Pixelworks, Inc.

Good day, ladies and gentlemen, and welcome to Pixelworks Inc.' 's first quarter 2024 earnings conference call. I'll be your operator for today's call. And as a reminder, 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.

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 Haley Amon. The purpose of today's conference call is to supplement the information provided in Pixelwork's press release issued earlier today announcing the company's financial results for the first quarter of 2024. 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, 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, May 14, 2024. 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, 2023, 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 stock-based compensation expense. The company uses these non-GAAP measures internally to assess operating performance. We believe the 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 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 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, I'd now like to turn the call over to Pixworks CEO, Todd DeBonis, for his opening remarks. Todd, please go ahead.

Thank you, Brett. Good afternoon and welcome to everyone joining us on today's call. In terms of our overall results, we had a solid first quarter. As outlined in today's press release, total revenue was just above the midpoint of guidance. We anticipated March quarter seasonality coming off record mobile revenue in the fourth quarter. Gross margin expanded nearly 600 basis points sequentially to over 50%. due to a favorable shift in revenue mix towards our newer X7 Gen2 visual processor, combined efficiencies, and an increase in true cut revenue. Together with well-managed operating expenses, we utilized minimal cash from operations during the first quarter. For a review of end markets, starting with our mobile business, as previously mentioned, mobile revenue for the quarter reflect the functionality associated with customers' launch cycles for new smartphone models. Year over year, mobile revenue was up nearly 200% and represented a record 61% of total revenue for the first quarter. This growth was driven by increased unit shipments of our X-Series visual processors, Gen 2 mobile visual processor, and an increase in TrueCut motion licensing and motion grading services. We have continued to expand and gain momentum with our IRX branded gaming experience and ecosystem, which serves to further differentiate the inherent performance advantage of the premium visual gaming experience that our mobile processors bring customer smartphones. Introduced in the second half of last year, IRX, which is short for Image Rendering Accelerator, is an end-to-end ecosystem solution that we established specifically for mobile gaming. The overall response and our resulting collaborations across industry-leading game engines and gaming studios have been encouraging. Since the introduction of IRX, our work with several leading gaming studios has resulted in a total of nine IRX-certified mobile games, and we've tuned our solution to optimize visual performance on over 100 IRX-qualified mobile games. When played on an IRX-enabled smartphone incorporating our X-Series visual processor, IRX-certified games deliver a superior high visual quality. In April, we announced that Diablo Immortal, a mobile game co-developed by Blizzard Entertainment and NetEase Studios, was the latest game to incorporate our IRX rendering solution. Based on our current pipeline of engagements with studios on new games, we are aiming to double the current number of IRX certified games by the end of this year. And among these, we expect some of the highest global ranking mobile games to soon be IRX certified. In terms of year to date, we've announced a series of newly launched smartphones incorporating our mobile visual processors. First, as highlighted on our last call in early January, the OnePlus Ace 3 smartphone was the first device launched incorporating our new X7 Gen 2. Also as a reminder, we're focused on expansion beyond premium domestic models in China. Our two-pronged strategy includes increasing penetration of the mid- to lower-tier market, as well as expanded adoption in models targeting for global markets. As evidence of our initial traction in January, OnePlus launched the global version of its OnePlus 12, representing the first flagship international model to incorporate both our X7 visual processor and IRX certification. Then in April, we announced the X5 Turbo visual processor was incorporated in Vivo's new Z9 Turbo smartphone targeted at the mid-tier market segment. Leveraging our X5 series processor, the iQOO Z9 Turbo features differentiated frame rate optimization as well as diverse gaming display enhancement modes. Most recently, we achieved a meaningful step toward international expansion with Tranchion's announced launch of its Infinix GT20 Pro smartphone. With the incorporation of our X5 series processor, Tranchion became our fifth tier one mobile customer. More importantly, the Infinix GT20 Pro represents the first integration of Pixelworks visual processing technology in a sub $350 smartphone that is primarily targeted for emerging markets outside of China. We are encouraged by these recently launched models in support of expanding our As we succeed in securing additional international models and penetration of the sub-premium market segments, it will further complement our core strategy, which remains focused on delivering highly differentiated, market-leading visual display performance for the mobile market. With expansion of our server-developable market, we have the opportunity to drive higher unit volumes, accelerated ecosystem development, and more robust future growth. Next, I want to cover updates on our other businesses, and then I will circle back with some additional comments about our near-term expectations for mobile as part of our closing remarks. Turning to True Cut Motion. As highlighted on our previous conference call, in late January, we announced a multi-year agreement with Walt Disney Studios to bring a collection of True Cut Motion graded titles to select home entertainment devices. the first Apple Vision Pro. Securing Disney as our first home entertainment ecosystem partner was a significant milestone for TrueCut Motion. Today, Apple Vision Pro users can watch motion-graded versions of Avatar and Avatar the Way of the Water on both Disney and Apple TV Plus streaming networks. In the three months since our announcement with Walt Disney Studios, Three additional new titles have been released to the premium format theaters in True Cut Motion's cinematic high frame rate format. In February, Matthew Vaughn's Argyle, which was in association with Marv, was distributed globally by Universal Pictures. Then in March, DreamWorks Animation's Kung Fu Panda 4 was released by Universal Pictures in True Cut Motion format in select premium theaters. Most recently, Legendary Pictures' Godzilla x Kong New Empire was released globally by Warner Brothers to select premium theaters. Additionally, in collaboration with our industry partner, Christie, in April, we demonstrated these titles in true-cut motion format at CinemaCon in Las Vegas. Utilizing a mock theater equipped with world-class CineD cinema system, these demos received very positive response from exhibitors, and also served as further industry validation that True Cut Motion is the leading premium format. Our near-term focus remains on bringing more high-value titles to theaters in True Cut Motion format over the coming months and quarters, while also continuing to engage in prospective content distribution and consumer device ecosystem partnerships. Shifting to our home and enterprise business, which is predominantly comprised of our visual processor SOCs for three LCD digital projector market. Revenue was in line with our expectations and consistent with typical first quarter seasonality, reflecting the standard practice of managing down internal inventories by Japanese OEM customers in advance of their fiscal year end. Compared to the first quarter, home and enterprise revenue was down slightly due to lower contribution from our legacy video delivery solutions with sales in the projector market effectively flat year over year. As indicated by home enterprise revenue, end market demand for digital projectors has stabilized in recent quarters. However, several quarters have represented a challenging environment for the professional projector market, resulting in a steady consolidation of three LCD market share by the industry's leading manufacturer, and also our largest projector customer. At the end, the same projector customer completed final testing and evaluation on production samples of our co-developed next-generation projector SOC. I'm pleased to report that we received acceptance on the new SOC, and it will go into volume production in support of our customer's first two models during the second half of this year. I want to briefly emphasize the significance of this new product milestone. while also recognizing our talented and dedicated team that made this multi-year development project a success. Our customers' transition to the new SOC from prior generation will be gradual as the new projector models are introduced to market. As a result, this SOC will drive revenue over the course of several years and effectively extends the runway for our profitable projector business through the latter part of this decade. Before handing the call to Haley, I want to take a minute to discuss our current outlook based upon two recent developments impacting our near-term mobile business. First, our largest mobile customer over the past two quarters recently informed us of a near-term reduction in their demand compared to our previous expectations. In short, this customer has counted some unique sales challenges on recently launched models that are completely unrelated to Pixelworks. Due to their slower than anticipated sell-through, they are pausing orders until their current and soon-to-be released production models consume existing inventory. We expect this pause to extend into calendar Q3. Separately, we are experiencing a delay on the market introduction of our next-generation mobile visual processor. As alluded to in the past, we have been aggressively working on this yet-to-be-announced, new product for the last two years. It will be by far the most advanced market disruptive visual processor that Pixelworks has introduced. In addition to being our first ever processor designed in TSMC's 12 nanometer LLP process, it integrates a highly advanced feature set that with the collaboration of our IRX ecosystem Our targeted timeline for releasing this next generation processor was the end of the current quarter. However, a few technical hurdles have required pushing out its production release to later in the year. As a result, we are unfortunately going to miss a couple of the customers designing windows for new premium models in the back half of 2024. that we had previously anticipated securing. Despite this delay, we still have multiple customers that are excited about our next-gen solution. They remain engaged for incorporating it in subsequently planned models. While these two developments are obviously very disappointing, I want to emphasize that IRX ecosystem engagement is an all-time high. I would also add that these respective headwinds primarily impact the timing of our previous expectations. including near-term revenue, and they do not change our strategy nor our longer-term growth potential. With that said, given the anticipated short-term drawdown in revenue, we are reviewing our near-term effects and areas to maximize operational efficiencies. Apart from the current headwinds, we are very pleased with the previously discussed expansion of our two-pronged mobile strategy, and we also remain very confident in the ability of our growing IRX ecosystem to drive increased adoption of our current and future mobile visual processors. With that, I'll pass the call to Haley to review finance. Thank you, Todd.