Q1 2024 Pixelworks Inc Earnings Call

Participants

Brett Perry; IR; Shelton Group

Todd DeBonis; President and Chief Executive Officer; Pixelworks Inc

Haley Aman; Chief Financial Officer; Pixelworks Inc

Suji Desilva; Analyst; Roth Capital Partners LLC

Nicholas Doyle; Analyst; Needham & Co LLC

Richard Shannon; Analyst; Craig-Hallum Capital Markets LLC

Presentation

Operator

Good day, ladies and gentlemen, and welcome to Pixelworks Inc's first-quarter 2024 earnings conference call. I will be your operator for today's call. And as a reminder, 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.

Brett Perry

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 first quarter of 2024.
Before we begin, I'd like to remind you that various remarks we make on this call, including those about our 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 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 14, 2024. 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, 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.
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 expenses, net loss, and net loss per share. Non-GAAP measures exclude stock-based compensation expense.
The company uses these non-GAAP measures internally to assess operating performance. We believe the 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 US GAAP.
Also note throughout the Company's press release and management's statements during this conference, we refer to net loss attributable to Pixelworks Inc as simply net loss.
For additional details, a reconciliation 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.
And with that, I'd now like to turn the call over to Pixelworks' CFO, Todd DeBonis for his opening remarks. Todd, please go ahead.

Todd DeBonis

Thank you, Brett. Good afternoon and welcome to everyone joining us on today's call. In terms of our overall results, we had a solid first quarter. As outlined in today's press release, total revenue was just above the midpoint of guidance for this anticipated March quarter seasonality, coming off record mobile revenue in the fourth quarter.
Gross margin expanded nearly 600 basis points sequentially to over 50% due to a favorable shift in revenue mix towards our newer X7 Gen 2 visual processor combining efficiencies and an increase in TrueCut revenue.
Together with well-managed operating expenses, we utilized minimal cash from operations during the first quarter. For a review of end markets, starting with our mobile business, as previously mentioned, mobile revenue for the quarter reflected seasonality associated with customers' launch cycles for new smartphone models.
Year over year mobile revenue was up nearly 200% and represented a record 61% of total revenue for the first quarter. This growth was driven by increased unit shipments of our X-Series visual processors, centered on the Gen 2 mobile visual processor, and an increase in TrueCut Motion licensing, and motion grading services.
We have continued to expand and gain momentum with a higher X branded gaming experience and ecosystem, which serves to further differentiate the inherent performance of branded premium visual gaming experience that our mobile processors bring customers smart [phones]. Introduced in the second half of last year, IRX, which is short for image rendering accelerator, is an end to end ecosystem solution that we established specifically for mobile games.
The overall response and our resulting collaborations across industry leading game engines and game studios have been encouraging. Since the introduction of IRX, our work with several leading gaming studios has resulted in a total of nine IRX certified mobile games, and we've tuned our solution to optimize visual performance on over a hundred IRX qualified mobile games.
When played on an IRX enabled smartphone incorporating our X Series visual processor, IRX certified games deliver a superior, high visual quality. This provides (technical difficulty).
In April, we announced that Diablo Immortal, a mobile game co-developed by Blizzard Entertainment and NetEase Studios, was the latest game to incorporate our IRX rendered [visual solutions]. Based on our current pipeline of engagements with studios on new games, we are aiming to double the current number of IRX certified games by the end of this year.
And among these, we expect some of the highest global ranking mobile games to soon be IRX certified. In terms of year to date, we've announced a series of newly launched smartphones incorporating our mobile visual processors.
First, as highlighted on our last call, in early January, the OnePlus Ace 3 smartphone was the first device launched incorporating our new X7 Gen 2. Also, as a reminder, we [entered] focused on expansion beyond premium domestic models in China.
Our two-prong strategy includes increasing penetration of the mid to lower tier market, as well as expanded adoption in models targeting for global markets. As evidence of our initial traction in January, OnePlus launched the global version of its OnePlus 12, representing the first flagship international model to incorporate both our X7 visual processor and IRX certification.
And then in April, we announced the X5 Turbo visual processor was incorporated in Vivo's new iQOO Z9 Turbo smartphone targeted at the mid tier market segment. Leveraging our X5 series processor, the iQOO Z9 Turbo features differentiated frame rate optimization as well as diverse gaming display enhancement.
Most recently, we achieved a meaningful step toward international expansion, when Transsion announced launch of its Infinix GT20 Pro smartphone, with the incorporation of our X5 series processor, Transsion became our fifth tier one mobile customer.
More importantly, the Infinix GT20 Pro represents the first integration of Pixelworks' visual processing technology in a sub-$350 smartphone that is primarily targeted for emerging markets outside of China.
We are encouraged by these recently launched models in support of expanding our [service], as we succeed in securing additional international models and penetration of the sub-premium market, since it will further complement our core strategy, which remains focused on delivering highly differentiated, market-leading visual display performance for the mobile market.
With expansion of our served available market, we have the opportunity to drive higher unit volumes, accelerated ecosystem development, and more robust future growth.
Next, I want to cover updates on our other businesses. And then I will circle back with some additional comments about our near-term expectations for mobile, as part of our closing remarks.
Turning to TrueCut Motion, as highlighted on our previous conference call, in late January, we announced a multiyear agreement with Walt Disney Studios to bring a collection of TrueCut Motion-graded titles to select home entertainment devices [in the first] Apple Vision Pro.
Securing Disney as our first home entertainment ecosystem partner was a significant milestone for TrueCut Motion. Today, Apple Vision Pro users can watch motion graded versions of Avatar and Avatar: The Way of the Water on both [digital Apple Vision Pro] and [Apple TV stream networks].
In the three months since our announcement with Walt Disney Studios, three additional new titles have been released to the premium format theaters in TrueCut Motions' cinematic high frame rate format. In February, Matthew Vaughn's Argylle, which was Apple Original Films in association with Marg, was distributed globally by Universal Pictures.
Then in March, DreamWorks Animation's Kung Fu Panda 4 was released by Universal Pictures in TrueCut motion format in select premium theaters. Most recently, Legendary Pictures' Godzilla x Kong: The New Empire, was released globally by Warner Brothers to select premium theaters.
Additionally, in collaboration with our industry partner, Christie, in April, we demonstrated these titles and TrueCut motion format at CinemaCon in Las Vegas. Utilizing a mock theater equipped with world-class CINITY Cinema System, these demos, we see very positive response from exhibitors, and also served as further industry validation that TrueCar motion is the leading premium format.
Our near-term focus remains on bringing more high-value titles to theaters in TrueCut motion format over the coming months and quarters, while also continuing to engage in prospective content distribution and consumer device ecosystem partnerships.
Shifting to our home and enterprise business, which is predominantly comprised of our visual processor SOCs for three LCD digital projector markets, revenue was in line with our expectations and consistent with typical first quarter seasonality, reflecting the standard practice of managing down internal inventories by Japanese OEM customers in advance of their fiscal year end.
Compared to the first quarter, home and enterprise revenue was down slightly, due to lower contribution from our legacy video delivery solutions, with sales in the projector market effectively flat year over year. As indicated by home and enterprise revenue, end market demand for digital projector has seen a rise in recent quarters.
However, it's about several quarters and represents a challenging environment from a retention perspective, resulting in a steady consolidation of three LCD market share by the industry's leading manufacturer, and also our largest projector customer.
In the end, the same projected customer completed final testing and evaluation on production samples of our co-developed next generation projector SOC. I'm pleased to report that we've received acceptance on the new SOC and it will go into volume production in support of our customers' first two models during the second half of this year.
I want to briefly emphasize the significance of this new product milestone, while also recognizing our talented and dedicated team that made this multiyear development project a success.
Our customers' transition to the new SOC from prior generation will be gradual, as the new projector models are introduced to market. As a result, this SOC will drive revenue over the course of several years, and effectively extend the runway for our profitable projector business through the latter part of this decade.
Before handing the call to Haley, I want to take a minute to discuss our current outlook based on two recent developments impacting our near-term mobile business. First, our largest mobile customer over the past two quarters recently informed us of a near-term reduction in their demand compared to our previous expectations.
In short, this customers' had some unique sales challenges on some recently launched models that are completely unrelated to Pixelworks. Due to their slower than anticipated sell through, they're pausing orders until their current and soon to be released production models consume existing inventory. We expect this pause to extend into calendar Q3.
Separately, we are experiencing a delay on the market introduction of our next-generation mobile visual processor. As alluded to in the past, we have been aggressively working on this yet to be announced new products for the last two years. It will be by far the most advanced market disruptive visual processor that Pixelworks has introduced.
In addition to being our first ever processor design in TSMC's 12 nanometer LLP process, it integrates a highly advanced feature set that with the collaboration of our IRX ecosystem (technical difficulty).
Our targeted timeline for releasing this next generation processor was the end of the current quarter. However, a few technical hurdles have required pushing out its production release to later in the year. As a result, we are unfortunately going to miss a couple of the customer design-in windows for new premium models in the back half of 2024 that we had previously anticipated securing.
Despite this delay, we still have multiple customers that are excited about our next [gen Z solution]. They remain engaged for incorporating it in subsequently planned models.
While these two developments are obviously very disappointing, I want to emphasize that IRX ecosystem engagement is at an all-time high. I would also add that these expected headwinds primarily impact the timing of our previous expectations, including near term revenue, and they do not change our strategy nor out longer term growth potential.
With that said, given the anticipated short-term drawdown in revenue, we are reviewing our near-term OpEx and areas to maximize operational efficiencies.
Apart from the current headwinds, we were very pleased with the previously discussed expansion of our two-pronged mobile strategy. And we also remain very confident in the ability of our growing IRX ecosystem to drive increased adoption of our current and future mobile visual processors.
With that, I'll pass the call to Haley to review finance (technical difficulty).

Haley Aman

Thanks, Todd. Revenue for the first quarter of 2024 was $16.1 million, which was just above the midpoint of our guidance. Year over year, total revenue for the first quarter increased 61%, driven by strong [growth].
The breakdown of revenue in the first quarter was as follows. Revenue from mobile was approximately $9.8 million, or 61% of total revenue, and was comprised primarily of shipments of our X5 and X7 series of visual processors as well as revenue [positive periods to] transition to cloud adoption [for grading services] and licensing fees.
[Omanified] revenue was approximately $6.2 million. First quarter non-GAAP gross profit margin expanded almost 600 basis points sequentially to 50.7%, [seeing an improvement] in the fourth quarter of 2023 and compared to 44.1% in the first quarter of 2023. The sequential and year-over-year improvement in gross margin primarily reflected a higher mix of revenue from newer generation mobile visual processors, increase in TrueCut licensing revenue, as well as the benefit of manufacturing cost efficiencies with our suppliers.
Non-GAAP operating expenses were $12.6 million in the first quarter compared to $12 million in the prior quarter, and $13.6 million in the first quarter of 2023. Comparing sequential quarter, fourth quarter operating expenses reflected the final credit to R&D related to the co-development with our largest projector customer.
On a non-GAAP basis, first quarter 2024 net loss was $4 million, or a loss was $0.07 per share, compared to a net loss of $2.6 million are a loss of $0.05 per share in the prior quarter, and a net loss of $8.2 million or a loss of $0.15 per share in the first quarter of 2022. Adjusted EBITDA in the first quarter of 2024 was a negative $3.2 million, compared to a negative $1.9 million in the fourth quarter of 2023, and a negative $7.8 million in the [third] quarter of 2023.
Turning to the balance sheet. We ended the first quarter with cash and cash equivalents of $46.2 million compared to $47.5 million at the end of the fourth quarter of 2023. While the company had a small sequential decrease in cash balance, I'd like to highlight that [point forward] Shanghai subsidiary achieved positive positive cash flow from operations for the first quarter of 2024.
Shifting to our current expectations and guidance for the second quarter of 2024. As Todd discussed, total revenue for the second quarter will be lower than previously anticipated, primarily a result of the near term headwinds in our mobile business.
Considering these factors and based on our existing backlog, we currently expect total revenue for the sector in a range of between $8 million and $9 million. I also want to emphasize that we believe the headwinds impacting second quarter mobile revenue are near term, and we expect to return to sequential growth in the second half of the year.
In terms of gross profit margin for the second quarter, we expect gross profit margin to be between 50% and 52%. We expect operating expenses in the second quarter to range between $12.5 million and $13.5 million on a non-GAAP basis, and lastly, we expect second quarter non-GAAP to be between a loss of $0.16 per share and a loss of $0.13 per share.
That concludes our prepared remarks and we look forward to taking your questions. Operator, please proceed with the Q&A session.

Question and Answer Session

Operator

(Operator Instructions)
Suji Desilva, Roth.

Suji Desilva

Hi, Todd. Hi, Haley. Couple of questions on the mobile. First of all, on the mobile customers, just curious how much concentration there is in the $20 million the last two quarters? The customer that's having, I guess, model challenges now, and are other large customers in mobile, just to understand the concentration there?

Todd DeBonis

So of the $20 million in the last two quarters, a significant portion was with one large customer. We don't break out each customer because we don't want to break out too much information about the models. You know, we're still on a handful of [ROI on a] per customer basis, but we were overweight one particular customer, and that is the customer that is pulling back.

Suji Desilva

Okay. That's helpful color. And then on the new chip, on the pushout in the launch, is that a chip architecture issue? Is it a design issue, or software, firmware, or is it a issue with the manufacturing process? Any color there on the challenge would be helpful.

Todd DeBonis

So it's not an architecture issue. I mean this is an entirely new architecture. We put several new features and functionality in the device as we were progressing to our first chip in 12 nanometer.
When you move to a new process node like this, one of the things we have is we have mixed signal analog interfaces, corporate supporting those two new process technology is always challenging.
Some of the new features are taking us longer to bring up, but it's certainly not anything to do with the process, technology, or our manufacturing partner. It is design related. We got devices back, I think late April, they were in good enough shape that we actually sampled devices to customers on [May].
So we wouldn't have done that if there was something architecture fundamentally wrong. But needless to say, we were already running on a tight schedule with the customers that were committed to use it in the near term. So it was already a bit of a risk.
And I would say some of the challenges we have, it was just too much of a risk to engage on those models. So these are companies that put out new models every six months. And so from their perspective, risk became too high to go on the near term, and we have ample time now to bring it up for the subsequent models.

Suji Desilva

Okay. Todd, appreciate the color. Thanks.

Operator

Nicholas Doyle, Needham.

Nicholas Doyle

Hey guys. I guess just a couple of follow-ups on Suji's question. I guess what gives you confidence that the large customer pausing through the third quarter -- what gives you confidence that it will come back in the fourth quarter? And then also how big is the impact that you'll miss the design window for these new premium models? How are you thinking about that? Thanks.

Todd DeBonis

So Nick, so first of all, (technical difficulty)
By saying that we're inferring that their order coverage will start to come back in partial third quarter. I do not anticipate we will be overweight one customer on a go forward basis. We've had a lot of design activity out over the last six months outside this large customer, that continues with our newest partner, Transsion, and it also continues outside of China, which is good for us.
And so even though this customer will be coming back (technical difficulty) And the second question, Nick, was can you repeat the edge?

Nicholas Doyle

How big of an impact is it that you'll miss the design window for these premium models?

Todd DeBonis

Well, for the new device, which was very high ST, it's significant. You know, it will impact our mobile growth for this year. So we'll probably not see mobile growth this year because of that.

Nicholas Doyle

Okay. And then on the international expansion, what I mean, did you see any trends in the first quarter with the OnePlus Ace? And then kind of moving over to trend in their global OEM, which ties in China, but focused in these emerging markets, including Africa and the Middle East and I think Europe, where are you focused on expanding internationally and what are the biggest challenges you see there? Thanks.

Todd DeBonis

Okay. So the OnePlus Ace 3 was not an international release, it was domestic-only from OnePlus. The one phone that they did put in an international market, so they put both the domestic version and their international, was their flagship their OnePlus 12. Transsion -- and by the way, to go back to OnePlus -- they still probably sell more domestically than they do internationally with [inflation].
Transsion does not sell domestically. They are a [ace share] publicly-traded company [that particularly from one of the significant functional product model], they sell throughout emerging markets throughout the world. And they're and they were the fastest growing mobile phone customer by unit growth in Q1. I think they grew over 80% year over year.
And all of that growth is by selling phones in what I would call low to mid tier price ranges, throughout the emerging markets. So engaging with them on this design, Transsion, has been a very good thing for our international expansion.
When we started with them, we had modest expectations for this first model. We believe there will be more. By the time we launched the model, we've been working with them probably eight months on this model. By the time we launched the model, their forecast had tripled.
Meaning the emerging markets they serve, there is pent-up demand for gaming centric mobile phones, and not a lot of companies have been targeting those emerging markets with these capabilities at this price point. And what we've seen is there's a strong demand for them. So let's hope that continues.

Nicholas Doyle

Thanks.

Operator

Richard Shannon, Craig-Hallum.

Richard Shannon

Well, hi, Todd and Haley. Thanks for taking my questions here on time. Todd, maybe I'll hit on gaming and IRX. I think you talked about I know it was 100% to 200% increase in the number of games announced by the end of year. Apologies, if I missed it. My line was garbled at times. Is that the same numerical goal as what you talked about a couple of quarters ago, when you're talking about a 400% increase? I don't have the numbers in front of me to do the math, but is that the same goal?

Todd DeBonis

It's consistent with what I think I've talked about in the past. I mean what I said in the prepared remarks is we have nine IRX certified games as of today. And our current goal is to double them by the end.

Richard Shannon

And okay --

Todd DeBonis

I also said one other thing, Richard. I also said for the first time, I brought up something besides certified, I brought up what we call qualified. And we have over 100 IRX-qualified. The difference between certified and qualified is a certified game is we work directly with the studio, and they incorporate our game engine SDK to support their game playing on an IRX enabled phone.
An IRX qualified again, is where we work with the phone manufacturer to make sure that game works well with our visual processor. It's more one-sided, but we do optimize the hardware to play with that game, and we qualify it. And then the OEM whitelists those games.
Today, they're we don't have any phone manufacturer that just turns on our visual processor to play with the game that somebody can download. It's a controlled environment. So it's either a whitelisted qualified IRX game, or one of our IRX certify games that we have engaged directly with the studio and collaborate.

Richard Shannon

Okay. That's helpful. And thanks for that description there, Todd. Maybe to touch on on IRX here, obviously introduced this last summer here, and that is to the degree a branding exercise. Obviously, there's a little bit of a chicken-and-egg dynamic here is establishing a brand, which clearly isn't very easy to do.
Maybe wanted to get your kind of qualitative scorecard on how well that has taken hold so far, and what are the things should we look for to show further entrenchment and success there?

Todd DeBonis

Was that TrueCut you were asking there, Richard, or IRX?

Richard Shannon

No, IRX.

Todd DeBonis

You know, we're trying to establish two brands.

Richard Shannon

I'm asking IRX.

Todd DeBonis

Okay. I just want to make sure. So, I mean within establishing brands, how do you do it? You go out and you spend marketing dollars in making sure that that brand is recognized with the businesses that you're targeting.
We've been able to do that. And we don't have a huge budget where I think we've done a pretty good job of people talking about IRX, given the budgets that we have. Secondly, the thing we do is we leverage our customers. So when they talk about -- sometimes they call it a dual processor architecture or they call [well at the multiprocessor] that they actually talk about it being an IRX certified processor in supporting the IRX ecosystem.
Most of the customers support us in that activity. And for evidence, I suggest you go see how the Infinix GT20 phone [were trained in] how to advertise their phone, and they talk about Pixelworks. They talk about our IRX certification.
The last thing we did is if you go look at these nine gains that are IRX certified, we've actually worked with the game manufacturer itself. So there is a setting in the user setting section that if you want to increase the performance on the output of the game, they have an IRX button in the menu of the game itself. And so that is another way for us to promote the IRX brand.
So when you have Tencent, or NetEase, or Perfect World, actually incorporate your IRX logo and explanation of what IRX is in their game. That gives us a lot of exposure.

Richard Shannon

Okay. Thanks for that, Todd. And my last question, I can't remember who mentioned this, but just kind of thinking past second quarter here, United States, again, the comments are a bit garbled here about how to think about the second half.
I think there was some expectation sequential growth, and I wasn't sure if that was the thought was there that would happen in third quarter or fourth quarter? Not sure. But could you clarify what your thoughts are, what you see right now?

Todd DeBonis

No, what we said -- I hope my answers aren't garbled. You sound perfectly clear so I don't know what's going on with that -- what we said was in the second half of the year, the Q3 would be sequential growth over Q2 and Q4 would be sequential growth over Q3.

Richard Shannon

Okay, perfect. I certainly heard that one. (multiple speakers) Okay. Thanks for repeating that again. I didn't hear very well before. So I think that's all the questions from me. Thank you.

Todd DeBonis

Thank you.

Operator

Thank you. And I'm not showing any further questions in the queue. I'd like to turn it back over to management for any closing remarks.

Todd DeBonis

All right. Well, thank you. Thank you for joining Pixelworks Q1 2024 earnings call. Even though the management team is disappointed in our near term guidance, we remain extremely confident in our long-term strategy as demonstrated by expanding our mobile [system] and TrueCut progress in the recent quarter.
Additionally, our expanded corporate gross margins demonstrate the value that our visual processing solutions bring to customers as well as our execution on cost efficiency initiatives. The team is very focused on the elements of the business we can control, and we look forward to progress over the next coming months. Thank you.

Operator

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect. Everyone, have a great day.