Pixelworks Q2 2024 Earnings Call Transcript

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August 7, 2024

There are 5 speakers on the call.

Operator

Good day, and welcome to the Pixelworks Inc. 2nd Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen only mode. After the speaker presentation, there will be a question and answer session. Please be advised that today's conference is being recorded.

Operator

I would now like to hand the conference over to your speaker, Mr. Brett Perry with Shelton Group Investor Relations. Please go ahead, sir.

Speaker 1

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 Amon. 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 Q2 of 2024. Before we begin, I'd like to remind you that various remarks 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.

Speaker 1

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 ks 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 restructuring costs and stock based compensation expense.

Speaker 1

The company uses these non GAAP measures internally to assess operating performance. We believe these non GAAP measures provide a meaningful perspective on core operating results and underlying cash flow dynamics.

Speaker 2

We caution investors to consider these measures in addition to and not as a substitute for nor superior

Speaker 1

to the company's consolidated financial results

Speaker 3

as

Speaker 1

the this call, we refer to net loss attributable to PixWorks Inc. As 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. Please go ahead.

Speaker 4

Thank you, Brett. Good afternoon, and welcome to everyone on the phone and the webcast. We appreciate you joining today's call. As discussed on our conference call in May, we expected the Q2 to be a challenging one due to specific near term headwinds in our mobile business. Earlier today, we reported revenue for the quarter at good point of guidance, reflecting the anticipated pause in orders from a large mobile customer.

Speaker 4

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 initial improvement and sequential revenue growth expected in the Q3. 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 headcount across all areas of the business effective June 30.

Speaker 4

Never an easy action, the reduced headcount is anticipated to result in approximately $4,000,000 of annualized cost savings beginning in the Q3. Combined with other cost containment measures, we believe the collective expense reductions we've implemented to date will contribute to total OpEx savings of $10,000,000 over the next 18 months. Turning to a review of our mobile business. As previously indicated, 2nd 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 twenty twenty four.

Speaker 4

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 next gen visual processor and our IRX ecosystem. More broadly within the mobile our mobile business, we continue to make steady progress on the expansion of our IRX branded gaming 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.

Speaker 4

Leveraging our IRX rendering acceleration solution, ecosystem partners gained the unique ability to deliver ultra high frame rate, desktop level photo realism 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 CSUN 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 innovated 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 TMI Studio Group on Honor of Kings.

Speaker 4

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 number 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.

Speaker 4

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 1st 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.

Speaker 4

To highlight one recent example, in late July, we showcased our IRX solutions at ChinaJoy 2024. Held at the Shanghai New International Expo Center, China Joy 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.

Speaker 4

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 GT20 Pro smartphone. It incorporated our X5 series processor and represented the first time that Pixelworks technology has been featured in a sub-three $50 smartphone that is targeting emerging markets outside of China.

Speaker 4

Also announced during the quarter, OnePlus incorporated our X7 Gen 2 visual processor in its newly launched OnePlus Ace 3 Pro smartphone. Positioned as a more affordable smartphone that delivers flagship like performance, the OnePlus Ace 3 Pro is priced between $4.50 to $600 depending on memory configuration, making the 2nd 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 and 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 devices full range of capabilities and intended performance.

Speaker 4

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 Q4. As anticipated, this push out in timing unfortunately results in missing the design in window for customer smartphone models in the back half of twenty twenty four. 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' 1st mobile visual processor and 12 nanometer process technology.

Speaker 4

We believe this newest generation solution is poised to bring this market disruptive performance to mobile gaming. With a series of new industry first features and the ability to deliver a true immersive 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.

Speaker 4

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 non premium 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 by 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 and D team will soon release a new generation of motion grading and reprojection tools to be used on upcoming projects.

Speaker 4

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 becomes 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 3 LCD digital projector market. For the Q2, total revenue from Home and Enterprise was roughly flat on both sequential and year over year basis.

Speaker 4

This was consistent with our internal expectation and also mirrors the recent feedback from our projector 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 co developed next generation projector SoC. We subsequently received the first purchase orders and the new co developed SoC is now scheduled for volume production in the 4th 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.

Speaker 4

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.

Speaker 4

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 Q3, while continuing to target improved operational results over the medium intermediate term. With that, I'll hand the call over to Haley to review financials and provide our guidance for the Q3.

Speaker 2

Thank you, Todd. Revenue for the Q2 of 2024 was $8,500,000 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 revenue the breakdown of revenue in the Q2 was as follows. Revenue from mobile was approximately $2,100,000 comprised primarily of shipments of our X Series visual processors.

Speaker 2

Home and Enterprise revenue was approximately 6,400,000 dollars 2nd quarter non GAAP gross profit margin expanded 30 basis points sequentially to 51% from 50.7% in the Q1 of 2024 and increased over 1,000 basis points from 40.5% in the Q2 of 2023. The significant year over year expansion in gross margin reflects our ongoing focus to drive healthy margins. Non GAAP operating expenses were $12,800,000 in the 2nd quarter compared to $12,600,000 in the prior quarter and $10,700,000 in the Q2 of 2023. With respect to the year over year comparison, as a reminder, lower operating expenses in the Q2 of 2023 included the benefit of a $1,900,000 credit to R and 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.

Speaker 2

As a result, we expect to realize approximately $4,000,000 in annualized savings. On a non GAAP basis, Q2 2024 net loss was $7,700,000 or a loss of $0.13 per share compared to a net loss of $4,000,000 or a loss of $0.07 per share in the prior quarter and a net loss of $4,800,000 or a loss of $0.09 per share in the Q2 of 2023. Adjusted EBITDA for the Q2 of 2024 was a negative $7,000,000 compared to a negative $3,200,000 in the first quarter and a negative $4,000,000 in the Q2 of 2023. Turning to the balance sheet. We ended the 2nd quarter with cash and cash equivalents of $37,800,000 compared to $46,200,000 at the end of the first quarter $47,500,000 at year end 2023.

Speaker 2

In addition to cash used for operations, the cash balance at quarter end also reflected approximately $2,500,000 used during the quarter for a one time purchase of a mask set associated with our next generation mobile visual processor. Shifting to our current expectations and guidance for the Q3 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 Q3. Based on current order patterns and existing backlog, we currently anticipate total revenue for the Q3 to be in a range of between $9,000,000 10,000,000 dollars In terms of gross profit margin, for the Q3, we expect non GAAP gross profit margin to be between 49% 61%. With respect to operating expenses, we expect to realize the initial benefits from the previously discussed cost reduction beginning in the Q3.

Speaker 2

However, we anticipate the resulting reduction in expenses to be partially offset by a one time expense associated with the design revisions completed on our next generation mobile visual processor. Net of these factors, we expect operating expenses in the 3rd quarter to range between 12,000,000 dollars 13,000,000 on a non GAAP basis. Lastly, we expect 3rd 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 and A.

Speaker 2

Thank you.

Operator

Thank Our first question comes from the line of Nick Doyle with Needham and Co.

Speaker 3

Hey, guys. Thanks for taking my question. First one would be on the international expansion. Do you guys did you have any shipments this quarter or just otherwise, what's the kind of interest you're getting and any detail on orders in general? Nick.

Speaker 3

And then also, if there is, I mean, are you seeing more interest on the low side of the mid tier? Thanks.

Speaker 4

I didn't hear what if you were on Nick, I didn't hear you. I just heard you at the end there.

Speaker 3

Okay. I'll repeat. The international expansion, just looking for if you had any shipments in the quarter and generally what kind of interest you're getting and if that's tilted to the low tier or the mid tier? Thanks.

Speaker 4

Sure. So just to summarize for everybody, the 2 previous models that were targeted to the international market were OnePlus in Q1 launched a phone, their OnePlus 13 is their flagship. And that's 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. And then the second phone was this phone that we did with the division of Transion, the Infinix GT20.

Speaker 4

That was absolutely targeted at competitive gaming. They've seen good demand. It's probably tripled over their previous model, their GT10. They did a very good job marketing it towards competitively priced international markets. They ship no phones into China.

Speaker 4

Their target markets are Africa, South America, Southeast Asia, Central Asia. And they did a very good job in marketing. And right now, we see reasonable volume from that volume for what we expected going into the design activity.

Speaker 3

Okay. That's helpful. And that's great to hear about the trench in stone. For the new projector SoC, congrats on the progress there. Will the ramp in the Q4 be able to offset the general seasonality?

Speaker 4

I would say that, yes. Normally, Q4 is a little bit seasonally down over Q3. I would say it won't be this year. But in general, what they're going to do is slowly replace some of the older models. So what you'll do is as the new processor comes online, it will give a little bit of positivity to the overall projector numbers.

Speaker 4

The ASP is higher than the previous devices. So as it replaces it does 2 things. It replaces some of our own devices, but it also replaces a competitor's device. So once it's been fully adopted, we'll have a higher market share at our largest customer. And 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.

Speaker 4

Thank you. You're welcome. Thanks, Nick.

Operator

Thank you.

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Earnings Conference Call
Pixelworks Q2 2024
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