Q1 2020 Earnings Call

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Ladies and gentleman Vince if your later, but it's gone for instance control to begin shortly we've continued to somebody and thank you for your patience.

Ladies and gentlemen, since your operator, but his conference that's supposed to be shortly these continue to toboggan. Thank you for your patience.

[music].

Good day, ladies and gentlemen, and welcome to beautiful versus Incorporated's first quarter 2020 earnings Conference call I Hope you're operator for today's call.

Hi, sorry, [laughter] certain other stuff.

Following management's prepared remarks, we will conduct a question answer session, if you'd like to ask a question.

There are one on the telephone keypad.

This conference call this being recorded for replay purposes.

No lots of trying to call over to Pixelworks CFO Mr. a larger number.

Thank you good afternoon, everyone.

Thank you for joining us today with me on today's call to stop the bonus.

Pixelworks precedent and she'll.

The Bush up today, Scott first goal is to supplement information provided in Pixelworks press release issued earlier today announcing the Companys financial results.

For the first quarter of 2020.

Before we begin I would like to remind you that various remarks, we make on this call.

Including doors or lots of projected future financial results economic and market trends I.

And our competitive position constitutes forward looking statements [laughter]. These forward looking statements on the older statements made on this call that another historical facts are subject to a number of fresh and such and tease that may cause actual results to differ materially.

All forward looking statements are based on the company's beliefs as of today Thursday April 32020.

The company undertakes no obligation to update any such statements reflect events or circumstances occurring after today.

Please refer to today's press release, an annual report on form 10-K for the year ended December 31 2019.

Subsequent to actually she finds in.

For a description of factors that's good color forward looking statements to differ materially from actual results.

Additionally, the company's press release and management's statements. During this conference call will include discussions of certain measures and financially because they shut in GAAP non-GAAP terms, including gross margin.

[music].

Operating expenses net income loss net income loss per share.

Non-GAAP measures exclude gain of Sheila batson's inventory step up and backlog amortization.

Amortization of acquired intangible assets stock based compensation expense and restructuring expense.

The company uses these non-GAAP measures entirely to assess our operating performance. We believe these non-GAAP measures provided meaningful perspective on a core operating results underlying cash flow dynamics.

But we caution investors took on C., though these measures in addition to.

That's a substitute for no superior to the company's consolidated financial results as presented in accordance with GAAP.

Also included in the company's press release definitions and reconciliation.

She doesn't have GAAP to non-GAAP net loss and GAAP net income lost adjusted EBITDA.

We'll provide additional details.

With that said I will now turn the call about to talk with his opening remarks. Thank you.

Thank you Elias and good afternoon, everyone joining us on today's call and webcast.

I hope that you and your family's abstain safe and remain healthy during these unprecedented times.

My sympathy and well wishes go out to all those who have suffered loss or hardship associated with the cold with 19 pandemic [noise].

I also want to sincerely. Thank the many individual serving on the front line to heal and care for others in the countless communities that have been impacted.

Given the current environment and heightened uncertainty we accelerated our reporting this quarter by disclosed gene preliminary Q1 results in early April.

Along with a simultaneously published shareholder letter that provided real time context on how the company was performing as well as responding to the cobot 19 pandemic.

Consistent with our preliminary indications our first quarter results were in line or above our original guidance.

A few of the notable highlights from our for Q1 financials included.

Mobile revenue grew 64% year over year.

Non-GAAP gross margin expanded to approximately 52% [noise] and we successfully implanted implemented cost reductions, resulting in operating expenses coming in approximately 10% lower than the midpoint of our guidance.

[noise] why wouldn't correct.

Our long term shareholders refer you to refer to our recent filings and read My April 7th letter in its entirety.

I want to take this opportunity to briefly reiterate several of the key points.

[noise] Pixelworks has operations in a number of countries with physical locations spanning across Asia and North America.

During the quarter, we proactively responded to the global spread to the covert 19 pandemic, making the safety and well being of our roughly 225 employees are single highest priority.

Beginning in China, which was impacted first and then subsequently in other locations.

We facilitated and effectively utilize remote working procedures to maintain all critical functions.

Following the extended Chinese new year, we reopened and gradually ramped up staff and our Shang in Shanghai and Shenzhen offices.

They have been fully operational since early March including active engagement and support of our customers as well as ongoing new product development efforts.

Our employees in Taiwan, Japan in North America have remained fully operational throughout however, with the exception of Taiwan, We're continuing to work remotely consistent with the current local and national guidelines in these geographies.

Since the onset of the pandemic.

Our team has demonstrated term tremendous agility and dedication to providing uninterrupted support to pixelworks customers.

[noise] without question the impacts of Cowen 19, pandemic have been extra ordinary and widespread resulting in a more challenging business environment and heightened uncertainty for both customers and suppliers.

Preparation for what is likely to be a more prolonged recovery of the global economy. We recently implemented a series of actions to further contain costs without impairing our ability to support customers and continue executing on our mobile growth initiatives.

To briefly summarize several of the key actions take it include.

Elias and I have both taken a 10% reduction in our base salary.

The executive staff has agreed to a salary reduction of 10% in exchange for restricted units restricted stock units.

The executive bonus program for 2020 was eliminated all other bonus and sales incentive programs remain in place.

The board of directors have agreed to receive or issues and move cash director fees for the full year of 2020.

Annual Merit increases for all employees will be delayed by one quarter.

All new hiring has been temporarily put on hold with the exception of a few critical open Rex.

With the exception.

Critical customer related travel within China, all corporate travel has been suspended.

We extended the program offered to senior management to exchange up to 10% of quarterly base salary for our shoes to the rest of our organization and the program was well received with 55% of all of our employees participating.

[noise] as a result of these collective actions, we have immediately reduce cash operating expenses by more than 10% from the midpoint of our Q1 guidance.

In further support of preserving cash the company applied for and recently secured funds as part of the P.P.P. loan program in the United States.

I'll, let Elias provide detailed however, I will say that we are actively pursuing other similar relief programs in multiple geographies in which Pixelworks operates.

Turning to a brief update on each of our businesses starting with digital projector.

As discussed extensively in recent quarters, the broader projector market has consistently been confronted with a series of headwinds.

Resulting in the continuation of a prolonged inventory correction.

Additionally, the first quarter.

Has been sees a seasonally soft quarter as Japanese OEM customers seek to reduce inventory prior to the fiscal year ending in March.

During the quarter the impact of these underlying market dynamics was further exacerbated by the recent challenges associated with Cobot 19.

More specifically some of our projector customers are currently prodrug production constrained due to a factory shutdown and or limitations on supply of certain projector components.

To be clear none of these constraints involve components provided by Pixelworks. However, we do expect these challenges to moderate production orders by certain customers in the near term.

Despite these challenges design in activity has continued to move forward as we actively migrate all of our projector customers to new SLC platforms, all of which have more favorable margin profiles than the previous generation Esso sees.

Although end demand in production has been impaired in some areas customers are still ordering and tender activity and in China has started to pick up in recent weeks.

In our video delivery business as anticipated we saw a continuation of the inventory correction for our customers consumer PD ours and set top boxes in Japan, although revenue from video delivery increased sequentially in the first quarter, Japan as since taking a more aggressive steps in response to the pandemic to control the spread of the outbreak.

In addition to putting downward pressure on consumer demand in the second quarter. The recent actions by the Japanese government increase the uncertainty on the timing and magnitude of the recovery of sales of PV ours in Japan.

Despite the headwinds to the end market demand, we remain closely engaged with existing customers and our supporting new program development.

Additionally, in Q1, we signed a development contract with a new well known consumer electronics brand in Japan to utilize our advance for K Transcoder Src for a video delivery platform.

Here in the U.S. sales of our Olivier Trans quarters for cord cutters devices, including the air TV to remain solid following record revenue from OTA in the fourth quarter.

Also during the quarter, we announced our newest collaboration with Qualcomm on a joint referenced solution to incorporate OTI HD TV broadcast with Fiveg wireless broadband service offerings.

More specifically this jointly developed platform combines pixelworks end industry, leading OTI, a transcoder and Qualcomm Snapdragon XT five fiveg modem RF system, enabling network operators Internet service providers and Oems to rapidly deploy a fully integrated integrated and optimized solution.

In future home media equipment.

[noise] shifting to updates on Truecar and our broader mobile business, we continue to make tangible progress on our true cut content mastering and delivery platform.

And we generated significant momentum on multiple engagements with prospective customers and partners going into March.

Although work from home mandates have slowed the pace of troops that customer valuations, particularly those in California in Hollywood, We remain focused and continue to advance the internal R&D development efforts.

In China, we have largely resumed engagements with multiple prospective customers, including nine onsite visits and evaluations.

We also recently completed the migration of the core true cut tools to our advanced GPU platform and the first build of our new stand alone on Prem GPU centric processing system.

Together, bringing over 100 times performance improvement resolution support up to 8-K and frame rates up to 120 frames per second.

These systems are now ready to be installed and supportive evaluations by select studios and post production partners once their facilities reopened and it can be done in a safe manner.

In our broader mobile business, we demonstrated a significant increase in the adoption of our Iris visual processors and software across expanded number of customers.

Over the last two months Pixelworks visual processors are soft iris solution or a combination of both enabled advanced display quality intend smartphones launched by five different customers.

Together exceeding the number of devices and customers announced for the full year in 2019.

Six of these newly launched devices represent expanded adoption by existing customers, including the black shark, three and three pro gaining smartphones as black Sharks latest generation of devices, specifically targeted at gamers the flagship gaming phones leverage Qualcomm Snapdragon 865 mobile platform.

And where the first ever smartphones to incorporate our newest fifth generation Iris processor.

Then building on the initial devices introduced last year as part of our ongoing collaboration agreement.

In March H.M.D. global launch the Nokia 8.3, Fiveg, featuring it's pure display branded viewing experience powered by Pixelworks visual processor.

And in April we announced an extension of our partnership with Tcl Communications in conjunction with the launch of three new Tcl branded smartphones.

The Tcl 10 pro the 10 ml and that Tcl 10 Fiveg.

The scene and always H.D.R. viewing video viewing.

Also you need to the devices every find index to series display is factory tune with pixel works highly efficient color calibration software to provide industry leading accuracy.

This is resulted in the find next to pro receiving the highest a. plus rating from display mate being touted as having close to textbook perfect calibration accuracy and performance that as visually indistinguishable from perfect.

And then most recently one plus aggressively raise the bar on display quality for the entire smartphone industry with the launch of it's one plus eight and 81 plus a pro feature in our most advanced display processing solutions. The one plus a pro features 120 Hertz Alma led fluid display.

With Quad H.D., plus the resolution capable of up to 1300, <unk> knits of peak brightness and it is the first ever smartphone to incorporate pixelworks patented dual motion engine technology.

Pushing the boundaries of the smartphone visual experience. The eight pro also includes always aged your video D.C. demean true flesh tones tone adapt to display and Pixelworks color calibration.

While learning the highest a. plus rating from display made the one plus eight pro shattered 13 industry Records.

Quality, taking mobile entertainment to a whole new level.

As a group effectively all of the recently launched smartphones have received excellent reviews for the display quality in performance, considering the sheer size and resources available to the mobile industry as a whole.

The industry, leading displays featured on many of these devices serve as a broad validation of pixelworks technology or value proposition as well as a testament toward split expertise and the execution of our engineering and support teams.

[noise], while we've observed the timing a certain customer program slip out slightly over the past few months, we are still on track to be incorporated in at least 12 devices launch during the first half of 2020.

In terms of how the remainder of 2020 plays out in our mobile business. We are currently cautiously cautiously optimistic.

The overwhelmingly positive reviews of Pixelworks enabled displays on recently launched smartphones have created excitement in incremental interest in or advanced display technology.

We continue to have a very solid pop pipeline of customer engagements and we are actively working to secure new and accelerate existing follow on programs with current and prospective customers.

Yeah with all of the seemingly positive indicators customer sell through of newly launch devices and consumer into men are still less than certain in the near term given the current global economic backdrop.

That said overall, we believe the future momentum remains extremely positive.

To close down my prepared remarks, it goes without saying that cobot 19 pandemic has brought about significantly more challenging business environment.

As well as increased uncertainty.

Management team of picks. It works is focused on what we can control and will rapidly respond with proactive indefinite actions to minimize the potential impact to our stakeholders.

As a result of our recent an ongoing actions I firmly believe that we've position the company positively given the current environment <unk>.

While preserving the ability to regain strong momentum as the global economy and market demand recover.

I would also remind our shareholders that our customer base and revenue contribution across her and markets is largely comprised of tier one multinational companies.

Moreover picks it works is often a sole source provider of processors and solutions to many of our customers and under a scenario in which the environment becomes more challenging the majority of these companies and their need for picks. It works technology is not going away.

Just as it had a beginning.

This pandemic will also have an end.

As an organization, we have an incredibly determined incapable team that is focused on the continued execution.

Positioning pixel works to thrive in a post covert 19 world.

[noise] would that our hand, the call overdue Elias to review the first quarter financials and provide our <unk> guidance for the second quarter.

[noise] thing <unk>.

Revenue for the first quarter of.

Wasn't funny was 13.8 million compared to 16 million under the fourth quarter of 2019.

<unk> to revenue of 16.6 million in the first quarter of 2019.

First quarter 2020 revenue reflects a combination of seasonality.

On the on going inventory corrections in the digital projector a video delivery markets.

Partially offset by the on disability over your group in the <unk>.

The breakdown of revenue during the first quarter was as follows.

Revenue from digital projector was approximately 8 million.

Video delivery revenue was approximately 3.2 million.

Avenue for a more more was approximately 2.6 million comprised large <unk> visual processes on soft Irish solutions.

Nongaap gross profit margin was 52.1% in the first quarter of 2020.

Bed to 48% and the fourth quarter of 2019.

I'm, 53.3% of the first quarter of 2019.

Nongaap operating expenses, when 9.7 million bows and the first quarter of 2020, <unk> 10.4 million and the fourth quarter of 2019.

10.3 million in the first quarter of 2019.

Just a it would for the first quarter of 2020 was a negative 1.5 million compared to a negative 1.7 million and the fourth quarter to those 19.

And the negative.

0.5 million and the first quarter of 2019.

On the non got bases first quarter 2020 lip gloss was 2.6 million.

<unk> seven cents per share compared to a net loss of 2.3 million.

<unk> says bush a an approach quarter.

On the net loss of 1.5 million or loss of four cents per share the first quarter of 2019.

Moving to the balance sheet.

We ended the first Gordon 2020 with cash cash equivalents on short term investments are for approximately 20.4 million.

Compared to approximately 14.2 million at the end of the fourth quarter of 2019.

The sequential increase reflects a combination of collections on a significant portion of guns receivable.

From certain customers in the first week of January.

And I grabbed down for approximately 5.2 million from what $10 million line of credit with Silicon Valley buying during the quarter.

Start outlined we have productively taken a series of actions to a string thing to companies financial position for potentially more prolonged economic recovery.

This included a meaningful reduction in operating expenses from my previous quarterly run rigs.

[noise]. Additionally, we have recently completed applications for multiple government back stimulus program, so close to geography.

In which Pixelworks operates.

We have successfully secure the beat check protection program known P.B.B. I received associated phones earlier this week totaling seven other $97000.

<unk> terms of 1% of what you use on the first payments of this little deferred for six months.

We also received the relief from the Chinese government in a form of little Wembley benefit payments covering February through June 2020 of the amount of approximately 150000.

We blonde to continue actively pursuing puts a suspicion although government programs across all applicable geography.

I was disclosing that it gave file in early April 2020, with the exception of the she on cheerful.

Compensation program <unk> offered to the executive team was recently extended to all employees to receive are issues.

And you have a salary cuts of 5% of 10%.

The response was very positive with 55% participation.

Which we expect to results in contributes to the company for approximately three and a key into too.

We will continue to offer this program every quarter until with bus this pandemic.

In terms of other balance sheet metrics for the first quarter.

They seals outstanding where 58 days, a quarter and compared with 61 gaze at the end or the fourth quarter.

And then to returns was 5.2 times in the first quarter compared to 7.8 times in the private quarter.

Now turned out guy those for the second quarter of 2020.

We expected me a term environment to remain challenging.

<unk> customers across offend markets work to navigate unique hurdles associated with the equivalent 19 pandemic.

We believe that impact on our customers would be varied, but meaningful to the second quarter due to hide to the uncertainty related to and market demand.

A swell us potential supply and demand imbalances for such an components are related to those provided by pixel works.

Such and based on current order trends and backlog.

We're expect revenue the second quarter to being a range off between.

$8.5 million on $11.5 million.

We expect Nongaap gross profit margin of between 54 and 57%.

Down anticipated improvements in gross margin.

Primarily reflects expectation of particularly.

Favorable product mix on product costs improvements in the second quarter.

[noise], we anticipate upbringing expenses and the second quarter to range between 9 million on $10 million on no on the basis.

Lastly, we expect second quarter <unk> has to be in the range of between a loss of six cents on a nongaap loss.

Oh 40 cents per share.

That concludes our prepared remarks, and we will now open the call for questions.

Operator police procedural matters in if you're on a session. Thank you.

Hmm.

Hi, My with my son reminded everyone.

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<unk> alright, followed by the number one on your telephones.

Again question.

<unk> or one <unk>.

Free sequence and will be coming from the line Uh huh.

Hmm.

Now.

Yeah, I think you've reducing my questions in glad to hear every one.

Environment I wanted to start with just a question about the mix of business.

So you won obviously, we're going to see.

You know all over the place, but curious by segment how how it works and then you are going for a higher gross margin then you call a mix. So we agree that those are related.

About and what also within the higher gross margin unsustainable mean, taking product cost out in within the segments <unk>.

I I'll take it I'll take it initially and maybe the Lions can follow up I, Charlie How're you doing.

Great.

Glad to hear it so.

Margin is improving because we haven't been.

You know on our projector business, which is still I would say a meeting part the largest part of our revenue.

We have have migrated all of our customer and not just our largest customer, but all of our customers to or you know various different percentage levels of our newest S.L.C. platform alright.

And the margin profile on those new S., so seizes significantly higher than the old margin profile.

In some cases, the A.S. teaser about the same in some cases, the S.P.'s or lower so provide some revenue head when but from a margin per set perspective.

Significantly higher and the reason I went to that level of detail is to answer the second part of the question is sustainable and the projector business that absolutely a sustainable were when when the projector business bounces back we expect those margins to stay intact. If not go even a little higher in the projector space because we'll have.

A higher percentage of the overall business will be the new platform out in time so.

So probably a similar story with video delivery.

We have migrated would improve both costs, there and migrated customers to slightly better margin product portfolio.

We expect that to also be sustainable so the the the what I'll call. The legacy business, a video delivery and projector as as the revenue comes back as the inventory corrections from.

Displacement of covert 19.

We get past them, we'll have revenue accelerating at a higher gross margin profile.

Mobile.

You know we've got a mix. There you know we are starting to ship a couple of platforms that are pure soft iris soft Iris gross margin is very good clearly the A.S.P. for those phones is not as high as if we sell you know false that solution for Iris based solution.

But the market profiles pretty good our mid mid range mobile processors. The margin is is pretty good and in our highest n. processor. It's the highest A.S.P., but the margins are the lowest on average it's it's still closer to this quarter's court corporate averages depending on mix.

So on a go for basis I expect the margin profile to to probably look more like what we're guiding into cue to even as we grow.

I think there was one last piece about your question about next you know, we really don't forecast the mix on a go forward basis, but I will give this bit of color.

Every one of our businesses is going through.

You know headwins or in a a inventory correction into two compared to what we had planned for you know we usually plan our annual operating plan late December and we have sort of ink.

And if I look at you know those are not public or <unk> annual operating plan is what we internally managed to but if I sort of look cute too.

Every businesses down compared to that plan.

The mobile I you know you didn't ask the question, but I'm going to offer the answer.

People will want to know with all these launches and I mean very good reviews, I mean, the one plus a pro sold out again.

Still can't get my own version I mean, we have several in the company, but I want my own personal version.

Why would they be doing you know why would we see an inventory correction and cute too and I I just need to remind people that on on if you go back to the December quarter of Q. for 2019, we had a you know 25% of our river was mobile we have that was in anticipation of many of these.

Launches that we talked about and one additional high volume program with Opal you know wasn't announced at the time that it was over it was a large OTM, but it was old though.

But we <unk> it was a very short circuited very small timeframe to capture that design and we did not have enough time to capture that design with the solution, but the customer.

Did a shared risk agreement to build and they took a lot of that inventory.

So they they had to build up the inventory.

They had continued to build up Inventorying Q1.

Forties launches and many of them were delayed one month to to to even three months and then we'll see how how robust. The demand is I mean these are they're flagship phones, both the OPO find X.X. two pro in the one plus phones.

And.

Demand for one cosine is very good.

The corporate phones were were high price demands pretty good for those phones, but these are global based phones, not just China marketed phones.

And as much as China's back I'm not sure the rest of the world is really back.

From a demand standpoints yet.

So maybe that getting gave some of the color you were looking for their on mix, but we we're not going outline and on specifics.

Great very helpful color Oh, Okay. So I wanted.

Oh.

With mobile.

I know so much has changed since then I I wonder.

Maybe just revisit that point and then also along with it sounds like things are by and large doing schedule with maybe a few exceptions on mobile the rest of the year.

There is the ability of.

<unk>.

Is everything progressing the way you would like to to are there are there something you're not able to do in terms of working with the customers to get through their phones launched.

Okay. Yeah. Good question, let me, let me, let me try to give guidance on it.

So yeah I would say that are pipeline you know if you really look at all the the action we've taken.

<unk>.

I wanted to hire significantly more software in support people going into this exact timeframe, we have postpone that hiring that hiring was to support the pipeline of customer program, specifically in mobile a bit into true cut.

We've redeployed some of our like our Toronto based team you know somebody activity and video delivery slowed down even though we signed on a new customer we read purpose some of the individuals there to work on mobile.

All of our mobile programs today.

Oh and designing activity is in China, China is back our shins in office is fully engaged our Shanghai offices will engage travel between Shanghai and she ends in Shanghai in Hong Joe and a few other towns is is is warming back up and you know I have people that actually travel on a weekly basis.

Either through train or or through airplanes, Beijing has not really opened up for travel although I found out yesterday I think within two weeks, we'll be able to travel to Beijing. So we have a cue customers that it's difficult to support in Beijing.

But you know I to me.

To get to the specific question of what our goal is you know our goal to still have mobile be more than 50% of the total revenue the company by queue for the goal is absolutely intact, whether we can achieve it into four or not I would say that that you know.

The.

The odd who went up you know against us that it's going to happen and Q. for.

Not completely out of the question, but it would take.

It would take we would have to close on most of the pipeline of activity that we have for the second half of the year going into the first quarter of 2021, if that happened and you probably still could happen.

I'm worried that if if we if we yeah, we have several new customers that were engaged with.

And if all of 'em turned on with the same level of intensity that that we had over the last six months, we may be resource constrained.

So we are prioritizing the programs were working on with that in mind.

I think.

<unk>, even if the goal is not achieved in the fourth quarter, it's it's not more than a quarter or two out after that.

Okay <unk> so much.

Yeah. Thanks, Charlie Thank you Charlie.

So what's coming from the line of <unk>, great talent airliner now okay.

Okay.

In my questions as well.

Maybe <unk> <unk>.

I guess, maybe a question on on kind of supply chain risks here, maybe if you can kind of help us understand where they may be coming from and you said, it's the non pixelworks related but anyway you into what those are you know in how long. They may continue might be helpful. If for some other calls here last week is with her earnings are that suggested some areas but love.

To hear your thoughts on that too.

So the ones that I know about and I may not know about them all but the ones that I know about that are impacting our customers in projected in projector. It's the the what we call. The optical subassembly, which is is is the lenses and near sub system that go in the projector.

Some of the suppliers, we're in one of those optical sub systems for not only our largest customer, but a couple of other customers and.

We ones back up and running but there was a good period of time the factories were down.

And so they're probably trying to catch up on inventory there.

Our largest customer has multiple factories they have one in the Philippines in one in one large and China. They have couple of factories in Japan as well.

Japan.

Even though they have sheltering place orders.

Factories are located outside of Tokyo's I think they're still working on somewhat skeleton crew. The Philippines was down for three or four weeks I think they're supposed to get back up and running in the next to China is up and running.

So it's sort of hit and miss across the factories and some some components for the projector space.

In mobile.

You know the one area that I think maybe we're a little bit more exposed to it and I'm not sure that it it's a severe impact but a lotta people are trying to migrate to very high frame rate high pixel count displays all simultaneously.

There there may be I wouldn't I'm not sure. It's even a covert 19 constraint maybe just overall demand constraint.

Too much too soon.

Would that said I think I think those are probably the main impact for us.

Okay. That's helpful perspective, Thanks for that you mentioned to briefly on untrue cut the a a gauge but has been slow down by the work place in California. His that is it improved or is or other ways to work around that or is that kind of.

One of a a continuing delay there <unk> I think he's he kind of implied or maybe that's my inference that you you thought you might be able to to announcing retain some business. It'll later this year that that kind of time frame at risk.

[noise].

It's hard for me to tell whether it's at risk or not you.

You know what that does seem like in California, Southern California's is.

If you look at the infection counts et cetera. It doesn't look like we're on the abatement yet on the down side of the the slope Northern California definitely is.

We're probably three to four weeks out northern California, Southern Californian could be longer.

There is a great deal of pressure.

The way that the that industry is structured on the post production.

Side of production.

A.

A lot of these post production, how students et cetera use experts at that part of the film making process, but many of these experts or 10 99 contractors almost all of these contractors are effectively on for low right now and the locations that they would go to work on a regular basis are no longer available to go to work for now.

There is some post production work I think they're doing remotely, but it was only on content that was pretty much wrapped up and ready to go.

There's going to be a delay I'm I'm worried that there might be a delay for us.

As as they ramp up.

As they start to come back to work production continues post production continues there will be a surge in trying to get content out I mean this is happening at the same time that everybody. All these new streaming services, we're trying to launch.

With the original content.

And have a lot of content available a lot of original content available to attract subscribers to their service.

So there's gonna be a high degree in demand for these same individuals when they come back to work.

With all that said you know there was a lot of interest in our in our technology. The team has been very creative on how we continue some of the the engagements.

You know for example, I'll give you one one creative.

Technique that they did I mean, a lot of the times we demonstrate.

True cut rendered content is either on like a very fancy Sony X. 300 monitor or a very large see led screen from Sony.

But another way to do it is on.

High end L.G.O. that T.V.'s.

And so in order for us to to demo some of this content, we actually created a true cut out that's all I mean, you could probably go online and look at the L.G. apt site and you'll find a pixel works to cut out you have to have a password in log in to get in it's not for consumer but it is a way for us to.

To allow some of our target customers to actually view content on their home T.V.'s.

So you know with all that said, yeah, it's definitely slowed us down whether this year major announcements are out of the question or not too too soon to to say on that.

Okay. That's great perspective, well last question, although I love getting your you'd be tell responses hope it'll still be shorter one Todd you'd mentioned in in your prepared remarks, and then pass calls about hopefully the c. kind of have a halo effect of phones getting to the market was good reviews and inspiring encouraging you know other <unk> two two weeks.

<unk> your plans to adopt Iris in in your mobile phones, you had some great ones here with like with the one plus and others like any any examples that you can describe about the raccoons, you've seen some from some customers either that you have been working with or it's already plans are ones that have come do something.

To hold we've recently hired or a couple of basic engineers and some software engineers, which are part of the critical wrecks that I had I had announced and the individuals we hired and we're very qualified and when I dug into why these these individuals came to us because we compete for people in Shanghai with with many other <unk>.

And he's trying to hire and.

Many of them said because of the reviews on the products. They got they they wanted to work at a company.

It was at the advent of changing the display experience in mobile.

And then yeah customers we have.

Several new customers in the pipeline that that you know.

We knew who they were they knew who we were but I would say that the validation by these phones hitting the market with extremely positive.

Editorial review and.

You know performance reviews was part of the equation.

Okay, Great appreciate all the beautiful jumping align takes time.

Thank you.

I don't have anything you'd like to ask you questions.

For one on your telephone keypad next question will be coming from alignments.

Well <unk> stopping all your line okay.

Hi, Hi lies maybe you.

You guys is similar question, maybe which was asking you know given that this is a value added feature that it seems very valuable you know that the high quality dealings cotton have you seen the customer sell through kind of indicators little phones that you're enabling have have kind of more interest among the consumer base. The mix that have just started to play.

Now the other several models and the marketing have been there for a few quarters any color there'd be awful.

[noise] so some of our customers actually you know Ah.

Some of the features we provide are always on calibration some of the tone mapping they're always on features that the customer doesn't have the ability to turn on or off the feature but some of the features we provide the customer have the ability to turn it off and not view it or turn it on dependent on the content there watching and so the.

We do have been customers that track.

Consumer behavior, and how often they turn it on or if they turn it on and leave it on and what we've seen as positive evidence there that people the consumers that bought these phones want to keep the features on and more people as they discovered them would keep them on which is it's a good indicator right.

And then you know as far as as.

The halo to <unk> to new customers I think the previous answer I gave me is is a good one I mean.

To me the the right Halo will be.

You can see we have customers both in the mid range phone product line.

And we have customers at the flagship level.

And.

One of the indicators that we're looking for and we're pushing for hard is to have the halo effect of these high and flagships and all the.

The benefit that we're bringing there to be demanded by the product management teams of the mid range phones that are marketing to their end markets and we have seen recently.

Yeah, I would say previously before these announcements we had some product marketing managers of these large phone companies that manage the mid range phones really focused on cost cost cost not differentiation now, adding or mid range process or just really not add that much to the cost, but if you're so focused on cost.

You don't really open up your mind, we have seen especially in India.

Where they care about the cinematic experience, where they view a lot of video content over their phones, the product marketing teams wake up and demand. This kind of experience in mid range phones, we'll see if that spreads out to design wins in that category, but the preliminary indicator looks good.

Not that great kind of color was looking for and then a question on I mean time, you've been through enough of these phone cycles. In your career to know is this a cycle, where if things continue to be difficult that the phone cut company think about thinking about these specking the phones, reducing the cost of the display going to lower refresh rates or is that just not an option for them.

Five g. upgrades or like might demand this and even you know cost wants to see price unless this is not the driver of new phone upgrades any any thoughts of that'd be okay, well, Oh I I. It right now the way I see this is I don't see it going backwards I, we have the customer that approached us a new customer, but they they predominantly target.

Low cost phones right for for Africa in Southeast Asia and.

They they they were not a customer I thought would approach us about a high frame rate display, but they they want to put a high frame rate display and I think they're targeting and under 125 dollar phone.

And there's different set of challenges that they have to go through to do that I frame rate display and there and seeing if we can help them there.

I think that I, just put that as approve point down I I feel that that the advent of high frame rate displays is not.

A flash in the Pan.

You know and that just like five g.'s not a flash in the Pan.

You know within three years.

My guess is two thirds of the phone solar be five new phones.

I I believe that within that same timeframe at least half the phone sold we'll have at least in 90 hertz screen on it or more.

So we're in the middle of this wave now the question is do people want to have.

You just put in 90 Hertz screen or 120 Hertz screen.

It actually create some problems, it's makes experience a little smoother in certain areas, but it creates problems.

Are solution solves many of those problems. So the question is how many of those people to put high frame rate screens want to <unk>.

Continue to solve the other problems and deliver an overall premium display experience and that we're going to try to make that as large of and attach rate to those I frame rate displays as possible.

Okay, so not really an optional option a great. Thanks guys critical.

[noise] versus.

And again later.

Oh, good question right or one.

But.

Yeah.

We don't have any further question <unk>.

I think you operator, I think we'll just conclude at that.

At the last question.

For everybody listening stay safe.

Thank you for your continued interest in a pixel works.

And we look forward to update you in the future.

<unk> Conference call. Thank you everyone for you work with <unk>.

[music].

Oh.

[music].

Oh.

[music].

[music].

[music].

[music].

Good day, ladies and gentlemen, and walk in truth be told works incorporated first quarter 2020 earnings conference call.

I will be or upgrade or Fortunately school effect.

So starting on it.

Following management's prepared remarks, we will conduct a question answer session.

<unk> good question, because our one on the telephone scheme, but.

This conference call. It mid recorded for replay purposes, I wouldn't know lots of joined the call over to Pixelworks CFO Mr. Allied yes, that's there.

[music]. Thank you good afternoon, everyone.

Thank you for joining us today with me on todays call to stop the bonus.

Actual work, especially that and she'll.

The purpose of today's conference call. It's a supplementary information provided in Pixelworks press release issued earlier today announcing the Companys financial results.

For the first quarter of 2020.

Before we begin I would like to remind you that various remarks, we'll make on this call.

Including those are lots of projected future financial results economic and market trends.

Competitive position constitute forward looking statements.

These forward looking statements on the older statements made on this call that another historical facts.

Subject to a number of fresh and such and tease that may cause actual results to differ materially.

All forward looking statements are based on the company's beliefs ourselves today.

It was 32020.

The company undertakes no obligation to update any such statements reflect events or circumstances occurring after today.

He's really start to today's press release on an annual reports on form 10-K for the year ended December 31 2019.

Subsequent Kashi five minutes for a description of factors that could cause your forward looking statements to differ materially from actual results.

Additionally, the company's press release and management's statements. During this conference call will include discussions off certain measurements.

Financially because they shut in GAAP non-GAAP terms.

Regarding gross margin.

Operating expenses.

That's income loss and net income loss per share.

Non-GAAP measures exclude gain on sale of patents inventory step up and backlog amortization.

How much is there's enough acquired intangible assets stock based compensation expense and restructuring expense.

[noise], but don't they usually these non-GAAP measures internally to assess our operating performance. We believe these non-GAAP measures provide a meaningful perspective on a core operating results on the underlying cash flow dynamics.

What we caution investors to consider these measures in addition tool.

That's a substitute for no superior to the company's consolidated financial results as presented in accordance with GAAP.

Also included in the company's press release definitions and reconciliations of GAAP to non-GAAP net loss on GAAP net income lost adjusted EBITDA.

Which provides additional details.

With that said I will now turn the call about to talk for his opening remarks. Thank you.

Thank you Elias and good afternoon, everyone joining us on today's call and webcast.

I hope that you and your family's upstate safe and remain healthy during these unprecedented times.

My sympathy and well wishes go out to all those who have suffered losses or hardship associated with the covert 19 pandemic [noise].

I also want to sincerely. Thank the many individual serving on the front line to heal and care for others and the countless communities that have been impacted.

Given the current environment and heightened uncertainty we accelerated our reporting this quarter by disclosing preliminary Q1 results in early April.

Along with a simultaneously published shareholder letter that provided real time context on how the company was performing as well as responding to the cobot 19 pandemic.

Consistent with our preliminary indications our first quarter results were in line or above our original guidance.

A few of the notable highlights from our for Q1 financials included.

Mobile revenue grew 64% year over year.

Non-GAAP gross margin expanded to approximately 52% and we successfully athletic implemented cost reductions, resulting in operating expenses coming in.

Approximately 10% lower than the midpoint of our guidance.

[noise] why wouldn't encouraging our long term shareholders ratio to refer to our recent filings and read My April 7th letter in its entirety.

I want to take this opportunity to briefly reiterate several of the key points.

[noise] Pixelworks has operations in a number of countries with physical locations spanning across Asia and North America.

During the quarter, we proactively respond to the global spread of the covert 19 pandemic, making the safety and well being or roughly 225 employees are single highest priority.

Beginning in China, which was impacted first and then subsequently in other locations.

We facilitated and effectively utilize remote working procedures to maintain all critical functions.

Following the extend the Chinese new year, we reopened and gradually ramped up staff in our Shang and Shanghai in Shenzhen offices.

They have been fully operational since early March including active engagement and support of our customers as well as ongoing new product development efforts.

Our employees in Taiwan, Japan in North America have remained fully operational throughout however, with the exception of Taiwan, We're continuing to work remotely consistent with the current local and national guidelines in these geographies.

Since the onset of the pandemic our team has demonstrated tremendous agility and dedication to providing uninterrupted support to Pixelworks [noise].

Without question the impacts of Cobot 19, pandemic have been extra ordinary and widespread resulting in a more challenging business environment and heightened uncertainty for both customers and suppliers.

In preparation for what is likely to be a more prolonged recovery of the global economy. We recently implemented a series of actions to further contain costs without impairing our ability to support customers and continue executing on our mobile growth initiatives.

To briefly summarize several the key actions take it include.

Elias and I, both taken a 10% reduction in our base salary.

The executive staff has agreed to a salary reduction of 10% in exchange for restricted units restricted stock units.

The executive bonus program for 2020 was eliminated all other bonus and sales incentive programs remain in place.

The board of directors have agreed to receive or issues and move cash director fees for the full year of 2020.

Annual Merit increases for all employees will be delayed by one quarter.

All new hiring has been temporarily put on hold with the exception of a few critical open racks.

With the exception of.

Critical customer related travel within China, all corporate travel has been suspended.

We extended the program offered to senior management to exchange up to 10% of quarterly base salary for our shoes to the rest of our organization and the program was well received with 55% of all of our employees participating.

As a result these collective actions we have immediately reduce cash operating expenses by more than 10% from the midpoint of our Q1 guidance.

In further support of preserving cash the company applied for and recently secured funds as part of the PPP loan program in the United States.

I'll, let Elias provide details however, I will say that we are actively pursuing other similar relief programs in multiple geographies in which Pixelworks operates.

Turning to a brief update on each of our businesses starting with digital projector.

As discussed extensively in recent quarters, the broader projector market has consistently been confronted with a series of headwinds.

Resulting in the continuation of a prolonged inventory correction.

Additionally, the first quarter.

It's been see a seasonally soft quarter as Japanese Oems customers seek to reduce inventory prior to the fiscal year ending in March.

During the quarter the impact of these underlying market dynamics was further exacerbated by the recent challenges associated with Cobot 19.

More specifically some of our projector customers are currently prodrug production constrained due to a factory shutdown and or limitations on supply of certain projector components.

To be clear none of these constraints involve components provided by Pixelworks. However, we do expect these challenges to moderate production orders by certain customers in the near term.

Despite these challenges design in activity has continued to move forward as we actively migrate all of our projector customers to new SLC platforms, all of which have more favorable margin profiles than the previous generation associates.

Although end demand in production has been impaired in some areas customers are still ordering and tender activity and in China has started to pick up in recent weeks.

And our video delivery business as anticipated we saw a continuation of the inventory correction for our customers consumer PV ours in set top boxes in Japan, although revenue from video delivery increased sequentially in the first quarter Japannext since taking a more aggressive steps in response to the pandemic to control the spread of the outbreak.

In addition to putting downward pressure on consumer demand in the second quarter. The recent actions by the Japanese government increased the uncertainty on the timing and magnitude of the recovery of sales of PV ours in Japan.

Despite the headwinds to the end market demand, we remain closely engaged with existing customers and our supporting new program development.

Additionally, in Q1, we signed a development contract with a new well known consumer electronics brand in Japan to utilize our advance for K Transcoder Esso see for a video delivery platform.

Here in the U.S. sales of our Olivier Trans quarters for cord cutters devices, including the air TV to remain solid following record revenue from OTN and the fourth quarter.

Also during the quarter, we announced our newest collaboration with Qualcomm on a joint referenced solution to incorporate OTI HGTV broadcast with Fiveg wireless broadband service offerings.

More specifically this jointly developed platform combines pixelworks end industry, leading OTI, a transcoder and Qualcomm Snapdragon X 55, Fiveg modem Rs system.

Enabling network operators Internet service providers and Oems to rapidly deploy a fully integrated integrated and optimized solution in future home media equipment.

Shifting to updates on Truecar and our broader mobile business, we continue to make tangible progress on our true cut content mastering and delivery platform.

And we generated significant momentum on multiple engagements with prospective customers and partners going into March.

Although work from home mandates have slowed the pace of Trutech customer valuations, particularly those in California in Hollywood, we remain focused and continuing to advance the internal R&D development efforts.

In China, we have largely resumed engagements with multiple prospective customers, including nine onsite visits and evaluations.

We also recently completed the migration of the core true cut tools to our advanced GPU platform and the first build of our new stand alone on Prem GPU centric processing system.

Together, bringing over 100 times performance improvement resolution support up to 8-K and frame rates up to 120 frames per second.

These systems are now ready to be installed and supportive evaluations by select studios and post production partners once their facilities reopened and it can be done in a safe manner.

In our broader mobile business, we demonstrated a significant increase in the adoption of our Iris visual processors and software across expanded number of customers.

Over the last two months Pixelworks visual processors are soft iris solution or a combination of both enable advanced display quality intend smartphones launched by five different customers.

Together exceeding the number of devices and customers announced for the full year in 2019.

Six of these newly launched devices represent expanded adoption by existing customers, including the black shark, three and three pro gaining smartphones as black Sharks latest generation of devices, specifically targeted at gamers the flagship gaming phones leverage Qualcomm Snapdragon 865 mobile platform.

And where the first ever smartphones to incorporate our newest fifth generation Iris processor.

Then building on the initial devices introduced last year as part of our ongoing collaboration agreement.

In March H.M.D. global launch the Nokia Eightpointthree Fiveg, featuring it's pure display branded viewing experience powered by Pixelworks visual processor.

And in April we announced an extension of our partnership with Tcl Communications in conjunction with the launch of three new Tcl branded smartphones, the Tcl 10 pro potential and Tcl 10 Fiveg.

Also notable where a series of recent launches by new customers as the first devices developed under our previously announced multiyear collaboration agreement in early March or launch the find X two and the X to pro.

Both as a flagship smartphones incorporate impressive 120 hurts variable refresh rate displays enabled by Pixelworks fifth generation visual processor and include market, leading content optimize motion processing and always HDR viewing video viewing.

Also you need to the devices every find next two series display is factory tone with Pixelworks highly efficient color calibration software to provide industry leading accuracy.

This has resulted in the fine next to pro receiving the highest a plus rating from display mate being touted as having close to textbook perfect calibration accuracy and performance that is visually indistinguishable from perfect.

And then most recently one plus aggressively raise the bar on display quality for the entire smartphone industry with the launch of its one plus eight and eight one plus April featuring our most advanced display processing solutions. The one plus a pro features 120 hurts all led fluid display.

Okay with Quad HD plus resolution capable of up to 1300 near net of peak brightness and it is the first ever smartphone to incorporate pixelworks patented dual motion engine technology.

Pushing the boundaries of the smartphone visual experience. The April also includes always HDR video DC damning true flesh tones tone adaptive display and Pixelworks color calibration.

While learning the highest plus rating from display made the one plus eight pro shattered 13 industry records for visual quality, taking mobile entertainment to a whole new level.

As a group effectively all of the recently launched smartphones have received excellent reviews for the display quality and performance considering the sheer size and resources available to the mobile industry as a whole.

The industry, leading displays featured on many of these devices serve as a broad validation of Pixelworks technology, our value proposition as well as a testament to our display expertise and the execution of our engineering and support teams.

Well, we've observed the timing of certain customer programs slip out slightly over the past few months, we are still on track to be incorporated in at least 12 devices launch during the first half of 2020.

In terms of how the remainder of 2020 plays out in our mobile business. We are currently cautiously cautiously optimistic.

The overwhelmingly positive reviews of Pixelworks enabled displays on recently launched smartphones have created excitement and incremental interest in our advanced display technology.

We continue to have a very solid pop a pipeline of customer engagements and we are actively working to secure new and accelerate existing follow on programs with current and prospective customers.

Yes, all of the seemingly positive indicators customer sell through of newly launched devices and consumer end demand are still less than certain in the near term given the current global economic backdrop.

That said overall, we believe the future momentum remains extremely positive.

To close out my prepared remarks, it goes without saying that Tobin 19 pandemic has brought about significantly more challenging business environment.

As well as increased uncertainty.

Management team of Pixelworks is focused on what we can control and will rapidly respond with proactive indefinite actions to minimize the potential impact to our stakeholders.

As a result of our recent an ongoing actions I firmly believe that we've positioned the company positively given the current environment, while preserving the ability to regain strong momentum as the global economy and end market demand recover.

I would also remind our shareholders that our customer base and revenue contribution across our end markets is largely comprised of tier one multinational companies.

Moreover, Pixelworks is often a sole source provider of processors and solutions to many of our customers and under a scenario in which the environment becomes more challenging the majority of these companies and their need for Pixelworks technology is not going away.

Just as it had a beginning.

This pandemic will also have an end.

As an organization, we have an incredibly determined and capable team that is focused on the continued execution and positioning pixelworks to thrive in a post covert 19 world.

With that I'll hand, the call over to Elias to review, the first quarter financials and provide our guidance for the second quarter.

Thanks.

Thank you Todd.

Revenue for the first quarter 2020 was 13.8 million compared to $16 million in the fourth quarter of 2019.

Compared to revenue of 16.6 million and the first quarter of 2019.

First quarter 2020 revenue reflects a combination of seasonality.

On going inventory corrections in the digital projector of digital delivery markets.

Partially offset by the anticipated year over year growth in the mobile markets.

The breakdown of revenue during the first quarter was as follows.

Revenue from digital projector was approximately 8 million.

Video delivery revenue was approximately 3.2 million.

Revenue from mobile was approximately 26 million comprised largely of sales of I visit visual processes soft Irish solutions.

Non-GAAP gross profit margin was 52.1% in the first quarter of 2020.

Thats, a 48% to the fourth quarter of 2019.

On 53.3% to the first quarter of 2019.

Non-GAAP operating expenses were 9.7 million pause in the first quarter of 2020 compared to 10.4 million and the fourth quarter of 2019.

10.3 million in the first quarter of 2019.

Adjusted EBITDA for the first quarter of 2020 was a negative 1.5 million.

I had to a negative $1.7 million in the fourth quarter 2019.

On a negative.

Europe on 5 million and the first quarter of 2019.

On a non-GAAP basis first quarter 2020, net loss was 2.6 million.

Our loss of seven cents per share compared to a net loss of 2.3 million.

Our loss of six cents Porsche and the prior quarter.

On the net loss of 1.5 million or loss of four cents per share the first quarter of 2019.

Moving to the balance sheet.

We ended the first quarter 2020 with cash cash equivalents on short term investments of approximately 20.4 million.

Compared to approximately 14.2 million at the end of the fourth quarter of 2019.

Yeah.

The sequential increase reflects a combination of collections on a significant portion of accounts receivable.

From certain customers and the first week of January.

On a dropdown of approximately 5.2 million from what $10 million line of credit with Silicon Valley Bank during the quarter.

Okay.

Start outlined we have proactively taking a series of actions to strengthen the companys financial position for potentially more prolonged economic recovery.

This concludes and meaningful reduction in operating expenses from a previous quarterly run rate.

Additionally, we have recently completed that applications for multiple government back stimulus programs across the geographies.

And rich Pixelworks operates.

We have successfully secured the paycheck protection program loan PPP and received associated phones earlier this week totaling $797000.

With favorable terms of 1% over two years on the first payments of this loan deferred for six months.

We also received relief from the Chinese governments in a formal flow employee benefit payments covering February through June 2020 in the amount of approximately 150000.

We plan to continue actively pursuing participation and other government programs across all applicable geographies.

As disclosed in the 8-K filed in early April 2020, with the exception of the CEO and CFO.

Compensation program previously offered to the executive team was recently extended to all employees to receive our issues.

And you have a salary cuts of 5% of 10%.

The response was very positive with 55% participation.

Which we expect still results in cost savings to the company for approximately 300 Kate in Q2.

We will continue to offer this program every quarter until we're past this pandemic.

In terms of other balance sheet metrics for the first quarter.

Days sales outstanding were 58 days at quarter end compared with 61 days at the end of the fourth quarter.

Inventory turns was 5.2 times in the first quarter compared to 7.8 times in the prior quarter.

Now turning to guidance for the second quarter of 2020.

We expect the near term environment to remain challenging.

US customers across our end markets work to navigate unique hurdles associated with the Corbett 19 pandemic.

We believe the impact on our customers would be varied, but meaningful in the second quarter due to heightened uncertainty related to end market demand.

As well as potential supply demand imbalances for certain components unrelated to those provided by Pixelworks.

As such and based on current order trends on backlog.

We expect revenue in the second quarter, two being a range of between.

8.5 million laws on the $11.5 million.

We expect non-GAAP gross profit margin of between 54 and 57%.

Yes anticipated improvements in gross margin.

Largely reflects our expectation of particularly.

Product mix on product cost improvements in the second quarter.

We anticipate operating expenses in the second quarter to range between 9 million on $10 million on a non-GAAP basis.

Lastly, we expect second quarter, non-GAAP EPS to being a range of between a loss of six cents on a non-GAAP loss.

40 cents per share.

Okay.

That concludes our prepared remarks on we will now open the call for questions.

Operator. Please proceed with merged into Q Oneof session. Thank you.

Ladies and at the time I would like to remind everyone.

People asking question.

Perhaps or followed by the number one on your telephone keypad.

Hi, Dan.

Good question. Please reference our 100 call it sounds that.

First question will be coming from the line probably Anderson.

The company your line now okay.

Yes. Thank you for taking my questions Im glad to hear everyone is safe in this environment I wanted to start with just a question about the mix of business.

In Q2 relative to Q1.

Obviously, we're going to see.

Inventory.

Balancing all over the place, but curious by segment how it looks and then you are only for a higher gross margin that you'd call out mix. So.

I agree that those are related.

To that and what also within the higher gross margin a sustainable meaning we've taken product cost out and within the segments will have higher gross margins going forward not going to follow up.

I'll take it I'll take it initially the maybe Elias can follow up.

Charlie how you doing.

Greg.

Glad to hear it.

So.

Margin is improving and because we have been.

On our projector business, which is still I would say a meaty part the largest part of our revenue.

We have have migrated all of our customer not just our largest customer, but all of our customers too.

Various different percentage levels of our newest Esso see platform all right.

And the margin profile on those new Esa sees is significantly higher than the old margin profiles.

In some cases, the asps are about the same and some cases the asps are lower so provided some revenue headwind, but from a margin percent perspective.

It's significantly higher and the reason I went to that level of detail as to answer the second part of the question is it sustainable in the projector business that absolutely a sustainable were when when the projector business bounces back we expect those margins to stay intact. If not go even a little higher in the projector space because we'll have.

A higher percentage of the overall business will be the new platform out in time.

So.

Probably a similar story with video delivery.

We have migrated to improve both costs, there and migrating customers to slightly better margin product portfolio.

We expect that to also be sustainable so the.

I'll call the legacy business.

Video delivery and projector.

As as the revenue comes back as the inventory corrections from.

Displacement of Covre 19.

We get passed them.

Well said revenue accelerating at a higher gross margin profile.

Mobile.

Yes, so we've got a mix there you know we are starting to ship.

Couple of platforms that are pure soft iris soft iris gross margin is very good.

Clearly the ASP for those phones is not as high as if we sell a.

For the solution pull Iris based solution.

But the margin profiles pretty good our mid mid range mobile processors. The margin is pretty good and in our highest end processor. It's the highest ASP, but the margins are the lowest on an average it's still closer to this quarter's core corporate averages depending on mix.

So.

On a go forward basis I expect the margin profile to two probably look more like what we're guiding into Q2, even as we grow.

I think there was one last piece about your question about mix, we really don't forecast the mix on a go forward basis, but I will give this bit of color.

Every one of our businesses.

Is going through.

No headwinds or.

Inventory correction in Q2 compared to what we had planned for we usually plan our annual operating plan late December and we have sort of Inc.

And if I look at.

Those are not public our annual operating plan is what we internally managed to but if I sort of look at Q2.

Every businesses down compared to that plan.

The mobile.

You didn't ask the question, but I'm going to offer the answer.

People will want to know with all these launches and I mean very good reviews, I mean, the one plus a pro sold out again I still can't get my own version and we have several in the company, but I want my own personal version.

Why would they be doing why would we see an inventory correction in Q2, and I just need to remind people that on on if you go back to the December quarter Q4, 2019, we had a.

25% of our revenue is mobile we had that was in anticipation of many of these launches that we talked about and one additional high volume program with Opel and it wasn't announced at the time that it was over it was a large OTN, but it was OPO.

What we it was a very short circuited very small timeframe to capture that design and we did not have enough time to capture that design with the solution, but the customer.

Got a shared risk agreement to build and they took a lot of that inventory.

So they had to build up the inventory.

They have continued to build up inventory in Q1.

For these launches and many of them were delayed one month to two to even three months and then we'll see how how robust the demand is I mean these are their flagship phones, both the OPO find X X to pro and the oneplus phones.

And.

Demand for one plus seems very good.

The mobile phones were high priced demands pretty good for those phones, but these are global based phones, not just China marketed phones and.

As much as China's back Im not sure the rest of the world is really back.

From a demand standpoint, yet.

So maybe that give you gave some of the color you were looking for their on mix, we're not going outlined on specifics.

Great very helpful color on all fronts today, so I wanted to revisit yet the goal initially of exiting the year.

We will be.

Potentially the majority revenue I know so much has changed that I wonder if you could maybe just revisit that point.

Then also along with that sounds like things are by and large still on schedule. It may be.

Yep.

On mobile the rest of the year sort of curious.

If that seem to work virtually the cases, where you can still be in Amazon is everything progressing.

The way you would like it to our there are there some things you're not able to do in terms of working with the customers to get.

Launched.

Okay, Yes, good questions. Let me, let me, let me try to give guidance on it.

So yeah, I would say that our pipeline.

If you really look at all that action we've taken.

[music].

Yes.

I wanted to higher.

Significantly more software and support people going into this exact timeframe, we have postpone that hiring that hiring was to support the pipeline of customer programs, specifically in mobile a bit into true cut.

We've redeployed some of our like our Toronto based team.

Some of the activity in video delivery slow down even though we signed on a new customer we re purpose some of the individuals there to work on mobile.

All of our mobile programs today.

All the design in activity is in China, China is back auctions in office is fully engaged our Shanghai office is fully engaged travel between Shanghai in Shenzhen, Shanghai in Hong Joe and a few other towns is is warming backup and if people that actually travel.

On a weekly basis, either through train or through airplanes, Beijing has not really opened up for travel although I found out yesterday I think within two weeks, we'll be able to travel to Beijing. So we have a Q customers that it's difficult to support in Beijing.

But.

To me to get to the specific question of what our goal is our goal to still have mobile be more than 50% of the total revenue the company.

Q4, with the goal is absolutely intact, whether we can achieve it in Q4 or not I would say that did.

The.

The odd went up against us that it's going to happen in Q4.

It's not completely out of the question, but it would take.

It would take we would have to close on most of the pipeline of activity that we have.

For the second half of the year going into the first quarter of 2021, if that happened and you probably still could happen.

I'm worried that if if we if we we have several new customers that we're engaged with.

And if all of them turned on with the same.

Level of intensity that we had over the last six months.

We may be resource constrained.

So we are prioritizing.

The programs, we're working on with that in mind.

I think.

The even if the goal is not achieved in the fourth quarter, it's it's not more than a quarter or two out after that.

Okay perfect. Thank you guys so much.

Yes, Thanks, Charlie Thank you Charles.

Next question is coming from the line of Richard Shannon with Craig Hallum. Your line is now open.

Okay, guys. Thanks for taking my questions as well.

Thank you Todd maybe.

Hi.

I guess, maybe a question on on kind of supply chain risks here, maybe if you can kind of help us understand where they may be coming from I know you said, it's the non pixelworks related but any you into what those are.

And how long that may continue might be helpful. It's heard some other calls here last week with earnings are that suggested some areas, but love to hear your thoughts on that too.

So.

The ones that I know about and I may not know about them all but the ones that I know about that are impacting our customers and project in projector. It's the what we call the optical subassembly, which is.

The lenses engineer.

Subsystem that go into projector.

Some of the suppliers.

We're in move on those optical subsystems for not only our largest customer, but a couple of other customers and.

We wanted to back up and running but there was a good period of time the factories were down.

So, they're probably trying to catch up on inventory there.

Our largest customer has multiple factories they have one in the Philippines and one in one large in China. They have couple factories in Japan as well.

Japan.

Even though they have shelter in place orders.

The factories are located outside of Tokyo's I think they're still working on somewhat skeleton crew the Philippines was down for three four weeks.

I think they're supposed to get back up and running in the next to China is up and running.

So it sort of hit and miss across the factories and sub seven components for the projector space.

In mobile.

Yes.

The one area that I think maybe we're a little bit more exposed to and I'm not sure that it's a severe impact but a lot of people are trying to migrate to very high frame rate hi, pixel count displays all simultaneously.

There there may be I wouldnt im not sure it's even a cobot 19 constraint, maybe just overall demand constraint.

Too much too soon.

With that said I think I think those are probably the main impacts for us.

Okay. That's helpful perspective, thanks for that.

You mentioned briefly on on true cut.

Again, it has been slow down by the work in place in California.

Does that is that we improved or is there other ways to work around that or is that kind of.

Kind of.

Continuing delay there.

I think we've kind of implied or maybe thats. My inference that you thought you might be able to two announcing retain some business a little later this year is that kind of timeframe at risk.

Yes, it's hard for me to tell whether it's at risk or not.

It does seem like in California, Southern California as is.

If you look at the infection counts et cetera. It doesn't look like we're on the abatement yet.

On the downside of them the slope Northern California definitely is.

We're probably three to four weeks out in northern California, Southern California could be longer.

There is a great deal of pressure.

The way that the that industry is structured on the post production.

Side of production.

A lot of these post production, how studios et cetera use experts at that part of the filmmaking process. The many of these experts are 10 99 contractors almost all of these contractors are effectively on for low right now.

And the locations that they would go to work on a regular basis are no longer available to go to work for now.

There is some post production work I think they're doing remotely, but it was only on content that was pretty much wrapped up and ready to go.

There is going to be a delay.

Im worried that there might be a delay for us is as they ramp up.

As they start to come back to work production continues post production continues there will be a surge in trying to get content out I mean this is happening at the same time that everybody. All these new streaming services, we're trying to launch.

With the original content.

And have a lot of content available a lot of original content available to attract subscribers to their service.

So there is going to be a high degree of demand for these same individualize when they come back to work.

With all that said.

There was a lot of interest in our and our technology.

The team has been very creative on how we continue some of the that engagements.

For example, I'll give you more on creative.

Technique that they did I mean, a lot of the times we demonstrate.

True cut rendered content is either on like a very fancy Sony.

X 300 monitor or a very large.

She led screen from Sony.

But another way to do it is on high end LG OLED Tvs.

And so in order for us to demo some of this content, we actually created a true cut app. That's all I mean, you could probably go online and look at the LG App site and you'll find a pixelworks to cut App you have to have a password log in to get in its not for consumer but it is for away for us to.

To allow some of our targeted customers to actually view content on their home Tvs.

So with all that said, it's definitely slowed us down.

Whether this year major announcements are out of the question or not too too soon to to say on that.

Okay Thats great perspective.

One last question.

Although I love getting you detailed responses hopefully this will be Sherlyn Todd.

You'd mentioned.

In your prepared remarks in past calls about hopefully to see kind of a halo effect of phones getting to the market with good reviews, and inspiring encouraging other Oems to to accelerate their plans to adopt iris and intermodal phones.

Some great ones here were linked with the one plus and others.

Any any examples you can describe about other actions you've seen some from some customers either that you have been working with are accelerating plans are ones that have come do you sense that.

Twofold.

We've recently hired.

All of basic engineers, and some software engineers, which are part of the critical Rex that I had announced and the individuals we hired.

Very qualified and when I dug into why these these individuals came to us because we compete for people in Shanghai.

But many other companies trying to hire and.

Many of them said because of the reviews on the products. They got they wanted to work at a company.

That was at the advent of changing the display experience in mobile.

And then yes customers we have.

Several new customers in the pipeline that.

We knew who they were they know who we were but I would say that.

The validation by these phones hitting the market with extremely positive.

Editorial review and.

You know performance reviews.

Was part of the equation.

Okay, Great appreciate all the detail I'll jump in the line picks up.

Thank you.

And again, if you'd like to ask your question. Please press star one of your telephone keypad.

Next question will be coming from the line of Suji Desilva with Roth capital Your line open.

Hi, Todd highlights.

Maybe a follow up.

Hey, guys is similar question, maybe which was asking.

Given that this is a value add feature that.

It seems very valuable high quality viewing content have you seen the customer sell through kind of indicate that the phones that you are enabling have have kind of more interest among the consumer base. The mix that haven't started to play out now they have several models in the market have been there for a few quarters any color there be helpful.

So some of our customers actually you know.

Some of the features we provide are always on calibration some of the tone mapping. They're always on features it is the customer doesn't have the ability to turn on or off the feature but some of the features we provide the customer has the ability to turn it off and not view it or turn it on dependent on the content there watching and so.

We do have been customers that track.

Consumer behavior, and how often they turn it on or if they turn it on and leave it on and what we've seen as positive evidence there that people.

Consumers the bought these phones want to keep the features on and more people as they discover them, we'll keep them off which is it's a good indicator right.

And then you know as far as as.

The halo to new customers I think the previous answer I gave is a good one I mean.

You to me the right Halo will be.

As you can see we have customers both in the mid range phone product line and we have customers at the flagship level.

And.

One of the indicators that we're looking for and we're pushing for hard is to have the halo effect of these high end flagships and all the.

Benefit that we're bringing there to be demanded by the product management teams of the mid range phones that are marketing to their end markets and we have seen recently.

I would say previously before these announcements we had some product marketing managers of these large phone companies that manage the midrange phones really focused on cost cost cost not differentiation now, adding our midrange process or just really not add that much to the cost, but if you are so focused on cost.

You don't really open up your mind, we have seen especially in India.

Were they care about the cinematic experience, where they do a lot of video content over their phones.

The product marketing teams wake up and demand.

This kind of experience in mid range phones, we'll see if that spreads out to design wins in that category, but.

The preliminary indicator looks good.

Now that is great kind of color is looking for and then a question on I mean, Todd you went through an up these bone cycles in your career to now is this a cycle, where if things continue to be difficult bags. The phone companies think about thinking about expecting the phones, reducing the cost of the display going to lower refresh rates or is that just not an option for them.

Given that fiveg upgrades or like might demand as an even cost less as the price licensees not the dry revenue going upgrades and any thoughts there would be helpful. As well so I right now the way I see this is I don't see it going backwards, we have a customer that approached us a new customer, but they are predominantly target.

Low cost phones right for for Africa in Southeast Asia and.

They were not a customer I thought would approach us about high frame rate display, but they want to put a high frame rate display Ana.

And your target in an under 125 dollar phone.

And there's different set of challenges that they have to go through to do that high frame rate display and seeing if we can help them there.

I think that just put that as a proof point down I feel that that the advent of high frame rate displays is not.

A flash in the Pan.

That just like Fiveg is not a flash in the pan.

[music].

You know within three years.

But my guess is two thirds of the phones sold would be five geophones.

I believe that within that same timeframe at least half the phones sold will have at least a 90 hertz screen on it or more.

So we're in the middle of this wave now the question is to people want to have.

You just put a 90 heard screen or 120 hurt screen.

It actually creates some problems, it's makes experienced a little smoother in certain areas, but it creates problems.

Our solution solves many of those problems. So the question is how many of those people to put high frame rate screens want to.

Continue to solve the other problems and deliver an overall premium display experience and that we're going to try to make that as large of an attach rate to those high frame it displays as possible.

Okay, so not really an approximate alright, great. Thanks, guys appreciate.

Hi, this is.

And again, ladies and gentlemen, if you'd like to ask a question first marlin on with Alison.

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Hi, Thank you operator, I think we'll just conclude at that.

At the last question.

For everybody listening.

Stay safe.

Thank you for your continued interest in Pixelworks and we look forward to update you in the future.

Hi, good that this concludes todays conference call. Thank you everyone for your participation and you may now disconnect.