Pixelworks, Inc.

Good day, ladies and gentlemen, and welcome to Pixelworks, Inc.' 's fourth quarter 2024 earnings conference call. I will be your operator for today's call. At this time, all participants are in the 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 Investment, excuse me, with Investor Relations. Please go ahead.

Thank you, Lisa. Good afternoon, and thank you for joining us on today's call. With me on the call are President, Pixelworks President and CEO, Todd DeBonis, and Chief Financial Officer, Haley Aban. 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 fourth quarter and fiscal year of 2024. Before we begin, I'd like to remind you that various remarks that 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, Wednesday, February 12, 2025. 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 its 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 conference call, we refer to net loss attributable to Pixelworks Inc. as simply net loss. For additional details and reconciliations of GAAP to non-GAAP net loss and GAAP net loss to adjust the 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.

I appreciate you joining today's conference call. I am currently watching a full moon over downtown Pudong in Shanghai. So I'll start with a brief recap of our fourth quarter financial results. Revenue was within the range of guidance with sequential growth in home and enterprise, helping to offset the anticipated product transition in our mobile business. Gross margin exceeded expectation, expanding over 340 basis points sequentially and nearly 1,000 basis points year over year. Combined with the realized benefits from our previously implemented and ongoing initiatives to reduce costs and increase operational efficiencies, we exited the year with significant improvement in our bottom line quarterly results. Now, for those accustomed to the typical format of our commentary on our previous conference calls, the flow of information and update on today's call will be a little different. More specifically, given the strategic review process currently underway with our Pixelworks Shanghai subsidiary, I'll begin with comments on our TrueCut Motion business in the U.S., then provide a detailed update on the developments specific to our majority-owned subsidiary in China. Today, Pixelworks TrueCut Motion platform remains the industry's leading and, in fact, only platform for the creation and delivery of motion-graded content. To recap, over the past 12 months, we've achieved a number of key ecosystem milestones, including a multi-year home entertainment agreement with Walt Disney Studios, a multi-year multi-title theatrical agreement with Universal Pictures, five major titles from three different distribution studios, and a compelling global compatibility footprint of over 1,100 of the world's highest-grossing premium large-format theaters. We are entering 2025 with momentum across both filmmakers and studios, with commitments on an additional five major theatrical releases, and we are targeting to double that number by year-end. We are also working to expand our title growth and motion-graded scalability through industry-leading partnerships, and post-production and visual effects companies. Our long-term plan has always been to bring TrueCut Motion to the mass market through home entertainment devices. And today, as a result of our momentum and foundational investments in the ecosystem, we are in active discussions or formal evaluations with three major device brands for potential incorporation of TrueCut Motion capability into their future devices. While we still must execute and convert these engagements into contractual agreements, 2025 has the opportunity to be a transformational year for our TrueCut Motion business. As a reminder, our TrueCut platform, as well as all associated intellectual property and tools, are 100% owned and managed by the U.S. parent company, Pixelworks, Inc., Turning to our Pixelworks Shanghai subsidiary, which we previously restructured to serve as the center of operations for all of our semiconductor business, including our open market and co-developed visual display processing chips for digital projector, mobile, and video delivery markets. I want to start by highlighting a few new opportunities that our team is currently pursuing. Then I'll comment on our existing mobile and home enterprise business, and provide an update on the strategic review process. As part of our ongoing focus to drive renewed growth and position the company to achieve profitability, we recently established a new framework for selectively providing ASIC design services to customers. In addition to the incremental revenue opportunity, these services also provide the benefit of fully utilizing our highly skilled ASIC engineering team and software resources. We are looking to secure our first customer engagement to provide a series of turnkey design services for a large international OEM. Also notable, the new program that we will be supporting includes the potential license of one or more blocks of display intellectual property. Based upon the current proposed scope, we believe this initial design services agreement could meaningfully contribute to our anticipated total revenue growth as soon as mid this year. Separately, but with the same goal of further leveraging our existing available resources, we're also engaged in active discussions with several other unrelated parties around agreements to license specific intellectual property for use in their respective products. To the extent that these discussions result in an agreement, the potential proceeds would represent high margin upside to the current forecast of our existing product businesses. Additionally, we believe these engagements could significantly accelerate momentum with our mobile gaming ecosystem efforts. And lastly, we are also currently evaluating an opportunity with a prior transcoding customer who recently approached us about placing a multimillion-dollar order for one of our legacy transcoding chips that was recently EOLed or end-of-life and is no longer in production. Our team is working with our supply chain partners to confirm whether this large limited production run of the legacy device is technically feasible. However, the initial assessment looks favorable. If we are ultimately able to accept and fulfill this customer's order, it will contribute to significant revenue upside on the second half of this year. Shifting to gears to a review of the subsidiaries and markets, starting with our mobile business. As expected, mobile revenue in the quarter continued to reflect the previously articulated headwinds that impact the majority of 2024. During the quarter, we announced our most recent win with Vivo's newly launched IQOO Z9 Turbo L smartphone. This phone is a refresh model following the success of the original IQOO Z9 Turbo launched earlier this year, both of which incorporated our X5 Turbo visual processor and targeted the mid-tier market segment. Entering the new year, we remain focused on several leading customer engagements on smartphone programs targeted for launch over the coming quarters. Collectively, these new programs represent a combination of significant unit volume opportunities for both our newest generation flagship mobile visual processor, as well as a cost down derivative of our X5 series processor. Specific to our cost down X5 visual processor, We have been working closely with a lead customer since the middle of last year to enable an innovative graphics and animation accelerating solution specifically targeted to mid and entry level smartphones. Additional OEMs have also expressed interest and they are evaluating our derivative X5 processor to solve the frequent technology mismatch between lower end application processors and the high frame rate capabilities of current generation display panels. Consistent with my comments on the previous call, we expect to begin ramping shipments of this solution to our lead smartphone customer in the second quarter. Finally, with respect to the home and enterprise business predominantly comprised of our visual processor system on a chip for three LCD digital projector market, revenue was up sequentially driven by a combination of increased projector SOC business as well as the anticipated contribution from our EOL of transcoding products. For the full year, Holman Enterprise was effectively flat, reflecting a relatively stable market dynamic and end demand for digital projectors. As anticipated during the quarter, we completed the first production shipments of our newest projector SOC to our large co-development customer, and we expect to gradually ramp additional shipments to this customer over the course of 2025. For our overall projector business, we expect historical double-digit seasonality in the first quarter, followed by sequential growth beginning in the second quarter, consistent with typical trends of seasonal demand. For the full year, we currently anticipate total projector business in 2025 to look similar to 2024. Taken together, we do expect a slower start to the year in terms of total revenue. However, we believe there are multiple drivers that will contribute to a sizable rebound starting in the second quarter, including the beginning of the return of mobile revenue growth. Additionally, we have continued to identify areas to further reduce fixed cost and increase operational efficiencies. Once fully implemented, we expect an additional 10% reduction in our run rate operating expenses. These savings will start toward the end of the first quarter and be fully captured by the end of Q2. Also, we expect the benefit from additional subsidies during the year as is customary with the little giant status our subsidiary has achieved. Combined with our for return of top line growth, we believe that our Pixelworks Shanghai subsidiary will achieve profitability for the full year of 2025. With that as a backdrop, I'll provide a brief update on our ongoing strategic review process with our advisor, Morgan Stanley. As discussed on the previous conference call, we initiated a formal and comprehensive review process in the latter part of last year after receiving inbound strategic interest in our Pixelwork Shanghai subsidiary. We have since fielded vetted indications of interest from additional parties, all of which that are currently progressing through various stages of due diligence. Together with our financial advisor, we are simultaneously evaluating potential ownership and collaboration structures to determine the optimal path for both enhancing Pixelworks Shanghai's long-term growth potential, as well as maximizing value for shareholders. While today there is no definitive timeframe in which this process will be completed, we are encouraged by the progress and respective dialogue to date. In summary, We believe we've made significant progress with regards to our cost structure over the last six months, and we'll continue with that effort over the first half of this year. We expect initial evidence of a renewed traction in mobile during the first quarter, followed by the potential for an aggressive ramp of production commitments and revenue as we approach the middle of the year. Additionally, with the recent push towards near-term adjacent revenue opportunities, we've positioned our Shanghai subsidiary on a clear path to achieving profitability. And finally, our multi-year evangelism for Pixelworks' TrueCut motion grading platform continues to capture growing mindshare, and we expect this to contribute toward further substantive traction in 2025. With that, I'll turn the call over to Haley to review financials and provide guidance for the first quarter.