Pixelworks, Inc. ($PXLW)

Good day, ladies and gentlemen, and welcome to Pixelworks, Inc.'s Fourth Quarter 2025 Earnings Conference Call. I will be your operator for today's call. [Operator Instructions] 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.

Thank you, Didi. Good afternoon, and thank you for joining us on today's call. With me on the call are Pixelworks' Chairman 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 fiscal year 2025. Before we begin, I'd like to remind you that various remarks we make on this call, including those about 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, Thursday, March 12, 2026. 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, 2025, and subsequent SEC filings for a description of factors that could cause forward-looking statements to differ materially from actual results. Please 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. With that, it's now my pleasure to turn the call over to Pixelworks' Chairman and CEO. Todd, please go ahead.

Thank you, Brett. Good afternoon, and welcome to everyone joining us on today's conference call. As a foundation for discussing our go-forward business and strategy, I want to begin today's call with a review of our recently completed sale of the company's Shanghai-based subsidiary. Following a roughly year-long process, in October, we signed a definitive purchase agreement to sell all of Pixelworks, Inc.'s ownership of its Shanghai semiconductor subsidiary to a special purpose entity controlled by VeriSilicon. Then on January 6 of this year, we announced the successful closing of the transaction, which resulted in net cash proceeds to Pixelworks of approximately $51 million. The cash proceeds from the sale were received in early January, and with the approximate $11 million we had on hand at the end of 2025, our cash balance starting this year was approximately $62 million. In addition, there is still approximately $1.2 million in escrow for a tax dispute that looks to be resolved in our favor. As outlined in my letter to shareholders last November, the rationale for the transaction was threefold. First, it unlocks significant value for our shareholders by monetizing a key asset that was exposed to increasingly complex business and geopolitical environments. In addition to repatriating the cash proceeds to the U.S., the transaction also completely eliminated all prior obligations of Pixelworks, Inc. to minority investors in the Shanghai subsidiary. Second, with the exit of the semiconductor hardware business, we were able to reposition Pixelworks as a global technology licensing business, focused on cinematic visualization solutions, which I'll talk more about in a minute. Lastly, the transaction meaningfully strengthened our balance sheet. increasing both the company's financial stability and flexibility. Without the financial and capital burdens associated with operating a resource-intensive semiconductor business in China, Pixelworks can focus on expanding our core strengths in visualization enhancement solutions, pursuing new and existing licensing initiatives and allocating capital to the highest ROI market opportunities. Since the transaction closed in January, we have taken additional steps to transform the remaining organization. These included reducing headcount that primarily were supporting the Shanghai subsidiary as well as adding a few key hires, most notably the appointment of our new EVP of Business Development, Sevan Brown. We also made changes to Pixelworks' Board of Directors to better align with and support our go-forward strategy. Having provided that background, I want to frame what our business looks like today post transaction. We have effectively transformed Pixelworks into a lean, asset-light global technology licensing company. We continue to have 100% ownership of a significant intellectual property portfolio, underpinned by over 60 issued and pending patents related to our TrueCut Motion grading platform as well as broader visual enhancement technologies. As of today, the company is comprised of less than 25 full-time employees with roughly 60% being dedicated to R&D. To the extent we choose to grow the size of our team, it will be based upon demand for our technology as opposed to arbitrary growth targets. Today and going forward, as a pure-play technology licensing company, we are focused on providing a combination of new and existing cinematic visualization solutions that enable truly differentiated viewing experiences. Our current portfolio of solutions is anchored by Pixelworks' TrueCut Motion platform, which continues to be utilized by leading filmmakers to enhance the cinematic experience across premium theatrical screens. In 2025, we were accredited with several notable releases featuring TrueCut Motion, including DreamWorks Animation's The Bad Guys 2 and Universal Pictures' Nobody 2 released to worldwide premium large-format theaters. Additionally, Jurassic World Rebirth was showcased in TrueCut Motion format on CINITY premium screens. And then our motion grading technology was most recently used in Universal Pictures' theatrical release of Wicked: For Good. As part of our refined strategy to accelerate expanded adoption of our TrueCut Motion platform, we are putting increased emphasis on supporting premium, visually stunning films that are released theatrically. Together with today's growing premium large-format theatrical experiences, these tent-pole titles generate an outsized share of the total theater box office sales. Further validating this fact is the rapidly growing number of premium large format, or PLF, screens with the industry's largest exhibitors allocating a majority of their new CapEx spending to expand their premium theatrical experiences. As such, we are pursuing further direct engagement with the leading premium exhibitors who are naturally aligned with our objective of engaging studios and filmmakers to deliver more premium format content. The initial results of these direct engagement efforts have been very positive. In January, we announced a partnership with Marcus Theatres to prioritize TrueCut Motion across their premium screens. For context, Marcus is the fourth largest theater chain in the United States, with nearly 1,000 screens across 78 cinema complexes operated under multiple different brands. Most recently, we secured a similar endorsement from Odeon Cinemas Group, the largest cinema operator in Europe and also affiliate of AMC, to bring additional titles to TrueCut Motion format to their premium auditoriums. We are currently in discussions with and expect to announce partnerships with additional leading premium exhibitors in the near future. Collectively, we anticipate these collaborations with exhibitors will result in increased demand for our TrueCut Motion format. Our near-term objective is to be associated with many of the most visually impactful titles released to theaters in a given year, which we believe will accelerate our growth path towards increased market awareness and expanding ecosystem partnerships. With TrueCut Motion's unique ability to enable the most authentic high-fidelity viewing experience and a growing number of premium screens, we continue to believe there is a large and compelling market opportunity for our motion grading technology and expertise. The primary focus of our advanced algorithm team is to further expand the capabilities of our motion grading tools, both for productivity and better picture quality. Today, we are working on our most complex projects to date, which is providing us with real-time feedback from our motion grading supervisors. In addition to this activity, we identified adjacent opportunities for our motion processing technology. We, like others, are leaning into the benefits that AI technology can bring to our development process. In summary, the successful exit from our previous semiconductor business has enabled us to transform the company into a more nimble, scalable and asset-light organization. That's well capitalized. Our immediate strategic focus is enabling additional premium large-format theatrical experiences and currently have a growing demand for our TrueCut Motion grading services. I also want to emphasize that maintaining a robust balance sheet remains a high priority. We are committed to prudently managing resources and efficiently using our cash on operations as we work to build a broader and highly profitable licensing business centered around cinematic and visual enhancement solutions. With that, I'll turn the call over to Haley to provide some additional information and details as well as our current balance sheet position.

Thank you, Todd. As Todd previously discussed, on January 6, 2026, we completed the transaction to sell all equity interests and associated assets of our Pixelworks Shanghai semiconductor subsidiary business. In December, this business met all criteria to be considered held for sale, at which time the operating results of our Shanghai subsidiary became designated as discontinued operations. Therefore, the company's reported financial results contained in today's press release for fiscal years 2024 and 2025 represent the company's results on a continuing operations basis. With respect to the reported approximately $690,000 in revenue from continuing operations for fiscal year 2025, this is comprised entirely of revenue generated from our TrueCut Motion platform and related motion grading services. With a large portion of our business prior to January 2026 now classified as discontinued operations, I will predominantly focus the remainder of my comments on continuing operations and the company's financial position subsequent to the sale of the subsidiary on January 6, 2026. Starting with the balance sheet. I want to briefly review several items that contributed to our current and projected cash balance. Following our previously announced and completed registered direct offering and sale of nonstrategic patents during the fourth quarter, the continuing company ended the year with approximately $11.2 million in cash and cash equivalents. Then, in January, we closed the sale of Pixelworks Shanghai semiconductor subsidiary, resulting in cash proceeds to Pixelworks, net of transaction costs and withholding taxes paid in China, totaling approximately $51 million. Hypothetically, had all of these items taken place before year-end, we would have entered 2026 with approximately $62 million. Subsequent to closing the sale of our Pixelworks Shanghai subsidiary, we paid out all remaining transaction expenses, including accounting, legal and advisory fees as well as bonuses. We also completed a series of restructuring actions to streamline the remaining organization, which will result in recognizing certain severance costs in the first quarter. Lastly, we believe that a previously pending tax matter in China has been fully resolved, and we expect an additional approximately $1.2 million of cash proceeds from the transaction to be released from escrow in the coming weeks. Taking all of these items into account, combined with expected results from continuing operations in the first quarter, we currently anticipate our cash and cash equivalents balance as of March 31 to be approximately $58 million. We believe this cash balance provides ample runway and flexibility to execute on our strategy of building a pure-play technology licensing business. As such, in early March, we elected to cancel our previously available but recently unused at-the-market stock facility. Lastly, with respect to the balance sheet, I want to reiterate that all previously reported liabilities and commitments, including redeemable noncontrolling interest associated with our prior Shanghai subsidiary were fully released in conjunction with the closed sale. The elimination of these prior contingencies will be reflected in the company's reported financial statements for the first quarter ending March 31. Another important change to our financial profile going forward relates to operating expenses. As mentioned earlier, during the first quarter, we took a number of actions to meaningfully reduce the company's overall cost structure and streamline the continuing operations portions of the business. These measures included a reduction in headcount and associated organizational expenses, reflecting our transition to focus on technology licensing. As a result, we expect cash used for operating expenses to be approximately $2 million per quarter beginning in the second quarter. Although we are not providing quarterly financial guidance, I would like to provide a high-level framework for thinking about the company's current cash position and anticipated near-term operating results. First, we expect to maintain cash operating expenses of $2 million or less again starting in the second quarter. Then based on the current interest rate environment, we expect to generate at least $1.5 million of interest income annually from the cash currently held on the balance sheet. That completes our prepared remarks, and we look forward to taking your questions. Operator, please proceed with the Q&A session.

[Operator Instructions] And our first question comes from Suji Desilva of ROTH Capital.

Congratulations on the transaction here and the go-forward opportunity. So maybe, Todd, you can start with sort of the big picture in terms of the media chain, from content creators to the end theaters and streaming guys in between. Where are the best near-term opportunities for you to drive revenue? Maybe we can start there and talk about the model for those given components -- for those...

I think I've been through this before. I think maybe people didn't focus in last year when we were in the middle of the transaction, but I'll bring it up again. So our business model is, first, we have advanced tools and technology where we create cinematic high frame rate or motion-graded content that's branded under the TrueCut Motion brand. When we do this work, we get paid for it. But we usually don't charge what the cost structure is, okay? So even though we make revenue there, we do not want it to be an inhibitor for content creators to come to us. So all the revenue that we've had so far have come -- in the last couple of years, has come from this content creation, but it's in a subsidized format. We are as busy as we've ever been. We're working on more complex projects today. We're advancing the tools that work on these projects. And so you could probably see an increase in revenue. But once again, that will not be the primary source of revenue. Then today, for those content creators and studios that engage with us, we give the theatrical rights to that content. for effectively free, right? It's included in the engagement to do the motion grading work. And so we encourage them and we encourage more theaters to bring cinematic high frame rate content, TrueCut Motion content to as many theaters and as many visually stunning pieces of content as possible. We expect, and we've been in discussions with several people that as this continues to expand, studios and distributors of content will want to deliver this premium experience to premium home entertainment devices. We will engage with those studios and distributors that want to distribute the content, and we will engage with device manufacturers of premium devices that want to have that differentiated content on their device. They need to be certified. They need to meet certain criteria and needs to operate in a mode that effectively guarantees the creator's intent, will be shown on those devices. And so we expect most of the revenue to come from this home entertainment ecosystem. TrueCut Motion is not the only technology we're working on. We're working on other licensing technologies. They may or may not use the same model as far as our revenue profile. But we're running pretty lean, Suji. And I believe if we execute on this, we will be profitable with TrueCut Motion stand-alone.

Okay. Maybe, Todd, you can help think about the margin structure of this as the revenue forms, where you think it will head and as a pathway to thinking about what the breakeven revenue opportunity might be so we can think about your runway there?

So our margin is very high, even on the content creation. But understand we put a lot of R&D investment in, and we have a lot of administrative costs in both marketing and as a small public company. And so those aren't always absorbed. So you'll see gross margins be very high. So most revenue, whether it comes from content creation or distribution licensing or device certification licensing will have extremely high margins.

Okay. And again, as we look forward, can you maybe talk about how we should think about your pipeline or how it's formed today and maybe some metrics we'd be using in the future to track your progress?

Yes. We're not going to go out and set that right. I mean I would say how we're going to track our progress is, today, we are -- clearly, we have a good cash position, okay? And as much as we're not subsidizing the content like some people have in the licensing business, they've gone out and subsidized the engagement early on prior to making money on it. We're not doing that, okay? We're being somewhat selective. But the way to gauge this is how fast are we expanding the exhibitor footprint that's pulling and -- pulling the studios to deliver more premium content to them, TrueCut Motion content, and how much content do we deliver to those theatrical experiences. That's the best way. That's the best way to figure out how we're succeeding in the near term, right? And then you'll see announcements at some point from the home entertainment portion of the ecosystem.

Okay. Yes, that makes sense. And then, I think, Haley, I appreciate you giving us 1Q some guidance we can work with, the OpEx being less than $2 million, the interest income for the year. What was the cash burn number you gave? Was that -- did you give a 1Q expected cash flow from operations?

No. I just said we expect to end the quarter with $58 million approximately, March 31.

Did you imply an amount of cash used in the quarter or...

Well, so I mean, we're paying severances and bonuses and other transaction costs plus operating cash, and we started sort of with the $62 million number.

$62 million, right? That's the delta, right? Okay. And then I saw some patent sales. Was that -- maybe last year, was that a one-off? Or is that something that could recur, Todd or Haley?

No, that's not going to be recurring revenue. Recurring revenue is going to come from licensing. We're -- listen, we sold off some patents that were not really specific to our TrueCut business. If you go back and looked at pre-transaction of the subsidiary sale, I would say 60% of our total patent portfolio was in the subsidiary, so that went with the subsidiary and the sale. Of what remains from what we didn't sell with the subsidiary transaction or outright to this person that wanted to buy these other patents, I would say we have no real intention of selling any more patents, and we're actively trying to add to that patent portfolio specific to our go-forward business.

Right. Okay. And then Todd, I might well just ask this question I asked a lot of companies who are kind of embarking on newer paths. What are maybe, as an executive, your 2 or 3 top priorities to try to accomplish in 2026 to get this off and running in the right direction?

Well, I mean, first and foremost, today, our technology is only used by Pixelworks TrueCut Motion editors. We are working on getting the product in a place where we could actually license it. And so you could expand upon our own people working on the technology to where we have third parties doing motion grading work using our tools. So that's a big priority for us. And then developing the demand profile. Those are the 2 biggest issues I have right now. And I mean, frankly, I was very focused on a transaction. I had a group of people running this. They gave me something. Now I'm very focused on this business. That was in a good place. It takes a long time to create an awareness for technology like this. And I would say that the awareness is strong. Now we need to convert that into pull and content.

Okay. Great. And just one quick housekeeping. Just to be 100% sure, the cash that you've gotten, it's all in the U.S. at this point. Is that correct?

Yes. It's been in the U.S. since mid-January.

Thank you. This concludes our question-and-answer session. I'd like to turn it back to management for closing remarks.

Yes. Thanks, everybody, for keeping up to speed on this transition of the company. From time to time, we'll have some more salient information to give to you. Thank you.

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