Pixelworks, Inc.

Good day and welcome to the Pixel Works 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 1 1 on your telephone. You will then hear an automated message advising your hand is read. To withdraw your question press star 1 1 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 Pixel Works president and CEO Todd DeBonus and chief financial officer Haley Amann. The purpose of today's conference call is to supplement the information provided in Pixel Works 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 7 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 gap and non-gap terms including gross margin operating expenses net loss and net loss per share. Non-gap measures exclude restructuring costs and stock based compensation expense. The company uses these non-gap measures internally to assess operating performance. We believe these non-gap measures provide a meaningful perspective on core operating results and underlying cash flow dynamics. We cost investors to consider these measures in addition to not as a cost to for nor superior to the company's consolidated financial results as presented in accordance with U.S. gap. 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 gap to non-gap net loss and gap net loss to adjust the dividend. Please refer to the company's press release issued earlier today. With that it's now my pleasure to turn the call over to PIXWORKS CEO Todd DeBonus. 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 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 an 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 head count across all areas of the business effective June 30th. Never an easy action the reduced head count is anticipated to result in approximately four million in four 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 op ex savings of 10 million dollars 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 experience experienced unanticipated weaker sell through of its newly launched smartphone models in the first half of 2024. Although completely unrelated to pixel works 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 I R X ecosystem. More broadly within the mobile our mobile business we continue to make steady progress on the expansion of our I R X branded gaming ecosystem. With the goal of enabling a dramatically enhanced visual experience for mobile gaming we established the I R X ecosystem to align and promote a collaborative end to end approach that benefits all industry participants from gaming studios to smartphone OEMs. Leveraging our I R X rendering acceleration solution ecosystem partners gain 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 I R X mobile games making a total of 11 I R X certified mobile games available today. The most recent of these two I R X certified games was a product of collaboration with CSUN games to help adapt and optimize a mobile version of the popular game J X 3 ultimate. Unlike most mobile games created based on existing I P J X 3 ultimate mobile innovated 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 it's 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 I R X 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 a hundred I R X I hundred I R X qualified mobile games. These qualified games have been individually tested and tuned for our solution to optimize their visual performance. I R X 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 I R X not only with the game studios and device OEMs but also targeting broader awareness directly with consumer gamers. Currently these I R X 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 I R X solutions at China Joy 2024 held at the Shanghai New International Expo Center. China Joe Joy is widely recognized as China's largest annual global gaming convention. Our team hosted an I R X branded booth which featured hands on demos allowing participants to experience playing several I R X certified mobile games on recently released I R X certified devices. In conjunction with the show we also launched a new dedicated I R X website and promotional video which I would encourage investors to check out at I R X gaming dot com. The I R X 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 I R X 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 Tranchin on the launch of the Infinix GX 20 pro smartphone. It incorporated our X 5 series processor and represented the first time that pixel works technology has been featured in a sub three hundred and fifty dollar smartphone that was targeting emerging markets outside of China. Also announced during the quarter OnePlus incorporated our X 7 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 and to six hundred dollars depending on memory configuration. Make it the second win with our X 7 Gen 2 processor in the mid tier smartphone model category. These two newly launched smartphones both feature I R X 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 devices 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 and 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 I R X ecosystem partners. This will be pixel works first mobile visual processor and 12 nanometer process technology. We believe this newest generation solution is poised to bring this 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 plan 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 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 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 operation results over the medium intermediate term. With that I'll hand the call over to Haley to review financials and provide our guidance for the third quarter.

Thank you Todd. Revenue for the second quarter of 2024 was 8.5 million which was at the midpoint of our guidance. The revenue decrease from the prior quarter was primarily driven by the anticipated near term headwinds in mobile. The revenue the breakdown of revenue in the second quarter was as follows. Revenue from mobile was approximately 2.1 million comprised primarily of shipments over X series visual processors. Home and enterprise revenue was approximately 6.4 million. Second quarter non-gap gross profit margin expanded 30 basis points sequentially to 51% from .7% in the first quarter of 2024 and increased over 1000 basis points from .5% in the second quarter of 2023. The significant -over-year expansion and gross margin reflects our ongoing focus to drive healthy margins. Non-gap operating expenses were 12.8 million in the second quarter compared to 12.6 million in the prior quarter and 10.7 million in the second quarter of 2023. With respect to the -over-year comparison as a reminder lower operating expenses in the second quarter of 2023 included the benefit of a 1.9 million dollar credit to R&D related to the now completed co-development agreement with our largest projector customer. As Todd previously highlighted we've recently implemented expense reduction actions to more appropriately align expenses with current revenue levels including an approximately 16% reduction in workforce which was affected at the end of the second quarter. As a result we expect to realize approximately 4 million in annualized savings. On a non-gap basis second quarter 2024 net loss was 7.7 million or a loss of 13 cents per share compared to a net loss of 4 million or a loss of 7 cents per share in the prior quarter and a net loss of 4.8 million or a loss of 9 cents per share in the second quarter of 2023. Adjusted EBITDA for the second quarter of 2024 was a negative 7 million compared to a negative 3.2 million in the first quarter and a negative 4 million in the second quarter of 2023. Turning to the balance sheet we ended the second quarter with cash and cash equivalents of 37.8 million compared to 46.2 million at the end of the first quarter and 47.5 million at year-end 2023. In addition to cash use for operations the cash balance at quarter end also reflected approximately 2.5 million used during the quarter for a one-time purchase of the mask set associated with our next generation mobile visual processor. Sifting to our current expectations and guidance for the third quarter of 2024. As Todd discussed and consistent with the expectations we outlined on our previous conference call we expect a return to sequential revenue growth in the third quarter. Based on current order patterns and existing backlogs we currently anticipate total revenue for the third quarter to be in a range of between 9 million and 10 million. In terms of gross profit margin for the third quarter we expect non-GAAP gross profit margin to be between 49% and 61%. With respect to operating expenses we expect to realize the initial benefits from the previously discussed cost reduction beginning in the third quarter. However we anticipate the resulting reduction in expenses to be partially offset by a one-time expense associated with the design revisions completed on our next generation mobile visual processor. Net of these factors we expect operating expenses in the third quarter to range between 12 million and 13 million on a non-GAAP basis. Lastly we expect third quarter non-GAAP EPS to range between a loss of 11 cents per share and a loss of 14 cents per share. That completes our prepared remarks and we look forward to taking your questions. Operator please proceed with Q&A. Thank you.

Thank you. As a reminder to ask a question please press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question press star 1-1 again. One moment while we compile the Q&A roster.

Our first question comes from the line of Nick Doyle with Needham & Co.

Hey guys, thanks for taking my question. First one would be on the international expansion. Do you guys, did you have any shipments this quarter or just otherwise what's the kind of interest you're getting and any detail on orders in general? And then also if there is, I mean are you seeing more interest on the low side of the mid, on the mid-tier?

Thanks. I didn't hear, if you were on Nick I didn't hear you. I just heard you at the end there.

Okay, I'll repeat. The international expansion just looking for, you know, if you had any shipments in the quarter and just generally, you know, what kind of interest you're getting and if that's tilted to the low tier or the mid-tier.

Sure. So just to summarize for everybody that the two previous models that were targeted international market were 1 Plus in Q1 launched a phone. Their 1 Plus 13th their flagship and that's not, I would say it's more of a flagship oriented phone. They did include our visual processor and target IRX internationally, but it wasn't all in in gaming, let's say. And then the second phone was this phone that we did with the division of the Infinix GT20. That was absolutely targeted at competitive gaming. They've seen good demand. It's probably tripled over their previous model, their GT10. They did a very good job marketing it towards competitively priced international markets. They ship no phones into China. Their target markets are Africa, South America, Southeast Asia, Central Asia. And they did a very good job in marketing and right now we see reasonable volume from that volume for what we expected going into the design activity.

Okay, that's helpful and that's great to hear about the transition stone. For the new projector SoC, congrats on the progress there. Will the ramp in the fourth quarter be able to offset, you know, the general seasonality? Yeah,

I would say that yes. Normally Q4 is a little bit seasonally down over Q3. I would say it won't be this year, but in general what they're going to do is slowly replace some of the older models. So what you'll do is as the new processor comes online, it will give a little bit of positivity to the overall projector numbers. The ASP is higher than the previous devices. So as it replaces, it does two things. It replaces some of our own devices, but it also replaces a competitor's device. So once it's been fully adopted, we'll have a higher market share at our largest customer and then we have a derivative product that we're introducing to the rest of the market, but those models will not start shipping till 2025. Thank you. You're welcome. Thanks, Nick.

Thank you. And as a reminder, if you would like to ask a question, please press star 1-1.

I'm showing no questions in the queue at this time. I would

like to turn the call back over to management for any closing remarks.

Thank you for attending today's call. We look forward to bringing progress over the next coming months. We'll talk to you on the next quarterly call.

This concludes today's program. Thank you all for participating. You may now disconnect.