Pixelworks, Inc. (PXLW) Earnings Call Transcript & Summary

Good day, and welcome to the Pixelworks, Inc. Second Quarter 2024 Earnings Conference Call. [Operator Instructions] I would now like to hand the conference over to your speaker, Mr. Brett Perry with Shelton Group Investor Relations.

With me on the call are Pixelworks' President and CEO, Todd DeBonis; and Chief Financial Officer, Hale 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 second quarter of 2024. Before we begin, I'd like to remind you that various remarks that 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, Wednesday, August 7, 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 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. The company uses these non-GAAP measures internally to assess our 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, not as a substitute for, nor superior to, the company's consolidated financial results as presented in accordance with U.S. GAAP. Also note throughout the company's press release and management statements during this call, we refer to net loss attributable to Pixelworks, Inc. and simply net loss. For additional details and reconciliations of GAAP to non-GAAP net loss and GAAP net loss to adjusted EBITDA, please refer to the company's press release issued earlier today. With that, it's now my pleasure to turn the call over to Pixelworks CEO, Todd DeBonis.

As discussed on our conference call in May, we expected the second quarter to be a challenging one due to specific near-term headwinds in our mobile business. Earlier today, we reported revenue for the quarter at midpoint of guidance, reflecting the anticipated pause in orders from a large mobile customer. Gross margin ticked up sequentially, remaining above 50% and representing more than 1,000 basis point improvement year-over-year. Operating expenses and bottom line results for the quarter were both better than the midpoint of our guidance. We continue to believe that the current headwinds are primarily near term, with signs of an initial improvement in sequential revenue growth expected in the third quarter. Acknowledging the current drawdown in quarterly revenue, we have implemented a number of cost reduction actions to better align our operating expenses with near-term revenue levels. In addition to a series of other measures taken over the last several months to maximize operational efficiencies, we implemented a reduction in head count across all areas of the business, effective June 30. Never an easy action, the reduced head count is anticipated to result in approximately $4 million of annualized cost savings beginning in the third quarter. Combined with other cost containment measures, we believe the collective expense reductions we've implemented to date will contribute to total OpEx savings of $10 million over the next 18 months. Turning to a review of our mobile business. As previously indicated, second quarter mobile revenue was down significantly and primarily reflected the impact of a pause in new orders from what had recently been our largest mobile customer. This customer experienced unanticipated weaker sell-through of its newly launched smartphone models in the first half of 2024. Although completely unrelated to Pixelworks, this resulted in excess inventory of our visual processors. They are now working down this existing inventory through a combination of prior and recently launched models that incorporate our technology. We continue to be closely engaged with this customer on the evaluation of our upcoming NextGen visual processor and our IRX ecosystem. More broadly, within our mobile business, we continue to make steady progress on the expansion of our IRX branded gaming ecosystem. With the goal of enabling a dramatically enhanced visual experience for mobile gaming, we established the IRX ecosystem to align and promote a collaborative end-to-end approach that benefits all industry participants from gaming studios to smartphone OEMs. Leveraging our IRX rendering acceleration solution, ecosystem partners gained the unique ability to deliver ultra-high frame rate, desktop level photorealism and high image resolution without excess device temperature or power consumption. Since our prior conference call, our team completed integration work on 2 additional IRX mobile games, making a total of 11 IRX certified mobile games available to date. The most recent of these 2 IRX certified games was a product of collaboration with Seasun games to help adapt and optimize a mobile version of the popular game, JX3 Ultimate. Unlike most mobile games created based on existing IP, JX3 Ultimate Mobile innovatively leveraged cross-platform data inheritance to produce full platform, high-quality mobile graphics that are comparable to the PC version. Separately, in June, we announced our latest collaboration with Tencent and its TiMi Studio Group on Honor of Kings. For those less familiar with gaming, Honor of Kings is a multiple player online battle arena game that was first launched several years ago. Today, it's literally a household name in China. According to mobile gaming industry experts, Honor of Kings remains the single most played multiplayer game globally. It also ranks #1 in revenue generated from in-app purchases. We continue to have a healthy engagement with new multiple leading game studios and plan to announce additional IRX certified mobile games this year. In addition to our direct collaboration with studios on certified games, we continue to expand a growing list of more than 100 IRX qualified mobile games. These qualified games have been individually tested and tuned for our solution to optimize their visual performance. IRX remains the first and only industry-wide ecosystem of its kind dedicated to improving the visual performance of mobile gaming. We have several ongoing initiatives underway to consistently drive increasing awareness of IRX. Not only with the game studios and device OEMs, but also targeting broader awareness directly with consumer gamers. Currently, these IRX promotion and co-marketing efforts are primarily targeted within the APAC region and specifically in China as the largest mobile gaming market. To highlight one recent example. In late July, we showcased our IRX solutions at ChinaJoy 2024 held at the Shanghai New International Expo Center, ChinaJoy is widely recognized as China's largest annual global gaming convention. Our team hosted an IRX branded booth, which featured hands-on demos, allowing participants to experience playing several IRX certified mobile games on recently released IRX certified devices. In conjunction with the show, we also launched a new dedicated IRX website and promotional video, which I would encourage investors to check out at irxgaming.com. The IRX ecosystem is a fundamental part of our mobile strategy, serving to further differentiate the performance advantages and premium visual game experience that visual processors bring to mobile devices. We believe that as the IRX ecosystem continues to grow, so does incentive for OEM customers to incorporate our visual processors across a broader range of smartphone models. Consistent with my comments last quarter, we remain focused on addressing an expanded served available market in mobile. This includes both increased penetration of mid- and lower tier smartphones as well as expanded adoption in customers' models targeting for global markets outside of China. In April, we demonstrated progress on each of these expansion goals with our first announced program win with transient on the launch of the Infinix GT 20 Pro smartphone. It incorporated our X5 series processor and represented the first time the Pixelworks technology has been featured in a sub-$350 smartphone that is targeting emerging markets outside of China. Also announced during the quarter, OnePlus incorporated our X7 Gen 2 visual processor in its newly launched OnePlus ACE3 Pro smartphone. Positioned as a more affordable smartphone that delivers flagship-like performance the OnePlus ACE 3 Pro is priced between $450–$600 depending on memory configuration, making the second win with our X7 Gen 2 processor in the mid-tier smartphone model category. These 2 newly launched smartphones both feature IRX certified solution while utilizing different generations of our visual processor. Both models have been well received in their targeted markets. Lastly, within mobile, I want to provide an update on our next-gen mobile visual processor. As discussed on our prior call, we pushed out the production release of our next-gen solution after encountering a few technical hurdles that were impairing the device's full range of capabilities and intended performance. As an update, our engineering team has completed the work on the required design changes and we are confident we have resolved all previously identified issues. We are scheduled to receive new samples of our next-generation device for testing and final verification at the end of this month, which will position us to be ready for its production launch in the fourth quarter. As anticipated, this pushout in timing unfortunately, results in missing the design and window for customer smartphone models in the back half of 2024. We do, however, remain engaged with multiple customers on our next-gen solution on their subsequent plan models. Architected with direct feedback from existing IRX ecosystem partners this will be Pixelworks' first mobile visual processor and 12-nanometer process technology. We believe this newest generation solution is poised to bring market disruptive performance to mobile gaming with a series of new industry-first features and the ability to deliver a true commercive PC like gaming experience to mobile devices. We look forward to a planned formal market introduction of our next-generation visual processor later this year. Turning to TrueCut Motion. We continue to see growing interest from premium large-format exhibitors that are specifically requesting TrueCut Motion for movie titles shown on their screens. As further evidence, 2 of the largest global premium large-format exhibitors are now actively recommending TrueCut Motion citing a demonstratively better viewing experience on their premium large screens. Movies shown in premium large-format theaters represent a growing portion of the global box office, outperforming nonpremium formats, both in viewer satisfaction and box office sales. As a result, premium large-format exhibitors not only have increasing influence, they're also engaging more than ever directly with filmmakers. Our current focus is on leveraging these endorsements of TrueCut Motion 5 premium large format exhibitors to facilitate increased awareness among filmmakers, studios and consumers in support of driving accelerated use of TrueCut technology for new release titles. Additionally, our TrueCut Motion R&D team will soon release a new generation of motion grading and reprojection tools to be used on upcoming projects. These new tools leverage a combination of both expertly trained AI and new patented algorithms to deliver faster results at higher resolution. In addition, these tools are more tightly integrated with leading post production tools and formats. As motion grading become standard practice within the film industry, this new generation of tools will be increasingly important for supporting new and expanded TrueCut Motion engagements. Shifting to our Home and Enterprise business, which, as a reminder, is predominantly comprised of our visual processor system on chips for the 3LCD digital projector market. For the second quarter, total revenue from Home and Enterprise was roughly flat on both sequential and year-over-year basis. This was consistent with our internal expectation and also mirrors the recent feedback from our projected customers that market supply and demand dynamics are generally well balanced. As I mentioned on the last call, in April, we secured final acceptance from our largest projector customer on production samples of our codeveloped next-generation projector SoC. We subsequently received the first purchase orders and the new codeveloped SoC is now scheduled for volume production in the fourth quarter. The first volume production shipments will support 2 new planned projector models and then this new chip will gradually be adopted more broadly over time as our lead customer introduces new additional projector models. In conclusion, we knew the quarter was going to be difficult. I'm proud of our team, which has confronted the recent challenges head on while remaining focused on strategic and operational execution across the business. We remain encouraged by our recent progress and look forward to delivering improved results in the second half of the year. Specific to mobile, we believe that we are positioned for renewed growth in the coming quarters. We are increasingly targeting an expanded served market for mid- to lower tier smartphones as well as incremental customer adoption in international models. Additionally, engagements and the influence of our IRX gaming ecosystem continue to grow and will soon be further supported by the introduction of our next-generation mobile visual processor. We also expect to benefit from a continued stable performance with our Home and Enterprise business, together with our recently implemented cost reduction actions, we expect to deliver sequential revenue growth in the third quarter while continuing to target improved operational results over the intermediate term. With that, I'll hand the call over to Haley to review financials and provide our guidance for the third quarter.

Revenue for the second quarter of 2024 was $8.5 million, which was at the midpoint of our guidance. The revenue decrease from the prior quarter was primarily driven by the anticipated near-term headwinds in mobile. The breakdown of revenue in the second quarter was as follows: revenue from mobile was approximately $2.1 million, comprised primarily of shipments of our visual processors. Home and Enterprise revenue was approximately $6.4 million. Second quarter non-GAAP gross profit margin expanded 30 basis points sequentially to 51% from 50.7% in the first quarter of 2024 and increased over 1,000 basis points from 40.5% in the second quarter of 2023. The significant year-over-year expansion in gross margin reflects our ongoing focus to drive healthy margins. Non-GAAP operating expenses were $12.8 million in the second quarter compared to $12.6 million in the prior quarter and $10.7 million in the second quarter of 2023. With respect to the year-over-year comparison, as a reminder, lower operating expenses in the second quarter of 2023 included the benefit of a $1.9 million credit to R&D related to the now completed co-development agreement with our largest projector customer. As Todd previously highlighted, we've recently implemented expense reduction actions to more appropriately align expenses with current revenue levels, including an approximately 16% reduction in workforce, which was affected at the end of the second quarter. As a result, we expect to realize approximately $4 million in annualized savings. On a non-GAAP basis, second quarter 2024 net loss was $7.7 million or a loss of $0.13 per share compared to a net loss of $4 million or a loss of $0.07 per share in the prior quarter and a net loss of $4.8 million or a loss of $0.09 per share in the second quarter of 2023. Adjusted EBITDA for the second quarter of 2024 was a negative $7 million compared to a negative $3.2 million in the first quarter and a negative $4 million in the second quarter of 2023. Turning to the balance sheet. We ended the second quarter with cash and cash equivalents of $37.8 million compared to $46.2 million at the end of the first quarter and $47.5 million at year-end 2023. In addition to cash used for operations, the cash balance at quarter end also reflected approximately $2.5 million used during the quarter for a onetime purchase of amassed associated with our next-generation mobile visual processor. Shifting to our current expectations and guidance for the third quarter of 2024. As Todd discussed and consistent with the expectations we outlined on our previous conference call, we expect to return to sequential revenue growth in the third quarter. Based on current order patterns and existing backlog, we currently anticipate total revenue for the third quarter to be in a range of between $9 million and $10 million. In terms of gross profit margin, for the third quarter, we expect non-GAAP gross profit margin to be between 49% and 51%. With respect to operating expenses, we expect to realize the initial benefits from the previously discussed cost reduction beginning in the third quarter. However, we anticipate the resulting reduction in expenses to be partially offset by a onetime expense associated with the design revisions completed on our next-generation mobile visual processor. Net of these factors, we expect operating expenses in the third quarter to range between $12 million and $13 million on a non-GAAP basis. Lastly, we expect third quarter non-GAAP EPS to range between a loss of $0.11 per share and a loss of $0.14 per share. That completes our prepared remarks, and we look forward to taking your questions. Operator, please proceed with Q&A. Thank you.

[Operator Instructions] Our first question comes from the line of Nick Doyle with Needham & Co.

The international expansion, if you had any shipments in the quarter and generally, what interest you're getting and if that's tilted to the low tier, the mid-tier?

Just to summarize for everybody, the 2 previous models that were targeted in the international market were OnePlus in Q1 launched a phone, their OnePlus 13 is their flagship. I would say it's more of a flagship-oriented phone. They did include our visual processor and target IRX internationally, but it wasn't all-in in gaming, let's say. Then the second phone was this phone that we did with the division of transient, the Infinix GT 20. That was absolutely targeted at competitive gaming, but they've seen good demand. It's probably tripled over their previous model, their GT 10. They did a very good job marketing it toward competitively priced international markets. They ship no phones into China. Their target markets are Africa, South America, Southeast Asia, Central Asia. They did a very good job in marketing. Right now, we see reasonable volume for what we expected going into the design activity.

For the new projector SoC, congrats on the progress there, will the ramp in the fourth quarter be able to offset the general seasonality?

I would say that, yes, normally, Q4 is a little bit seasonally down over Q3. I would say it won't be this year. In general, what they're going to do is slowly replace some of the older models. What you'll do is as the new processor comes online it will give a little bit of positivity to the overall projector numbers. The ASP is higher than the previous devices. As it replaces, it does 2 things. It replaces some of our own devices, but it also replaces a competitor's device. Once it's been fully adopted, we'll have a higher market share at our largest customer. Then we have a derivative product that we're introducing to the rest of the market, but those models will not start shipping until 2025.

[Operator Instructions] I'm showing no questions in the queue at this time. I would like to turn the call back over to management for any closing remarks.

Thank you for attending today's call. We look forward to bringing progress over the next coming months. We'll talk to you on the next quarterly call.

This concludes today's program. Thank you all for participating. You may now disconnect.