Pixelworks Inc. Q1 2023 Earnings Call

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Good day, ladies and gentlemen, and welcome to Pixel works, Inc. First quarter 2023 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 Perry with Shelton Group Investor Relations.

Thank you Liz good afternoon, and thank you for joining us on today's call.

With me on the call are pixel works, President and CEO talked about us and Chief Financial Officer, Terry a mountain.

The purpose of today's conference call is to supplement the information provided in <unk> press release issued earlier today announcing the company's financial results for the first quarter of 2023 before we begin I'd like to remind you that various remarks, we make on the call, including those about projected future financial results economic and market trends and competitive position.

Constitute forward looking statements. These forward looking statements and all other statements made on this call that are not historical facts are subject to a number of risks and uncertainties that may cause actual results to differ materially.

All forward looking statements are based on the company's beliefs as of today Tuesday May nine 2023, 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 annual reports on Form 10-K for the year ended December 31 2022.

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 expenses net loss and net loss per share non-GAAP measures exclude amateurization of acquire.

Intangible assets and stock based compensation expense as well as the tax effects of the non-GAAP adjustments. 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 for nor 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 additional details and reconciliations of GAAP and non-GAAP net loss and GAAP net loss to adjusted EBITDA. Please refer to the company's press release issued earlier today with that.

It's now my pleasure to turn the call over to <unk> CEO Todd about US. Please go ahead.

Thank you Brett and good afternoon, and welcome to those participating on today's call.

2023.

As a result multiple component suppliers indicated that digesting that inventory could potentially extend out to the end of this year.

Specific to pixel works, we were capacity constrained for effectively all of 2022.

And with that we managed inventory conservatively.

As a result, unlike many others today, we are shipping to fulfill current customer demand and refill depleted channel partners buffer inventory.

Regarding China smartphone OEM demand.

Although there are different views on the pace of the China recovery most industry commentary suggests that the global smartphone demand is soffer softer than previously hoped.

Which translates into taking longer to digest excess inventory.

While softer demand.

<unk> may be true for the broader mobile market.

<unk> shipped and premium segments that we predominantly sell into are outperforming the broader market.

In addition, the customers' models that include our visual processors are exceeding preliminary forecast.

Since February we have received order pull ins and upside demand for mobile customers on a combination of existing models and soon to be launched mobile programs.

We have had multiple tier one customers agreed to cover the expedite fees to meet the revised demand profile.

To briefly recap our mobile wins announced year to date, we've been in six premium smartphone models launched by several of pixel works multi generational mobile customers.

Including one plus and ROMI, both will both open sub brands as.

As well as honor and Acs <unk>.

Together these models represent multiple wins with soft Iris X five and <unk>.

Seven our latest generation visual processor.

As mentioned on the previous call. The one plus 11 and oneplus eight two flagship smartphones were launched at the beginning of the year and where two of the first devices to incorporate our latest X seven visual processor.

Both of these devices feature of the industry's first solution combined ultra low latency motion engine low power Super resolution and always on HDR.

These functions have now been adapted for optimal performance on over 100 different popular mobile games.

In February one of the fastest growing <unk> smartphone smartphone brands real mean.

Launched the <unk> smartphone incorporating our X five plus visual processor.

<unk> Real me GT series continues to embrace the high quality display differentiation enabled by pixel works visual processors, which this latest model coupled together with other hardware innovations such as 240 watt fast charging capability.

Additionally, one of pixel works first ever mobile customers Aces continued its adoption of our pixel works visual processing solutions in the launch of the <unk> phone seven series featuring.

Featuring our industry <unk> industry, leading ACR enhancement professional color calibration and DC dimming technologies.

Also during the corner during the quarter on a released the magic five series smartphones with both the honor Magic five pro and honor Magic five ultimate incorporating our advanced X five plus visual processor.

Subsequent to its launch the honor Magic five pro was listed and ranked by <unk>, an independent third party quality evaluation lab.

The magic five pro scored an impressive $1 51 on Dx DSO marks display test ranking at number one in global smartphone display performance.

Complementing our work with mobile Oems, we continue to expand our initiatives with key partners aimed at establishing an advanced mobile gaming ecosystem.

Following our initial collaboration with unity is a verified solutions partner, we are advancing engagements with other leading gaming engines, including Unreal and multiple studios own custom gaming engines.

Together with a uniquely differentiated visual performance enabled by pixel works X seven visual processor.

<unk> rendering accelerator SDK, we are increasing momentum on further collaboration with major mobile gaming studios.

We've announced two of these collaborations the first of which was gala sports.

Their soccer simulation game total football.

The latest version of this game is now being launched internationally. However, when initially launched in mainland China last year and ranked among the top downloaded sports games and ranked six most downloaded in the free games category.

Then yesterday, we announced our second collaboration with new versus.

On its latest released of Crystal of Atlan, which is developed using the unreal four game engine.

Both of these mobile games incorporate pixel works rendering accelerator SDK, which in combination with our X seven processor delivers an exceptional 120 frames per second visual experience with low power consumption.

These types of direct engagement as well as other initiatives in our mobile gaming ecosystem.

Have and continue to increase the awareness and recognition of pixel works.

Looking ahead in the second quarter and second half of the year.

We have a robust pipeline of tier one mobile OEM.

Grams.

This includes a recently secured first design and production orders with our fourth tier one mobile customer.

We will begin shipping in support of these orders this quarter.

With this customer's first of our device incorporating pixel works technology scheduled relaunch in the third quarter.

Taken together with our existing design ins across other tier one mobile Oems, we expect renewed momentum accelerating into the second half of this year.

Now turning to an update on our true cut motion platform.

As we've been communicating to investors since launch Truecar motion is a full ecosystem play not a standalone solutions, we continue to build out this ecosystem from the ground up.

Advancing the technology innovation from the 24 frames per second that's been used for decades to cinematic high frame rate will take time.

We've discussed several of the reasons for this in the past.

However over the past six months, our true cut motion grading technology has been an integral part of how the biggest movies are shown in premium large format theaters.

Starting with the release the rerelease of Avatar in late late last year.

And then followed by Disney's global theatrical release of James Cameron's the way of the water in December .

And then 20th century studios rerelease of Titanic in February James.

James Cameron has truly awake in the industry to what's possible.

In addition to each of these titles being released to theaters and four K H D. R. M. Three D. They.

They all featured cinematic high frame rate enabled by pixel works true cut motion platform.

These films represent three of the.

Three of the four highest grossing box office films of all time.

Which is indicative of the high level of interest in consumer acceptance of true cinematic realism.

The incredible global success of these titles has also resulted in increased demand from industry participants for additional premium large screen format content.

Today true cut remains the only end to end high frame rate solution validated by Hollywood and with the proven capability to deliver cinematic high frame rate to any screen and has led to a significant increase in inbound engagement from ecosystem participants.

As discussed on previous conference calls, we continue to focus on establishing true cut motion in the global home Entertainment ecosystem.

Our unique and proven video experience is becoming increasingly important to streaming service providers.

As they look to add higher tier subscriptions that offer superior content that recreates the premium cinematic experience that that they enjoy in today's state of the art theaters.

We believe the initial commercial success in high level of engagement from leaders in motion picture in the motion picture industry represents an early glimpse into the significant opportunity that lies ahead for our true cut motion solution.

Okay.

Shifting to home and entertain enterprise market.

Yeah.

As anticipated revenue declined in the quarter with weaker demand, primarily reflecting typical first quarter seasonality as Japanese Oems managed down their inventory prior to the fiscal year end.

Following the extended period of constrained supply for key projector components throughout late all of last year.

Projector customers have generally indicated inch.

Incremental improvement in their supply chains.

With that said, we currently expect it will take projector Oems through at least the second quarter to more fully address remaining supply and demand imbalances.

Also I'm pleased to report that the co development project.

First with our most of our continues to progress well and remains on track.

In fact, we expect to deliver initial samples of this next generation Soc during the current quarter triggering the next milestone payment associated and associated credit to R&D.

Once released to production towards the end of this year, we expect this new SLC to become a major revenue driver within the projector business beginning in 2024 and continue through the latter part of this decade.

Another highlight in the quarter that merits mentioning is our successful closing in February of the previously announced strategic investment in our pixel works Shanghai subsidiary.

As a reminder, this transaction exchanged roughly 3% equity interest in the subsidiary and an implied valuation of more than $500 million.

Following the strategic investment pixel works, Inc continues to hold a majority equity interest of approximately 78%.

And the proceeds from the transaction are reflected in our quarter end cash balance of $62 8 million.

In addition to helping support our broader ongoing growth initiatives. The strategic investments. We secured have also served to properly capitalized picks were Shanghai as we continue preparations for a public local listing on the stock exchange in China.

As an update on where we are in this multi phased process.

I'm thrilled to report that we recently retained the number one investment bank in China Citic Securities.

Citic has expensive extensive expertise with listings on the star exchange and they will serve as an important partner through the remainder of the application and underwriting process.

We currently expect our pixel works Shanghai subsidiary to begin the formal tutoring process during the current quarter.

In conclusion, I am proud of the team's diligent work to efficiently manage through the impacts of the macro and end market specific headwinds during the quarter.

Our prudent management of inventory has positioned us to rebound faster than many of our industry peers and today our bookings fully supports strong sequential revenue growth in mobile and we are also seeing the initial improvement in order patterns in the projector market.

Acknowledging there remains uncertainty in the global economy, we're feeling increasingly optimistic about the balance of the year.

We are well capitalized to continue exiting executing on our growth initiatives, while maintaining our focus on an aggressive new product roadmap as well as expanded ecosystems for both advanced mobile gaming and true cut motion platform.

With that said I'll.

I'll hand, the call to Hayley to review financials and provide our guidance for the second quarter.

Thank you Todd.

Revenue for the first quarter of 2023 with $10 million in line with the midpoint of our guidance.

Quench all in year over year decline was driven by lower demand in mobile related to the industry wide inventory correction in smartphones.

Combined with historical first quarter seasonality in the projector market.

Additionally, as anticipated video delivery revenue declined sequentially following higher sale of certain end of life product during the fourth quarter.

The resulting breakdown our revenue in the first quarter was as follows.

Revenue from mobile was approximately $3 3 million.

Home and enterprise revenue was approximately $6 7 million as a reminder, home and enterprise now reflects the combination of revenue from protector.

And video delivery end markets.

Sector accounted for approximately 90% of home and enterprise revenue in the first quarter and we expect it to continue to represent a majority of home and enterprise revenue in future quarters.

non-GAAP gross profit margin was 44, 1% in the first quarter of 2023.

<unk> to 53, 3% in the fourth quarter of 2022.

And compared to 53, 2% in the first quarter of 2022.

Gross margin for the quarter reflected a combination of product mix and reduced absorption rate associated with lower revenue.

non-GAAP operating expenses were $13 6 million in the first quarter.

Compared to $10 8 million last quarter, and $11 6 million in the first quarter of 2022.

As a reminder, operating expenses in the fourth quarter benefited from a $2 $5 million credit to R&D related to our co development project excluding.

Excluding this credit first quarter operating expenses were largely consistent with the opex level in the fourth quarter of 2022.

On a non-GAAP basis first quarter 2023, net loss was $8 2 million or a loss of <unk> 15 per share.

Compared to a net loss of approximately 800000 or a loss of <unk> 10 per share in the prior quarter and a net loss of $3 5 million or a loss of $6 per share in the first quarter of 2022.

Adjusted EBITDA for the first quarter of 2023 was a negative $7 8 million.

Compared to a negative 1 million last quarter, and a negative $2 2 million in the first quarter of 2022.

Turning to the balance sheet.

We ended the quarter with cash and cash equivalents of $62 8 million as discussed on our last conference call.

And Todd just mentioned during the first quarter.

We closed the previously announced sale of equity interest in our Shanghai subsidiary, which was the primary contributor to the increased cash balance at quarter end.

In addition to cash used from operation a portion of the cash proceeds from the transaction were offset by the purchase of two masks that during the quarter.

Shifting to our current expectations and guidance for the second quarter of 2023.

Based on current order trends and backlog, we anticipate second quarter total revenue to be in a range of between $12 5 million and $14 5 million.

At the midpoint of this range total revenue would represent sequential growth of approximately 35% led by an anticipated increase in sales of IC into the mobile market.

non-GAAP gross profit margin in the second quarter is expected to be between 40% and 42%.

This gross margin range reflects anticipated product mix, including higher revenue contribution from mobile.

Additionally, the lower than historical gross margin levels in the first half of 2023 reflect previous increases in cost of materials and <unk>.

Portion of which we chose not to immediately pass through to mobile customer during a period of weaker demand associated with the inventory correction in smartphones.

As demand and unit sales of Ics increased in the second half of 2023, we expect to pass through incrementally higher material cost to customers, resulting in improved gross margin, particularly in mobile.

We continue to target gross margins returning to levels near 50%.

We expect operating expenses in the second quarter to range between $11 million and $12 million on a non-GAAP basis.

This range reflects our expectation to achieve another planned milestone related to our co development agreement.

As of previous treatment the milestone payment will be recognized as a credit to R&D, reducing our anticipated reporting reported operating expenses for the second quarter.

Lastly.

We expect second quarter non-GAAP EPS to range between a loss of eight <unk> per share and a loss of <unk> 12 per share.

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

Operator. Please proceed with the Q&A session.

If you'd like to ask a question at this time. Please press star one one on your telephone and wait for your name to be announced to withdraw your question. Please press star one again.

Please standby, while we compile the Q&A roster.

Okay.

Our first question comes from the line of Rajiv Gill with Needham.

Yeah. Thanks for taking my questions and congrats on a really good momentum in your business in the mobile phone.

Margin for the second quarter, and then kind of what youre seeing throughout the year.

Todd you're bucking a lot of the trends that youre seeing in the China handset market.

What a lot of suppliers are have been indicating that the correction of the steeper and the recovery in the China handset market is going to take longer than expected you guys are really bucking that trend.

I guess my first question is one.

Emmanuel your channel inventory pretty pretty effectively last couple of quarters.

Maybe you could talk a little about that in terms of the way your channel inventory is and then in terms of.

The rebound that you're seeing in your own with your customers.

Can you talk about where the inventory levels are.

The customers are sitting on.

This clarity on kind of how youre able to kind of diverge from both trends.

Sure. Thanks Roger.

So overall channel inventory, we went into the start of Q1, when we guided down significantly we went in.

It would probably be at all.

Q1, and some of Q2 in the channel.

For whatever we were projecting for mobile.

By February I was it for the month of July .

And there it became clear to me that the new programs that we were included in <unk>.

We're ramping much harder than I anticipated.

And so it became clear that we would burn through that inventory.

Sometime in probably April .

So we started while I was there in February .

Ramping up.

New orders to our supply chain through both our foundry in the end Assembly and test. The good news is because we're bucking the trend getting access and short term to capacity was not a challenge. This particular time right.

And.

But even with that going into.

March.

Those programs we're doing.

Better than forecasted customers, we're trying to expedite what we had in with they had ran through inventory and then needed to expedite what we had in whip.

And so we have multiple tier ones for multiple programs simultaneously for both X five and <unk> seven.

We're expediting paying expedite fees for us to get that product through.

Our foundry quicker than anticipated.

So today.

The channel is.

As.

Is leap to say the least.

With the guidance we gave you.

Yeah.

We could probably beat the midpoint, if we get.

Expedited wafers quicker than we anticipate which will be a challenge.

Okay.

So that demand pull is exceeding through into Q3.

Okay.

It's probably too early.

We have new models being launched in the second half of the year that'll add to these models.

So we're optimistic but I want to see if that sticks through with the consumers and how China comes back but right now we're pretty optimistic.

Great I appreciate it and then for my follow up.

The gross margins.

<unk> talked a little bit about some of the puts and takes on the in the near term.

Now that Youre seeing.

A pickup in X seven which would have.

Higher ASP.

I'm just curious how you're how you're thinking about the pricing environment.

<unk>.

Over the next couple of quarter.

Yeah. Good question.

So we.

Seven does have a higher ASP.

But it has a bunch of new features and definitely is a larger die then X five.

And where we priced it even though it's a higher ASP.

It has a lower margin profile of the next five when we kept it that way on purpose to try to increase adoption of it.

When we when we originally priced at.

We expected the price increases from the supply chain to abate.

I think it's well known out there that they have not fully abated.

And there was some new price increases that got extended into 'twenty three through the supply chain.

We are no longer absorbing notes. So we are now passing through price increases to all of our customers in all of our markets.

For the starting in the second half of this year.

Thank you.

Yes.

Yeah.

As a reminder, that is star one one to ask a question.

Our next question comes from <unk> de Silva with Roth capital.

Hi, Tyler Haley.

These new smartphone program some of these where these pause Todd during the Lockdowns are they resuming now and I presume some of the newer programs that they are coming back but it sounded like from what you said, they're coming back fairly aggressively are they more for the X seven or is it a mix of the two.

It was a mix of the two I mean so.

When we went out of 'twenty two.

With inventory.

There was some excess inventory in the channel, but it was if you look at the channel and the customers. It was predominantly X five.

I thought for sure it would take us six to eight months to burn through the X five inventory.

Some of the Expedites or an X five devices.

So some of the phones in it that I, just mentioned and I mentioned, which ones that included X five.

They had such strong demand for those models. They went through our excess inventory of X five and are expediting new wafer starts.

And then same with the <unk> seven some of the models we're at seven.

They the demand was high and they went through our inventory and now are expediting wafers through the line.

Yeah.

They are all sued you to be clear.

So all of this demand is based upon models that have been released.

Make sure.

Pretty much all of the demand it's got to be well over 95% are models that were released.

From either later part of December or early January on.

So this is not.

Like a rejuvenation of older models that burn through inventory. These are all new models.

And.

I understand the customers I think went into these new models.

Being conservative.

Because they they had not been conservative the year prior.

And.

And in our particular case, we had.

Four or five different models that all blew through the initial forecast.

And when they realized they were blowing through the forecast.

We quote 26, we'd like.

Which leads.

These guys came in and we're expediting within.

Eight weeks to when they needed the parts.

The closer you are in to that.

Cycle time, the harder it is for us to expedite the further out it easier just ex that.

Sure.

Okay, Great and then switching over to the projector market just to understand what kind of what's your updated view on end demand for 23 versus a typical year I know, it's obviously had a headwind starting the year Im curious what youre expecting in terms of where that demand starts to come back into normal or not this year.

We don't really want to give annual guidance, but I will say that right now we expect mobile to finish the year as a growth business year over year compared to 22, even with the the trough we had in Q1.

We still expect a projector.

To probably be down.

Low.

Low double digits, just 10% to 15% for the year right is the correction takes through.

We don't give guidance on throughput.

I do expect us to be through any inventory correction by the end of this year on projector.

We're expecting this back half of the year to be.

For mobile the growth year over year growth business.

Okay, Alright, thanks, Tom Thanks, Ed.

Yeah.

Our next question comes from Richard Shannon with Craig Hallum.

Yeah.

Hi, Todd and Hayley Thanks for taking my questions can you hear me.

We can thanks, Richard good morning, clicked off there I mean.

<unk>.

I got on a little late and I may have missed some comments here. So apologies for repeating some of this but just want to make sure I understand.

Our guidance for the second quarter, but the moving pieces here wasn't clear to me whether.

Whether you're expecting any growth within the home and enterprise bucket, whether that includes the last time buys or is it all of it coming from mobile.

No no last time buys at the last time buys we had on the trans coding products finished up in the fourth quarter of 'twenty two.

And.

And we expect overall home and enterprise, which is project and transcoding to be slightly slightly up from Q1, so sequentially up.

And then we expect mobile to be significantly up.

Okay. That's why I'm running my model here clauser almost in real time here. It seems like that's getting closer to kind of double to fluctuate with that.

About right.

That is about right.

Okay.

Okay.

Come back to that in a second here one here in a couple of other topics here on gross margins.

There are a number for the year, which I think makes sense here without passing through the cost, but as we think about your passing those through.

Not sure what kind of pace, you're thinking, but what's kind of numb.

Number could we think if you were trying to just this quarter for price increases what could be a.

A couple of points or a few points well the acute the Q2, we guided and the reason we're guiding to a low margin is.

We get plenty of lead time to our price increases to our customers. So that there are no price increases loaded into the Q2 numbers.

So that growth is all unit growth.

Q3, and Q4, we're passing on price increases across the board to all markets all customers various different levels.

Depending on the mix.

We're trying to get back there.

There's two things happening one.

Our mix is more mobile centric.

And it probably will be on a go forward basis for for the foreseeable future, it's going to be just a much faster growing business than projected and home entertainment.

But we didn't pass through all the price increases that we absorbed or continue to absorb.

And.

We are now doing that now.

Now with the goal that we get back at.

If we get back to a reasonable mix.

It's still going to be more mobile centric that we get back above 50%.

Corporate level gross margin with the higher mobile mix.

We are still not modeling in any of this.

Significant true cut revenue once true cuts the licensing business once this kicks in.

We will re advise to all the analysts what the corporate goals for our margin are but they are significantly higher than low fifty's.

Okay.

Paul One last question for me I'll jump out of line Todd.

Obviously, you had a lot of nice milestones and events in your tier type business last year.

And you've been you've been clear with us.

Long profit developing an ecosystem.

So assuming you sign up a screaming customer at any point in time I'm not trying to apply timeframes with us, but assuming you do that what kind of milestones would you expect.

To be able to announce.

Not only with Australia customer maybe before that Workover.

Some partners to make this a reality.

So that's a good question I think that's good for for any investors that are listening on the call to see how how do you keep an eye and see if we're hitting our milestones given that we're not putting financial milestones in there.

I would suggest that.

We are getting interest and strong interest in <unk>.

In helping.

Yeah.

Yeah.

Other studios deliver.

High frame rate to premium large format theaters around the world with new releases. So you probably will hear some of that activity.

Sooner than later I think if people monitor and see more content partners.

Using our technology to deliver a better experience I think that that's a telling tale.

Upon.

Announcing our first distribution partner streaming company to.

Then want to deliver this this premium format content to the home in the entertainment World.

You will quickly see us announced partnerships with device manufacturers that are on the other end of that home entertainment.

Delivery.

I think once you see that.

Zero to one.

Then the next question is does.

Does it expand beyond that first major distributor in those device partners.

And multiply the multiple streaming companies in multiple device partners.

So that's that's how are you.

The it rollout I think.

Okay I'm sure will follow up on the future, but I think that's all the questions from me and thanks, a lot Todd.

Thank you Richard.

Okay.

That concludes today's question and answer session I'd like to turn the call back to management for closing remarks.

For those of you attending today's call. Thank you for your time I Hope. It was helpful look forward to giving you updates as the year progresses.

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

Yeah.

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