Q2 2020 Pixelworks Inc Earnings Call
[noise] good day, ladies and gentlemen, and walk him to Pixelworks I started 2020 <unk> earnings conference call I'll be your operator for today's call. At this time all participants are in listen only melody. Following managements prepared remarks instructions will be given sort of question answer session. This conference.
Paul is being recorded for replay purposes outdoor lack the turned to come over to Pixelworks, Yes, Oh life. Neither please go ahead.
Thank you.
Good afternoon, everyone and thank you for joining us today with me on todays call stopped the bonus.
Pixelworks precedent and she'll.
Bush of today's conference call. This a supplementary information provider the picture works, especially.
Issued earlier today announcing the Companys financial results for the second quarter of 2020.
Before we begin I would like to remind you that various remarks, we make on this call, including those about a projected future financial results because I'll make a market trends on a competitive position constitute forward looking statements.
These forward looking statements on all of those 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 Monday August 10th 2020.
The company undertakes no obligation to update any such statements reflect events or circumstances occurring after today.
Please refer to today's press release.
Reports on form 10-K for the ended December 31, 2009 gene.
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 on management's statements. During this conference call will include discussions of such a measures on financial information in GAAP and non-GAAP terms.
Gross margin operating expenses net income loss.
Net income loss per share.
Non-GAAP measures exclude gain on sale of buttons and inventory step up and backlog amortization.
I want to position the acquired intangible assets stock based comp expense and restructuring expense.
The company uses these non-GAAP measures is generally to assess our operating performance.
We believe these non-GAAP measures provide a meaningful perspective, well not core operating results.
Underlying cash flow dynamics.
Well, we caution investors.
The cost is are these measures in addition to not a substitute for.
No superior to the company's consolidated financial results as presented in accordance with GAAP.
Oh, sorry, do them in the company's press release definitions and reconciliations of GAAP to non-GAAP net loss on GAAP net loss.
Net income loss adjusted EBITDA would provide initial results additional details.
With that said I will now turn the call up to thoughts goes up.
For his opening remarks, thank you.
Thank you Elias and good afternoon to those join us on today's call and webcast.
As outlined in today's press release, our second quarter results reflected the anticipated headwinds associated with the brought impact from the covert 19 pandemic on our target end markets.
Although revenue was at the lower end of guidance range, we provided.
Favorable product mix as well as cost improvement initiatives resulted in better than expected gross margin with non-GAAP EPS at the midpoint of guidance.
As a results indicate we continue to be in a challenging environment.
However, we believe it is important to clearly distinguish the ways in which pixelworks has been impacted.
And the areas, where we have continued to make progress.
In terms of customer sell through and end market demand, we're seeing negative effects in all of our end markets with the projector business experienced seen the largest year over year decline.
Given that a majority of total projector unit volume is driven by large government tenders for education and corporate tenders for enterprise applications. We've naturally observed reduced customer demand as a result at the recent shifts towards working and learning remotely.
We are confident the Pixelworks has maintained our leading market position in projector and the current revenue level of this business is purely a reflection of the projector customers uncertainty and weak end market demand.
[noise] similar to the projector business our video delivery business has been in a process of working through a prolonged inventory correction when the coded pandemic emerged.
While Japan has appeared to weather the pandemic relatively well compared to some other countries. The end products, we sell into our predominantly consumer discretionary and as such demand was lower in Q2 and will continue into Q3.
We have remain engaged with our leading Japanese consumer electronics Oems in support of new programs and development efforts, which we believe will result in pixelworks, capturing a dish additional market share in 2021.
[noise] our execution on new mobile programs during the first half of 2020 continued and all of the models launched four well received by the analyst community and specifically stood out with premium display performance.
But given the fact that many of the models for at the higher price premium and flagship category, where consumer demand has been weaker unit volumes have been considerably lower than expected.
More recently, we've seen the green shoots that the recovery in mobile demand in the current quarter. We continue to believe there'll be a high correlation between Oems adoption of Fiveg technology and high performance displays in smartphones as.
As video remains the most single compelling use case for Fiveg with consumers.
[noise], we're still in the early innings of this multiyear transition to Fiveg and the corresponding battle by Oems to capture market share.
In addition, we're seeing a more rapid introduction of high frame rate displays into mid tier phones than we previously anticipated.
Which is positive and increases the pixelworks value proposition in mid tier devices.
[noise] acknowledging the potential for a more pro long recovery of the global economy. We began taking actions early in the second quarter to contain costs I provided a detailed overview of these proactive cost reduction measures in the last conference call.
Which collectively enabled us to immediately reduce cash operating expenses by more than 10%, while retaining a 100% of our employees.
[noise], though we are seeing an increasing evidence and supportive of the third quarter being the bottom of the cycle for both the projector and video delivery businesses.
We also believed in a more substantial recovery in these respective businesses is potentially going to be a slow process.
In response today, we implemented a restructuring plan to further reduce operating expenses preserve cash and focus available resources on the largest growth opportunities within our mobile and true cut businesses.
The restructuring included a 14% reduction in Pixelworks head count and will produce an incremental 3.2 million an annualized cost reductions without marginalizing, our ability to fully support customers for our growth initiatives or impacting our advanced technology and new product development roadmap.
This is a difficult but necessary action and one that I'd hoped to avoid.
I personally want to thank all of those employees affected for the past efforts and support.
Turning to an update on our mobile and true growth true cut growth initiatives.
We've continued to gain increased interest from both existing and prospective customers for our latest technology.
Starting with true cut as previously communicated we enter 2020 was significant momentum towards ecosystem adoption here in North America.
Without question work from home mandate and the halting effectively all production activity in Hollywood as well as all new theatrical releases has slowed our progress.
Against this backdrop, our team has creatively work to overcome at least some of the hurdles brought on by the pandemic.
As one example in May we expanded Pixelworks presence in Hollywood with an opening of an office in Burbank, California. This office is close to most of the major studios and streaming service providers. We recently installed our new true cut on Prem GPU centric processing system onsite.
Well, we can now host studio Representatives and post production experts for collaborative demonstrations in a private screening room, while complying with Cowen 19 safety guidelines.
[noise] as with all market disruptions new opportunities emerge.
And in this case that as the acceleration of direct to consumer delivery of cinematic content.
Home Entertainment and streaming is now more critical than ever for both consumers and content providers.
However, one of the biggest casualties of this shift is creative intent.
Which today is difficult to ensure when delivery and direct to consumers viewing at home or while traveling.
Every TV and handheld viewing device is different and how they process and display digital content, which results in a wise that spectrum of display quality and experiences across hundreds of millions of users.
This varied and unpredictable experience is exactly what pixelworks true cut platform was designed to eliminate by providing software based tools leveraging pixelworks proprietary algorithms that will enable content to be created delivered and viewed with consistent resolution color tone and motion across all.
Certified devices.
So although the pandemic has certainly extended our previous timeline true cut the value proposition has never been more relevant.
Our team remains focused on achieving a series of important milestones in the coming quarters, as we look to secure endorsement and adoption from ecosystem partners and customers.
With China's OEP reopening in early May we saw an increased traction with several to cut programs. We had been pursuing we expect some of these programs to close during the second half of this year.
Looking at our mobile business, we've continued to drive incremental adoption, despite a more challenging business landscape.
Year to date, our Iris visual processing technology has been incorporated into 12 announced smartphone launches.
Across six different OEM customers.
Our two most recently announced mobile wins, which launched since the first quarter conference call, where the Ace, whose RG phone three and the Tencent Black shark three S.
Both devices represent the latest industry, leading gaming smartphones to be released by two recurring multiyear mobile customers.
Org phone three Leverages Pixelworks high efficiency color calibration with every individual phone being factory tuned with our patented display calibration technology.
This gaming smartphone also features our industry, leading HDR tone mapping that provides unprecedented contrast, and color debt as well as our auto adaptive ultra smooth brightness control for seamless doing an all lighting environments.
The Tencent Black shark three S. combines pixelworks fifth generation Iris visual processor with our software enhancements solution to take full advantage, but the 6.67 inch Chem OLED display with optimize support for its 120 hurts refresh rate.
In addition to this device utilizing our always HDR moat mode and academic features the Tencent Black short three us Leverages Pixelworks unique motion engine technology with dual channel Nippy. This advanced feature enables separation and dedicated processing of text and underlying graphics, which are then recombine.
Turning to deliver superior visual visual quality, while playing 10 set games.
Additionally, Additionally, I would like to emphasize the strength of our engineering team as well as our commitment to an ambitious roadmap and our continuous development of next generation technology in support of new industry, leading features and products.
I'm pleased to announce that we recently completed the successful tape out of our sixth generation I wish Iris visual processor.
Which we plan to formally introduce later this year.
Additionally, advanced algorithm development design and engineering work is already underway on our seventh generation processor, which is currently slated for release in the second half of 2021.
We continue to work on a solid and growing pipeline of engagements that span plant smartphones in multiple price tiers across numerous customers with some programs extending throughout next year.
Specific to our expectations for the remainder of this year. We're currently on track to have our visual processing solutions incorporated into a total of at least 20 models launched by eight different Oems for the full year.
For perspective. This compares with six models across four Oems for the full year in 2019.
Included in these planned launches for the second half of 2020.
He is our second tier one mobile OEM engagement.
In closing I want to reiterate the despite this challenging business environment, we have maintained our market, leading or market disruptor position in each of our target end markets as we've done in the past, we will continue to proactively respond to changing conditions with appropriate and decisive at.
Hello.
Start with.
[noise] presenters renal line.
[laughter], Yes could you please tell me where would dropped off.
Yes, Sir your line just went on mute out of the Blue.
Okay, Okay, but is it I'll tell you what I'll start with closing my closing statement, and then hand off to Elias.
So in closing I want to reiterate the despite this challenging business environment, we have maintained our market leading or market disruption position in each of our targeted end markets.
As we've done in the past, we'll continue to proactively respond to changing conditions with appropriate and decisive actions while simultaneously remaining focused on successful execution of our mobile and true cut growth initiatives.
Extremely confident we have a winning strategy and team in place today and the pixelworks longer term growth process prospects are still fully intact as.
As previously mentioned in mobile we have a solid pipeline of new engagements and are well positioned to generate momentum in the second half of the year as customers incorporate more advanced displays and premium viewing devices, including HDR higher frame rate variable frame rate and auto adapted visual enhancements in can you.
Function with their introductions of new Fiveg enabled smartphones.
With that I'll hand, the call over to Elias one more time to review the second quarter financials and provide our guidance for the third quarter.
Thank you Todd.
Revenue for the second quarter, 2020 was 9.3 million compared to 13.8 million for the first quarter of 2020.
Compared to revenue of 18 million in the second quarter of 2019.
I started indicated in his opening remarks second quarter 2020 revenue primarily reflect the ongoing inventory corrections in the digital projector on video delivery markets compounded by low end market demand, resulting from the global pandemic across all of our target markets.
The breakdown of revenue in the second quarter was as follows.
Revenue from digital projector was approximately 6.5 million.
Video delivery revenue was approximately 2.3 million.
Revenue from mobile was approximately 419000 comprised largely of shields of Iris visual processes and soft Irish solutions.
Non-GAAP gross profit margin expanded to 59.2% in the second quarter of 2020.
From 52.1% in the first quarter of 2020.
On 54.1% to the second quarter of 2019.
The increase in gross margin reflects a combination of particularly favorable product mix in the quarter.
As well as ongoing initiatives to drive product cost improvements, especially our newer products.
Non-GAAP operating expenses decreased to 9.3 million in the second quarter of 2020.
Compared to $9.7 million.
Last quarter on nine for 6 million in the same period last year.
The reduction in operating expenses reflects our continued focus on cost containments across our business.
Adjusted EBITDA for the second quarter of 2020 was a negative 2.9 million.
Compared to negative 1.5 million in the first quarter of 2020.
On a positive 1 million second quarter of 2019.
On a non-GAAP basis second quarter 2020, net loss was 3.9 million.
All loss of 10 cents per share compared to a net loss of 2.6 million or loss of seven cents per share and the prior quarter.
On a net loss of 97000 of breakeven on a Porsche beaches in second quarter of 2019.
Moving to the balance sheet. We ended the second quarter of 2020 with cash cash equivalents on short term investments of approximately 21.4 million.
Compared to approximately 20.4 million at the end of the first quarter of 2020.
The sequential increase of approximately 1 million reflected an approximately 2.5 million net proceeds.
Generated from the sale of stock through our ATM vehicle and 800000 laws in cash proceeds.
From the Paycheck protection program loan.
Partially offset by approximately 700 K useful operating activities.
Payment of approximately 800 key on the outstanding balance of a letter of credits on approximately 700 Keating capital expenditures.
Okay.
As discussed on our conference call last quarter, we've taken a series of additional actions to meaningfully reduce operating expenses.
Since the beginning of the year.
In addition to the benefits of our participation in the Paycheck protection program.
Other steps.
Taken have included.
Relief from the Chinese governments in the form of lower employee benefit payments through June 2020.
Amounting to approximately 400000.
We offered on RSC composition program total employees, providing the option to receive our issues in lieu of a salary cuts of 5% or 10%.
Resulting in an expected cash savings to the company of approximately 350 per quarter.
Additionally, our study outlined previously we implemented restructuring plan to further reduce operating expenses and preserve cash.
As a results we expect to record a onetime restructuring charge of approximately 1.5 million in the third quarter.
Once fully implemented these actions are anticipated to generate an incremental 3.2 million an annualized cost savings.
In terms of other balance sheet metrics for the second quarter.
Days sales outstanding were 58 days at quarter end, which was consistent with a 50. It is at the end of first quarter.
Inventory turns was 3.1 times in the second quarter compared to 5.2 times in the prior quarter.
Now turning to our guidance for the third quarter of 2020.
As previously indicated we expect the near term environment to remain challenging, especially for large portions of the project on the to delivery markets.
While the magnitude of the impact of our customers in these market than these market varies we expect many customers to remain more conservative in the order patterns due to heightened uncertainty related to end market demand.
That said, we do anticipate meaningful growth and our mobile business for the third quarter as we continue to support previously announced smartphones on ramp shipments associated with customers planned launches of new devices and the second half of the year.
Based on recent order trends on a current backlog.
We expect total revenue in the third quarter to range between 7.5 million and 10 million.
We expect non-GAAP gross profit margin in the third quarter of between 52% and 56%.
We anticipate operating expenses in third quarter to range between 8 million, a 9 million on a non-GAAP basis.
Please note third quarter operating expenses will include only a partial quarter benefit from today's announced trust restructuring plan.
Lastly, we expect third quarter non-GAAP EPS to be in the range of between a loss of six cents on a non-GAAP loss of 13 cents per share.
That concludes our prepared remarks, and we will now open the call for questions.
Operator. Please proceed with managing acuity session. Thank you.
Thanks, Lee ladies and gentlemen, thank you have a question at this time. Please rationalizing the number one key on attached on telecom again that will be slide in the number one on your Thats telecom.
Your first question comes from the line of Charlie Anderson from call. Your Securities. Your line is open.
Yes, thanks for taking my questions I, just want to start outcome from the Q3 guidance, if you'd be willing to talk a little bit of the to the segments did sell Mike.
After a very deliberately.
Have their challenges mobile growing so maybe just relative to what were seen in Q2 and any additional comment there and then also in gross margin.
Thats very high gross margin Q2, but it looks like it's come back this for the mid low to mid Fiftys. In Q3, maybe you could talk about just the trajectory gross margin as well or some other factors that are going to grapple.
Hi, Thanks, Charlie.
So.
Well you know, we don't usually and we probably not going to now.
Break down our businesses when we give forward guidance I mean.
As you know were given a pretty wide range.
And they're still several companies not given guidance.
But I will say that that.
Yeah I mean.
We expect mobile to sequentially grow.
And we expect projector and video delivery.
To not sequentially grow.
Probably won't talk about the magnitude.
But with that said.
We do expect Q4.
With what we know today, we expect Q4 for both projector and video delivery to start coming back.
And we expect continued sequential growth in mobile.
But thats with what we know today and there's there's still a lot of uncertainty with how each of the economies is gonna be affected as we move forward on this pandemic.
Regarding the margins.
It is partly due to mix that we come back down in Q3 software is still helping us there.
But some of them.
Product mix, the SFC product mix that we had benefit for in Q2 changes a little bit in Q3.
Also.
Still haven't absorption issue, especially those revenue levels.
On a go forward basis.
We do expect corporate gross margins to continue to make progress.
Perfect and then now.
I did mention the second tier one mobile Oems. So that's great news and congratulations on that I wondered maybe if you want to maybe just reset our expectations.
You know what this means big picture I know there was.
View earlier in the you're potentially getting mobile perhaps the revenue at some points.
So maybe taking that into account and the union.
Previous thoughts on where this could all go.
Just maybe update us on your views there.
You know so so one of the things that we're dealing with in the in the mobile arena is.
Especially if you look we've had a pretty targeted focus.
In China, and even within China.
As I define tier ones there are four in China.
And we're focused on three of them.
And for the most part those three and some of the tier twos.
Especially ones that have large exposure to the Chinese market.
I have been impacted by walkaway coming back and being very aggressive trying to get rid of inventory in the Chinese market.
Now whether that is a short term impact or a longer term impact I think it remains to be seeing.
We believe and it's just our belief that longer term. These three companies that were focused on.
We'll maintain a reasonable market share in China, and also will grow their international business as soon as is the economies that they're focused on start to emerge.
Out of this pandemic and all three of these companies have big exposures in India and they are starting to put a footprint in the western Europe and elsewhere.
[music].
So gaining.
Ground.
The second tier one that we've been working with for a long time, and then finally convincing them to take a leap on a program.
As a big deal for us.
So far any place that we've had at least one program overtime weve been able to secure multiple.
So it's no guarantee of future success, but it certainly is an indicator that we.
One in many cases leads to multiple so it's very encouraging for us.
And then secondly, we're working on.
And we'll be sampling iris three to customers this quarter.
We taped out in Q2.
We got it through the fab.
Twod suite and so far it looks good we are scheduled to sample early customers I think next week even.
And we are engaged on some very innovative.
Ecosystem and architectural changes for Iris seven that would enable capabilities that currently none of our visual processors enable.
And so.
I think.
Many of these engagements, we have especially with the two tier ones. They see a SEDAR third current engagements is a predecessor of what could be.
And so they will continue to stay engaged with us and if we execute.
I am convinced will expand there.
Their footprint with us so at some 0.1 would say.
Projected video delivery will come back next year.
We do expect growth next year, because it's going to be over.
The reduction induced by the pandemic this year.
Over all they're not high growth markets.
Mobile is and so at least for us and and so we at some point in less we fail mobile will be more than 50% of our revenue that will become the predominant part of our revenue at some point.
Previously anticipated that to be before and this was all pre coven anticipated to leave the year at that.
It's probably unlikely that will happen this year.
But it is still predicted in our near future.
Great. Thank you so much.
Thank you and your next question comes from the line of Suji Desilva not capital your line is open.
Hi, timelines so.
Perhaps you're talking about the dynamic in China with the the flat the flagship high end phones in the mid range phones.
Cross Malik Fiveg ramp and how that's affecting you guys know constructively or whether it's a challenge.
Oh, well I'm trying to us it so the question is.
Fourg versus Fiveg now in Fiveg, the I think good customers or maybe leaning toward more of the mid range versus the flagship perhaps.
Well I mean, I would say yeah, I understand now you're coming from the question I would say going into.
Late 2019, it was premium and flagship that were fiveg. They are now pushing to bring fiveg to a much lower price point.
In fact, some of the phones that were launched by some of our customers have pushed fiveg below $400.
You will you will see.
In fact, I'm trying to search right now any forward looking program.
That were either targeting launch in 2020 or 2021.
I don't think Theres any fourg programs left so everything we're working on his fiveg.
And.
[music].
Yes.
I think it's a natural reaction given the economic slowdown.
In particular Oems, we we call on are a very nimble.
Reactive group of customers.
And.
They are reacting to the environment, they're in and so and they do if you really look at these customers.
They have launches throughout the year, but there's a big wave at the front part of the year and there's a big wave it at the latter part of the year and so they almost have a six month rhythm.
And.
The launches that happened people were far focused on because they made decisions in the back half of 2019. They were focused on higher ASP higher margin products at the back half of 2020, there clearly focused on.
Skinnier margin lower ASP products.
Yes, Tom if you could just kind of follow up with the impact you guys in terms of your content market position.
Well, we have a family of solutions and.
With the with the introduction of Iris six.
We havent, formerly announced that yes, I'm not going talk about the features in the price point Board I will say is that it falls between our previous low cost Irish three solution and our high end Iris five and we have done a very good job. The ops team has done a very good job of pushing the costs down of Iris three.
And so we have been very aggressive that positioning.
Irish three add at low cost mid tier devices. So we have we have a family of products that can that can fit the gap across the board and follow our customers reaction.
Okay. That's very helpful color ton and then just one quick question on the Truecar I think you mentioned you programs that China is that some new customers those existing customers and is there a survey.
Kind of revenue model that you'd be able to talk about now coming out of these efforts are still early days for them.
The true cut programs I'm talking about will be new customers and.
It's a licensing business and like I said in the past depends on how the the engagements go they can the onetime license they can be over multiple years, it depends who the customer in the program this but thats probably as far as I want to go until we actually announced the program.
Fair enough thanks, guys.
Thank you Susan.
Thank you once again, ladies and gentlemen, if you have a question at this time. Please press Star then the number one key on your thoughts on solid.
Again that will be side than the number one key on you touched on telecom.
And your next question comes from the line of Jason Smith from Lake Street. Your line is open.
Yeah. Thanks for taking my questions. I know you said you believe the projector and video delivery businesses.
Come back in Q4 is that confidence early being driven by expected new launches or just the inventory having been fully digested in Q3.
I'd say a combination of both.
There are customers that have I mean, one thing I'll say is across the board.
The Japanese Oems had stayed fairly focused.
We havent seen.
Yes, layoffs, even though their business was way off its not their typical approach and so what they usually do is hunker down.
And they start working on new program development. They had already been working on some new programs and transitioning to newer products from us.
And so I think.
The main thing will be their customers.
It's not like we expect these tenders to go away the education tenders. The enterprise tenders, we just expected them to get delayed.
And.
The question is when do they start to come back and we we anticipate we've seen some green shoots of it already in Q3, we anticipate more of it in Q4.
Okay. That's helpful and I know you mentioned 20 model for this year for the mobile business, but have you seen the size of orders with Peos. Good downwardly adjusted at all going into the second half just given the macro environment.
Well all of our mobile business.
Goes through our channel.
And so how they adjust is they just split the channel sit on the inventory until they're ready digested.
So the way we see it is we see the inventories at the end of the quarter not being depleted.
And then we have to wait for those inventories to deplete to convinced that the distributors or to refill and they're not going to do until they see demand from the customers. So.
There are some new programs that are coming on for the second half of the year and then we're seeing inventory start to deplete in Q3. So that's that's why we're feeling more comfortable with model.
Okay. That's helpful. Thanks, guys.
Thank you Jason.
Thank you and I'm showing no further questions at this time I would now like to turn the conference back to the management for any closing remarks.
Thank you.
So obviously challenging times and a little bit massage everyday of Pixelworks.
Very good people that worked very hard over the last several years had pixelworks.
We were forced to part ways with today.
And.
We look forward to to trying to dig our way out of this and grow quickly and.
See where that takes us. Thank you for your time.
Ladies and gentlemen. This concludes today's conference. Thanks, all for joining you may now disconnect.
[music].