Although the sequential uptick in demand is an encouraging indication of normalization, the broader projector market is continuing to work through an inventory correction in response to more subdued end demand and macro uncertainty. Following the industry's extended period of supply constraints, Projector OEMs are continuing to adjust their build forecast and buffer inventories to reconcile previous supply and demand imbalances. Feedback from customers suggests going to normalize. However, it will be likely next year before the industry achieves a more sustainable balance between supply and demand. While speaking about supply chains, I want to briefly highlight the recent recognition we received from our largest projector customer. In September, Pixelworks with its supplier of the year award for their fiscal 2022. Similar to many other companies, Epson was confronted with shortages of key components across various product lines and Pixelworks was the only vendor that was able to fully support Epson's demand throughout. Also notable, Pixelworks was the only supplier across all of Epson's product lines to receive this award. This is a true testament to the contributed performance and dedication of our entire team, including our operational sales and technical support teams. Separately, multi-year co-development project with the same customer continues to progress well. We remain on track to achieve conditional acceptance of our next generation SOC by year end. Upon completion of this development milestone, we expect to recognize the final milestone as an R&D credit. which will reduce our reported OpEx in the fourth quarter. Following the planned delivery of production samples early next year, the new SOC will go into volume production the second half of 2024. Shifting to an update on our Pixelworks Shanghai subsidiary and . We are now in the final preparation and tutoring process that is required before an application for listing can be filed. Getting to where we are today has taken roughly two years and countless hours of hard work by numerous members of our team. With respect to the larger Pixelworks organization and our Shanghai subsidiary being ready, we believe we are effectively there. As with any IPO on a major exchange, underlying market conditions play an important role in their ultimate timing. Given the current environment for technology IPOs in China, we are closely monitoring market conditions and sponsor CITIC securities. While a definitive decision has not yet been made to the respect of the timing for filing an application to list, our continued plan is to pursue a local listing of our Pixelworks Shanghai subsidiary when we believe market conditions are supportive. In closing, despite recently heightened macro uncertainty, including indications of weaker global demand and a slower ongoing recovery in China, We remain confident about our near-term outlook for sustained growth, especially in our mobile business. Specific to the fourth quarter, our current order backlog and visible visual processors fully support achieving continued double-digit sequential growth in mobile while also returning to solid year-over-year top-line growth. Even with mobile poised to continue to become an increasing percentage of our overall business, we remain committed to and expect in conjunction with our growth over the next several quarters. Overall, our team continues to execute well on strategic initiatives, which have been key to enabling our renewed growth during a broadly challenging environment. I am pleased with the recent achievement, our important milestones, as well as our expectations to close out the year with a strong fourth quarter. With that, I'll hand the call to Haley to review the financials and provide our fourth quarter guidance.