Q4 2024 Pixelworks Inc Earnings Call
Good day, ladies and gentlemen, and welcome to Pixelworks, Inc.'s fourth quarter 2024 earnings conference call. I will be your operator for today's call. At this time, all participants are in the 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.
Speaker Change: I would now like to turn the call over to Brett Perry with Shelton Group Investor, excuse me, with Investor Relations. Please go ahead.
Thank you, Lisa.
Speaker Change: Good afternoon and thank you for joining us on today's call. With me on the call are Pixelworks President and CEO Todd DeBonis and Chief Financial Officer Haley Aman. 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 fourth quarter and fiscal year of 2024.
Speaker Change: Before we begin, I'd like to remind you that various remarks that we make on this call, including those about
Speaker Change: 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.
Speaker Change: All forward-looking statements are based on the company's beliefs as of today, Wednesday, February 12, 2025.
The company undertakes no obligation to update any such statements.
forward-looking statements to differ materially from actual results.
Speaker Change: 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 restructuring costs and stock-based compensation expense.
Speaker Change: The company uses these non-GAAP measures internally to assess its operating performance.
Speaker Change: 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 U.S. GAAP.
Speaker Change: Also note throughout the company's press release and management statements during this conference call we refer to net loss attributable to Pixelworks Inc. as simply net loss.
Speaker Change: For additional details and reconciliations of GAP to non-GAPNet loss and GAPNet loss to adjust to DVDOC, please refer to the following slides.
Thank you for joining today's conference call.
Speaker Change: So I'll start with a brief recap of our fourth quarter financial results.
helping to offset
The anticipated product transition in our mobile business.
Speaker Change: Gross margin exceeded expectation expanding over 340 basis points sequentially and nearly a thousand basis point year-over-year.
Speaker Change: Combined with the realized benefits from our previously implemented and ongoing initiatives to reduce costs and increase operational efficiencies, we exited the year with significant improvement in our bottom line quarterly results.
Speaker Change: Now, for those accustomed to the typical format of our commentary on our previous conference calls, the flow of information and update on today's call will be a little different.
Speaker Change: More specifically, given the strategic review process currently underway with our Pixelworks Shanghai subsidiary, I'll begin with comments on our TrueCut Motion business in the U.S., then provide a detailed update on the developments specific to our majority-owned subsidiary in China.
Speaker Change: Today, Pixelworks TrueCut Motion Platform remains the industry's leading, and in fact only, platform for the creation and delivery of motion-graded content.
To recap, over the past 12 months, we've achieved
Speaker Change: a number of key ecosystem milestones, including a multi-year home entertainment agreement with Walt Disney Studios.
Speaker Change: We are entering 2025 with momentum across both filmmakers and studios, with commitments on an additional five major theatrical releases, and we are targeting to double that number by year end.
Speaker Change: We're also working to expand our title growth and motion-graded scalability through industry-leading partnerships and post-production and visual effects companies.
Speaker Change: We are in active discussions or formal evaluations with three major device brands for potential incorporation of TrueCut motion capability into their future devices.
Speaker Change: While we still must execute and convert these engagements into contractual agreements, 2025 has the opportunity to be a transformational year for our True Cut Motion business.
As a reminder, our TrueCut platform
Speaker Change: as well as all associated intellectual property and tools are 100% owned and managed by the U.S. parent company, Pixelworks, Inc.
Thank you.
turning to our Pixelworks Shanghai subsidiary.
Speaker Change: which we previously restructured to serve as the center of operations for all of our semiconductor business, including our open market and co-developed visual display processing chips for digital projector, mobile, and video delivery markets.
Speaker Change: I want to start by highlighting a few new opportunities that our team is currently pursuing. Then I'll comment on our existing mobile and home enterprise business and provide an update on the strategic review process.
Speaker Change: We recently established a new framework for selectively providing ASIC design services to customers.
Speaker Change: In addition to the incremental revenue opportunity, these services also provide the benefit of fully utilizing our highly skilled ASIC engineering team and software resources.
Speaker Change: We are looking to secure our first customer engagement to provide a series of turnkey design services for a large international OEM.
Speaker Change: Also notable, the new program that we will be supporting includes the potential license.
of one or more blocks of display intellectual property.
Speaker Change: Based upon the current proposed scope, we believe this initial design services agreement could meaningfully contribute to our anticipated total revenue growth as soon as mid this year.
Speaker Change: Separately, but with the same goal of further leveraging our existing available resources.
Speaker Change: We're also engaged in active discussions with several other unrelated parties around agreements to license specific intellectual property for use in their respective products.
Speaker Change: To the extent that these discussions result in an agreement, the potential proceeds would represent high margin upside to the current forecast of our existing product businesses.
Additionally, we believe these engagements could significantly accelerate momentum.
with our Mobile Gaming Ecosystem efforts.
Speaker Change: And lastly, we are also currently evaluating an opportunity with a prior transcoding customer.
Speaker Change: who recently approached us about placing a multi-million dollar order for one of our legacy transcoding chips that was recently EOLed or end-of-lifed and is no longer in production.
Speaker Change: Our team is working with our supply chain partners to confirm whether this large limited production run of the legacy device is technically feasible. However, the initial assessment looks favorable.
Speaker Change: If we are ultimately able to accept and fulfill this customer's order, it will contribute to significant revenue upside in the second half of this year.
Speaker Change: shifting to gears to a review of the subsidiaries and markets starting with our mobile business.
Speaker Change: As expected, mobile revenue in the quarter continued to reflect the previously articulated headwinds that impact the majority of 2024.
Speaker Change: During the quarter, we announced our most recent win with Vivo's newly launched iQOO Z9 Turbo L smartphone.
Speaker Change: This phone is a refresh model following the success of the original iQOO Z9 Turbo launched earlier this year.
Speaker Change: Both of which incorporated our X5 Turbo Visual Processor and targeted the mid-tier market segment.
Speaker Change: Entering the new year, we remain focused on several leading customer engagements on smartphone programs targeted for launch over the coming quarters.
Speaker Change: Collectively these new programs represent a combination of significant unit volume opportunities for both our newest generation flagship mobile visual processor as well as a cost down derivative of our x5 series processor.
specific to our cost down x5 visual processor.
Speaker Change: We have been working closely with a lead customer since the middle of last year.
to enable an innovative graphics and animation accelerating solution.
specifically targeted to mid and entry-level smartphones.
Speaker Change: Additional OEMs have also expressed interest, and they are evaluating our derivative X5 processor to solve the frequent technology mismatch between lower end application processors and the high frame rate capabilities of current generation display panels.
Speaker Change: Consistent with my comments on the previous call, we expect to begin ramping shipments of this solution to our lead smartphone customer in the second quarter.
Speaker Change: Finally, with respect to the home and enterprise business predominantly comprised of our visual processor system on a chip.
Speaker Change: for 3LCD Digital Projector Market. Revenue was up sequentially driven by a combination of increased projector SOC business as well as the anticipated contribution from our EOL of transcoding products.
Speaker Change: For the full year, Holman Enterprise was effectively flat, reflecting a relatively stable market dynamic and end demand for digital projectors.
Speaker Change: As anticipated during the quarter, we completed the first production shipments of our newest projector SOC to our large co-development customer.
Speaker Change: and we expect to gradually ramp additional shipments to this customer over the course of 2025.
Speaker Change: For our overall projector business, we expect historical double-digit seasonality in the first quarter, followed by sequential growth beginning in the second quarter.
consistent with typical trends of seasonal demand.
Speaker Change: For the full year, we currently anticipate Total Projector Business in 2025 to look similar to 2024.
Speaker Change: Taken together, we do expect a slower start to the year in terms of total revenue. However, we believe there are multiple drivers that will contribute to a sizable rebound starting in the second quarter, including the beginning of the return of mobile revenue growth.
Speaker Change: Additionally, we have continued to identify areas to further reduce fixed cost and increase operational efficiencies.
Speaker Change: Once fully implemented, we expect an additional 10% reduction in our run rate operating expenses.
Speaker Change: These savings will start toward the end of the first quarter and be fully captured by the end of Q2.
Speaker Change: Also, we expect the benefit from additional subsidies during the year as is customary with the Little Giant status our subsidiary has achieved.
Speaker Change: Combined with our plans for a return of top-line growth, we believe that our Pixelworks Shanghai subsidiary will achieve profitability for the full year of 2025.
Speaker Change: With that as a backdrop, I'll provide a brief update on our ongoing strategic review process with our advisor, Morgan Stanley.
Speaker Change: As discussed on the previous conference call, we initiated a formal and comprehensive review process in the latter part of last year after receiving inbound strategic interest in our PICSwork Shanghai subsidiary.
Speaker Change: We have since fielded vetted indications of interest from additional parties.
Speaker Change: all of which that are currently progressing through various stages of due diligence.
Speaker Change: Together with our financial advisor, we are simultaneously evaluating potential ownership and collaboration structures to determine the optimal path for both enhancing Pixelworks Shanghai's long-term growth potential as well as maximizing value for shareholders.
Speaker Change: In summary, we believe we've made significant progress with regards to our cost structure over the last six months and will continue with that effort over the first half of this year.
Speaker Change: We expect initial evidence of a renewed traction in mobile during the first quarter, followed by the potential for an aggressive ramp of production shipments and revenue as we approach the middle of the year.
Speaker Change: Additionally, with the recent push towards near-term adjacent revenue opportunities, we've positioned our Shanghai subsidiary on a clear path to achieving profitability.
Speaker Change: And finally, our multi-year evangelism for Pixelworks' TrueCut motion grading platform continues to capture growing mindshare, and we expect this to contribute toward further substantive traction in 2025.
Speaker Change: With that, I'll turn the call over to Haley to review financials and provide guidance for the first quarter.
Thank you, Todd.
Haley Aman: Revenue for the fourth quarter of 2024 was $9.1 million, compared to $9.5 million in the third quarter and $20.1 million in the fourth quarter of 2023. The decrease in revenue primarily reflected the previously expected near-term headwinds in mobile.
Haley Aman: The breakdown of revenue in the fourth quarter was as follows.
Haley Aman: Holman Enterprise revenue was approximately $8.5 million. Revenue from mobile was approximately $550,000.
Haley Aman: and increased 1,000 basis points from 44.8% in the fourth quarter of 2023.
Haley Aman: The improvement in gross margin for the fourth quarter and throughout 2024 reflect the more favorable product mix and our ongoing focus to drive healthy margins.
Haley Aman: Non-GAAP operating expenses decreased to $10.4 million in the fourth quarter from $12.4 million in the prior quarter and $12 million in the fourth quarter of 2023.
Haley Aman: The sequential and year-over-year decrease in the fourth quarter operating expenses reflected our previously implemented cost reduction measures.
Haley Aman: As Todd mentioned, we have identified and plan to take additional cost reduction measures during the first quarter.
Haley Aman: This, combined with the previous measures taken in mid-2024, is expected to contribute to a total year-over-year decrease in operating expenses of approximately $10 million for the full year of 2025.
Haley Aman: Additionally, during the fourth quarter, our Pixelworks Shanghai subsidiary received $1.8 million in cash subsidies as part of its certified status in China's Little Giant program.
Haley Aman: These subsidies effectively serve as reimbursement for certain purchases of IP, design tools, as well as various R&D and sales expenses.
Haley Aman: We recognize $1.1 million as other income in the fourth quarter, with the balance of the total subsidies allocated as offsetting credits to applicable expense and balance sheet items.
Haley Aman: On an on-gap basis, Q4 2024 net loss was $4.3 million, or a loss of $0.07 per share, compared to a net loss of $7.1 million, or a loss of $0.12 per share in the prior quarter.
Haley Aman: and a net loss of $2.6 million or a loss of $0.05 per share in the fourth quarter of 2023.
Haley Aman: Adjusted EBITDA for the fourth quarter of 2024 was a negative $3.6 million compared to a negative $6.3 million in the prior quarter and a negative $1.9 million in the fourth quarter of 2023.
Turning to the balance sheet.
Haley Aman: Together, with a return to top-line growth, we expect to achieve significantly lower cash burn in 2025.
Haley Aman: Shifting to our current expectations and guidance for the first quarter of 2025.
Haley Aman: As Todd discussed, we anticipate our home and enterprise business to reflect typical first-quarter seasonality, as well as a decrease in revenue from the end-of-life of our transcoding products.
Haley Aman: We anticipate this seasonality to be partially offset by an initial recovery and sequential increase in mobile revenue in the first quarter.
Haley Aman: Based on our existing backlog, we currently expect total revenue for the first quarter to be in a range of between $7 million and $8 million.
Haley Aman: For the first quarter, we expect non-GAAP gross profit margin to be between 49% and 51%. This range primarily reflects anticipated product mix and lower overhead absorption.
Haley Aman: With respect to operating expenses, we expect first quarter operating expenses to be in a range of between $10 million and $11 million on a non-gap basis.
Haley Aman: Lastly, we expect first quarter non-GAAP EPS to range between a loss of $0.13 per share and a loss of $0.10 per share.
Haley Aman: That completes our prepared remarks and we look forward to taking your questions. Operator, please proceed with the Q&A session.
Haley Aman: Thank you. If you would like to ask a question, please press star 1-1 on your telephone.
Speaker Change: You will then hear an automated message advising your hand is raised. If you would like to withdraw your question, please press star 11 again. We also ask that you wait for your name and company to be announced before proceeding with your question. One moment while we compile the Q&A roster.
Speaker Change: Our first question of the day will come from Suji DeSilva of Roth. Your line is open.
Hi, Todd. Hi, Haley.
Speaker Change: So, the mobile revenues, as we look ahead to the second half, 25 to 26, what's your visibility there with programs and recovery?
Speaker Change: You know, what kind of revenue recovery can we kind of think about versus the past levels? And then specifically the X5 product, are you seeing the mainstream volumes kick up where those might cut over on unit revenue basis versus the premium programs or would that be a longer term opportunity?
Speaker Change: So, we expect growth throughout the year, Susie, thanks for the question, in mobile. Our current expectation is we will end the year with higher mobile revenue than we did in 2024.
It will progress sequentially every quarter.
Speaker Change: I think we have a range. On the high side of that range, it probably puts us similar to our 2023 numbers. On the low side of the range, it still shows growth over 2024. There still is work to be done for that to be realized. Not all the programs are one.
And then on the second question, which is.
or this new.
Speaker Change: probably almost all cases be in that range between the low end and the high end. I would expect this new visual processor for the broader market to be over 50% of the revenue.
Okay.
Speaker Change: Great. And then separately, you talked about a bunch of new opportunities. It sounds like, I mean, I want to just list them as TrueCut device partnerships. I'm curious what geography those are.
Speaker Change: ASIC support like what kind of end devices are those and when you said legacy, is that the the Vixis products coming back? I'm just curious
A bunch of things mentioned on the call.
Speaker Change: So the legacy product that was end-of-life, yes, that is Transcoding Vix's product. This is a long-standing customer we've had for 10 years. They
Speaker Change: Their own M&A and the new owner wants to kick off some programs that are based upon this device.
Speaker Change: As far as the other opportunities, you know, both Truecut, I'm not going to go into detail who the device manufacturers are, what region they're from, etc. Let's just say they're leading device manufacturers, you know, global brands.
And the IP opportunities are...
in several markets.
So, yeah, it's exciting. It's broad-based.
Speaker Change: Great. Maybe one last question for Haley. The China subsidiary benefit there, does that impact the COGS and gross margin or was that all operating?
Speaker Change: There was a portion of it that impacted COGS and gross margin related specifically to subsidies received for mask purchases in the past.
Okay, got it. Great. Thanks, guys.
Thank you.
Speaker Change: As a reminder, if you'd like to ask a question, please press star 1-1 on your telephone. And our next question will be coming from the line of Richard Shannon of Craighalen. Your line is open.
Speaker Change: Hi, this is Tyler Anderson on for Richard Shannon. Thank you for taking my questions.
Speaker Change: I was wondering, you mentioned getting 10 films out this year, or around that. How many films do you think it would take to create a tipping point for these streaming services to adopt this technology broadly?
Speaker Change: Well, it's not just Tyler. Thanks for the question. It's not just titles that would create that tipping point, I think.
You know, certainly having a history.
of key titles, you know,
Speaker Change: a quantity of key titles, a minimum set of key titles announced every year, they get a benefit of those titles showing them in true cut format in the premium large format space, whether it goes to home entertainment or not.
and so
Speaker Change: It will make the home entertainment streaming companies and device manufacturers because there's two ends to that home entertainment piece, right?
It'll make them more comfortable.
Speaker Change: The longer we have an established track record of bringing content to premium large format theaters and the quantity of films, but
Speaker Change: It's really going to be about I think tentpole titles. I don't think it's going to be about quantity of titles now, so We're probably approaching that critical mass of tentpole tiles. You know if you get up into the double digits That's probably enough to matter
But other things are important, you know?
Speaker Change: If for the streaming companies to go out and commit to it on a long term basis, they need to know that the device manufacturers are going to have TrueCut certified devices to display that content.
Speaker Change: and as well as the device manufacturers to fully commit to incorporating the technology and then marketing that their devices are capable.
Speaker Change: of displaying TrueCut cinematic high frame rate content, they're gonna wanna know that the streaming service providers are committed to do it. So it's a little chicken and egg thing.
Speaker Change: delivers on the promise of delivering an experience that is notable and wanted by the consumer. I think we've achieved that. I think they all agree our technology delivers on the promise.
Speaker Change: And then the second piece is you just got to continue to build critical mass and momentum, and then it will happen.
OK, so it sounds like.
Speaker Change: If one goes, the other may be soon to follow. So then...
That's kind of what I'm thinking too
Speaker Change: So with these post-production houses, are you going after the smaller fragmented post-production houses, or are these owned by the larger production companies?
Speaker Change: So as you know, we have had relationships with current post-production companies and I would say they're of decent size. You know, Pixelagic's a decent-sized finishing company that wanted to expand into post-production. But if you really look at...
There is a couple of very large
Speaker Change: post-production companies that do color grading and finishing work for many of the tentpole titles for the studios. And I would say that we're in discussion with those, that level of post-production company today. So it is expanded.
and Haley Aman.
Speaker Change: And then, do you have an update on the breakeven model, whether or not that's a 25 or 26 story? And if that's a 25, if there's any timing available for that?
So...
Your question is probably specific to,
All of TXAWorks, right?
Speaker Change: We just said on this call that we expect the subsidiary to be profitable in 2025.
Speaker Change: We did not say that we expect a parent company. Yeah, yeah, so we did not expect it. So I would suggest that, you know, we're also going through a strategic review process, right?
Speaker Change: integrating their T&L into ours, right? It'll be sold, right? We may still have some ownership of it, but it won't be a controlling ownership.
So...
Speaker Change: You know, it really depends how the strategic process goes and how much progress we make with both Shanghai Subsidiary and Truecut. Right now, I am not expecting to be fully profitable at the top level, but probably close.
Probably close. Maybe exit the year. We'll see.
Okay, great. Thank you. That's all my questions for now.
Thank you. One moment for the next question.
Speaker Change: And our next question will be coming from the line of Nick Dole of Needham & Company. Your line is open.
Speaker Change: Hey guys, thanks for taking my questions. The first one, is there any sort of timeline that you can help us think about for the strategic processes that could be, you know, a year, two years?
I doubt it's going to be two years, Nick.
Speaker Change: I mean, if I thought it was going to be two years, we would probably shut down the current process and then it would restart, right? So it's not going to take that long.
Speaker Change: But other than that, I'm encouraged, which I said on my prepared remarks.
Speaker Change: and I don't have a timeline for you. As soon as I do, I'll update you.
Speaker Change: Okay. Can you expand at all on the ASIC design services and IP licensing as in maybe any any more specificity on what you're offering and to who? I mean I know you mentioned international OEMs but I guess Chinese OEMs are interested as well. Thanks.
but
Speaker Change: It's not IP that we're not specialized in. I mean, people come to us because we are display experts, okay? We're also motion experts.
Speaker Change: So one would assume that the IP discussions we're having are either some of our display
I.P.
or our motion processing IP.
Speaker Change: and specifics on on who those are with until there's a deal and even if there's a deal it may not be announceable.
Speaker Change: and maybe somebody that wants to keep it confidential, but it will show up in our financials.
Speaker Change: and so I thought it was important to make sure people understand this is something we're pursuing with vigor. It is not, I mean, since I've been CEO I have always occasionally, I would say at least once a year, sometimes multiple, been approached by people for licensing.
I have usually
Speaker Change: said no, because licensing, we're not in the IP licensing business until now.
Speaker Change: And if you're in the IP licensing business, you prepare your IP to be transferred to another party.
Speaker Change: If you are only building IP for your own products, it does take effort to prepare that IP, to transfer it to somebody else, license it, and have them incorporate it in their products. And so many of the deals that were brought to me over the years...
would take significant resources and it would pull away
from our own product development.
So I shaded away from it.
Speaker Change: Where we are today, two things. One, some of the IP that we've been
that we've had inbound interest on.
is easy to transfer, so it is not as
time-consuming for our team, and two,
I wanna get to profitability as soon as possible.
and its high margin business.
Speaker Change: the segment being flattish for the year, is that just based on, you know, majority is this new product, this new co-developed product, and then any transcoding ELL would be on top of that, you know, if that comes to pass. Thanks.
Speaker Change: If we this up this new opportunity that has been brought to us to bring a product back for a limited production run
Speaker Change: That would be upside to that flat year-over-year or similar to year-over-year. Okay, that's that question. The other question is relative to specific to projector, which is the majority of renovative in Holman Enterprise.
Speaker Change: will is ramping, but it will not be the major revenue portion in 2025. It'll it'll be bigger than it was in 24, but I do not think it will be the largest revenue portion in 2025. It'll probably take till 2026 for that to be the largest portion of the projected revenue.
Got it. Thank you.
Yep.
Speaker Change: Thank you, and at this time I'd like to go ahead and turn the call back over to management for closing remarks. Please go ahead.
Speaker Change: So thanks all for joining this call. Clearly a lot of activity going on. I look forward to updating you on our next quarterly call.
Thank you.
Speaker Change: This concludes today's conference call. Thank you so much for participating. You may all disconnect.