Q2 2021 Pixelworks Inc Earnings Call
[music].
Good day, ladies and gentlemen, and welcome to pixel works second quarter 2020 on earnings Conference call.
Although be operating for today's call at this time all participants are emerging on the mode. After the Speakers' remarks, there will be a question and answer session.
To ask a question during that time, Please press star 1 on the telephone keypad.
This conference call is being recorded for replay purposes.
Like to turn the call over to fix it works CFO Michelle last neither.
Thank you.
Good day, ladies and gentlemen, and welcome to the Pixel works, Inc. Second quarter 2021 earnings Conference call.
Well for being on the call is starting to born on books for the World takes a look especially on the CEO.
After this conference call is to supplement the provision provided in pixel works press release issued earlier today announcing the company's financial results for the second quarter of 2021.
Before we begin I would like to remind you that various remarks, we make on this call.
Including those about our projected future financial results economic on market trends and our competitive position constitute forward looking statements.
These forward looking statements on all of the statements made on this call that are not historical facts.
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 on Tuesday August 10.2021.
The company undertakes no obligation to update any such statements to reflect events or circumstances occurring after today.
Please refer to today's press release.
On your reported on form 10-K for the year ended December 31.2020.
And subsequent SEC filings for a description of factors that could cause forward looking statements to differ materially from actual results.
Additionally, the company's press release and management statements. During this conference call will include discussions of certain measures and financial information in GAAP and non-GAAP terms.
Clearly in gross margin operating expenses net loss on net loss per share.
Non-GAAP measures exclude amortization of acquired intangible assets stock based compensation expense on restructuring expense.
The company uses these non-GAAP measures internally to assess our.
Operating performance.
We believe these non-GAAP measures provide a meaningful perspective on our core operating results on underlying cash flow dynamics.
We caution investors to consider these measures in addition to and not a substitute for nor superior to the company's consolidated financial results as presented in accordance with GAAP.
Also included in the company's press release are definitions and reconciliations of GAAP to non-GAAP net loss on.
Non-GAAP net loss to adjusted EBITDA, which provide additional details.
With that said I will now turn the call over to Todd for his opening remarks. Thank you.
Thank you Elias and good afternoon to those joining us on today's call and webcast.
I'm looking forward to walking through the significant developments that we announced as part of our 8-K filing yesterday.
But first I'll provide a brief recap of our results for the second quarter total revenue came in just above the midpoint of guidance at $14.1 million, representing over 50 per cent growth on both a sequential and year over year basis.
Revenue from mobile set another quarterly record at $4.5 million and we benefited from a recovery on our projector business, which more than doubled over the previous quarter.
Gross margin was also in line with the midpoint of our guidance improving to nearly 53% as we began passing through higher material cost to customers and realize the benefit of increased unit volumes.
Additionally, we did a good job of managing operational expenses in the second quarter, all of which contributed to sequential and year over year improvement on our bottom line results.
As announced in our 8-K filing yesterday, we have completed a series of actions as part of a broader strategic plan designed to accelerate pixel works future growth and success by transforming our existing Shanghai R&D Center picks a worksheet Hi, Inc.
A profit center.
This will enable us to enhance the focus of our mobile projector and video delivery businesses on their global Center in Asia increase.
Increasing our ability to access capital ecosystem partners customers and key talent.
As part of this strategic plan to establish greater prominence in Asia, we realigned our mobile projector and video delivery resources and established our existing subsidiary pixel works Shanghai to operate as a profit center. This.
This does not represent a fundamental shift from our previous product strategies, but rather an optimized optimization of our operating structure to accelerate the growth of the company.
The new structure provide the following benefits.
Direct equity ownership by employees through a newly established Aesop in the Shanghai based subsidiary enhances our ability to attract and retain key talent, we had approximately 75% participation from our existing employees reporting into pixel works Shanghai.
2 provides access to a new source of capital that a lot.
Aligned with strategic relationships and opens adjacent markets for our industry, leading visual processing technology.
3.
Dresses specific qualification requirements for.
For our pixel Shanghai subsidiary to pursue an initial public offering and listing of shares on the star market in China.
For further aligns our resources closer to our key customers ecosystem partners and end markets.
And 5 allows pixel works U S to increase the focus on its true cut business as well as other licensing opportunities.
In addition to the realignment of resources picks it works entered into an agreement with a private equity fund and other strategic investors that are based in China as well as with entities owned by approximately 75% of the pixel works Shanghai employees.
Under which committed investments will be made in exchange for equity interest and pixel works Shanghai.
The private equity funds are affiliates of M to M to which the company sold common stock in December of 2020.
And the strategic investors our funds owned by various silicon can non and chip 1 technology.
In aggregate the capital increase agreements consist of the commitment by employee entities to pay the amounts in RMB.
Equating to approximately $12.3 million in exchange for total equity interest of <unk>.
595% interest in pixel works Shanghai.
Reflecting the pre money valuation of approximately $173 million.
And then by non employee investors to pay amounts equating to approximately $38 million in exchange for total equity interest of 10, 45% and pixel works Shanghai.
Reflecting a pre money valuation of approximately $247 million.
Following the closing of these transactions picks it works would continue to hold an 83, 6% equity interest and picks it works Shanghai.
Specific to pursuing a listing of the pixel works Shanghai subsidiary on the stock exchange, we would like to emphasize that this is a lengthy process that is comprised of meeting certain regulatory criteria and multiple periods of review.
As such we currently intend to qualify the subsidiary and apply for its listing as early as Q3.2022, but no later than June of 2023.
Longer term, we believe listing the pixel works Shanghai subsidiary in China will provide expanded access to future potential capital at what could be more competitive evaluations.
Coming back to our second quarter results and updates on our end markets.
In our mobile business, we continue to gain increased traction across an expanding number of Oems and launch smartphone models and in Q2, we delivered the fourth consecutive quarter of sequential revenue growth.
Mobile revenue for the first half of 2021 grew by nearly 200% compared to the first half of 2020.
Year to date, our visual processing and enhancement technologies have been incorporated into more than a dozen models across a half a dozen different Oems, including 2 first time mobile customers and 2 tier 1 mobile Oems.
A number of these launched phones using pixel works technology.
Net new industry records for display performance and several have been ranked by independent third party reviews as delivering visual quality on par with the industry's ultra flagships, while selling at a fraction of the price.
Even more important has been the very positive feedback from an end user consumers on the display features and functionality enabled by picks works across these launch devices.
This market validation has reinforced the value proposition of our technology and ability to influence customers' buying decisions.
Resulting in Oems coming back and incorporating our solutions into more of their future devices.
Further supporting our realignment to directly operate our mobile business from within Asia.
We recently recruited Leo Chen joined the company in a newly created role of senior VP and general manager of our mobile business.
<unk> is a seasoned mobile industry executive with over 20 years of mobile experience in the last 10 years in various roles for Qualcomm China.
He is based in Shanghai, and he will lead our teams mobile growth and expansion initiatives throughout Asia.
During the quarter, we secured several new design ins for X 5 pro and <unk> visual processors with multiple phones scheduled to launch in the second half of the year as well as in early 2022.
In addition, we believe we are close to securing our third tier 1 mobile OEM customer on a device targeted for.
For launch later this year.
We've also continued to secure additional wins for our soft Iris solution, which is serving our strategic benefit in the current hardware constrained environment and.
In addition to continuously increasing the value proposition of our software only solution. Our mobile team has been actively working to expand soft irises compatibility for use with a new family of application processors.
Pixel works mobile value proposition remains well aligned with the most prominent market trends, including mainstream adoption of OLED displays higher refresh rates on those displays and <unk> enabled mobile gaming.
As Oems continue to confront the non trivial challenges of combining these 3 attributes into their next generation smartphones. They are increasingly coming to fix it works for solutions.
While higher frame rates are fundamental to providing the most immersive and realistic gaming experience the need to render high resolution at ever increasing frame rates creates a challenging system engineering problem.
We're not addressed properly it results in reduced battery life and overheating that impact device performance in the mobile gaming experience.
Our visual processors utilized a distributed visual architecture to off load this intensive processing and upscaling, both resolution and frame rate from the apps processor, enabling less powertrain lower operating temperature, even during sustained high frame high frame rate gaming, providing a unique mobile gaming experience.
<unk>.
According to recent third party estimates revenue from mobile gaming in 2020 exceeded $90 billion and represented just over half of the total global video game market.
With the growing popularity of mobile gaming in China, and improved gaming experience has become 1 of the highest priorities for mobile Oems on their next generation devices.
Our newest and most advanced seventh generation visual processor, which we taped out last month is specifically designed to address the fundamental challenges associated with delivering high performance gaming on a mobile device.
I will defer a full review of the specs and industry first features until we formally unveiled the chip to the market. Later. This year. However, we will begin sampling this visual processor to select customers later this month.
We already have an alpha customer committed to use this chip in a device scheduled for mid next year.
Shifting to the projector business.
Following initial improvement in order patterns that began early in the year, we realized a significant recovery in shipments and bookings during Q2.
With revenue more than doubling sequentially and increasing 30% year over year.
A number of factors contributed this outsized rebound, including channel inventories that were unsustainably low after having adjusted to the weaker sell through in 2020 due to the Tam due to the pandemic.
Coupled with improving end market demand in China and parts of the U S.
During the quarter, our operations team worked with our supply chain partners to eliminate a large majority of the supply GAAP going into the quarter and meet a significant portion of the customer demand in Q2.
As a result of the ongoing supply constrained environment. We have continued to extend our required lead times on orders and customers are placing orders through early next year.
As notable for our projector business in late July we finalized a $10.6 million dollar multi year agreement to develop an advanced SSE for a large existing customers plan next generation product family.
As part of this co development agreement the customer will effectively fund a significant portion of the research and development expenses related to the new product, which we in turn expected to deliver and ramp into production at the beginning of 2023.
Keeping in mind this relatively long life cycles of our solutions in the projector market. Our successful execution of this new SFC that can be repurposed and targeted to the broader projector market represents an opportunity to solidify and extend picks it works market leading position through the majority of this decade.
Regarding the broader supply constrained environment across the semiconductor industry and more specifically, what we're doing to mitigate the impact on picks it works and our ability to meet customer demand in all end markets.
Our customers have responded favorably to 2 are extending of lead times across all product lines, resulting in increased backlog and visibility for the second half of the year. We've also been making progress with our supply partners to mostly meat.
Anticipated demand throughout the rest of this year.
Our operations team, whose focus is on all elements of our supply chain has been doing an incredible job at successfully back filling customer demand in Q1, and Q2 and securing supply during the second half of the year.
These focused efforts also include back end Assembly and test, where we recently qualified to additional testing houses for projected to give us multiple sources of testing.
While we currently have very good visibility into future demand, we expect supply constraints to remain an ongoing challenge an element of uncertainty.
Our ability to support further upside demand in mobile and sustained recovery in projector beyond Q3, we will continue to be contingent on mitigating the prevailing supply constraints in the latter part of this year.
Okay.
Turning to a brief update on true cut.
Following an industry wide halt on more than a year on theatrical production due to COVID-19. The major studios have started to reopen and production activity is ramping up again in Hollywood.
While progress has been slower during this period, our team's ongoing efforts have been very productive over the last few months, especially as it relates to building out and are supporting ecosystem for true cut adoption.
Today, we are focused on a narrow group of existing engagements and in depth technology evaluations with a combination of perspective true cut ecosystem partners.
We are increasingly optimistic about securing our first breakthrough partners for Truecar North America before year end.
In summary, we've been extremely busy we are executing well during a dynamic in supply constrained environment, and we had a solid second quarter with significant growth and improved operating results are.
Our team continues to be aggressive and focused on securing supply from both our foundry and back and back end packaging partners to support growing product demand from our customers.
Entering the second half of the year, we have strong bookings from a combination of mobile and projector customers with orders extending into 2022.
This includes a healthy pipeline of mobile design ins on next generation smartphones across both existing and new tier 1 mobile Oems.
We are also on track to begin sampling our recently taped out 7 generation visual processor in the third quarter.
With the implementation of the strategic plan introduced today, we have repositioned the company to fully align with our customers in Asia and accelerate fixed pixel works growth trajectory although.
Although the magnitude of our growth in the near term will depend on a large part on our ability to secure incremental support from the supply chain I am confident we will deliver sustained solid revenue growth through the remainder of the year.
With that I'll hand, the call over to Elias to review, the second quarter financials and provide our guidance for the third quarter.
Thank you Todd.
Yes.
Revenue for the second quarter of 2021 was $14.1 million compared to $9.3 million in the first quarter of 2021 on compared to revenue of $9.3 million on in the second quarter of 2020.
As Todd previously highlighted the sequential on year over year revenue increase of over 50%.
It reflected a combination of continued strong growth on record revenue the mobile market.
On the southern recovery of demand in the projected market.
The breakdown of revenue in the second quarter was as follows.
Revenue from mobile increased to approximately $4.5 million, representing 32 percentage of total revenue driven.
Driven by strong growth in sales of both visual display processors on software solutions.
Revenue from digital projected to increase to approximately $8.5 million.
Video delivery revenue was approximately $1.1 million.
Non-GAAP gross profit margin increased by over 900 basis points sequentially to 52, 7% from the second quarter of 2021.
From 43, 7% for the first quarter of 2021 on compared to 59, 2% for the second quarter of 2020.
As we indicated last quarter, the lower than historical gross margin in Q1 was primarily the result of product mix.
On temporary pricing extended to a new mobile customer.
We anticipate gross margin will remain historical range for the remainder of 2021, while continuing to trend higher from Q2 levels us mobile revenue expense on demand stabilizes from the project to market.
Non-GAAP operating expenses were $10.1 million in the second quarter of 2021 compared to $10.2 million last quarter on $9.3 million in the same period last year.
On a non-GAAP basis second quarter 2021, net loss was $2.6 million.
On loss of <unk> <unk> per share compared to a net loss of $6.4 million on loss of <unk> 12 per share in the prior quarter on a net loss of $3.9 million on loss of <unk> <unk> per share in the second quarter of 2020.
Adjusted EBITDA for the second quarter for 'twenty, 1 was a negative $1.8 million.
Compared to a negative $5.2 million for the first quarter of 2021 on a negative $2.9 million in the second quarter of 2020.
Moving to the balance sheet.
We ended the second quarter of 2021 with cash on cash equivalence of approximately $23.6 million.
In terms of other balance sheet metrics for the second quarter.
Days sales outstanding were 41 days at quarter end.
Compared to 54 days at the end on the first quarter.
Inventory turns were 16 times in the second quarter up from 10 times in the prior quarter.
Now turning to our guidance for the third quarter of 2021.
Based on recent order trends on our current backlog, we expect another quarter of very strong year over year revenue growth for the third quarter.
Driven by sustained solid demand in both mobile and projector.
We expect to remain supply constrained in Q3 for both mobile on 22 nanometers on the project on it 40 nanometers.
And we're working with our suppliers for resolve all delinquencies by the end of the year.
Specifically, we currently anticipate total revenue for third quarter to range between $14 million on $16 million.
Consistent with my previous comments, we anticipate gross margin to remain on historical range in the third quarter.
Supported by sustained trends in mobile and projector as well as the benefits of better overhead absorption associated with.
With higher total revenues.
More specifically, we expect non-GAAP gross profit margin in the third quarter of between 50% to 55%.
We anticipate operating expenses third quarter to range between 10 and $11 million on a non-GAAP basis.
Finally, we expect third quarter non-GAAP EPS to be in the range of between a loss of 7 cents.
On a non-GAAP net on a non-GAAP loss of <unk> <unk> per share.
That concludes our prepared remarks, we will now open the call for questions.
Please proceed with margin NICU. Other question. Thank you everyone.
Thank you for sensors at this time for participants to ask any question Keith Great Star 1 on your telephone keypad.
Again, Thats star 1 on your telephone keypad.
We'll pause for just a moment to compile the Q&A roster.
We have our first question from Covid Silva from Roth capital.
Your line is open.
Hi, Todd highlighted congratulations on the strong recovery here and obviously the restructuring announcement very exciting for the company.
So yeah no problem. So the mobile Todd I kind of caught in your remarks, you talked about expecting additional growth from <unk>.
Listing and new customers I wanted to get a sense for the statement about new mobile customers. If that is not an expanding opportunity versus what we might have expected or whether that's just kind of.
Sleeping across the China Oems that we're familiar with just wanted to get some color there.
It's a new tier 1 so and.
Theyre going through some particular changes where there.
We're spending a lot of energy on.
Our new family of flagship <unk>.
<unk>.
It looks like Theyre going to use picks that works across their flagship processors not done yet but that's.
That's what I'm referring to.
Okay and would you care to Todd.
It provides some timing timeframe of when that might come to market or is that still to be there for the first of the family of phones would be launched at the latter part of this year.
Okay late 'twenty 1.
And then the restructuring we're all trying to get a handle on it so.
Is there any longer term operating impact operating expense impact of this restructuring would you be able to provide Shanghai standalone operating metrics profitability is on meaningful data point to help us with.
Well were probably not provide that here I mean, we will have it because at some point in time.
Pairing.
Financials operating entity that we'll be filing to go public on the stock exchange and the regulators in China will want to see for.
Financials, just for that entity. So we clearly the probably the only thing that I would say.
Short term nothing's going to change from an operating expense standpoint right.
Longer term.
<unk>.
We will have some added cost in finance, because we'll be doing both audit in China and in the U S.
And we will have finance teams supporting that audit in both locations I wouldn't say, it's a complete duplication, but there's added costs there.
And then just the added operational cost of growth.
We do expect right now we're planning for.
Fairly significant growth.
Next year on into 2023.
We will have to expand the organization to support the growth.
Okay. That's helpful. And then we'll look for that as that plays out and then lastly on the projector business I know Todd you gave a lot of color on the prepared remarks, but just the.
Kind of the key essence kind of elements of the driver of the sharp recovery here and more importantly, your comfort with the sustainability of this recovered level of demand any help there would be appreciated.
So specific to project Youre talking about the recover correct correct yes.
So I'd call it a snapback when it comes back a 100% that matured.
I don't I don't think there Jim and demand went up 100% right their sell through didn't go up 100% clearly, it's starting to pick up for them, but they were at very low.
There is a very big with.
And a lot of it's finished good projectors around the world at distributors and resellers of their equipment and so as we went into.
The pandemic last year.
We saw an overcompensating because if you have this expanded with a material throughout the process, so raw goods and materials like semiconductors from US finished goods that they hadn't shipped out to distributors and vars, yet and then inventories around the world at distributors and Vars.
It contracts and so we went through the contraction last year and what you just saw was a bounce back now.
Now.
The business the actual end business of the projector customers I would say is that.
On may.
70% of what they expect to be normalized when we completely come out of.
On the pandemic.
And so its snapping back to not a full utilization okay. Its snapping back to the 70% level and so we would expect.
Probably over really depends on.
On a global reopening the U S is fairly open.
Open at least let's let's hope it stays open.
Europe is reopening.
Most of Asia.
China's even going through some closures right now so.
Southeast Asia is going through fits and starts so I would suggest that we're probably going to see another year of fits and starts it will see gentle recovery from the projector market during that year.
And then as we go into latter part of 2022 and 2023 I expect then we're going to get up to full recovery.
I appreciate the help thanks guys.
Awesome.
We have on our next question from Richard Shannon from Craig Hallum. Your line is open.
Great. Thanks, Todd for LIFO add my congratulations on a nice.
On a nice bounce back in a.
Very fascinating.
On strategic initiatives here so.
I think I'm going to are.
We get on a follow up on <unk> first question regarding the tier 1 and asked for a little bit more context here, obviously that the new tier 1 I'd actually like to step back and get a sense of how the existing tier ones are they are expecting to expand their usage of pixel works I know you've had 1 that's been in place for a while on the new 1 I think earlier this year.
What signs are you getting that theyre going to be.
Pulling in greater breadth and then how would you compare that to the promise of this with new tier 1 here in size relative if you look a year or 2 out.
If you think about that.
Well so.
I'm not going to go into 2 minutes for specifics about our tier ones because a lot of it's confidential, but what I will say what I'll say is of the 2 tier ones both are still.
Utilizing <unk> technology across.
A broader swath of phones I would say that the existing tier ones. We have we're launching.
Between a half a dozen to 10 models each.
With various products from pixel works between soft Iris.
And our Iris 5 X 5 processor and then.
They are for both focused on the new new seventh generation device.
And the new OEM I would say is is.
Uh huh.
They are starting off very consistent to where we started off with the first 2.
Okay.
Let's share perspective.
Second question I think Todd you announce youre going to work with our new applications.
Processing partner wondering if you could.
Help us understand the drivers for that is just driven by a particular customer we'd like to thank you for tier 1 customer or or non thing, maybe just kind of give us a simple 1 that will happen and when do you start seeing benefit from that.
So this was this was a collaboration that's been going on between the other apps processing company in our sales for awhile, but we needed a catalyst to really were all short on resources right even large.
Large modem application companies are short on resources and so as much as the 2 parties thought it was in both their best interest to collaborate you need that first program to put a sense of urgency behind it and so we have 1 customer that put a sense of urgency behind that that work.
Okay.
Let's see here your question on I guess, it relates to the third quarter and potentially beyond year, but youre talking about supply constraints.
Any way that you could quantify how much you think you could ship this quarter. If you didn't have the supply constraints.
I could but I'm not gonna, but.
I'll try to give you a little bit of color I'll try to give you a little bit of color.
So when you say this quarter do you mean in the quarter, we just closed and announced.
Third quarter.
For the quarter were in because we definitely left.
Avenue.
Net net we recorded for Q2.
Was was short of demand okay.
And the revenue in Q3.
With the guidance. We just gave is short of demand.
And the revenue not so much in Q2, because that this really started to we weren't really we were a little bit affected in Q1 or affected in Q2.
Beginning that it was.
For us with sort of the beginning stages of.
On strength.
We didn't turn any programs down so I wouldn't say that's of revenue when I say, we were short of revenue that's to backlog right.
And the way that backlog exists is it just rolls over to the next quarter.
Backlog, we're pretty much on a go forward basis.
Getting.
Secured orders from customers out in time, so not only are we getting longer lead time, we're getting binding orders right that they can't back out. So if we can't ship it it doesn't go away it rolls over.
But also in Q3.
I would say there was a program as we started this year and we understood the constraints.
There were at least 1 high volume program, we had to walk away from because of <unk>.
We could anticipate enough capacity to support it.
That's a little harder to quantify what that would be I mean, we have forecast for what it would be but so.
If I really got down and.
<unk> said.
How much did <unk>.
Supply constraints.
In fact, the guidance in Q3.
Yes.
Reasonable for backlog, that's rolling over to Q4.
And considerably more that we probably turned away on new designing activity.
Okay that is helpful..1 last question for me on your.
Youre funding agreement with the projector customer I think the last time it is few years ago.
It provides a step down in ESP has been an increase in gross margin was wondering if you're expecting similar dynamics and then when do we see the offsets the opex here does it start later this year next year, how do we think about that.
Okay. So you are at.
Asking me that as as mobile increases will we see a downward trajectory on margins is that what you are asking me.
No. It was related to the funding agreement that I think it was with a projected cost.
Funding, there's funding agreement okay.
So this particular development.
<unk>.
It has a lot of.
Outside IP that we bring in for the system on Chip in addition to our own Inc.
A lot of the upfront money.
We secured I think.
About half.
Of that contract was paid upfront by the customer or Invoiced upfront.
Most of that is going to go right out the door too.
Design tools and IP providers third party support right. So there'll be no offset hits this year I would call it.
New troll to slightly negative for us we may absorb more costs this year than we actually take in.
Next year it'll reverse next year, we'll have Austin.
Okay that is fair enough. That's all for me guys. Thank you.
Thanks Richard.
Thanks Richard.
We have our next question from Darrin Peller from.
Thank you.
Your line is open.
Hi, guys. Thanks for taking my questions I.
I did have a question on mobile.
Wanted to get a sense of customer response to Iris I think for the most part you guys continue to re sign high risk on to the next generation device.
The refreshed version on the device.
Are you seeing more discussions with your customers to move from maybe those higher end phones phones to the mid tier with higher volumes.
Any update on that or detail on some of the discussions you're having would be great.
Well so.
With the first tier 1 they kept most of the solutions that they use pixel works on I would say on on higher Asps funds maybe <unk>.
$600 on that.
For the second tier 1 they are actually the first family of products that they launched iris or <unk> pro on.
I think range from just around $300 to 450.
So that's new for us that was that was.
And it was reasonable volume.
They are following up with launches that will be announced.
Very shortly those are probably a little bit higher end phones.
But on a go forward basis, we do expect that our solutions will get down to let's call. It the upper mid range right. We've had tier 2 phone companies.
Launch Iris our solutions down into the $250 price range with.
With several tier 2 Oems.
What I found is that those companies.
They are struggling with volume for 2 reasons.
1.
They are struggling at securing other capacity outside of pixel works.
Mainly AP capacity.
And then too.
During this environment it seems to me that.
We still have some markets that are service provider markets, where the customers are service providers in other markets that are direct to consumer markets and it seems to me in both cases.
The customers, whether they be service provider customers or direct to consumer models are migrating to larger Oems.
And I think the market data you can see out there.
The top 5 top 6 mobile Oems in the world or regionally, whether you look at Europe data or China, only data or the Americas data.
It's consistent data, which is the top 6 have all grown.
Market share and.
And significant year over year growth.
With maybe the exception of Huawei.
Sure.
<unk>.
The other category, which is where the tier twos fall in and Theres a lot of them.
Have shrank market share and are about flat year over year and last year was not a very good year.
So the question was will this trend continue.
And will there be more consolidation at the.
The top 6 or 7 Oems.
Or not.
And we will.
In some cases these tier 2 spent a lot of money.
To try to break through and ship a reasonable amount of volume to support their efforts.
I would say over the last 2 years.
They haven't got a return on their investment.
So the question is do they continue to do that.
Or do we see further consolidation over the next 2 years I.
I'm not going to answer that maybe the market pundits will answer and I have my own views, but.
Anyway, so with that said for us.
Clearly we're the.
The more we move down into lower price bonds, whether we use lower asps solutions from pixel works or not the more volume that would be obtained but I would also say.
No.
We are taking.
We treat silicon in a little more revered and access to capacity and a little more revered way this year and next than we probably did in the past.
And so.
It does affect our roadmap and it will affect.
We have an opportunity to significantly grow the topline by selling higher ASP.
Solutions.
But may be lower volume, because we secure more capacity that way.
We use the capacity we have on higher Asps solutions that differentiate higher end phones more.
If we can grow the top line and the margin line.
In a better fashion by going there with our roadmap versus going down we will do that.
And so all of the things, we just talked about Eric probably affecting how we go forward, who we pursue as our customers our ecosystem partners and the solutions that our folks were focused on our roadmap.
Got it got it and my apologies if some of this has been covered I've been jumping on multiple calls not on that wasn't that was a new 1 that was a good 1 that was a new welcome. Okay. And then just quickly on true cut I think in the past you guys have spoken about some large potential customers. There I was just curious how those conversations are progressing.
And I'm wondering if you can maybe size that opportunity in some sense.
Providing sort of a pricing details there.
But just generally how are you feeling about true cut in some of the opportunities there.
So.
On the constant conversation with the customers are going quite well and so remember when we say.
It's hard for me to say customers, because it's a combination and the way we are trying to bring this technology to market is not a pure tools provider, which would go to content creators and postproduction houses only.
But we do have to go start there and get the content creators and the post production.
Houses.
Brought in.
To the value proposition that we bring.
They are key advocate.
At true cuts going to be adopted it's because the content creators demanded it pretty much. Okay. So if they don't come along and see the value of what we can bring to their moving making process and what the end product would look like on all screens that they delivered to whether its theatrical.
Or device.
True cut will not go will not be a success if they don't buy it. So it is very key that we get the content creators.
And the postproduction houses bought in and I would suggest that we're doing okay. There.
Out of interest.
A lot of interest.
Then another element as you have the distributors of that content.
And in some cases.
The content creators have more power over the distribution of their content than others.
But in the end if you wanted it to be really successful.
The distributors would also have to see the value proposition of the technology I would say those conversations are still going.
They are.
It's clear to me that the distributors.
Our busy doing a lot of things.
And.
Theyre moving way more focused right now coming out of the pandemic on quantity of content and there is a lack of talent out there creating content and they are just like there is a semiconductor shortage. There is a shortage of new content coming out that they can put on their formats. There are more.
More streaming format that need content, then there is new content coming in for those of us.
That subscribe to all of these new offerings whether.
Let it be Disney year, paramount or or Netflix or Amazon.
Apple you name it Warner.
I would suggest that I havent seen near the quantity of content come on new to these platforms as we saw pre pandemic.
There's a big pull from them. They are focused elsewhere doing that right and we're trying to market technology innovation to them at a time when there <unk>.
Number 1 focus is quantity for quality content.
So thats a harder discussion to have.
The content people were having discussion with really see the value proposition if they see the value proposition enough. They may push the distributors to prioritize.
What we're doing.
And then the third element of the ecosystem.
Is the device manufacturers and licensing.
And there we're having positive.
Conversations and in fact, we have a very large device OEM, that's engaged with US trying to go back and convinced the other ecosystem partners that this is the way to solve some problems.
They want to solve those problems and they want to solve those problems with pixel.
So I think this is the first time publicly and Derrick. Thank you for teeing it up that I've got that detailed about where we're at.
Sure.
What we're trying to do is is not easy.
But we are making good progress.
And as far as the Fi.
Scoping the overall market.
No.
Sure.
The goal.
Would be long term and I'm going to paint long term like let's just say.
5 to 7 years out the goal would be that.
We would have licensees.
From device manufacturers around the world.
Licensing.
On their devices.
The ability to show true cut.
Master technology.
And then too.
<unk>.
To have content creators around the world use our tools.
To create content as part of their post production process.
To deliver a premium experience to all of those device manufacturers.
And the value would be.
Would be put it this way for a company our size the opportunity.
<unk> is quite large.
Yes got it no I really appreciate the color if I could squeeze 1 other quick 1 on just on the stock exchange.
Too familiar with the process. So what are sort of on the next steps after that listing and how would that impact for the stock trading on the U S markets.
Are you guys going to trade on both exchanges.
What is sort of on listening mean for your engagements in China any benefits there.
Any additional detail on.
That announcement would be great.
Good question.
Yes.
That's a tough 1 to answer on.
On the listing once assume we are successful with the listing.
So we apply and we are approved and we.
We go and have a listed subsidiary list from historic strength.
We have no intention of not list keeping our listing in the U S. Right. So both both listings will exist dual listed.
Not quite a dual listed because it's not an ADR or something like that it's a subsidiary listing.
In China and.
Once again go back to your previous question of true cut depending on how big our licensing business is here.
You would own.
Investors in pixel works.
On the NASDAQ wood.
On the forward looking cash flow.
The capability of that licensing business plus.
Have the majority ownership in the subsidiary that's listed on the stock exchange. So that's the value to holding the U S shares right and then for the value of in China.
The fact that we go do this lifting 1 of the key value propositions and I'm glad you asked this question. So I think it's important for people to understand.
Is if you're in.
Semiconductor business like we are and we are we're not pushing the process technology envelope, but we are pushing display system on and system engineering envelope and how to do it in a very low power way and so we need very good talent.
And.
Most of our organization working on that was already in Shanghai.
That is where that is a much larger talent pool as far as electrical engineers software engineers that work on display and people with display experience is a much larger talent pool there than there is here and so it's very important that we have the ability for that talent pool to feel like they have a vested interest.
<unk> in the company they are working for.
And they do know I mean not that.
Our employees previously didn't have.
Incentive stock and picks works USA, they did but it's very difficult for local people over there to own it long term and keep it in truly value. It they understand the value of our local listed company.
And so once we announced that we were going to go do this internally and we set up the Aesop and we went out and polled our employees. We saw incredibly strong demand for us to go do this to make this change and the participation level, we saw by the way we did it.
That should make any investor in this company feel very good when you have 75% participation of these people.
Their own share.
<unk>.
To invest in pixel works Shanghai at a pre money $173 million valuation at a time when our market cap was probably running at a $150 million.
And so and then the ability to retain new talent that we compete every day over there for.
Is much easier.
When you have when you set up and organized the way we are and we have the promise of the store listing.
So really the.
To me the biggest benefit.
Is the retention and access to talent.
The secondary benefit is capital Theres, a lot of capital over there.
There's a lot of capital here.
<unk>.
For a small semiconductor company.
It is hard for us to get the attention sometimes of the capital markets here in North America.
For a large semiconductor company, maybe not but for small semiconductor company, yes for small semiconductor company in China. It is not hard to get the attention.
So hopefully that helps.
Yes, thanks for the color again.
Yes, thanks, guys.
Thanks Derek.
We have a follow up question from Judy Silva from Roth Capital. Your line is open hi.
Hi, Todd Thanks for Indulging me for the follow up but a lot going on this quarter on.
On the U S business when you do the restructuring you mentioned true cut in licensing I just want to make sure. If the mention of licensing along with true cut was purposeful on that there is a pipeline potentially a patent type opportunities that have been dormant and underserved because you've been busy is that the case or is that just meant to be a generic label for truecar.
It was purposeful on most things I've put that spent a lot of time on these prepared remarks.
Okay.
I'm glad you caught it Susie.
It is not about our patents.
When you licensed IP, if you license.
Let's say IP that would be integrated on somebody else's system on a chip.
Part of what they want is the patent protection for the IP license them. The methodology that you weren't part of what they want as your system Knowhow on your support et cetera, I would say that's referring to.
We've always had opportunities to license we have.
We have a lot of intellectual property, we used to be in the TV chipset business, we're not in it anymore, but we have very good IP there right.
We have some.
Some general display IP that we apply to all of our solutions, whether they be on the projected space mobile elsewhere.
And then we have some very specific IP for our target markets, but we've been approached on all the above to license the IP.
Hum.
Up to this point I felt would defocus the company on trying to get the momentum going in mobile.
And then true cut I feel like we are now at a time where the.
We're sort of often running.
And.
We're hiring and it may be okay to go out, especially if they're in adjacent markets that are noncompetitive, what are what we feel our core businesses are.
To go out and pursue some of those and so I think that's what it was in reference to.
Great and the other 1 I'll try to make it quick.
8-K yesterday, you mentioned, some new investors, which are very interesting very silicon <unk> and chip <unk> chip on I don't know the other 2 but none of our silicon pretty well, they're good at pumping out chips.
<unk> increased the velocity and the cadence of your product introductions going forward or was there any specific sort of thought on that investor base or any color on.
There was specific thought of every 1 of those.
We've been in dialogue prior to the investment with every 1 of those companies.
I'll give a little context, you know who their silicon is for those on the call that don't know who their silicon is there.
Turnkey ASIC and IP provider that recently went public about 9 months ago on the stock exchange themselves.
And they're doing very well.
Then theres can on Who's also went public and there are Chinese based.
Basic provider that has done both bit mining bitcoin mining Asics and recently they announced a very neat.
Edge AI processor.
And so we are in discussions with them about.
From adjacent markets in collaboration and then chip 1 is display company, but not a display processing company theyre more in the very front end <unk> T cons analog front ends devices for large.
<unk> displays that you would see lot in Asia like advertising displays all over and then of course, they are getting into the mobile phone market et cetera, and so we're in discussions with them.
<unk>.
Some adjacent markets and so all of those investments was more than money at a reasonable valuation. It was also about collaboration.
Okay. Thanks Todd.
There are no further questions at this time from.
On the call I'll go back to the per centers.
Alright, well.
I'll, let elias finish in a minute, but I just wanted to say listen a lot to digest.
I Hope this was helpful for everybody.
And thanks for your attendance today.
And England.
Just just to say thank you for participating on.
Expenses about this right you were taking we won't see those are the same trade.
Take care. Thank you.
Ladies and gentlemen. This concludes today's presentation. Thank you for participating you may now disconnect.
No it did.
Yeah.
[music].
[music].
[music].
Good day, ladies and gentlemen, and welcome to pick for second quarter 2020 on earnings Conference call.
They'll be operator for today's call at this time, all participants are American on the mode.
After the Speakers' remarks, there'll be a question and answer session and to ask a question during that time. Please press star 1 on your telephone keypad.
This call is being recorded for replay purposes, I would like to turn the call over to Vic for CFO, Mr last meter.
Thank you.
Good day, ladies and gentlemen, and welcome to the pixel works Inc.
Second quarter of 2021 earnings conference call.
Uh huh.
Well for being on the call is starting up on us.
President and CEO.
The purpose for this conference call is to supplement the information provided on <unk> press release issued earlier today announcing the company's financial results for the second quarter on 2021.
Before we begin I would like to remind you that various remarks, we make on this call income.
Moving those about our projected future financial results economic on market trends and our competitive position constitute forward looking statements.
These forward looking statements on all of the statements made on this call that are not historical facts.
Subject to a number of risks and uncertainties that could cause actual results to differ materially.
All forward looking statements are based on the company's beliefs as of today on Tuesday August 10.2021.
The company undertakes no obligation to update any such statements to reflect events or circumstances occurring after today.
Please refer to today's press release on.
On your reports on form 10-K for the year ended December 31.2020.
And subsequent SEC filings for a description of factors that could cause forward looking statements to differ materially from actual results.
Additionally, the company's press release for management take months. During this conference call will include discussions of certain measures and financial information in GAAP and non-GAAP terms.
Including gross margin operating expenses net loss on.
Net loss per share.
Non-GAAP measures exclude amortization of acquired intangible assets stock based compensation expense on restructuring expense.
The company uses these non-GAAP measures internally to assess.
Operating performance.
We believe these non-GAAP measures provide a meaningful perspective on our core operating results on the underlying cash flow dynamics.
We caution investors to consider these measures in addition to and not a substitute for nor superior to the company's consolidated financial results as presented in accordance with GAAP.
Also included on the Companys press release on definitions and reconciliations of GAAP to non-GAAP net loss on a GAAP net loss on adjusted EBITDA, which provide additional details.
With that said I will now turn the call over to Todd for his opening remarks. Thank you.
Thank you Elias and good afternoon to those joining us on today's call and webcast.
I'm looking forward to walking through the significant developments that we announced as part of our 8-K filing yesterday.
But first I'll provide a brief recap of our results for the second quarter total revenue came in just above the midpoint of guidance at $14.1 million, representing over 50% growth on both a sequential and year over year basis.
Revenue from mobile set another quarterly record of $4.5 million and we benefited from a recovery on our projector business, which more than doubled over the previous quarter.
Gross margin was also in line with the midpoint of our guidance improving to nearly 53% as we began passing through higher material cost to customers and realize the benefit of increased unit volumes.
Additionally, we did a good job on managing operational expenses in the second quarter, all of which contributed to sequential and year over year improvement on our bottom line results.
As announced in our 8-K filing yesterday, we have completed a series of actions as part of a broader strategic plan designed to accelerate pixel works future growth and success by transforming our existing Shanghai R&D Center takes a workshop Hi, Inc.
A profit center.
This will enable us to enhance the focus of our mobile projector and video delivery businesses on their global Center in Asia increase.
Increasing our ability to access capital ecosystem partners customers and key talent.
As part of this strategic plan to establish greater prominence in Asia, we realigned our mobile projector and video delivery resources and established our existing subsidiary picks or Shanghai to operate as a profit center. This.
This does not represent a fundamental shift from our previous product strategies, but rather an optimized optimization of our operating structure to accelerate the growth of the company.
The new structure provide the following benefits.
Direct equity ownership by employees through a newly established Aesop in the Shanghai based subsidiary enhances our ability to attract and retain key talent, we had approximately 75% participation from our existing employees reporting into pixel works Shanghai.
2 provides access to a new source of capital that a lot.
Aligned with strategic relationships and opens adjacent markets for our industry, leading visual processing technology.
3.
Dresses specific qualification requirements for.
For our picks for Shanghai subsidiary to pursue an initial public offering and listing of shares on the star market in China.
For further aligns our resources closer to our key customers ecosystem partners and end markets.
And 5 allows pixel works U S to increase the focus on its true cut business as well as other licensing opportunities.
In addition to the realignment of resources picks it works entered into an agreement with a private equity fund and other strategic investors that are based in China as well as with entities owned by approximately 75% of the pixel works Shanghai employees.
Under which committed investments will be made in exchange for equity interest and pixel works Shanghai.
The private equity funds are affiliates of M to M to which the company sold common stock in December of 2020.
And the strategic investors our funds owned by their silicon.
Non and chip 1 technology.
In aggregate on a capital increase agreements consist of the commitment by employee entities to pay the amounts in RMB.
Equating to approximately $12.3 million in exchange for total equity interest of 5.9 for a 5% interest in pixel works Shanghai.
Reflecting a pre money valuation of approximately $173 million.
And then by non employee investors to pay amounts equating to approximately $38 million in.
<unk> for total equity interest of 10, 45% and pixel works Shanghai, reflecting for a pre money valuation of approximately $247 million.
Following the closing of these transactions pixel works would continue to hold an 83, 6% equity interest and picks it works Shanghai.
Specific to pursuing a lifting of the pixel works Shanghai subsidiary on the Star Exchange, we would like to emphasize that this is a lengthy process that is comprised of meeting certain regulatory criteria and multiple periods of review.
As such we currently intend to qualify the subsidiary and apply for its listing as early as Q3.2022, but no later than June of 2023.
Longer term, we believe listing the picture works Shanghai subsidiary in China will provide expanded access to future potential capital at what could be more competitive evaluations.
Coming back to our second quarter results and updates on our end markets.
In our mobile business, we continued to gain increased traction across an expanding number of Oems and launch smartphone models and in Q2, we delivered the fourth consecutive quarter of sequential revenue growth.
Mobile revenue for the first half of 2021 grew by nearly 200% compared to the first half of 2020.
Year to date, our visual processing and enhancement technologies have been incorporated into more than a dozen models across a half a dozen different Oems, including 2 first time mobile customers and 2 tier 1 mobile Oems.
A number of these launched phones using pixel works technology.
Net new industry records for display performance and several have been ranked by independent third party reviews as delivering visual quality on par with the industry's ultra flagships, while selling at a fraction of the price.
Even more important has been a very positive feedback from end to end user consumers on the display features and functionality enabled by picks works across these launch devices.
This market validation has reinforced the value proposition of our technology and ability to influence customers' buying decisions.
Resulting in Oems coming back and incorporating our solutions into more of their future devices.
Further supporting our realignment to directly operate our mobile business from within Asia.
Recently recruited Leo Chen joined the company in a newly created role of senior VP and general manager of our mobile business.
<unk> is a seasoned mobile industry executive with over 20 years of mobile experience in the last 10 years in various roles for Qualcomm China.
He is based in Shanghai, and he will lead our teams mobile growth and expansion initiatives throughout Asia.
During the quarter, we secured several new design ins for X 5 pro and <unk> visual processors with multiple phones scheduled to launch in the second half of the year as well as in early 2022.
In addition, we believe we are close to securing our third tier 1 mobile OEM customer on a device targeted for.
For launch later this year.
We've also continued to secure additional wins for our soft Iris solution, which is serving our strategic benefit in the current hardware constrained environment and.
In addition to continuously increasing the value proposition of our software only solution. Our mobile team has been actively working to expand soft irises compatibility for use with a new family of application processors.
Pixel works mobile value proposition remains well aligned with the most prominent market trends, including mainstream adoption of OLED displays higher refresh rates on those displays and <unk> enabled mobile gaming.
As Oems continue to confront the non trivial challenges of combining these 3 attributes into their next generation smartphones. They are increasingly coming to fix it works for solutions.
While higher frame rates are fundamental to providing the most immersive and realistic gaming experience the need to render high resolution at ever increasing frame rates creates a challenging system engineering problem.
We're not addressed properly it results in reduced battery life and overheating that impact device performance in the mobile gaming experience.
Our visual processors utilized a distributed visual architecture to offload this intensive processing and upscaling, both resolution and frame rate from the apps processor, enabling less powertrain lower operating temperature, even during sustained high frame high frame rate gaming, providing a unique mobile gaming experience.
<unk>.
According to recent third party estimates revenue from mobile gaming in 2020 exceeded $90 billion and represented just over half of the total global video game market.
With the growing popularity of mobile gaming in China and improve the gaming experience has become 1 of the highest priorities for mobile Oems on their next generation devices.
Our newest and most advanced seventh generation visual processor, which we taped out last month is specifically designed to address the fundamental challenges associated with delivering high performance gaming on a mobile device.
I will defer a full review of the specs and industry first features until we formally unveiled the chip to the market. Later. This year. However, we will begin sampling this visual processor to select customers later this month.
We already have an alpha customer committed to use this chip in a device scheduled for mid next year.
Shifting to the projector business.
Following initial improvement in order patterns that began early in the year, we realized a significant recovery in shipments and bookings during Q2.
With revenue more than doubling sequentially and increasing 30% year over year.
A number of factors contributed to this outsized rebound, including channel inventories that were unsustainably low after having adjusted to the weaker sell through in 2020 due to the Tam due to the pandemic.
Coupled with improving end market demand in China and parts of the U S.
During the quarter, our operations team worked with our supply chain partners to eliminate a large majority of the supply GAAP going into the quarter and meet a significant portion of the customer demand in Q2.
As a result of the ongoing supply constrained environment. We have continued to extend our required lead times on orders and customers are placing orders through early next year.
As notable for our projector business in late July we finalized a $10.6 million dollar multi year agreement to develop an advanced SSE for a large existing customers plan next generation product family.
As part of this co development agreement the customer will effectively fund a significant portion of the research and development expenses related to the new product, which we in turn expected to deliver and ramp into production at the beginning of 2023.
Keeping in mind this relatively long life cycles of our solutions in the projector market. Our successful execution of this new SFC that can be repurposed and targeted to the broader projector market represents an opportunity to solidify and extend <unk> market leading position through the majority of this decade.
Regarding the broader supply constrained environment across the semiconductor industry and more specifically, what we're doing to mitigate the impact on picks it works and our ability to meet customer demand in all end markets.
Our customers have responded favorably to 2 are extending of lead times across all product lines, resulting in increased backlog and visibility for the second half of the year. We've also been making progress with our supply partners to mostly needs.
Anticipated demand throughout the rest of this year.
Our operations team, whose focus is on all elements of our supply chain has been doing an incredible job at successfully back filling customer demand in Q1, and Q2 and securing supply during the second half of the year.
These focused efforts also include back end Assembly and test, where we recently qualified to additional testing houses for projected to give us multiple sources of testing.
While we currently have very good visibility into future demand, we expect supply constraints to remain an ongoing challenge an element of uncertainty.
Our ability to support further upside demand in mobile and sustained recovery in projector beyond Q3, we will continue to be contingent on mitigating the prevailing supply constraints in the latter part of this year.
Turning to a brief update on Truecar.
Following an industry wide halt on more than a year on theatrical production due to COVID-19. The major studios have started to reopen and production activity is ramping up again in Hollywood.
While progress has been slower during this period, our team's ongoing efforts have been very productive over the last few months, especially as it relates to building out and are supporting ecosystem for true cut adoption.
Today, we are focused on a narrow group of existing engagements and in depth technology evaluations with the combination of perspective true cut ecosystem partners we.
We are increasingly optimistic about securing our first breakthrough partners for Truecar North America before year end.
In summary, we've been extremely busy we are executing well during a dynamic in supply constrained environment, and we had a solid second quarter with significant growth and improved operating results are.
Our team continues to be aggressive and focused on securing supply from both our foundry and back and back end packaging partners to support growing product demand from our customers.
Entering the second half of the year, we have strong bookings from a combination of mobile and projector customers with orders extending into 2022.
This includes a healthy pipeline of mobile design ins on next generation smartphones across both existing and new tier 1 mobile Oems.
We are also on track to begin sampling our recently taped out 7 generation visual processor in the third quarter.
With the implementation of the strategic plan introduced today, we have repositioned the company to fully align with our customers in Asia and accelerate fixed pixel works growth trajectory although.
Although the magnitude of our growth in the near term will depend on a large part on our ability to secure incremental support from the supply chain I am confident we will deliver sustained solid revenue growth through the remainder of the year.
With that I'll hand, the call over to Elias to review, the second quarter financials and provide our guidance for the third quarter.
Thank you Todd.
Revenue for the second quarter of 2021 was $14.1 million compared to $9.3 million in the first quarter of 2021 on compared to revenue of $9.3 million in the second quarter of 2020.
As Todd previously highlighted the sequential on year over year revenue increase of over 50% reflected a combination of continued strong growth on record revenue in the mobile market on.
On a solid recovery of demand from the projected market.
The breakdown of revenue in the second quarter was as follows.
Revenue from mobile increased to approximately $4.5 million, representing 32 percentage of total revenue.
Driven by strong growth in sales of both visual display processors on software solutions.
Revenue from digital projected to increase to approximately $8.5 million.
Video delivery revenue was approximately $1.1 million.
Non-GAAP gross profit margin increased by over 900 basis points sequentially to 52, 7% from the second quarter of 2021.
From 43, 7% for the first quarter of 2021 on compared to 59, 2% in the second quarter of 2020.
As we indicated last quarter the lower than historical gross margin in Q1 was primarily the result of product mix on temporary pricing ex Senator new mobile customer.
We anticipate gross margin will remain historical range for the remainder of 2021, while continuing to trend higher from Q2 levels us mobile revenue expense on demand stabilizes in the project to market.
Non-GAAP operating expenses were $10.1 million in the second quarter of 2021.
Compared to $10.2 million last quarter on $9.3 million in the same period last year.
On a non-GAAP basis second quarter 2021, net loss was $2.6 million.
Our loss of <unk> <unk> per share compared to on net loss of $6.4 million on loss of <unk> 12 per share in the prior quarter on a net loss of $3.9 million on loss of <unk> <unk> per share in the second quarter of 2020.
Adjusted EBITDA for the second quarter of 2021 was a negative $1.8 million.
Compared to a negative $5.2 million for the first quarter of 2021 on a negative $2.9 million in the second quarter of 2020.
Moving to the balance sheet.
We ended the second quarter of 2021 with cash on cash equivalence of approximately $23.6 million.
In terms of other balance sheet metrics for the second quarter.
A day sales outstanding were 41 days at quarter end comp.
Compared to 54 days on the ads on the first quarter.
Inventory turns were 16 times in the second quarter up from 10 times in the prior quarter.
Now turning to our guidance for the third quarter of 2021.
Based on recent order trends on our current backlog, we expect another quarter of very strong year over year revenue growth on the third quarter.
Driven by sustained solid demand in both mobile and projector.
We expect to remain supply constrained in Q3 for both mobile on 22 nanometers on the projected on our 40 nanometers.
And we are working with our suppliers for resolve all delinquencies by the end of the year.
Specifically, we currently anticipate total revenue for third quarter to range between $14 million on $16 million.
Consistent with my previous comments, we anticipate gross margin to remain on historical range in the third quarter.
Supported by sustained trends in mobile and projector as well as the benefits of better overhead absorption associated with.
With higher total revenues.
More specifically, we expect non-GAAP gross profit margin in the third quarter of between 50% to 55%.
We anticipate operating expenses third quarter to range between 10 and $11 million on a non-GAAP basis.
Finally, we expect third quarter non-GAAP EPS to be in the range of between a loss of 7 cents.
On a non-GAAP net on a non-GAAP loss of <unk> <unk> per share.
That concludes our prepared remarks, we will now open the call for questions.
Please proceed with margin in Q on your question. Thank you everyone.
Thank you for sensors at this time for participants to ask any question.
First on <unk> on your telephone keypad.
Again, Thats star 1 on your telephone keypad.
We'll pause for just a moment to compile the Q&A roster.
Yes.
We have our first question from <unk> Desilva from Roth capital.
Your line is open hi.
Todd highlighted congratulations on the strong recovery here and obviously the restructuring announcement very exciting for the company. Thank you. So yeah no problem. So the mobile Todd I kind of caught in your remarks, you talked about expecting additional growth from existing and new customers I wanted to get a sense for like the statement about new mobile customers.
That is not an expanding opportunity versus what we might have expected or whether that's just kind of sleep.
Sweeping across the China Oems that we're familiar with just wanted to get some color there.
Yeah.
It's a new tier 1 so and.
Theyre going through some particular changes where there they are spending a lot of energy on.
Our new family of flagship processes.
It looks like Theyre going to use picks of works across their flagship processors not done yet.
That's what I'm referring to.
Okay and would you care to Todd to.
Provide some timing timeframe on when that might come to market or is that still to be there for their first of the family of phones would be launched at the latter part of this year, Okay late 'twenty 1.
Okay, and then the restructuring we're all trying to get a handle on it so.
Is there any longer term operating impact operating expense impact of this restructuring and would you be able to provide Shanghai standalone operating metrics profitability is on a meaningful data point to help us with.
Well were probably not provide that here I mean, we will have it because at some point in time, we're preparing.
Financials and operating entity that we'll be filing to go public on the stock exchange and the regulators in China will want to see.
The financials just for that entity. So we clearly the probably the only thing that I would say.
Short term nothing's going to change from an operating expense standpoint right.
Longer term.
We will have some added cost in finance, because we'll be doing both audit in China and in the U S.
And we'll have finance teams supporting that audit in both locations I wouldn't say, it's a complete duplication, but there's added costs there.
And then just the added operational cost of growth we.
We do expect right now we're planning for.
Fairly significant growth.
Next year on into 2023, and we will have to expand the organization to support the growth.
Okay. That's helpful. And then we'll look for that as that plays out and then lastly on the projector business I know Todd you gave a lot of color on the prepared remarks, but just the.
The key essence kind of elements of the driver of the sharp recovery here and more importantly, your comfort with the sustainability of this recovered level of demand any help there would be appreciated.
So specific to project Youre talking about the recover correct correct yes.
So I'd call it a snapback when it comes back a 100% that matures.
I don't think there Jim and demand went up 100% right their sell through didn't go up 100% clearly it starting to pick up for them, but they were at very low.
There is a very big with.
And a lot of it's finished good projectors around the world at distributors and resellers of their equipment and so as we went into.
The pandemic last year.
We saw an overcompensating because if you have this expanded with the material throughout the process, so raw goods and materials like semiconductors from US finished goods that they hadn't shipped out to distributors and vars, yet and then inventories around the world the distributors and Vars.
It contracts and so we went through the contraction last year and what you just saw was a bounce back now.
Now.
The business. The actual end business is the projector customers I would say is at.
Oh man.
70% of what they expect to be normalized when we completely come out of.
On the pandemic.
And so its snapping back to not a full utilization okay. Its snapping back to the 70% level and so we would expect.
Probably over really depends on.
On a global reopening the U S is fairly open.
Open at least less let's hope it stays open.
Europe is reopening.
Most of Asia.
China's even going through some closures right now so.
Southeast Asia is going through fits and starts so I would suggest that we're probably going to see another year of fits and starts it will see gentle recovery from the projector market during that year and then as we go into latter part of 2022 and 2023 I expect then we're going to get up to full recovery.
I appreciate the help thanks guys.
Hmm.
We have our next question from Richard Shannon from Craig Hallum. Your line is open.
Great. Thanks, Todd for LIFO add my congratulations on a nice nice bounce back in yes, very fascinating.
On strategic initiatives here so.
I'll take a little while we get on a follow up on <unk> first question regarding the tier 1 and asked for a little bit more context here, obviously that the new tier 1 I'd actually like to step back and you get a sense of how the existing tier ones are you expecting to expand their usage of pixel force I know you've had 1 that's been in place for a while.
On the new 1 I think earlier this year, what signs are you getting that theyre going to be.
<unk> and greater breadth and then how would you compare that to the promise of this with new tier 1 here in size relative if you look a year or 2 out how should we think about that.
Well so.
We're not going to go into 2 minutes for specifics about our tier ones because a lot of it's confidential, but what I will say what I'll say is of the 2 tier ones both are still.
Utilizing <unk> technology across.
For broader swath of phones I would say that.
The existing tier ones, we have we're launching.
Between a half a dozen to 10 models each.
With various products from pixel works between soft Iris.
And our Iris 5 X 5 processor and then.
They are for both focused on the new new seventh generation device.
And the new OEM I would say is as you know.
Uh huh.
They're starting off very consistent to where we started off with the first 2.
Okay.
That's fair perspective.
Second question I think Todd you announce youre going to work with our new applications.
Processing partner wondering if you could.
Help us understand the drivers for that is this driven by a particular customers like to thank you for tier.
Tier 1 customer or or non thing, maybe just kind of give us the same flow.
On that will happen and when you see start seeing benefit from that.
So this was this was a collaboration that's been going on between the other apps processing company in our sales for a while but we needed a catalyst to really with where all short on resources right even large.
Large modem application companies are short on resources and so as much as the 2 parties thought it was in both their best interest to collaborate you need that first program to put a sense of urgency behind it and so we have 1 customer that put a sense of urgency behind that that work.
Okay, that's fair.
Let's see here your question on <unk>.
As it relates to the third quarter and potentially beyond here, but you're talking about supply constraints.
Any way that you could quantify how much you think you could ship this quarter. If you didn't have the supply constraints.
I could but I'm not gonna, but.
I'll try to give you a little bit of color I'll try to give you a little bit of color.
And so when you say this quarter do you mean the quarter, we just closed and announced.
Third quarter you.
For the quarter were in because we definitely left the.
The revenue that we recorded for Q2.
Was was short of demand okay.
And the revenue in Q3.
With the guidance. We just gave is short of demand.
And the revenue not so much in Q2, because that this really started to we weren't really we were a little bit affected in Q1 or affected in Q2.
But beginning that it was.
For us with sort of the beginning stages of of constraint.
We didn't turn any programs down so I wouldn't say that's of revenue when I say, we were short of revenue that's to backlog right.
And the way that backlog exists is it just rolls over to the next quarter.
Backlog, we're pretty much on a go forward basis.
Getting.
Secured orders from customers out in time, so not only are we getting longer lead time, we're getting binding orders right that they can't back out. So if we can't ship it it doesn't go away it rolls over.
But also in Q3.
Sure.
I would say there was a program as we started this year and we understood. The constraints there were at least 1 high volume program, we had to walk away from because we.
We could anticipate enough capacity to support it.
That's a little harder to quantify what that would be I mean, we have forecast for what it would be but.
If I really got down and.
<unk> said, how much did <unk>.
Supply constraints.
In fact, the guidance in Q3.
Yes.
Reasonable for backlog, that's rolling over to Q4.
And considerably more that we probably turned away on new designing activity.
Okay that is helpful..1 last question for me on your.
You're funding agreement with the projector customer I think the last time. It was few years ago and it provides a step down in ESP has been an increase in gross margin was wondering if you're expecting similar dynamics and then when do we see the offsets the opex here does that start later this year next year, how do we think about that.
Okay. So so.
You are asking me that as as mobile increases will we see a downward trajectory in margin is that what you're asking me.
No. It was related to the funding agreement that I think it was with a projected cost oh the for.
Funding the funding agreement okay.
So this particular development.
It has a lot of.
Outside IP that we bring in for the system on Chip in addition to our own IP.
A lot of the upfront money.
We secured I think.
About half.
Was that contract was paid upfront by the customer or Invoiced upfront.
Yeah.
Most of that is going to go right out the door too.
Design tools and IP providers third party support right. So there'll be no offset hits this year I would call it.
Neutral to slightly negative for us we may absorb more costs this year than we actually take in net.
Next year it'll reverse next year, we will have offsets.
Okay that is fair enough. That's all for me guys. Thank you.
Thanks Richard.
Thanks Richard.
We have our next question from Doug Harter from.
Colliers Securities Your line is open.
Hi, guys. Thanks for taking my questions I did have a question on mobile.
Wanted to get a sense of customer response to Iris I think for the most part you guys continue to re sign Iris on to the next generation device.
The refreshed version on the device.
Are you seeing more discussions with your customers to move from maybe those higher end phones <unk> phones to the mid tier with higher volumes any any update on that or detail on some of the discussions you're having would be great.
Well so.
With the first tier 1 they kept most of the solutions that they use pixel works on I would say on on higher ASP front.
Maybe.
$600 on that.
For the second tier 1 they are actually the first family of products that they launched iris or <unk> pro on.
I think range from just around $300 for 450.
So that's new for us that was that was.
And it was reasonable volume.
They are following up with launches that will be announced.
Very shortly those are probably a little bit higher end phones.
But on a go forward basis, we do expect that our solutions will get down to let's call. It the upper mid range right. We've had tier 2 phone companies.
Launch Iris our solutions down into the $250 price range with.
With several tier 2 Oems.
What I found is that those companies.
They're struggling with volume for 2 reasons.
1.
They are struggling at securing other capacity outside of pixel works.
Mainly AP capacity.
And then too.
During this environment it seems to me that.
We still have some markets that are service provider markets, where the customers are service providers in other markets that are direct to consumer markets and it seems to me in both cases.
The customers, whether they be service provider customers or direct to consumer models are migrating to larger Oems.
And I think the market data you can see out there.
The top 5 top 6 mobile Oems in the world or regionally, whether you look at Europe data or China, only data or the Americas data.
It's consistent data, which is the top 6 have all grown.
Market share and.
And significant year over year growth.
With maybe the exception of Huawei.
Sure.
The other category, which is where the tier twos fall in and Theres a lot of them.
Have shrank market share and are about flat year over year and last year was not a very good year.
So the question was will this trend continue.
Will there be more consolidation at the.
The top 6 or 7 Oems.
Or not.
And we will.
In some cases these tier 2 spent a lot of money.
To try to break through and shift a reasonable amount of volume to support their efforts.
I would say over the last 2 years.
They haven't got a return on their investment.
So the question is do they continue to do that or do we see further consolidation over the next 2 years on.
I'm not going to answer that maybe the market pundits will answer at IMI on views.
But.
Anyway, so with that said.
Well for us.
Clearly would.
The more we move down.
Into lower price loans, whether we use lower asps solutions from fixed it works or not the more volume that would be obtained but I would also say.
We are taking.
We treat silicon in a little more revered and access to capacity and a little more revered way this year and next than we probably did in the past and so.
It does affect our road map and it will affect.
We have an opportunity to significantly grow the top line by selling.
Higher ASP.
Solutions.
But maybe lower volume because we secure more capacity that way or we secure and we use the capacity we have on higher asps solutions that differentiate higher end phones more.
If we can grow the top line and the margin line.
In a better fashion by going there with our roadmap versus going down we will do that.
And so all of the things, we just talked about Derek on probably affecting how we go forward, who we pursue as our customers our ecosystem partners and the solutions that our folks were focused on our roadmap.
Got it got it and my apologies if some of this has been covered I've been jumping around multiple calls not all of that was that was a new on that was a good 1 and that was a new welcome. Okay. And then just quickly on true cut I think in the past you guys have spoken about some large potential customers. There I was just curious how those conversations are progressing.
And I'm wondering if you can maybe size that opportunity in some sense.
Providing sort of a pricing details there.
But just generally how are you feeling about true cut in some of the opportunities there.
So.
The conversation for the customers are going quite well so remember when we say.
It's hard for me to say customers because it's a combination in the way we are trying to bring this technology to market is not a pure tools provider, which would go to content creators and postproduction houses only.
But we do have to go start there and get the content creators and the post production.
Houses.
Brought in.
To the value proposition that we bring.
They are key advocate.
If true cuts going to be adopted it's because the content creators demanded it pretty much. Okay. So if they don't come along and see the value of what we can bring to their moving making process and what the end product would look like on all screens that they delivered to whether the theatrical.
Or device.
True cut will not go will not be a success if they don't buy it. So it is very key that we get the content creators.
And the postproduction houses bought in and I would suggest that we're doing okay. There.
Of interest <unk>.
Lot of interest.
Then another element as you have the distributors of that content.
And in some cases.
The content creators have more power over the distribution of their content than others.
But in the end if you wanted it to be really successful. The distributors would also have to see the value proposition of the technology I would say those conversations are still going.
They are.
It's clear to me that the distributors.
Our busy doing a lot of things.
And.
Theyre moving way more focused right now coming out of the pandemic on the quantity of content and there is a lack of talent out there creating content and they are just like theres a semiconductor shortage. There is a shortage of new content coming out that they can put on their formats. There are more.
More streaming format that need content, then there is new content coming in for those of us.
That subscribe to all of these new offerings whether.
Disney year, paramount or or Netflix or Amazon.
Apple you name it Warner.
I would suggest that I havent seen near the quantity of content come on new to these platforms as we saw pre pandemic. So theres a big pull from them. They are focused elsewhere doing that right and we're trying to market technology innovation to them at a.
A time when there are.
Number 1 focus is quantity for quality content.
So thats a harder discussion to have the.
The content people were having discussion with really see the value proposition if they see the value proposition enough. They may push the distributors to prioritize.
What we're doing.
And then the third element of the ecosystem.
Is the device manufacturers and licensing.
And there we're having positive.
Conversations and in fact, we have a very large device OEM thats engaged with US trying to go back and convinced the other ecosystem partners that this is the way to solve some problems and they want to solve those problems and they want to solve those problems with pixel works.
So I think this is the first time publicly and Derek. Thank you for teeing it up that I've got that detailed about where we're at.
What we're trying to do is is not easy.
But we are making good progress.
And as far as the Fi.
Scope in the overall market.
No.
The goal.
Would be long term and I'm going to paint long term like let's just say.
5 to 7 years out the goal would be that.
We would have licensees.
From device manufacturers around the world.
Licensing.
On their devices the ability to show true cut.
Master technology.
And then too.
To have content creators around the world use our tools.
To create content as part of their post production process.
To deliver a premium experience to all those device manufacturers.
And the value would be.
Would be put it this way for a company our size.
The opportunity.
Is quite large.
Yep got it no I really appreciate the color if I could squeeze in another quick 1 on just on the stock exchange not too familiar with the process.
So what are sort of the next steps after that listing and how would that impacts on the stock trading on the U S markets.
Are you guys going on trade on both exchanges.
What is sort of on listening mean for your engagements in China any benefits there.
Any additional detail on the net.
That announcement would be great.
Good question.
That's a tough 1 to answer on the.
Listing.
Once assume we.
Our successful with our listing.
So we apply and we are approved and we've.
We go and have a listed our subsidiary listed on the stock exchange.
We have no intention of not list keeping our listing in the U S. Right. So both both listings will exist due on listed.
Not quite a dual listed because it's not an ADR or something like that it's a subsidiary listing.
In China and.
Once again go back to your previous question of true cut depending on how big our licensing business is here.
You would own.
Investors in pixel works.
On the NASDAQ wood.
On the forward looking cash flow.
The capability of that licensing business plus.
Have the majority ownership in the subsidiary that's listed on the Star Exchange. So that's the value to holding the U S shares right and then for the value of in China.
The fact that we go do this listing 1 of the key value propositions and I'm glad you asked this question is I think it's important for people to understand.
Is if you're in this.
Semiconductor business like we are and we are we're not pushing the process technology envelope, but we are pushing display system on system engineering and envelope and how to do it in a very low power way and so we need very good talent.
And.
Most of our organization working on that was already in Shanghai.
That is where that is a much larger talent pool as far as electrical engineers software engineers that work on display and people with display experience is a much larger talent pool there than there is here.
So it's very important that we have the ability for that talent pool to feel like they have a vested interest in the company. They are working for.
And they do know I mean not that.
Our employees previously didn't have.
Incentive stock and picks works USA, they did but it is very difficult for local people over there to own it long term and keep it in truly value and they understand the value of our local listed company.
And so once we announced that we were going to go do this internally and we set up the Aesop and we went out and polled our employees. We saw incredibly strong demand for us to go do this to make this change and the participation level, we saw by the way we did it.
And that should make any investor in this company feel very good when you have 75% participation. These people.
Wrote their own <unk>.
<unk>.
To invest in pixel works Shanghai at a pre money $173 million valuation at a time when our market cap was probably running at a $150 million.
And so and then the ability to retain new talent that we compete every day over there for.
Is much easier.
When you have when you are set up and organized the way we are and we have the promise of this store listing.
So really the.
To me the biggest benefit.
Is the retention and access to talent.
The secondary benefit is capital Theres, a lot of capital over there.
There's a lot of capital here.
<unk>.
For a small semiconductor company.
It is hard for us to get the attention sometimes at the capital markets here in North America.
For large semiconductor company, maybe not but for a small semiconductor company, yes for a small semiconductor company in China. It is not hard to get the attention.
So hopefully that already had held on Australia.
Yes, thanks for the color again.
Yeah. Thanks, guys.
Thank you thanks Derek.
We have a follow up question from some guidance from Roth Capital. Your line is open hi.
Hi, Todd Thanks for Indulging me for the follow up but a lot going on this quarter on.
On the U S business when you do the restructuring you mentioned true cut in licensing I just want to make sure. If the mention of licensing along with true cut was purposeful on that there is a pipeline potentially a patent type opportunities that have been dormant and underserved because you've been busy is that the case or is that just meant to be a generic label for truecar.
It was purposeful on most things I'd put on ice.
Been a lot of time on these prepared remarks.
Okay.
I'm glad you caught it Susie.
It is not about our patents.
When you licensed IP, if you license.
Let's say IP that would be integrated on somebody else's system on a chip.
Part of what they want is the patent protection for the IP license them. The methodologies that you weren't part of what they want as your system Knowhow and yet youre support et cetera, I would say that's referring to.
Net we've always had opportunities to.
2 license we have.
We have a lot of intellectual property, we used to be on the TV chipset business, we're not in it anymore, but we have very good IP there right.
We had some general display IP that we apply to all of our solutions, whether they be in the projector space mobile elsewhere.
And then we have some very specific IP for our target markets, but we've been approached on all of the above to license the IP.
Okay.
Up to this point.
Felt would defocus the company on trying to get the momentum going in mobile.
And then true cut I feel like we are now at a time where.
We're sort of often running.
And.
We're hiring and it may be okay to go out, especially if they are in adjacent markets that are noncompetitive, what are what we feel our core businesses are.
To go out and pursue some of those and so I think that's what it was in reference to.
Great and the other 1 I'll try to make it quick.
The 8-K yesterday, you mentioned, some new investors, which are very interesting very silicon <unk> and chip <unk> chip on I don't know the other 2 banana very silicon pretty well, they're good at pumping out chips could this increase the velocity and the cadence of your product introductions going forward or was there any specific sort of thought on that investor base or any color on guidance.
There was specific thought of every 1 of those.
We've been in dialogue prior to the investment with every 1 of those companies.
I'll give a little context, there silicon is for those on the call that don't know who their silicone is there.
Ill turn key ASIC and IP provider that recently went public about 9 months ago on the stock exchange themselves.
And they're doing very well.
Then there is can on who's also went public and there are Chinese based.
<unk> provider that has done both bit mining bitcoin mining Asics and recently they announced a very neat.
Edge AI processor.
And so we are in discussions with them about.
Some adjacent markets and collaboration and then chip 1 is display company, but not a display processing company. They are more in the very front end <unk> T cons analog front ends devices for large.
Displays that you would see lot in Asia like advertising displays all over and then of course, they are getting into the mobile phone market et cetera, and so we're in discussions with them about.
Some adjacent markets and so all of those investments was more than money at a reasonable valuation. It was also about collaboration.
Okay. Thanks Todd.
There are no further questions at this time.
On the call I'll go back to the per centers.
Alright, well.
I'll, let Elias finished in a minute, but I just wanted to say listen a lot to digest.
I Hope this was helpful for everybody.
And thanks for your attendance today.
In England now just just to say thank you for participating on.
We're excited about this right you were taking we want you guys are the same team.
Take care. Thank you.
Ladies and gentlemen. This concludes today's presentation. Thank you for participating you may now disconnect.