Pixelworks, Inc.

Good day and welcome to the Pixelworks, Inc. second quarter 2024 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, press star 11 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker, Mr. Brett Perry, with Shelton Group Investor Relations. Please go ahead, sir.

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 Pixelworks' press release issued earlier today announcing the company's financial results for the second quarter of 2024. Before we begin, I'd like to remind you that various remarks that we make on the 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 subjects 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, Wednesday, August 7th. 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 restructuring costs and stock-based compensation expense. The company uses these non-GAAP measures internally to assess operating performance. We believe these 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 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 call, 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 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 Pixwork's CEO, Todd DeBonis. Please go ahead.

Thank you, Brett. Good afternoon and welcome to everyone on the phone and the webcast. We appreciate you joining today's call. As discussed on our conference call in May, we expected the second quarter to be a challenging one. one due to specific near-term headwinds in our mobile business earlier today we reported revenue for the quarter at midpoint of guidance reflecting the anticipated pause in orders from a large mobile customer gross margin ticked up sequentially remaining above 50 percent and representing more than a thousand basis point improvement year over year operating expenses and bottom line results for the quarter were both better than the midpoint of our guidance We continue to believe that the current headwinds are primarily near-term, with signs of initial improvement and sequential revenue growth expected in the third quarter. Acknowledging the current drawdown in quarterly revenue, we have implemented a number of cost reduction actions to better align our operating expenses with near-term revenue levels. In addition to a series of other measures taken over the last several months to maximize operational efficiencies, we implemented a reduction in headcount across all areas of the business, effective June 30th. Never an easy action, the reduced headcount is anticipated to result in approximately $4 million of annualized cost savings beginning in the third quarter. Combined with other cost containment measures, we believe the collective expense reductions we've implemented to date will contribute to total OPEX savings of $10 million over the next 18 months. Turning to a review of our mobile business. As previously indicated, second quarter mobile revenue was down significantly and primarily reflected the impact of a pause in new orders from what had recently been our largest mobile customer. This customer experienced unanticipated weaker sell-through of its newly launched smartphone models in the first half of 2024. Although completely unrelated to Pixelworks, this resulted in excess inventory of our visual processors. They are now working down this existing inventory through a combination of prior and recently launched models that incorporate our technology. We continue to be closely engaged with this customer on the evaluation of our upcoming next-gen visual processor and our IRX ecosystem. More broadly within our mobile business, we continue to make steady progress on the expansion of our IRX branded gaming ecosystem. With the goal of enabling a dramatically enhanced visual experience for mobile gaming, we established the IRX ecosystem to align and promote a collaborative end-to-end approach that benefits all industry participants. from gaming studios to smartphone OEMs. Leveraging our IRX rendering acceleration solution, ecosystem partners gained the unique ability to deliver ultra high frame rate, desktop level photo realism, and high image resolution without excess device temperature or power consumption. Since our prior conference call, our team completed integration work on two additional IRX mobile games. making a total of 11 IRX-certified mobile games available to date. The most recent of these two IRX-certified games was a product of collaboration with CSUN Games to help adapt and optimize a mobile version of the popular game JX3 Ultimate. Unlike most mobile games created based on existing IP, JX3 Ultimate Mobile innovatively leveraged cross-platform data inheritance to produce full-platform, high-quality mobile graphics that are comparable to the PC version. Separately in June, we announced our latest collaboration with Tencent and its TMI studio group on Honor of Kings. For those less familiar with gaming, Honor of Kings is a multiple-player online battle arena game that was first launched several years ago. Today, it's literally a household name in China. According to mobile gaming industry experts, Honor of Kings remains the single most played multiplayer game globally. It also ranks number one in revenue generated from in-app purchases. We continue to have a healthy engagement with new multiple leading game studios and plan to announce additional IRX certified mobile games this year. In addition to our direct collaboration with studios on certified games, we continue to expand a growing list of more than 100 IRX-qualified mobile games. These qualified games have been individually tested and tuned for our solution to optimize their visual performance. IRX remains the first and only industry-wide ecosystem of its kind dedicated to improving the visual performance of mobile gaming. We have several ongoing initiatives underway to consistently drive increasing awareness of IRX, not only with the game studios and device OEMs, but also targeting broader awareness directly with consumer gamers. Currently, these IRX promotion and co-marketing efforts are primarily targeted within the APAC region and specifically in China as the largest mobile gaming market. To highlight one recent example, in late July, we showcased our IRX solutions at China Joy 2024. Held at the Shanghai New International Expo Center, China Joy is widely recognized as China's largest annual global gaming convention. Our team hosted an IRX branded booth, which featured hands-on demos, allowing participants to experience playing several IRX certified mobile games on recently released IRX certified devices. In conjunction with the show, we also launched a new dedicated IRX website and promotional video, which I would encourage investors to check out at irxgaming.com. The IRX ecosystem is a fundamental part of our mobile strategy, serving to further differentiate the performance advantages and premium visual game experience that visual processors bring to mobile devices. We believe that as the IRX ecosystem continues to grow, so does incentive for OEM customers to incorporate our visual processors across a broader range of smartphone models. Consistent with my comments last quarter, we remain focused on addressing an expanded served available market in mobile. This includes both increased penetration of mid and lower tier smartphones, as well as expanded adoption in customers' models targeting for global markets outside of China. In April, we demonstrated progress on each of these expansion goals with our first announced program win with TransShen on the launch of the Infinix GT20 Pro smartphone. It incorporated our X5 series processor and represented the first time that Pixelworks technology has been featured in a sub $350 smartphone that is targeting emerging markets outside of China. Also announced during the quarter, OnePlus incorporated our X7 Gen 2 visual processor in its newly launched OnePlus Ace 3 Pro smartphone. Positioned as a more affordable smartphone that delivers flagship-like performance, The OnePlus Ace 3 Pro is priced between $450 to $600 depending on memory configuration. Make it the second win with our X7 Gen 2 processor in the mid-tier smartphone model category. These two newly launched smartphones both feature IRX certified solution while utilizing different generations of our visual processor. And both models have been well received in their targeted markets. Lastly, within mobile, I want to provide an update on our next-gen mobile visual processor. As discussed on our prior call, we pushed out the production release of our next-gen solution after encountering a few technical hurdles that were impairing the device's full range of capabilities and intended performance. As an update, our engineering team has completed the work on the required design changes, and we are confident we have resolved all previously identified issues. We are scheduled to receive new samples of our next generation device for testing and final verification at the end of this month, which will position us to be ready for its production launch in the fourth quarter. As anticipated, this push out in timing unfortunately results in missing the design in window for customer smartphone models in the back half of 2024. We do, however, remain engaged with multiple customers on our next-gen solution on their subsequent plan models. Architected with direct feedback from existing IRX ecosystem partners, this will be Pixelwork's first mobile visual processor in 12 nanometer process technology. We believe this newest generation solution is poised to bring market-disruptive performance to mobile gaming. With a series of new industry-first features, and the ability to deliver a true, immersive PC-like gaming experience to mobile devices. We look forward to a planned formal market introduction of our next generation visual processor later this year. Turning to True Cut Motion. We continue to see growing interest from premium large format exhibitors that are specifically requesting True Cut Motion for movie titles shown on their screens. As further evidence, two of the largest global premium large format exhibitors are now actively recommending True Cut Motion, citing a demonstratively better viewing experience on their premium large screens. Movies shown in premium large format theaters represent a growing portion of the global box office, outperforming non-premium formats both in viewer satisfaction and box office sales. As a result, premium large format exhibitors not only have increasing influence They're also engaging more than ever directly with filmmakers. Our current focus is on leveraging these endorsements of True Cut Motion by premium large format exhibitors to facilitate increased awareness among filmmakers, studios, and consumers in support of driving accelerated use of True Cut technology for new release titles. Additionally, our True Cut Motion R&D team will soon release a new generation of motion grading and reprojection tools to be used on upcoming projects. These new tools leverage a combination of both expertly trained AI and new patented algorithms to deliver faster results at higher resolution. In addition, these tools are more tightly integrated with leading post-production tools and formats. As motion grading becomes standard practice within the film industry, This new generation of tools will be increasingly important for supporting new and expanded true-cut motion engagements. Shifting to our home and enterprise business, which as a reminder is predominantly comprised of our visual processor system on chips for the 3LCD digital projector market. For the second quarter, total revenue from home and enterprise was roughly flat on both sequential and year-over-year basis. This was consistent with our internal expectation and also mirrors the recent feedback from our projector customers that market supply and demand dynamics are generally well balanced. As I mentioned on the last call, in April we secured final acceptance from our largest projector customer on production samples of our co-developed next generation projector SOC. We subsequently received the first purchase orders and the new co-developed SOC is now scheduled for volume production in the fourth quarter. The first volume production shipments will support two new planned projector models, and then this new chip will gradually be adopted more broadly over time as our lead customer introduces new additional projector models. In conclusion, we knew the quarter was going to be difficult, I'm proud of our team, which has confronted the recent challenges head on while remaining focused on strategic and operational execution across the business. We remain encouraged by our recent progress and look forward to delivering improved results in the second half of the year. Specific to mobile, we believe that we are positioned for renewed growth in the coming quarters. We are increasingly targeting an expanded served market for mid to lower tier smartphones as well as incremental customer adoption in international models. Additionally, engagements and the influence of our IRX gaming ecosystem continue to grow and will soon be further supported by the introduction of our next generation mobile visual processor. We also expect to benefit from a continued stable performance with our home and enterprise business, together with our recently implemented cost reduction actions We expect to deliver sequential revenue growth in the third quarter while continuing to target improved operational results over the intermediate term. With that, I'll hand the call over to Haley to review financials and provide our guidance for the third quarter.