Q1 2022 Pixelworks Inc Earnings Call

May 10, 2022

Okay.

Good day, ladies and gentlemen, and welcome to Pixel works, Inc. First quarter 2022 earnings conference call.

Be your operator for today's call at this time all participants are in a listen only mode. Following management's prepared remarks instructions will be given for the question and answer session. This conference call is being recorded for replay purposes, I would now like to turn the call over to Brett Sheri of Shelton Group Investor Relations.

<unk>.

Sure.

Thank you Gigi good afternoon, and thank you for joining today's call with me on the call as pixel works, President and CEO , Todd to bonus and Chief Financial Officer Haley Amman.

The purpose of today's conference call is to supplement the information provided in pixel works as press release issued earlier today announcing the Companys financial results for the first quarter of 2022.

Before we begin I'd like to remind you that various remarks, we make on this call, including those about projected future financial results economic and market trends and our competitive position constitute forward looking statements. These forward looking statements and all other statements made on this call that are not historical facts are subject to a number of risks and uncertainty.

Fees that may cause actual results to differ materially all forward looking statements are based on the company's beliefs as of today Tuesday May 10 2022.

Any undertakes no obligation to update any such statements to reflect events or circumstances occurring. After today. Please refer to today's press release, our annual report on Form 10-K for the year ended December 31 2021.

And subsequent SEC filings for a description of factors that could cause forward looking statements to differ materially from actual results. Additionally, the company's press release and management statements. During this conference call will include discussions of certain measures and financial information in GAAP and non-GAAP terms, including gross margin operating expense net loss and net loss per.

Share non-GAAP measures exclude amortization of acquired intangible assets and stock based compensation expense. The company uses these non-GAAP measures internally to assess operating performance. We believe these non-GAAP measures provide a meaningful perspective on core operating results and underlying cash flow dynamics, we caution investors.

We consider these measures in addition to and not as a substitute or superior to the company's consolidated financial results as presented in accordance with GAAP also note throughout the company's press release and management statements. During this conference we refer to net loss attributable to <unk>, Inc. Is simply net loss for.

For additional details and reconciliations of GAAP to non-GAAP net loss and GAAP net loss to adjusted EBITDA. Please refer to the company's press release issued earlier today with that it's my pleasure to turn the call over to Todd for his opening remarks. Please go ahead.

Thanks, Brett.

Good afternoon to everyone joining us on the phone and webcast.

Starting with Q1 results, we've had a great start to the year with momentum we had exiting last year continuing into the first quarter.

Total revenue increased 79% year over year with strong growth across all of our target end markets and sales of our hardware based mobile visual processors growing sequentially and year over year to another quarterly record gross profit also came in strong at 53% of revenue together with Opex and bottom line results in the first quarter.

We're better than the midpoint of guidance.

Given the recent headlines regarding COVID-19 related lockdowns.

Wanted to begin by addressing the status of our business operations in China, and how our pixel or Shanghai subsidiary has been navigating this difficult situation.

First I want to highlight that we have offices located in multiple provinces and our China based employees are not exclusively in Shanghai. Our office in Pudong has approximately 135 employees, which is a little over 50% of our global workforce.

Imposed restrictions often vary by specific region, therefore, any potential impacts are not universal.

I would also emphasize that our operations team and supply chain partners are located in Taiwan and as of today. There has been no associated impact on our ability to fulfill planned shipments to our customers.

Having said that the reported Lockdowns have presented temporary challenges for a certain number of our employees and our office in Pudong is working with local officials to reopen over the next couple of weeks.

The team has done a great job remaining productive and we've done our best to accommodate those employees.

The organization in China has demonstrated incredible agility and dedication to maintaining program deadlines and supporting customer engagements.

They're in the office or at our customers' facilities or working remotely from home due to local restrictions.

To date, we have sustained all operational and R&D activities, including development work on our next generation mobile and projector products.

These projects remain on track.

We are continuing to monitor the situation daily and remain prepared to mitigate any future potential impacts on our day to day operations.

I applaud the perseverance of our team during what has been a challenging time, but one that we will get through together.

Turning to a review of activity across our primary end markets are.

Our mobile business had another strong quarter.

With the launch of several notable smartphones by tier one customers and revenue increasing 40% year over year.

As previously mentioned sales of our visual processor hardware increased sequentially, marking our seventh consecutive quarter of growth.

Briefly highlighting several of the announced wins since our last conference call in February our long standing partner, Opal launched 555 X or X five series smartphones.

Which included three models that all utilized pixel works patented high efficiency color calibration software.

Two of the models are built on a Qualcomm snapdragon platform, while the third model the Opal find X five demented. The addition.

Was the worlds first smartphone to leverage media techs newly released Immensity 9000 AP.

This unique introduction of series utilizing different application processor platforms provides increased flexibility and choice of hardware configurations to best satisfy different use cases for individual customers.

Defined X five series served as an excellent opportunity to extend our relationship with Opal, while also achieving a notable milestone in our collaboration with Mediatek as the first smartphone based on media text Immensity <unk> open architecture platform to incorporate <unk> visual quality technology.

Also in February we were able to confirm the name of our previously indicated wind with a third tier one mobile OEM.

Following the launch of honors Magic for series smartphones.

This initial engagement with on are ultimately resulted in wins on two models in the series with the magic for pro and.

Then the magic for pro plus Shims in addition.

Both incorporating pixel works X five plus advanced visual processor.

In addition to being one of the fastest growing brands on our actively seeks to position itself in the premium market.

And the company's owns words, they aimed to reshape the high end flagship market with powerful performance and excellent visual enjoying it.

Our X five plus visual processor proved to be critical to honors achievement in these aspirations as they recognize the <unk> unique value of not only enabling superior visual quality, but also a distributed architecture that could offload visual processing from the GPU and reduce overall system power consumption.

In March <unk> affiliate real knee launch the real need GT, Neil III also incorporating our X five series visual processor.

This win represented the first real need.

Branded smartphone to utilize our technology.

Additionally, it was the first ever smartphone to incorporate pixel works hardware based visual processing technology and a device built on media text Immensity 8100 platform.

As a result as a result.

Now both our software only and visual processor based solutions have been successfully utilized in commercially launched smartphones based upon Qualcomm and Mediatek AP platforms.

In April <unk> launched the <unk> premium smartphone with a design focused on high performance mobile gaming and incorporating our X five plus visual processor.

This device and its features built upon the combined success of the IQ <unk> and its predecessor, the Neal five which was our first ever win with the vivo IQ series.

Unique to the latest <unk> and incorporates another a number of advanced gaming filters to enhance visual display effects, including dedicated filters for specific gains as well as customized filters that independently adjust the display display contrast saturation human brightness.

Enabled by pixel works X X five processor and our ongoing collaboration with vivo. These extensive filter options provide end users with advanced capability to choose and personalize their own immersive gaming experience.

Most recently, we extended our successful partnership with one plus.

With the launch of the one plus a smartphone also incorporating our <unk> probe processor and leveraging pixel works full suite of visual quality and performance capabilities.

The one plus Ace is built on the media techs latest 8100, Max flagship <unk> mobile platform, which utilizes tsmc's five nanometer process technology.

Together with other expanded cutting edge technologies. This smartphone received recognition for both its design appearance and performance configuration.

The one plus Ace is also designated as the official foam for the 2022 Peace Elite Pro League and League of Legends Professional League further solidifying one plus market leadership for mobile devices used in esport tournaments.

Collectively these wins underscore the continued traction and momentum of our differentiating visual processing technology across multiple tier one smartphone designs and AP platforms.

Additionally, these leading mobile customers are making visual display quality and performance a centerpiece of their device marketing campaigns.

Although they don't always attribute the capability to us by name tier one customers are choosing to highlight and differentiate their brands based upon features and performance that they simply cannot rapidly replicate going forward without using $6.

Yes.

One of the.

Objectives.

Our mobile growth strategy that we highlighted on our previous call was to cultivate and expand and ecosystem that further positions pixel works technology as the default solution.

At that time, we were active and inactive collaboration in testing with unity on its gaming engine platform and.

In April we announced that pixel works is now a unity verified solutions partner or VSP.

This means our SDK has now been fully vetted and optimized making our high frame rate rendering accelerator readily available to leading mobile game developers and studios that utilize unities game engine platform.

Together with this designation we have also increased direct engagement with the game content studios as part of establishing a mutually beneficial ecosystem for more immersive high frame rate mobile game.

As a reminder, our rendering accelerator that's now available to developers was specifically designed and optimized for utilizing unique.

In advanced capabilities and incorporate into our newest.

Generation X seven visual processor.

This will enable mobile game developers and studios to take full advantage of the <unk> processor.

Including the ability to elevate content frame rate by preprocessing motion vectors, more precisely and efficiently to deliver optimal and smooth animation, while simultaneously offloading the GPU to extend the length of gameplay and lowering the operating temperature and mobile devices.

With continued engagement and buying from the ecosystem. We believe the combination of our rendering accelerator and X seven visual processor has the potential to completely redefine the industry standard in specs for mobile gaming performance.

We currently have multiple lead customers engaged and in advanced stages of evaluation and design in and we expect the first smartphone models, incorporating our X seven visual processor will be launched in the second half of this year.

Shifting to true cut.

Recently demonstrated steady progress on our ongoing efforts to cultivate and build out our supporting ecosystem for our true Cup motion platform.

Since our formal launch of the platform in December we've had two named foundational partners join the ecosystem on.

On the device side Tcl joined and endorsed the true cut motion ecosystem in January in conjunction with CES is the first device manufacturer.

And then at cinema Con in late April we announced pixel logic as a certified services partner for the true cut motion ecosystem.

<unk> is a leading provider of global content mastering localization and distribution for the media and entertainment industry, including many major studios.

In digital content platforms.

<unk>.

<unk> is a certified ecosystem partner pixel logic will provide true cut motion mastering for theatrical and streaming titles as part of their standard process for new and existing customers.

In partnership with <unk>, We recently demonstrated our true cut motion platform to industry participants at cinema.

With express permission from the production company, we showcased selected clips from the habit remastered with true cut motion.

While this was exclusively a demonstration it showed how true cut motion can bring a cinematic look to a high frame rate production like the habit.

Specific to content, we are actively working on multiple titles that are planned for theatrical release later this year. We believe that these initial titles will encourage additional title and ecosystem growth as we go into 2023.

Yes.

Turning to the projector business.

The recovery began in the first half of 2021.

Is continuing to play out in 2022.

End market demand has generally continued to outpace the projector Oems ability to source supply of all necessary components in recent quarters.

As a result of longer lead times for some components, we have seen some customer order patterns become more linear from quarter to quarter.

Projector revenue in the first quarter was effectively flat compared to the fourth quarter of <unk>.

Contrast from the traditional first quarter seasonality, we usually see.

As further evidence of the ongoing recovery in the projector market first quarter revenue nearly doubled year over year and matched the pre pandemic revenue levels reported in the first quarter of 2020.

Specific to picks it works ability to supply projector customers capacity has remained tight. However, we continue to work closely with both our foundry and back end partners to fulfill customer demand.

The latest feedback from our projected customer supports continued expectations for double digit growth in 'twenty two.

Together with modest improvement and component supply constraints towards the second half of the year.

Separately I also want to briefly acknowledge the activity of our next generation co development project with our largest projector customer.

It is going well and remains on schedule.

Once development is complete towards the end of the year. This new SFC will begin to ramp production in late 2023.

Yes.

In summary, we had a great first quarter highlighted by strong topline growth year over year.

A record quarter for our mobile visual processors, the achievement of significant ecosystem milestones for both mobile and true cut and continued recovery in the projector market.

And finally solid execution, despite a portion of our team dealing with the Covid lockdown challenges.

Looking forward to the second quarter, we are constantly comfortably positioned with considerable bookings and secured capacity allocation to deliver double digit sequential revenue growth, primarily driven by what we expect to be a record quarter for our mobile business.

I'll now turn the call over to Hayley review, the financials and provide our detailed guidance for the second quarter.

Thank you Todd.

Revenue for the first quarter of 2020 to $16 6 million essentially flat with $16 6 million in the fourth quarter of 2021, and representing an increase of 79% from $9 3 million in the first quarter of 2021.

As Todd previously mentioned are sequentially flat top line results reflect the demand that was significantly above the traditional first quarter seasonality.

The year over year increase was driven by strong growth across all of the company's target end market highlighted by the ongoing recovery in the projector market and continued expansion of design wins and customers in the mobile market.

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

Revenue from mobile was $5 7 million, representing 34% of total revenue, we would like to highlight the revenue contribution from mobile visual display processor in Q1 grew 24% sequentially and increased over 50% year year over year to a new quarterly record.

Revenue from digital projector was approximately $7 9 million down, 3% sequentially and up more than 90% year over year, reflecting the significant and ongoing recovery and customer and end market demand.

A video delivery revenue was approximately $3 1 million in the first quarter.

non-GAAP gross profit margin was 53, 2% in the first quarter of 2022 compared to 55% in the fourth quarter of 2021, which benefited from higher licensing revenue from mobile software solution.

And compared to 43, 7% in the first quarter of 2021.

First quarter gross margin reflected our ongoing effort to both mitigate and pass through higher material costs to customers.

non-GAAP operating expenses were $11 6 million in the first quarter compared to $11 million last quarter and $10 2 million in the first quarter of 2021.

On a non-GAAP basis revenue first quarter 2020, excuse me on a non-GAAP basis first quarter 2022, net loss was $3 5 million or a loss of <unk> <unk> per share compared to a net loss of $1 4 million or a loss of <unk> <unk> per share in the prior quarter and a net loss of <unk>.

$6 4 million or a loss of <unk> 12 per share in the first quarter of 2021.

Adjusted EBITDA for the first quarter of.

2022 was negative $2 2 million compared to a negative $1 1 million in the fourth quarter of 2021, and a negative $5 2 million in the first quarter of 2021.

Turning to the balance sheet, we ended the quarter with cash and cash equivalents of $55 2 million.

Sure.

Shifting to our current expectations and guidance for the second quarter of 2022.

We expect continued top line growth in the second quarter with total revenue anticipated to be in a range of between 18 million and $20 million.

At the midpoint of this range, we anticipate sequential growth to be driven primarily by mobile and with revenue contribution from mobile representing a new quarterly record.

non-GAAP gross margin in the second quarter is anticipated to be between 49% and 51%.

<unk> quarter gross margin is expected to reflect a larger mix of mobile chip revenue as compared to the most recent quarter.

We expect operating expenses in the second quarter to range between 13 million and $14 million on a non-GAAP basis.

Compared to the previous quarter anticipated operating expenses for the second quarter reflects a combination of planned hiring and timing of expense related to simultaneous development of both our mobile chip and a projector chip.

We expect our operating expenses to be uneven throughout 2022 due to the timing of the recognition of the credit associated with our co development agreement with an existing projector customer.

Lastly, we expect second quarter non-GAAP EPS to be in a range of between a loss of 10 cents per share and a loss of <unk> <unk> per share.

That completes our prepared remarks, and we look forward to taking a few of your questions.

Operator. Please proceed with the Q&A session. Thank you.

As a reminder to ask a question you will need to press star one on your telephone to withdraw your question press the pound key please standby, while we compile the Q&A roster.

Our first question comes from the line of <unk> Desilva from Roth Capital. Your line is now open hi.

John Haley.

No.

Just to clarify.

Todd the the China Lockdowns, obviously here.

You talked a lot about the offices and the limited.

In terms of the end demand for the smartphone customer China can you just talk about the order patterns, you've seen whether you've seen more cautious ordering ordering or whether the demand remains steady through this through the China lockdowns.

We've certainly seen customers.

Yes.

Tate I would say with.

There's a lot of churn in.

Their model lineup, how they want to configure their model lineup what price points. They want to go after.

I would say it was it's not as convicted as it was this time last year for sure.

But we've also reached a point where.

Our value proposition, where we come in is no longer I would say.

Something they are speculating on we're pretty much a proven technology now if they want to target a certain demographic, where mobile gaming and visual performance as a requirement.

We are in every discussion.

I would say, yes, I've seen the order patterns change for us.

I would still say the orders are stronger than I still suppliers my biggest issue.

Okay that color definitely I'll start and then.

Can you talk specifically about the pairing up with Mediatek versus typically Qualcomm baseband, what does that open up a newer market for you or is that just kind of.

<unk> of the footprint you already have.

Just help us understand there.

Well so it's not just the media tech versus Qualcomm. It's also Mediatek has.

Over the last two years made a conscious effort.

Two focus on Fig flagship.

Performance.

As you can imagine the volume.

On lower end Aps.

The margin the profit margin is on flagship.

Quality or high performance quality Aps.

Mediatek is very ambitious.

Going after qualcomm's market share in that particular area and so.

With that said if you look at the phones that we're in we're either in the flagship or subset of ship series and so I think it's a perfect combination for mediatek in ourselves to collaborate.

So.

For us.

Some of the volume some of the programs, we've been in with Mediatek or higher volume than the Qualcomm because they've been at a slightly lower ASP.

So but.

I expect those guys to move up the food chain.

Over the next two years.

As helpful understand perhaps a question for Lee could you.

Clarify the comments you had about I know the overall mobile troop mobile slash true cut category was down sequentially, but you're talking about mobile being up I think it was sequentially and just help us understand kind of the dynamics of that segment.

As you expect mobile to grow again in the second quarter.

Yeah, I think what I noted is that our hardware sales are up in mobile.

Sequentially, and we expect that trend to continue into Q2.

Okay, great and just because it's declined sequentially I'm curious what the offset was there.

Decline sequentially, the mobile side <unk> was $6 2 million in <unk> and $5 7 million.

Okay.

Yeah in the fourth quarter included.

The big soft Iris deal, which we consider mobile so it's like a license for soft Iris in Q4. This is why we're making the distinction this quarter that hardware grew hardware sales chip sales grew mobile on the mobile side, but Q4 did include.

The soft Iris, which bumped up Q4 and total mobile.

Great that was a clarification of the reporter. Thanks, and then lastly, Todd you talked about you got in the habit and then some motion pictures in the second half where you're going to play a bigger Roland can you clarify or update the revenue model youre seeing there and how it how the how customer wins factor into that Youre inclusion in those titles. Thanks.

Yes, Thats a long.

So long answer to that question, which I'm, probably not going to go into right now so.

Question <unk>, but I'll give you. This it is very important for us.

To be tied to.

What we would consider marquee theatrical releases so one of the things that happened at cinema Khan. Besides us just announcing our relationship with pixel logic and.

Demo ing high frame rate cinematic.

Versions of the habit.

Was that.

There was an announcement by Lightstone technologies.

John Landa was there and James Cameron gave a video about.

The new upcoming Avatar two.

To be delivered to the theaters and high frame rate and have the theaters get ready for high frame rate theatrical releases.

So the reason I bring this up is because this is really setting the tone, where youre going to see the movie industry.

Move towards higher frame rate high.

Higher resolution HDR theatrical releases and the student the remaining.

Theater companies.

Are actually upgrading all of their theaters not all of them, but many of them to be able to <unk>.

Show this content as it start to come out. So this this trend that we have been.

Pushing for a while right.

Is now starting to merge both the theatrical releases and we think it is going to follow the streaming releases. So I think it's very important.

And for all.

Not sure all of our investors understand this but I think it's very important and if you see this trend hit.

True cut motion technology.

Becomes very.

Indispensable.

Okay great.

So that's probably what I'll talk about there okay.

Helpful. Thanks, Todd Thanks, Eric.

Thank you.

A reminder to ask a question you will need to press star one on your telephone.

Draw your question press the pound key.

Our next question comes from the line of Richard Shannon from Craig Hallum. Your line is now open.

Great. Thanks, John Haley for taking my questions.

Well Todd I guess, despite the fact, you said you want to talk more about throughput I think thats exactly where I'll go but I'll ask it pretty simple straightforward question you talked.

Talked about multiple titles coming out later this year can we think of these as like a test case.

The team's successful that we might see a license being signed with <unk>.

Video streaming guys or how do we how do we think about the.

The implications of these titles coming out.

Well I mean first I just wouldn't get ahead of ourselves on what the implications are first of all I would say that these titles were working on and see the value of true cut motion to providing.

<unk>.

A true cut masters version of their content.

And they believe that's the best way to demonstrate their content.

I'm not going to go into the details of the.

Distribution licenses and tool licenses that we have in place with these customers.

<unk>.

But assume assume these are formal engagements.

Okay.

Great.

Let me follow up on the topic within mobile on your third tier one customer on or what are you. What are you expecting here in terms of those engagement relative to the first two tier ones, where we can help them.

And the funnel.

Repeat the question for me Richard.

Let's see.

<unk>.

Engagement over the next one to two years with honor relative to the experience you've had with your first two tier one.

How about I speak about our experience so far engage with them, which has probably been close to a year. Okay.

They are.

When they separated from Huawei, a great deal of their product management team and design teams came with them.

Their philosophy on how to strive for flagship excellence I think also came with them. The difference is the honor brand typically had not been pursuing.

Top tier flagship quality phones.

Now they are.

And so we're engaged with them on those models.

Yes.

Okay.

Fair enough.

Let's jump over to the X seven processor I think I heard you say that youre expecting the first phones launched in the <unk>.

Second half of the year.

I guess, maybe and maybe if you'd like to tie this into a success direct or indirect with linear relationship. There you can kind of talk about what we should expect to see with X seven relative to adoption of the X five processor.

But to see something more rapid and also just wanted to confirm you are still expecting it to be on the order of double prior generations.

Yes, ASP is significantly higher than previous generations.

We are we.

We are engaged in.

Several models simultaneously either in evaluation or in design stage.

<unk>.

The take up will be a combination of.

How many of these evaluations get done.

Early what capacity, we have and resources to engage in them. So.

I mean definitely if I if you go back and look at X five X five it add.

We were we were being the features of X five and motion processing, we're not fully digested by the first couple of models that we engaged with.

When it was launched back in 2019.

And then I think in 2020 in 2021 has started to gain momentum.

Okay.

I don't think we're going to go through that same fit and start.

Pixel works value proposition is now in a known quantity to all these customers. So we don't have to go through that learning curve again.

And to the features and functionality of <unk>, 7%.

Our profound so.

Yes.

There is a lot of churn as I previously talked about with <unk> question not so much about picks that works in our technology, but about how.

The customers in China.

Focus on product lineup.

Target feature set.

Price points.

Demographics, they are targeting do they want to consolidate programs do they want to expand programs a lot of churn right now.

Okay, certainly understandable, what's going on out there one last question for me and I'll jump out of line Gili can you talk about what's been a breakeven model, we should be thinking about here as we march towards that point Youre, assuming next year, you've got the Opex is going up your gross margins a little bit lower than last couple of quarters. How do we think about this as a kind of a.

Center point of our breakeven model.

Yeah, So I think.

So as I said Opex is kind of uneven and a little bit lumpy. This year elevated levels in Q2, and Q3 and then in Q4 back down maybe to like at or below Q1, So going into 2023, we would expect opex probably to be more in the range of Q1 Q4 of this year.

Margins, probably staying around where I guided to for Q2, So I would think a breakeven maybe around $23 million going into 2023.

Yes.

Okay perfect.

That's all for me daily Thanks, Thanks, a lot.

Thanks.

Thank you at this time I am showing no further questions I would like to turn the call back over to management for closing remarks.

For those of you who attended the call today. Thank you so much for your time and attention.

We continue to move forward with our plan.

With planning and execution.

Thanks for your time Bye bye.

This concludes today's conference call. Thank you for participating you may now disconnect.

[music].

Good day, ladies and gentlemen, and welcome to the Pixel works, Inc. First quarter 2022 earnings Conference call I will be your operator for today's call. At this time all participants are in a listen only mode. Following management's prepared remarks instructions will be given for the.

Question and answer session. This conference call is being recorded for replay purposes, I would now like to turn the call over to Brett Sheri of Shelton Group Investor Relations.

Thank you Gigi good afternoon, and thank you for joining today's call with me on the call is <unk>, President and CEO , Todd the bonus and Chief Financial Officer Haley Amman.

Before we begin I would like to remind you that various remarks, we make on this call, including those about projected future financial results economic and market trends and our competitive position constitute forward looking statements. These forward looking statements and all other statements made on this call that are not historical facts are subject to a number of risks and.

<unk> that may cause actual results to differ materially all forward looking statements are based on the company's beliefs as of today Tuesday may 10th 2022.

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, our annual report on Form 10-K for the year ended December 31, 2021, 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's statements. During this conference call will include discussions of certain measures and financial information in GAAP and non-GAAP terms, including gross margin operating expense net loss and net loss per share non-GAAP measures exclude amortization of acquired intangible assets and stock based compensation expense.

The company uses these non-GAAP measures internally to assess operating performance. We believe these non-GAAP measures provide a meaningful perspective on core operating results and underlying cash flow dynamics, we caution investors to consider these measures in addition to and not as a substitute or superior to the company's consolidated financial result.

As presented in accordance with GAAP also note throughout the company's press release and management statements. During this conference we refer to net loss attributable to <unk>, Inc. Is simply net loss.

For additional details and reconciliations of GAAP to non-GAAP net loss and GAAP net loss to adjusted EBITDA. Please refer to the Companys press release issued earlier today with that it's my pleasure to turn the call over to Todd for his opening remarks. Please go ahead.

Thanks, Brett.

And good afternoon to everyone joining us on the phone and webcast.

Starting with Q1 results, we've had a great start to the year with momentum we had exiting last year continuing into the first quarter.

Gross profit also came in strong at 53% of revenue together with Opex and bottom line results in the first quarter that were better than the midpoint of guidance.

Given the recent headlines regarding COVID-19 related Lockdowns I wanted to begin by addressing the status of our business operations in China, and how our pixel works Shanghai subsidiary has been navigating this difficult situation.

First I want to highlight that we have offices located in multiple provinces and our China based employees are not exclusively in Shanghai. Our office <unk> has approximately 135 employees, which is a little over 50% of our global workforce.

Posed restrictions often vary by specific region, therefore, any potential impacts are not universal.

Having said that our reported Lockdowns have presented temporary challenges for a certain number of our employees and our office in Pudong is working with local officials to reopen over the next couple of weeks.

The team has done a great job remaining productive and we've done our best to accommodate those employees.

The organization in China has demonstrated incredible agility and dedication to maintaining program deadlines and supporting customer engagements, whether in the office or at our customers' facilities or working remotely from home due to local restrictions.

To date, we have sustained all operational and R&D activities, including development work on our next generation mobile and projector products.

These projects remain on track.

We are continuing to monitor the situation daily and remain prepared to mitigate any future potential impacts on our day to day operations.

I applaud the perseverance of our team during what has been a challenging time, but one that we will get through together.

Turning to a review of activity across our primary end markets.

Our mobile business had another strong quarter.

With the launch of several notable smartphones by tier one customers and revenue increasing 40% year over year.

As previously mentioned sales of our visual processor hardware increased sequentially, marking our seventh consecutive quarter of growth.

Briefly highlighting several of the announced wins since our last conference call in February our longstanding partner Opal launches five find five X or X five series smartphones.

Which included three models that all utilized picks works patented high efficiency color calibration software.

Two of the models are built on a Qualcomm snapdragon platform, while the third model the Opal find X five <unk> addition.

Was the worlds first smartphone to leverage media techs newly released Immensity 9000 AP.

This unique interjection of series utilizing different application processor platforms provides increased flexibility and choice of hardware configurations to best satisfy different use cases for individual customers.

Defined X five series served as an excellent opportunity to extend our relationship with Opal, while also achieving a notable milestone under our collaboration with Mediatek as the first smartphone based on Mediatek <unk> open architecture platform to incorporate <unk> visual quality technology.

Also in February we were able to confirm the name of our previously indicated wind with a third tier one mobile OEM.

Following the launch of honors Magic for series smartphones.

This ink initial engagement with on are ultimately resulted in wins on two models in the series of the Magic four pro and.

Then the magic for pro plus Shims in addition.

Both incorporating pixel works X five plus advanced visual processor in.

In addition to being one of the fastest growing brands on our actively seeks to position itself in the premium market.

And the company's owns words, they aimed to reshape the high end flagship market with powerful performance and excellent visual enjoying it.

Our <unk> plus visual processor proved to be critical to honors achievement and these aspirations as they recognize the exercise unique value of not only enabling superior visual quality, but also a distributed architecture that could offload visual processing from the GPU and reduce overall system power consumption.

In March <unk> affiliate real Mi launched the real need GT, Neil III also incorporating our X five series visual processor.

This win represented the first really branded smartphone to utilize our technology.

Additionally, it was the first ever smartphone to incorporate pixel works hardware based visual processing technology and a device built on media text Immensity 8100 platform.

As a result as a result.

Now both our software only and visual processor based solutions have been successfully utilized and commercially launched smartphones based upon Qualcomm and Mediatek AP platforms.

And in April <unk> launched the Ecu <unk> premium smartphone with a design focused on high performance mobile gaming and incorporating our X five plus visual processor.

This device and its features build upon the combined success of the IQ <unk> and its predecessor, the Neal five which was our first ever win with the vivo IQ series.

The latest IQ Neostem and incorporates another a number of advanced gaming filters to enhance visual display effects, including dedicated filters for specific gains as well as customized filters that independently adjust the display display contrast, saturation hue and brightness.

Most recently, we extended our successful partnership with one plus with.

With the launch of the one plus a smartphone.

Also incorporating our <unk> processor and leveraging pixel works full suite of visual quality and performance capabilities.

The one plus Ace is built on the media techs latest 8100, Max flagship <unk> mobile platform, which utilizes tsmc's five nanometer process technology.

Together with other expanded cutting edge technologies. This smartphone received recognition for both its design appearance and performance configuration.

The one plus Ace is also designated as the official fallen for the 2022 Peace Elite Pro League and League of Legends Professional League further solidifying one plus market leadership for mobile devices used in esport tournaments.

Collectively these wins underscore the continued traction and momentum of our differentiating visual processing technology across multiple tier one smartphone designs and AP platforms.

Additionally, these leading mobile customers are making visual display quality and performance a centerpiece of their device marketing campaigns.

Yes.

One of the objectives of our mobile growth strategy that we highlighted on our previous call was to cultivate and expand and ecosystem that further positions pixel works technology as the default solution.

At that time, we were active in an active collaboration in testing with unity on its gaming engine platform.

In April we announced that pixel works is now a unity verified solutions partner or VSP.

As a reminder.

Our rendering accelerator that's now available to developers was specifically designed and optimized for utilizing unique.

And advanced capabilities and incorporate into our newest.

Generation X seven visual processor.

This will enable mobile game developers and studios to take full advantage of the <unk> processor.

Shifting to Truecar.

We've recently demonstrated steady progress on our ongoing efforts to cultivate and build out our supporting ecosystem for our true cut motion platform.

Our formal launch of the platform in December we've had two named foundational partners joined the ecosystem.

On the device side Tcl joined and endorsed the true cut motion ecosystem in January in conjunction with CES is the first device manufacturer.

Net at cinema Con in late April we announced pixel logic as a certified services partner for the true cut motion ecosystem.

<unk> is a leading provider of global content mastering localization and distribution for the media and entertainment industry, including many major studios.

In digital content platforms.

<unk>.

<unk> is a certified ecosystem partner picture logic will provide true cut motion mastering for theatrical and streaming titles as part of their standard process for new and existing customers.

In partnership with <unk>, We recently demonstrated our true cut motion platform to industry participants at cinema.

With express permission from the production company, we showcased selected clips from the habit remastered with true cut motion.

While this was exclusively a demonstration it showed how true Cup motion can bring a cinematic look to a high frame rate production like the habit.

Specific to content, we are actively working on multiple titles that are planned for theatrical release later this year. We believe that these initial titles.

We'll encourage additional title and ecosystem growth as we go into 2023.

Turning to the projector business the.

The recovery began in the first half of 2021.

Is continuing to play out in 2022.

End market demand has generally continued to outpace the projector Oems ability to source supply of all necessary components in recent quarters.

As a result of longer lead times for some components, we have seen some customer order patterns become more linear from quarter to quarter.

<unk> revenue in the first quarter was effectively flat compared to the fourth quarter.

A sharp contrast from the traditional first quarter seasonality, we usually see.

Specific to <unk> ability to supply projector customers.

Capacity has remained tight however, we continue to work closely with both our foundry and back end partners to fulfill customer demand.

The latest feedback from our projected customer supports continued expectations for double digit growth in 'twenty two.

Together with modest improvement and component supply constraints towards the second half of the year.

Separately I also want to briefly acknowledge the activity of our next generation co development project with our largest project your customer.

It is going well and remains on schedule.

Once development is complete towards the end of the year. This new SSE will begin to ramp production in late 2023.

Yes.

In summary, we had a great first quarter highlighted by strong topline growth year over year.

A record quarter for our mobile visual processors, the achievement of significant ecosystem milestones for both mobile and true cut and continued recovery in the projector market.

And finally solid execution, despite a portion of the TR team dealing with the Covid lockdown challenges.

I'll now turn the call over to Hayley review, the financials and provide our detailed guidance for the second quarter.

Thank you Todd.

As Todd previously mentioned are sequentially flat top line results reflect the demand that was significantly above the traditional first quarter seasonality the.

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

Video delivery revenue was approximately $3 1 million in the first quarter.

non-GAAP gross profit margin was 53, 2% in the first quarter of 2022 compared to 55% in the fourth quarter of 2021, which benefited from higher licensing revenue from mobile software solution and.

And compared to 43, 7% in the first quarter of 2021.

First quarter gross margin reflected our ongoing effort to both mitigate and pass through higher material costs to customers.

non-GAAP operating expenses were $11 6 million in the first quarter compared to $11 million last quarter and $10 2 million in the first quarter of 2021.

The $6 4 million or a loss of <unk> 12 per share in the first quarter of 2021.

Adjusted EBITDA for the first quarter.

2022 was negative $2 2 million compared to a negative $1 1 million in the fourth quarter of 2021, and a negative $5 2 million in the first quarter of 2021.

Turning to the balance sheet, we ended the quarter with cash and cash equivalents of $55 2 million.

Sure.

Shifting to our current expectations and guidance for the second quarter of 2022.

We expect continued top line growth in the second quarter with total revenue anticipated to be in a range of between $18 million and $20 million.

At the midpoint of this range, we anticipate sequential growth to be driven primarily by mobile and with revenue contribution from mobile representing a new quarterly record.

non-GAAP gross margin in the second quarter is anticipated to be between 49% and 51% second.

Second quarter gross margin is expected to reflect a larger mix of mobile chip revenue as compared to the most recent quarter.

We expect operating expenses in the second quarter to range between 13 million and $14 million on a non-GAAP basis <unk>.

We expect our operating expenses to be uneven throughout 2022 due to the timing of the recognition of the credit associated with our co development agreement with an existing projector customer.

Lastly, we expect second quarter non-GAAP EPS to be in a range of between a loss of 10 cents per share and a loss of <unk> <unk> per share.

That completes our prepared remarks, and we look forward to taking a few of your questions.

Operator. Please proceed with the Q&A session. Thank you.

As a reminder to ask a quick question you wanted to breath star one on your telephone to withdraw your question correct Lasalle Keene. Please standby, while we compile the Q&A roster.

Our first question comes from the line of <unk> de Silva from Roth Capital. Your line is now open hi.

John Haley.

No.

Just to clarify.

Todd the the China Lockdowns, obviously your.

You talked a lot about the offices and the limited.

We've certainly seen customers.

Yes.

Hesitate I would say with that.

There is a lot of churn in.

There are model lineup, how they want to configure their model lineup what price points. They want to go after.

I would say it was it's not as convicted as it was this time last year for sure.

But.

We've also reached a point where.

Our value proposition, where we come in is no longer I would say.

Something they are speculating on we're pretty much a proven technology now if they want to target a certain demographic, where mobile gaming and visual performance as a requirement.

We are in every discussion so I would say, yes, I've seen the order patterns change for us.

I would still say the orders are stronger than I still have that supply is my biggest issue.

Okay that color definitely I'll start and then.

Can you talk specifically about the pairing up with Mediatek versus typically Qualcomm baseband, what does that open up a newer market for you or is that just kind of.

The broadening of the footprint you already have.

Just help us understand there.

Well.

So it's not just the media tech versus Qualcomm. It's also Mediatek has.

Over the last two years made a conscious effort.

To focus on <unk> flagship.

Performance.

As you can imagine the volume are on lower end Aps.

The margin the profit margin is on flagship.

Quality or high performance quality Aps.

Mediatek is very ambitious.

Going after qualcomm's market share in that particular area and so.

<unk>.

With that said if you look at the phones that we're in we're either in the flagship or sub flagship series and so I think it's a perfect combination for mediatek in ourselves to collaborate.

<unk>.

So.

For us.

Some of the volume some of the programs, we've been in with Mediatek or higher volume than the Qualcomm because they've been at a slightly lower ASP.

So but I.

I expect those guys to move up the food chain.

Over the next two years.

Helpful understand perhaps a question for you.

Clarify the comments you had about.

Though the overall mobile troop mobile slash true cut category was down sequentially, but you're talking about mobile being up I think it was sequentially Im just help us understand kind of the dynamics of that segment.

Would you expect mobile to grow again in the second quarter.

Well, yes, I think what I noted is that our hardware sales are up in mobile.

Sequentially, and we expect that trend to continue into Q2.

Okay, great and just because it's declined sequentially I'm curious what the offset was there.

Declined sequentially, the mobile side <unk> was $6 2 million in <unk> and $5 7 million yes.

Okay.

In the fourth quarter included.

That big soft Iris deal, which we consider mobile so it's like a license for soft Iris in Q4. This is why we're making the distinction this quarter that hardware grew hardware sales chip sales grew mobile on the mobile side, but Q4 did include.

The soft Iris, which bumped up Q4 and total mobile.

Great that was a clarification of the report and then lastly, Todd you talked about you got in the habit and then some motion pictures in the second half where you're going to play a bigger Roland can you clarify or update the revenue model youre seeing there and how it how the how customer wins factor into that Youre inclusion in those titles. Thanks.

Yes, Thats a long.

So long answer to that question, which I'm, probably not going to go into right now so but thanks for the question <unk>, but I'll give you. This it is very important for us.

To be tied to.

What we would consider marquee theatrical releases so one of the things that happened at cinema Khan. Besides us just announcing our relationship with <unk> and <unk>.

Demo ing high frame rate.

Cinematic.

Versions of the habit.

Was that.

There was an announcement by lifestyle technologies.

John Landa was there and James Cameron gave a video about.

The new upcoming Avatar two.

To be delivered to the theaters and high frame rate and have the theaters get ready for high frame rate theatrical releases.

So the reason I bring this up is because this is really setting the tone, where you're going to see the movie industry.

Move towards higher frame rate high.

Higher resolution HDR theatrical releases and the student the remaining.

Theater companies.

Are actually upgrading all of their theaters not all of them, but many of them to be able to <unk>.

Show this content as it start to come out. So this this trend that we have been.

Pushing for a while right.

He is now starting to merge both the theatrical releases and we think it is going to follow the streaming releases. So I think it's very important.

And for all.

Not sure all of our investors understand this but I think it's very important is if you see this trend hit.

True cut motion technology.

Becomes very.

Indispensable.

Okay great.

So that's probably what I will talk about their okay.

Helpful. Thanks, Todd Thanks.

Thank you.

A reminder to ask a question you will need to press star one on your telephone.

With draw your question press the pound key.

Our next question comes from the line of Richard Shannon from Craig Hallum. Your line is now growing.

Great. Thanks, John Haley for taking my questions.

Well Todd I guess, despite the fact, you said you don't want to talk more about your guide I think thats exactly where I'll go but I'll ask it pretty simple straightforward question you talked.

Talked about multiple titles coming out later this year can we think of these as like a test case.

<unk> successful that we might see a licensing signed with studios streaming guys or how do we how do we think about the.

Implications of these titles coming up.

Well I mean first I just wouldn't get ahead of ourselves on what the implications are first of all I would say that these titles were working on and see the value of true cut motion to providing.

<unk>.

A true cut mastered version of their content.

And they believe that's the best way to demonstrate their content.

Im not going to go into the details of the.

Distribution licenses and tool licenses that we have in place with these customers.

<unk>.

But assume assume these are formal engagements.

Okay.

Great.

Let me follow up on the topic within mobile on your third tier one customer honor. What are you. What are you expecting here in terms of engagement relative to the first two tier ones.

And the funnel.

Repeat the question for me Richard.

Let's see.

<unk>.

Engagement over the next one to two years with honor relative to the experience you've had with your first two tier one.

Well, how about I speak about our experience so far engage with them, which has probably been close to a year. Okay.

They are.

When they separated from Huawei.

Great deal of their product management team and design teams came with them.

Their philosophy on how to strive for flagship excellence I think also came with them. The differences the honor brand typically had not been pursuing.

Top tier flagship quality phones.

Now they are and so we're engaged with them on those models.

Yes.

Okay Fair.

Fair enough.

Over to the X seven processor I think I heard you say that youre expecting the first phones launched in the.

Second half of the year.

I guess, maybe and maybe if you'd like to tie this into a success direct or indirect with we ended the relationship. There you can kind of talk about what we should expect to see with <unk> seven relative to adoption of the X. Five processors do you expect to see something more rapid and also just wanted to confirm you are still expecting to be on the order of double.

<unk> prices in the regions.

Yes, ASP is significantly higher than previous generations.

<unk>.

We are we.

We are engaged in.

Several models simultaneously either in evaluation or in design stage.

<unk>.

The take up will be a combination of.

How many of these evaluations get done.

Early what capacity, we have and resources to engage in them. So.

I mean definitely if I if you go back and look at X five X five add.

We were we were being the features of X five and motion processing, we're not fully digested by the first couple of models that we engaged with.

When it was launched back in 2019.

And then I think in 2020 in 2021 has started to gain momentum.

Thanks.

I don't think were going to go through that same fit and start.

Pixel works value proposition is now in a known quantity to all these customers. So we don't have to go through that learning curve again.

And to the features and functionality of <unk>, 7%.

Our profound so.

Yes.

There is a lot of churn as I previously talked about with <unk> question not so much about picks that works in our technology, but about how.

The customers in China.

Focus on product lineups.

Target feature set.

Price points.

Demographics. They are targeted do they want to consolidate programs do they want to expand programs a lot of churn right now.

Okay, certainly understandable, what's going on out there one last question for me and I'll jump out of line Healy can you talk about what kind of breakeven model, we should be thinking about here as we march towards that point Youre, assuming next year, you've got the Opex is going up your gross margin.

Lower than last couple of quarters, how do we think about this as a kind of a center point of our breakeven model.

Mhm, Yeah, So I think.

And so as I said opex is kind of uneven and a little bit lumpy. This year elevated levels in Q2, and Q3 and then in Q4 back down maybe to like at or below Q1, So going into 2023, we would expect opex probably to be more in the range of Q1 Q4 of this year.

Margins, probably staying around where I guided to for Q2, So I would think a breakeven maybe around $23 million going into 2023.

Okay perfect.

That's all from me daily Thanks, Thanks, a lot.

Thanks.

Thank you at this time I'm showing no further questions I would like to turn the call back over to management for closing remarks.

For those of you who attended the call today. Thank you so much for your time and attention.

We continue to move forward with our plan.

With planning and execution.

Thanks for your time Bye bye.

This concludes today's conference call. Thank you for participating you may now disconnect.

Q1 2022 Pixelworks Inc Earnings Call

Request a DemoDemo

PXLW

Pixelworks

Earnings