Q3 2024 Pixelworks Inc Earnings Call
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Speaker Change: Good day, ladies and gentlemen, and welcome to Pixelworks Inc.'s 3rd Quarter 2024 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.
Speaker Change: 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. Please go ahead.
Thank you for that one.
Brett Perry: Good afternoon, and thank you for joining today's conference call. With me on the call are Pixelworks President and CEO Todd DeBonis and Chief Financial Officer Haley Aman.
Brett Perry: The purpose of today's conference call is to supplement the information provided in Pixelworks press release issued earlier today announcing the company's financial results for the third quarter of 2024.
Brett Perry: 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 that may cause actual results to differ materially.
Brett Perry: All forward-looking statements are based on the company's beliefs as of today, Tuesday, November 12, 2024. The company undertakes no obligation to update any such statements to reflect events or circumstances occurring after today.
Brett Perry: Please refer to today's press release, the company's annual report on Form 10-K for the year ended December 31, 2023, and subsequent SEC filings for a description of factors that could cause forward-looking statements to differ materially from actual results.
Brett Perry: Additionally, the company's press release and management statements during this conference call will include discussions of certain measures and financial information in both GAAP and non-GAAP terms, including gross margin, operating expenses, net loss, and net loss per share.
Non-GAAP measures exclude restructuring costs and stock-based compensation expense.
Brett Perry: The company uses these NODGAP measures internally to assess operating performance.
Brett Perry: We believe these non-GAAP measures provide a meaningful perspective into core operating results and underlying cash flow dynamics. We caution investors to consider these measures in addition to, not as a substitute for, nor superior to, the company's consolidated financial results as presented in accordance with U.S. GAAP.
Speaker Change: please refer to the company's press release issued earlier today. With that, it's now my pleasure to turn the call over to Pixelworks' CEO. Todd, please go ahead.
Thank you, Brett.
Todd DeBonis: Good afternoon and welcome to everyone on the phone and the webcast. We appreciate you joining us on today's call.
Todd DeBonis: As reported in our press release earlier today, our third quarter results were consistent with our prior expectations for moderate sequential improvement. Revenue was at the midpoint of guidance, primarily reflecting steady demand in home and enterprise as we continue to work through the near-term headwinds in our mobile business.
Gross Margin Expanded Sequentially
and year-over-year to over 51 percent.
mainly due to a product mix during the quarter.
Todd DeBonis: Additionally, operating expenses decreased from the prior quarter as we began to realize initial benefits of our previously implemented cost reductions.
To briefly recap our recent and ongoing cost actions.
as well as expected benefits.
Todd DeBonis: At the end of the second quarter, we initiated a broad series of actions to reduce expenses and focus on operational efficiencies.
to better align operating expenses with anticipated near-term revenue levels.
Todd DeBonis: This included a reduction in headcount effective June 30th, resulting in expected annualized cost savings of approximately four million dollars.
Todd DeBonis: Due to certain one-time expenses incurred in the third quarter, we expect to realize a more significant reduction in operating expenses beginning in the fourth quarter.
Todd DeBonis: Together with our cost containment measures that we have taken, we continue to believe our collective actions will contribute to total cost savings of approximately $10 million over six quarters through year-end 2025.
for review of end markets starting with our mobile business.
Todd DeBonis: Revenue was down by 7% sequentially and 76% year-over-year, reflecting the expected multi-quarter impact from the headwinds that I discussed last quarter.
Todd DeBonis: Mobile revenue in the quarter was primarily comprised of shipments of prior generation mobile visual processors in support of smartphones initially launched by customers in the first half of the year.
Todd DeBonis: Due to the previously communicated delay of our next-generation visual processor and the mis-design cycle window for new device launches in the second half of this year, our primary focus has been on positioning for a return to growth in 2025.
Todd DeBonis: In support of achieving this renewed growth, we are focused on three key strategic objectives.
First is the continued expansion of our IRX-branded gaming ecosystem.
Todd DeBonis: Second, is to secure significant targeted design wins for our next generation flagship visual processor.
which I will provide an update in a moment.
Todd DeBonis: For the mobile market, but particularly across Asia and in China, mobile gaming consistently ranks among the top influencing factors for...
for consumers when choosing which smartphone to purchase.
Todd DeBonis: Recognizing this and the increasing influence of mobile gaming in the design and marketing of newly launched smartphones.
Todd DeBonis: Our IRX gaming ecosystem continues to be a fundamental part of our mobile strategy.
Speaker Change: As highlighted on prior conference calls, Pixworx's unique IRX rendering acceleration represents both a proven and practical solution to dramatically enhance visual performance for mobile gaming.
Speaker Change: More specifically, it enables simultaneous high image resolution and ultra-high frame rate with desktop-level photorealism while also overcoming the device temperature and power consumption challenges frequently associated with mobile gaming.
Speaker Change: By design, the differentiated visual display and device performance that IRX brings to mobile gaming further elevates the core value proposition of our mobile visual processors.
Speaker Change: And we believe further increases the incentive for smartphone OEM customers to adopt our visual processors across a broader range of new models.
Speaker Change: As such, we are continuing towards expanding the size and awareness of the IRX gaming ecosystem. This includes our team's work.
Speaker Change: ongoing with leading game studios, leading gaming studios, on additional IRX certified mobile games, as well as continuing to grow the existing list of over a hundred games that we have IRX qualified.
regarding an update on our next-generation flagship mobile visual processor.
Speaker Change: Following our engineering team's incorporation of the requisite design changes, during the quarter we received new samples of our next-gen device and conducted further extensive testing and verification.
Speaker Change: Today, I'm pleased to report that we recently completed production qualification of our new flagship mobile processor with it successfully meeting or exceeding all qualifications criteria and targeting performance metrics.
Speaker Change: We have since delivered early production samples and are now engaged with multiple customers on smart phone programs targeted for launch in the coming year.
Speaker Change: As Pixelworks first ever visual processor utilizing 12 nanometer process technology and specifically architected to fully leverage the advantages of our IRX gaming ecosystem, we continue to believe our new flagship mobile visual processor stands to be a disruptive force within the mobile gaming market.
Speaker Change: Complementing this now production-ready flagship solution for a high-end segment of the market, we are simultaneously focused on addressing a larger served market with a cost down version of a prior generation visual processor.
Speaker Change: specifically targeting higher unit volume opportunities in the mid and entry-level smartphones.
Speaker Change: Leveraging a cost-down derivative of our prior generation X5 visual processor, we have worked closely with one of our Tier 1 customers to increase several high frame rate graphical use cases in addition to high frame rate mobile gaming.
Speaker Change: As the display technology has evolved faster than the display pipeline in lower-end application processors, the OEMs have a very challenging time utilizing the high frame rate capabilities of the display.
Speaker Change: This mismatch has created an opportunity for a new tier of visual processors from Pixelworks.
Speaker Change: We are currently engaged in customer evaluations of this new solution on programs targeted for launch in the first half of next year. In addition, our Visual Processor Product Roadmap has now prioritized this new low-cost, graphical-focused solution.
turning to an update on our TrueCut Motion platform.
Speaker Change: Our team continues to focus on cultivating new and expanding ecosystem partnerships. The progress we are making from this persistent activity and its contribution towards new commercial engagement is difficult to assess externally.
Speaker Change: However, we believe there are growing indications of a dramatic shift in perception.
Speaker Change: with broader industry recognition that motion grading is required for new theatrical and home entertainment displays that are being introduced and that TrueCut is the only solution for cinematic motion grading.
Speaker Change: As evidence of this evolving perception, during the quarter, we announced a multi-year agreement with Universal Pictures.
Speaker Change: to utilize our industry-leading motion-graded technology to enhance the visual experience.
for major theatrical releases of future Universal titles.
Speaker Change: This multi-title commitment by one of the world's largest movie studios represented another tangible milestone.
Speaker Change: Unlike previous announcements of a single title, this agreement demonstrated recognition in advance that multiple planned future releases would benefit from using
TrueCut Motion Technology
Speaker Change: In September, DreamWorks Animation's The Wild Robot became the first major title released as part of this agreement. The movie was released globally in true-cut motion format on over 300 of the world's highest-grossing premium large-format screens, and achieved domestic opening box office of $35 million.
Speaker Change: The Wild Robot movie has recently received universally high praise from both critics and audiences. It has since succeeded in grossing over $270 million in worldwide box office on an estimated $78 million production budget.
Speaker Change: In addition to Truecut being endorsed by two of the largest global premium large format exhibitors, we are also seeing growing interest from top post production companies.
Speaker Change: This concept is still in early discussion, however it could effectively bring motion grading upstream as part of the standard post-production process.
Speaker Change: It would then be more readily accessible to a broader group of filmmakers, contributing to accelerated adoption.
Speaker Change: The simple fact that these types of conversations are taking place with leading post-production companies is further evidence that the film industry is moving in the direction of motion grading becoming a future standard practice.
Shifting to our home and enterprise business
Speaker Change: Digital Projector Market, revenue increased sequentially and was consistent with expected positive seasonality for the third quarter projector shipments.
Speaker Change: The overall demand for digital projector SOCs has remained reasonably stable in recent quarters, although end-market demand for projector systems has continued to be relatively flat.
Speaker Change: As indicated last quarter, we've received initial purchase orders for our co-developed Next Generation Projector OC from our lead customer.
Speaker Change: We have since begun initial volume production and remain on schedule to deliver the first production shipments of this new projector SOC during the fourth quarter.
Speaker Change: Based on previews of our customer's plan product introductions, we continue to anticipate gradual but healthy incremental adoption of our newest projector solution throughout 2025 and beyond.
Speaker Change: Lastly, related to home and enterprise. During the third quarter, we began a process to end of life our small remaining portfolio of consumer transcoding products.
Speaker Change: Collectively, these legacy video delivery products have consistently amounted to less than 5% of our total revenue in recent years.
Speaker Change: As unit volumes of these products declined, it became increasingly difficult and prohibitively expensive to source the required substrate and packaging capabilities to support their continued production.
Speaker Change: The end of life of these legacy products will also further streamline our home and enterprise business to be primarily comprised of our digital projection solutions, contributing to more optimized allocation of our resources and approved operational efficiencies.
Speaker Change: Switching gears, I want to briefly highlight a couple of recent developments related to our Pixelworks Shanghai subsidiary.
Speaker Change: As a reminder, for those newer to our story, several years ago we restructured the entire organization to operate all of our semiconductor business through our Shanghai-based subsidiary.
Speaker Change: There were several strategic reasons for adopting the structure, including the majority of our employees are based in China, in addition to our largely Asia-centric customer base.
Speaker Change: We also previously leveraged the structure to secure additional equity capital.
at a time when valuations were very attractive in China.
Speaker Change: Of note, our Pixelwork Shanghai subsidiary was recently awarded with the designation of Little Giant.
contributing to both provincial and national level recognition within China.
Speaker Change: The designation Little Giant is part of an ambitious government program overseen by China's Ministry of Industry and Information Technology.
Speaker Change: with the purpose of identifying and issuing formal certification to outstanding small and medium sized enterprise based businesses on a series of strict criteria.
Speaker Change: In addition to completing an extensive application process to be considered, certification requires undergoing multiple stages of in-depth business reviews that a majority of applying companies fail to pass.
Speaker Change: Designated Little Giants benefit from the increased local and national prominence having been recognized by the Chinese government as a leading company with unique strengths in areas such as innovation and R&D capabilities as well as for having significant growth potential.
Also notable, these designations
Speaker Change: qualify enterprises to apply for various forms of government-mandated subsidies, including grants and R&D credits.
Speaker Change: Pixelwork Shanghai was recently awarded one such subsidy and our team is now in the process of applying for other potential financial awards as part of the Little Giant program.
Speaker Change: Separately, I want to briefly highlight on another new and ongoing development in China.
Speaker Change: We recently received inbound strategic interest in our Pixelworks Shanghai subsidiary.
Speaker Change: and we have formally retained Morgan Stanley as a financial advisor to assist with reviewing various potential strategic options specific to our Shanghai entity.
Speaker Change: I want to emphasize that we are still just beginning a comprehensive review process.
Speaker Change: Given the recent designation of Little Giant and the inbound interest, we continue to have strong confidence in our Shanghai-based subsidiary and its highly innovative technology, as well as its long-term growth potential.
Speaker Change: We are evaluating different ownership and collaboration structures that could enhance and accelerate this potential.
In summary,
Speaker Change: Our team has continued to execute well toward overcoming recent challenges and we believe our mobile business is well positioned for a return to growth in 2025.
Speaker Change: We have a strong pipeline of new program opportunities for our latest mobile solutions, including our newest flagship visual processor, as well as the cost-down derivative solution that we are particularly excited about.
Speaker Change: We expect to sustain a high level of customer engagement activity over the next several quarters, particularly as we target an expanded server market for our visual processing solutions in mid- to entry-level smartphones.
Speaker Change: Moreover, we remain committed to optimizing near-term operational efficiencies in order to reduce the financial impact of temporarily lower revenue.
Speaker Change: Coupled with our previous and ongoing cost reduction actions, we expect to realize meaningful improvement in our operating results as we drive renewed top-line momentum in mobile in the coming year.
Speaker Change: With that, I'll hand the call to Haley to review the financials and provide our guidance for the fourth quarter.
Haley Aman: Thank you, Todd. Revenue for the third quarter of 2024 was $9.5 million, which was at the midpoint of our guidance and compared to $8.5 million in the second quarter and $16 million in the third quarter of 2023.
Haley Aman: The sequential increase in third-quarter revenue was driven by increased sales in the home and enterprise markets, while the year-over-year decline primarily reflected the previously discussed headwinds in mobile.
Haley Aman: The breakdown of revenue in the third quarter was as follows.
Revenue from mobile was approximately $2 million.
Coleman Enterprise revenue was approximately 7.5 million.
Haley Aman: Third quarter non-GAAP gross profit margin expanded 30 basis points sequentially to 51.3% from 51% in the second quarter of 2024 and increased 820 basis points from 43.1% in the third quarter of 2023.
Haley Aman: Non-GAAP operating expenses decreased to $12.4 million in the third quarter from $12.8 million in the prior quarter and $13.3 million in the third quarter of 2023.
Haley Aman: The sequential and year-over-year decrease in third quarter operating expenses reflected the initial benefits from the cost reduction actions implemented at the end of the second quarter. However, we're partially offset by a one-time expense associated with the design revisions completed on our next generation mobile visual processor.
Haley Aman: We continue to expect to realize approximately $4 million in annualized savings from our previously taken cost reduction measures.
Haley Aman: Adjusted EBITDA for the third quarter of 2024 was a negative $6.3 million compared to a negative $7 million in the prior quarter.
Haley Aman: and a negative $5 million in the third quarter of 2023.
Turning to the balance sheet.
Haley Aman: We ended the third quarter with cash and cash equivalents of $28.8 million compared to $37.8 million at the end of the second quarter.
Haley Aman: 3.6 million in one-time severance and related cash payments associated with the restructuring implemented at the end of June as well as a one-time expense associated with the design revision completed on our next generation mobile visual processor that I just mentioned.
Absentee is non-recurring cash expenses.
Haley Aman: We expect to realize significantly lower cash burn in the fourth quarter of 2024.
Haley Aman: Shifting to our current expectations and guidance for the fourth quarter of 2024.
Haley Aman: Based on existing backlog and anticipated order trends, we currently expect total revenue for the fourth quarter to be in a range of between $9 million and $10 million.
Haley Aman: In terms of gross profit margin for the fourth quarter, we expect non-GAAP gross profit margin to be between 49% and 51%.
Haley Aman: With respect to operating expenses, we expect to realize incremental benefits from our previously implemented cost reduction actions.
Haley Aman: Specific to the fourth quarter, we anticipate operating expenses to range between $10 million and $11 million on an on-gap basis.
Haley Aman: That completes our prepared remarks and we look forward to taking your questions. Operator, please proceed with the Q&A session. Thank you.
Speaker Change: At this time, I would like to remind everyone in order to ask a question, press star then the number one on your telephone keypad. We will pause for just a moment to compile the Q&A roster.
Speaker Change: Your first question comes from the line of Nick Doyle with NIDDM and Company. Please go ahead.
Nick Doyle: Thanks for taking my questions. Great to see you guys completed production and qualification with the NextGen processor. Can you talk about what customer interest has been like and engagements for this product and expand on what the expected timeline is from initial samples to design wins to revenue? Thanks.
Speaker Change: I don't want to get into too much detail, Nick, but I will say that we have
Speaker Change: sampled, you know, engineering samples but they are production qualified to several tier one customers.
Speaker Change: and we're going through a thorough analysis. I mean, one thing to note with this device is we incorporated features.
Speaker Change: that all the previous features we've had in our visual processes are included, but in addition we've included features that can only be enabled with our IRX certified gaming partners.
Speaker Change: And so when we go through these evaluations at the customer, it's...
Speaker Change: evaluating three sets of things. The performance of the existing set of features on a new 12 nanometer device.
Speaker Change: The performance of new features that are still one-sided new features that we've incorporated that
Speaker Change: The OEN can enable without the support of the IRX ecosystem, and then the third set is features that can only be supported if the IRX gaming ecosystem have enabled them.
Speaker Change: So, this evaluation process will take some time. We do expect decisions for new programs will be made. We are still strongly encouraged that they'll be made positively, but there's no guarantee of that within the next several months.
Speaker Change: But, that's just for programs that they have to make a decision for mid-year. We expect this solution to be a valid solution through 2026.
So that engagement
It will get broad interest.
I think as a reminder to everyone on the call.
Our flagship gaming processors targeted, you know,
Speaker Change: They're either what they call flagship killers or flagship devices of these Chinese tier 1 OEMs. They're very good phones They don't sell a ton of them Their total market share compared to Apple and Samsung is quite small when you look at phones over $500
Speaker Change: We do participate in those. We've done, you know, I think in our best year we probably shipped over 12 million units into a market that may absorb, you know, all of the premium phones and maybe 50 million units from these tier ones combined, if you don't include Huawei.
So, going after this...
Speaker Change: broader market, you're going after where the majority of the volume from Chinese tier ones comes from.
comes from phones that are under $250.
and as low as $100.
Speaker Change: And so this is the range that we're targeting this new low-cost derivative product, and it's not just mobile gaming. It's how do you enable several use cases for high frame rate experience on one of these lower-end phones.
Thank you.
Speaker Change: Again, if you would like to ask a question, press star, then the number one on your telephone keypad. Your next question comes from the line of Richard Shannon with Craig Hallam. Please go ahead.
Richard Shannon: Well, hi, Todd and Haley. Thanks for taking my questions as well. Maybe I'll follow up on the topic and the past questions here in the mobile space and maybe just kind of take a big top-down here.
Richard Shannon: I know, Todd, I'm probably asking you to look a little far ahead when the mobile business generally doesn't allow you to look too far forward without a lot of confidence, but...
Richard Shannon: When you started to add, you know, processors for the lower end part of the market, how do you think your revenue and unit profile balances out when you've kind of got both both product families humming at once? I mean, is this something where the premium or the higher end is still a majority, a clear majority, or can the low end, you know, be a majority of your business over time?
Um...
Speaker Change: I would say if you look in the near term, which is 25, first half of 26, I would still, you know, maybe it could be 50-50, but I'm still leaning on the high end right now.
Speaker Change: But I think beyond that, the low end will, if we're successful, the low end will be a much bigger part of the business.
Speaker Change: Okay. What's the relative ASP we're talking about between these two? Is it more than, you know, half the price, or... About half, probably about half the price.
Okay.
Okay, and then...
Speaker Change: Just any thought process on how to think about the trajectory and timing of inflection point of your mobile business back. I know we had a bit of a delay with the product developments and it sounds like you're back on track. It obviously takes, I would assume, a number of months here to get there. When do you expect to see that inflection point in your mobile business?
Lake, Q1, Q2.
Speaker Change: But we expect really, really to ramp in the back half of the year of 25. Okay.
Speaker Change: Okay, that was consistent with what I was thinking. I just want to make sure. Maybe a couple of last questions here. Just want to understand the the financial model going forward here, especially on how to think about break-even.
Speaker Change: I think you said 4 million annual expense reductions here, but then I heard something about 10 million. I wasn't sure where that came from, so I just want to make sure how to fit those two together.
Speaker Change: So, the $4 million is just referencing the reduction in workforce.
Speaker Change: employee reductions that combined and that four millions over annually right so what I'm saying is ten million over six quarters right it would suggest that just the
Speaker Change: that we've implemented effectively, and so we will secure them. And actually, since that ...
We are now identifying further reductions.
Speaker Change: Okay, does that come out of OPEX mostly or other other parts of the...
cost structure.
Speaker Change: Okay, that's all. One last question for me. You mentioned gauging a banker for early interest in Pixelworks Shanghai. I guess I just want to get a sense of the nexus of this situation here, you know, where the interest is coming from and does this mean anything about the lower prospects or at least near-term prospects of getting a star listing for that subsidiary?
Speaker Change: Well, so understand if you change the controlling interest structure you would delay
Speaker Change: Any public offering, right? Okay. Possibly. You know, right now, they're not really open for business, right, for IPOs. So...
Speaker Change: But by the rules of the Star Exchange, if you change controlling interest, then you set back yourself a year from filing for a public offering.
Speaker Change: Because it would be the new controlling interest party that would be doing the filing and All what they call a tutoring process would have to be redone with that entity
Okay.
Speaker Change: So, frankly, if you're looking at a structural change, it's not because you think that you're about ready to go public. It's because that you are being patient.
and you think that...
Changing the ownership structure.
potentially.
would give
advantages.
to this entity.
to, one, fulfill its promise.
Speaker Change: dramatically grow revenue, become profitable, and then have a liquidity event.
Given the current geopolitical state that we're in,
Having a U.S. public company.
Speaker Change: … of the subsidiary, and the U.S. public company being the controlling shareholder with almost 80 percent…
interest.
Speaker Change: It creates challenges in the environment we're in that a different structure may
Okay.
Speaker Change: Seeing as we do not have any more questions at this time, I will now turn the call back over to management for closing remarks.
As things happen, we will announce them.
Thank you.
Speaker Change: Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.