Pixelworks, Inc.

Good day, ladies and gentlemen, and welcome to the Pixelwork Inc's first quarter 2025 earnings conference call. I will be your operator for today's call. At this time, all participants are on a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you'll need to press star 1-1 on your telephone. You will then hear an automated message advising, your hand is raised. To withdraw your question, please press star 1-1 again. As a reminder, this conference call is being recorded for replay purposes. I would like to turn the call over to Brett Perry with Shelton Group Investor for any questions or questions. please feel free to ask them in the chat box. Kevin, please go ahead.

Thank you, Kevin. Good afternoon and thank you for joining today's call. With me on the call are Pixelworks President and CEO Todd DeBonis and Chief Financial Officer Haley Amun. 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 first quarter of 2025. Before we begin, I'd like to remind you that various remarks we make on this 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, May 13, 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 10K for the year ended December 31, 2024, 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 restructuring costs and stock-based compensation expense. The company uses these non-GAAP measures internally to assess its operating performance. We believe the 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, we'll refer to net loss attributable to Pixaworks Inc. as simply net loss. For additional details on a reconciliation 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 serve the call over to Pixaworks CEO. Todd, please go ahead.

Thank you, Brett. Good afternoon and welcome to everyone on the phone and webcast. We appreciate you joining us for today's conference call. As reported in our press release earlier today, first quarter results were consistent with our expectations. Revenue reflected anticipated first quarter seasonality in the home and enterprise market, which was partially offset by sequential growth in our mobile business. We also realized significant benefits from our previous and continued actions to streamline our cost structure, with first quarter operating expenses down more than $2 million year over year. Similar to the format and flow of remarks last quarter, I'll begin with comments on our true cut motion business in the U.S. and then review the development specific to our majority owned Pixaworks Shanghai subsidiary, including an update on the strategic review process. Starting with our true cut motion platform, as discussed last quarter, achieving a tipping point for broader adoption and commercialization requires creating momentum across an ecosystem comprised of filmmakers, studios, content distributors and exhibitors, and device manufacturers. We continue to make tangible progress on all these strategic fronts over the last quarter. First, with respect to the broader film industry. For the first time since the pandemic, there are indications of an uptick in activity from filmmakers and studios. This includes a positive trajectory for both the planned number and quality of new release theatrical titles, representing a positive shift in the overall industry landscape from prolonged headwinds to a tailwind. Specific to true cut motion content, we are still targeting to double the number of titles year over year from five in 2024 to 10 in 2025. In line with this growth in titles, we are seeing announcements of major capital investments from both or by exhibitors in both the standard and large format premium laser theaters that benefit the most from the true cut motion format. As of today, our exhibition ecosystem includes over 1500 of the world's highest grossing premium theaters. Additionally, we have maintained our focused efforts to expand the true cut ecosystem in support of accelerating future content growth and scaling access to motion grading capabilities. As evidence of our most recent progress in traction, during the corner, we formalized a strategic partnership with a market leading post production company. Notably, this partnership serves to bring true cut motion further upstream in the larger post production process, streamlining the accessibility of true cut motion grading tools to more filmmakers. As this and other partners come on board, we will scale our ability to bring filmmaker awareness of true cut leading to further growth in title releases. With our collective theatrical ecosystem efforts approaching critical mass, we've begun engaging deeper discussions with targeted leading device companies to incorporate true cut motion capability and certification in future devices. On our previous conference call, I referred to active dialogue with three major device brands. What I can share today is we have recently completed rigorous certification testing with one of these brands, allowing us to start jointly engaging with streaming service providers. This robust demonstration of a major improvement in the user experience for film in the home validates our progress towards the end goal of bringing true cut motion to the mass market via home entertainment devices. Turning to our Pixelwork Shanghai subsidiary, which as a reminder comprises all of our semiconductor business, including open market and co developed visual display processing chips for the mobile as well as home enterprise markets. Starting with an update on the mobile business. As expected, mobile revenue increased sequentially in the first quarter, primarily reflecting shipments of visual processors in support of customers previously launched smartphone models. Driving renewed and sustained growth in mobile remains among our top priorities. We are making steady progress on the product transition to our latest visual processing solutions. This includes expanding our serve target market with our new low cost mobile graphics accelerator solution for the mid and entry level smartphones. Our current focus continues to be on a co development of capabilities with a lead mobile OEM customer on multiple programs targeted for launch later this year. Separately, we also have multiple active program engagements with additional mobile OEMs for both our X7 Prime solution as well as our latest flagship mobile visual processor. Alongside our focused efforts to secure new design ends for our latest visual processor solutions, we are continuing to drive innovation aimed at expanding the mobile gaming ecosystem. In April, we announced our strategic collaboration with Tencent's Perfdog, a well established platform for performing mobile gaming testing. The motivation behind this collaborative project was to help the gaming ecosystem overcome the specific technical challenges associated with objectively and reliably testing visual display performance across mobile devices that incorporate a dedicated visual processor. As a result, we jointly introduced the Perfdog, the frame generation index with Perfdog, the frame generation index, which is a multi dimensional framework for quantifying and evaluating mobile gaming performance. This innovative index for performance testing provides gaming and smartphone developers with precise real time data for benchmarking, enabling enhanced optimization and ultimately superior visual display performance for mobile gaming. Shifting to our home enterprise business, which following our completed end of life shipments of transcoding products in the fourth quarter is now exclusively comprised of our visual processor system on a chips for 3 LCD digital projector market. Revenue was down sequentially consisting with the typical first quarter seasonality as Japanese OEM customers managed down internal inventories in advance of their fiscal year end. Projector only revenue for the quarter was effectively flat year over year. Acknowledging the increasingly dynamic global macro and trade environment, we haven't seen any significant impacts on the projector market, nor any change in order patterns from our large co development customer. Barring any larger global economic shifts, we continue to anticipate total projector business in 25 to look similar to 2024. Apart from our primary mobile and home enterprise businesses, I previously outlined several new adjacent revenue opportunities that our team is pursuing. Today, all of these engagements remain remain in play with the potential to contribute meaningful upside revenue in support of our focus on driving renewed growth and paving the path to profitability. Briefly recapping these opportunities and their current status. First, we established a framework to provide ASIC design services, and we are engaged with a large international OEM to become the first customer for turnkey services as well as a potential licensing of our display IP. We are currently in advanced discussions, including review and negotiation of technical details with this anticipated lead customer, and we believe this initial design services engagement could contribute meaningful revenue as soon as the third quarter. Separately, we're continuing to advance discussions with several unrelated parties to license specific intellectual property for their products. These respective license opportunities span multiple different end markets and include the potential to accelerate our efforts towards expanding the mobile gaming ecosystem. Finally, we now have two different prior transcoding customers that have indicated interest in ordering our recently end of life transcoding chips that are no longer in production. Our team has recently confirmed that a limited production run of these legacy chips is technically feasible if initiated within a prescribed period. As such, we're prepared to accommodate one or both customers should they choose to move forward. Bringing everything together and looking at the big picture, we expected the first half to be challenging from a total revenue perspective. We proactively took a series of actions to significantly reduce our cost structure and streamline the entire organization. Today we have engagements across a diverse set of primary and secondary opportunities to drive renewed top line growth. Taken together, we are well positioned to meaningfully benefit from the upside revenue, and we continue to believe that our PICS at Work Shanghai subsidiary is poised to reach profitability in the second half of 2025. As most on this call are aware, we engaged Morgan Stanley and initiated a formal review process in the later part of 2024 after receiving inbound strategic interest in our PICS at Work Shanghai subsidiary. Together with our financial advisor, we have since been engaged in due diligence with several qualified parties. While also continuing to evaluate potential ownership and collaboration structures to determine a more optimal scenario for enhancing PICS at Work Shanghai's long term growth potential as well as maximizing value for existing shareholders. Although the outcome is yet to be determined, we believe the process itself is nearing closure and likely to result in a clear strategic direction for our PICS at Work Shanghai subsidiary within 90 days. In summary, we're focused on executing our strategic and operational objectives in a dynamic global macro environment. We significantly reduced our overall cost structure and expect to realize continued benefits from a more streamlined organization. With respect to our PICS at Work Shanghai subsidiary, we're encouraged by the depth of customer engagements on smartphone programs, particularly for our new mobile graphics accelerator solution. We are also continuing to advance and expect to capitalize on multiple near term adjacent revenue opportunities over the next several quarters. Additionally, remain committed to the path for our PICS at Work Shanghai subsidiary to reach profitability in the second half of 2025. With our TrueCut business, we are continuing to make inroads towards an expanded ecosystem and achieving critical mass required to bring PICS at Work's TrueCut motion platform to more consumers, both in premium large format theaters and ultimately to home entertainment devices. With that, I'll turn the call to Haley review financials and provide guidance for the second quarter.

Thank you, Todd. Revenue for the first quarter of 2025 was 7.1 million compared to 9.1 million in the fourth quarter and 16.1 million in the first quarter of 2024. The sequential decrease in revenue reflected a combination of anticipated first quarter seasonality in the home and enterprise market, as well as the fourth quarter, including higher sales of end of life transcoding products. These were partially offset by sequential revenue growth in mobile in the first quarter. The breakdown of revenue in the first quarter was as follows. Home and enterprise revenue was approximately 5.8 million. Revenue from mobile was approximately 1.3 million. First quarter non-gap gross profit margin was .9% compared to .8% in the fourth quarter of 2024 and .7% in the first quarter of 2024. The sequential decrease in first quarter gross margin was primarily a result of the shift in product mix between our home and enterprise and mobile businesses, as well as less overhead absorption. Non-gap operating expenses of 10.4 million in the first quarter were flat with the prior quarter, however, decreased approximately 2.2 million from 12.6 million in the first quarter of 2024. This -over-year decrease in first quarter operating expenses reflects our previously implemented cost reduction actions through the end of 2024. We've also taken additional cost reduction measures since the beginning of 2025, which we expect to result in further reductions in operating expenses beginning in the second quarter. Collectively, the cost reductions we have implemented over the past 12 months are expected to contribute to a total -over-year decrease in operating expenses of approximately 10 million for the full year of 2025. On an on-gap basis, first quarter 2025 net loss was 6.5 million or a loss of 11 cents per share compared to a net loss of 4.3 million or a loss of 7 cents per share in the prior quarter and a net loss of 4 million or a loss of 7 cents per share in the first quarter of 2024. Adjusted EBITDA for the first quarter of 2025 was a negative 5.8 million compared to a negative 3.6 million in the prior quarter and a negative 3.2 million in the first quarter of 2024. Turning to the balance sheet, we ended the first quarter with cash and cash equivalents of 18.5 million compared to 23.6 million at the end of the fourth quarter. As previously discussed, we have and continue to take action to reduce overall costs and preserve our existing cash balance. Shifting to our current expectations and guidance for the second quarter of 2025, based on our existing backlog, we currently expect total revenue for the second quarter to be in a range of between 8 million and 9 million.

For

the second quarter, we expect non-gap gross profit margin to be between 41% and 43%. This range primarily reflects a unique product mix that includes a newly ramping product with lower initial yields and margins that will meaningfully improve in the third and fourth quarters.

With

respect to our operating expenses, we expect second quarter operating expenses to be in a range of between 9 million and 10 million on a non-gap basis. Note that this range reflects the initial expected benefits associated with our cost reduction actions in March and anticipates only partial realized benefits from our most recent cost actions taken in early May. Lastly, we expect second quarter non-gap EPS to range between a loss of 11 cents per share and a loss of 8 cents per share. That completes our prepared remarks and we look forward to taking your questions. Operator, please proceed with the Q&A session. Thank you.

Thank you. Ladies and gentlemen, if you have a question or a comment at this time, please press star 1-1 on your telephone. If your question has been answered and you wish to move yourself from the queue, please press star 1-1 again. We'll pause for a moment while we compile our Q&A roster. Our first question comes from Suji De Silva with Roth Capital. Your line is open.

Hi Todd. Hi Haley. Todd, you talked about Pixelwork Shanghai reaching profitability. Can you give us some help with what the revenue levels that might be achieved at and maybe what portion of the OPEX is attributable to Shanghai so we can understand that operating model? So

OPEX is approximately, I think going into the back half of the year, we'll be down at $7.5 million, something like this, $7 to $7.5 million for Pixelwork Shanghai. As far as revenue, it's a mix of home and entertainment coming back, projector, mobile, IP licensing, and design services. And to reach profitability, you don't need all of it to happen. You need a chunk of it to happen. And so the mix depends on how it falls in. If all of it happens the way we anticipate, then the unit will be profitable for both Q3 and Q4. But it's still early to say.

Right, understood. Okay, so OPEX for Shanghai, $7.25 million. Got it. And then switching over to Truecut, I'm just curious, your device discussions, are those Chinese brands, given Truecut's early kind of traction there, or are those global non-Chinese smartphone OEMs?

So you asked me about Truecut

and you're asking me about mobile

OEMs?

Well, no, no, device discussions for Truecut. Okay,

okay. Yeah, but you mentioned mobile OEMs. I wouldn't conclude they're mobile OEMs, first of all. That's fair. Got it. And they could be, but I wouldn't conclude that. And they are the ones that I talked about certification testing is not a Chinese. Oh, yeah. Okay. And to be clear, just to give a little bit further clarity there, our focus with Truecut has about, you know, we do want to bring it on a global basis to premium home entertainment devices. But I would say that we've been focused on content generation here in Hollywood for the most part. And we've been focused on home entertainment devices that would be marketed to North America and Europe. Eventually globally, but we're very focused in North America and Europe for the home entertainment ecosystem for Truecut.

Okay, that's helpful, Todd. And then my last question is on the ASIC's design services engagements, which are relatively new here. How would you give a framework for sizing those opportunities and the revenue models associated?

Well, so you talk about design services?

Yeah, I guess there's IP layered in there, so I'm not sure how to...

Well, listen, you offer design services. Other companies offer design services. We're not the first company to do this, right? There are large system OEMs that want custom semiconductor content but don't have an SOC design team that is proficient at start to finish tape out of a 12-nanometer SOC. So they can hire and outsource to other firms. We have done this as co-development in the past or taken NRE for an ASIC. The difference between design services are you can open yourself up to an intermix, a model where you can just do a portion of the design as a design service. You can do all of the turnkey for the design service. You may buy the mass set yourself. The customer may buy the mass set. The customer may do assembly and test. So what you've done is you've opened yourself up to anywhere in the process of design on how you can help this large system OEM get the custom silicon that they're looking for. So to get to your question, revenue size really would depend on how much you do for the customer. To give you – if you did a full turnkey and didn't do production, the customer went and did the production themselves. Depending on what intellectual property is involved in large SOCs and 12-nanometer, I mean they can range anywhere from probably a low of $10 million in costs to a high of $20 million in costs. Now, that doesn't mean you'll do all of it on a turnkey basis. You may do part of it. So I'm not giving you clarity on the design project we're doing on because we haven't closed it yet, but I'm trying to give you a range on what design services at 12 nanometer would look like.

Okay. Helpful parameters. Thanks, Todd.

One moment for our next question. Our next question comes from Richard Shannon with Craig Hallam. Your line is open.

Well, great. Thanks, Todd

and

Haley, for taking my questions. I guess the first one I'll ask here is on mobile. Todd, I think in the last call you talked about kind of a range of outcomes here, one of which would be maybe on the lower side be kind of flat or slightly up this year and then maybe on the high side be more like 2023. Maybe you can just help us understand how the engagements are lining up to anywhere in that range.

Well, I would say, you know, given the guidance we just gave for Q2, it'd probably be hard to replicate 2023 revenue on mobile, which for everybody on the call was approximately $30 million. So we definitely expect an uptick in the second half of the year, but I would say we're probably closer to looking at a 2024 year over year or slightly above.

Okay. And then how do we think about the profile of this, you know, because you talked about some lower and mid-range, you know, kind of ASPs here. How do we think about this profile over this year?

It'll be predominantly on the low end at those revenue levels. And ASPs are sub $2.

Okay, let's jump over to Truecut. You talked about a collaboration with a post production house here. I guess, does collaboration mean it's a done deal or is it still something to be worked out here? And then how do we think about the, you know, this partner here, this collaborator, in terms of how informed they are about how the ecosystem is building? Is this more of a build it and they will come thing or is this highly informed and they know something is about to happen? So

let's be clear. This is we haven't announced the name because we would prefer to announce the name with projects that the two of us have engaged in with a film. And so until that's done, we probably won't announce who it is, but it is a signed agreement. And the nature of the company is the company is a mature, large post production house that does color grading and other forms of post production processing for theatrical titles. They get to see a lot of, you know, we're targeted. If you go look at what we're targeting, you know, we did five films last year. We're trying to double it this year. But these are all, you know, meant to be top 50 type budgeted films for the year. Right. This post production house deals with many of these films already. Right. They get access. I mean, we have access to some of these filmmakers through the studios that we have relationships with. They have access to the filmmakers through other means. So we believe that and what they see is a benefit for it, I think, which is the most important thing. I mean, clearly we're small. Any way for us to expand our reach is good for us. But why would they do it? If they're a large, mature post production company, why would they want to do it? And the reason is, is they clearly see the benefits of what motion grading does to the content and what it brings to premium large format experience. That's one. But two, they want to expand their stickiness, their capabilities to their filmmaker customers.

Appreciate all

the detail. I will jump in on that. Thank you.

Thank you. One moment for our next question. Our next question comes from Nick Dole with Needham and Company. Your line is open.

Thanks for taking my questions. Could you just expand on the two comments you made on mobile? You talked about multiple programs with your lead customer and then additional engagements. I guess the question is, do you mean you're in multiple phones now with that lead customer and those unit shipments are getting us to the revenue levels you just talked about? And then would any additional engagements that you're working on now, would they come in 2025? Would we see revenue in 2025? Thank you.

So the additional engagements are booked design wins with actually the X7P. The co-development or co-collaboration with this lead customer, this is for a new solution that we haven't offered to the market yet. And it's a complete rework of the software for our visual processor. And it is focused not just on enhancing the gaming experience, but enhancing all graphical experience. So what's happening here is high frame rate displays are moving down because the cost of the display itself, the panel, there's no adder anymore to 120 frames per second LCD display. Video mode display. It is almost met parity, if not met parity, with 60 and 90 frames per second displays. So what you're seeing is it moved down to, and I talk in RMB because we're talking to Chinese OEMs that target certain market segments. So this is a thousand RMB or a 1500 RMB type market segment. And they're sold globally, but they're low cost. And as you put high frame rate displays in these lower end phones, the APs were not designed to take advantage of a high frame rate display. So if you add our graphics accelerator, it can look like a flagship experience. And this is not just from a gaming experience standpoint. This is from like anybody that has a phone in front of them right now listening to this call, if you have a ProMotion display from Apple, this thing is a variable display up to 120 frames per second. If you scroll up and down on it, the faster you scroll up and down on it, it will adjust to what you're doing. It'll do high speed or it'll do low speed. If you try to do this on these low end phones, you'll see lots of visual artifacts. The GPU doesn't keep up with the pixel rendering or the frame generation. And so what we're doing is bringing an accelerator to this low end market. What we've done with this co-development customer is worked with their engineering team, their system engineering team and software team, to vet out all the little issues. There's lots of little issues between us and the AP that's involved and Android. We've reached a point where system engineering has approved the solution to be marketed internally to all the program managers and product planners that we're targeting. We're at that stage in the process. We anticipate it will generate multiple design wins, not only with that customer, but eventually with multiple customers. There are no designs in the bag as of yet. There are designs that are available to us this year.

And second, could you help pull out the gross margin impact regarding the yield issues? Where are the meaningful yield improvements coming from, and can that get you back to mobile gross margin levels in the mid-30s? Thanks.

So the product issues are not with mobile. The product issues are with a new projector chip we have that – it's not a big thing. When you ramp a chip, sometimes you need to get your yield up, and until you run volume, it's hard to do that. And so the first quarter or so of high volume, you can experience lower than expected yields. And sometimes you recapture these devices. You don't always throw them away. Sometimes it's just enhancing your test program. But if it's within a quarter, then it'll look like lower margin product. So I think what we're trying to articulate to you, this is not a pricing low margin mix issue. This is us ramping a product that we expect – we're already making yield advancements. So I expect it to be back on that side, back to where our target yields were. But with that said, as we ramp mobile, mobile margins will be lower than projector. So the mix will become more important as we ramp mobile again. Right. All right. Thank you. Thanks, Nick.

And I'm not showing any further questions at this time. And as such, this does conclude today's presentation. You may now disconnect and have a wonderful day.