Pixelworks, Inc Q4 FY2021 Earnings Call

Good day, ladies and gentlemen, and welcome to Pixelworks Fourth Quarter and Fiscal Year 2021 Earnings Conference Call. I will be your operator for today. My name is Carmen. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. This conference call is being recorded for replay purposes. I would now like to turn the call over to Brett Perry with Investor Relations. The floor is yours.

Thank you, Carmen. Good afternoon, and thank you for joining today's conference call. With me on the call is Pixelworks' President and CEO, Todd DeBonis, and Chief Financial Officer, Haley Aman. The purpose of today's conference call is to supplement the information provided in Pixelworks' press release issued earlier today announcing the Company's financial results for the fourth quarter of 2021. Before we begin, I would like to remind you that various remarks we make on this call, including those about our projected future financial results, economic and market trends, 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 belief as of today, Thursday, February 10, 2022. 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, annual report on Form 10-K for the year ended December 31, 2020, 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 amortization of acquired intangible assets, stock-based compensation expense, restructuring expense, and gain of loan extinguishment. The Company uses these non-GAAP measures internally to assess our operating performance. We believe these non-GAAP measures provide a meaningful perspective on our core operating results and underlying cash flow dynamics. We caution investors to consider these measures in addition to, and not as a substitute for, nor superior to the Company's consolidated financial results as presented in accordance with GAAP. Also note throughout the Company's press release and management statements during this conference we refer to net loss attributable to Pixelworks, Inc. as simply net loss. For additional details and reconciliations of GAAP to non-GAAP net loss and GAAP to adjusted EBITDA, we would refer you to the press release issued earlier today. With that, it is now my pleasure to turn the call over to Todd for his opening remarks. Please go ahead.

Thank you, Brett, and good afternoon, or morning, to everyone on the phone and webcast. As reported in today's press release, we closed out the year with another consecutive quarter of growth and increasing momentum entering 2022. Total revenue in the fourth quarter was up 72% year-over-year, and mobile revenue was another record, growing 29% sequentially and 194% over the year-ago quarter. For the full year, total revenue increased 35% with mobile revenue growing 203%. In addition to strong top line growth, gross margin expanded throughout the year as a result of improved overhead absorption as well as our ability to pass on a majority of the higher semiconductor material costs to customers. Gross margin was particularly strong in the fourth quarter due to product mix and recognition of licensed revenue from a mobile customer for our Soft Iris solution that covers several phone models. With regards to our progress with our China-based subsidiary, Pixelworks Shanghai, we are continuing to build out a strong local leadership team. Earlier this week, we announced the appointment of two highly experienced executives to our Shanghai organization. The first is our new Senior VP of Operations, Mr. Frank Liu, who brings extensive experience from similar prior roles at Dialog Semiconductor, MStar, TSMC, and Skyworks Solutions. We also appointed Linna Liu as CFO and Senior Vice President of Finance of the Pixelworks Shanghai subsidiary. Most recently, Linna served as the interim CFO and General Manager for NTT Data Systems and prior was the Global CFO of Chemtex Chemical Engineering. Together with the restructuring and financing of our Shanghai subsidiary, these recent appointments are an important element to establishing independence for our Pixelworks Shanghai subsidiary. We remain on track to be positioned to submit our application as early as the latter part of this year. Turning to a review of activity across our primary end markets, our mobile business had another strong quarter, with revenue increasing 29% sequentially and over 190% year-over-year. Q4 represented the sixth consecutive quarter of sequential growth with record revenue contribution from both our visual processors and software-only solutions. Briefly highlighting several announced wins since our prior conference call, two multi-year customers OPPO and OnePlus, both introduced new models incorporating our Soft Iris solution. OPPO launched the brand's first-ever foldable phone, the OPPO Find N, leveraging our patented high-efficiency color and brightness calibration technology. Then, OnePlus launched the 10 Pro smartphone using our latest Pro Software solution, including features such as absolute color accuracy, professional brightness calibration, and ambient color correction. On the visual processor hardware side, vivo launched three NextGen series of its iQOO smartphones. In December, vivo launched the iQOO Neo5S as a refresh of the Neo5, which was our first-ever win with vivo in early 2021. The iQOO Neo5S incorporates our X5 Pro visual processor coupled with Qualcomm Snapdragon 888 platform, enabling overall high performance and an ultra-premium 120 hertz visual display experience for gaming. In January, vivo launched its iQOO 9 and iQOO 9 Pro, each also incorporating our X5 Pro's visual processor. Specific to the 9 Pro flagship model, it features a 6.78-inch curved flexible AMOLED screen with LTPO controller capable of 1 to 120 hertz variable frame rate adjustment, and a maximum resolution of 1400x3200 pixels. Potentially even more distinguishing in terms of the uniquely high performance of the smartphone, the iQOO 9 series has been designated as the official smartphone partner of the King Premier League, KPL, which is a dedicated competition for the single most popular game in China, Honor of Kings. Acknowledging this doesn't have much meaning for those in the U.S. here, I don't believe there's ever been an equivalent. The game Honor of Kings is estimated to have over 100 million active daily users. As discussed on previous calls, mobile gaming has become a dominant market trend, on which nearly all OEMs are keenly focused and attempting to capitalize. However, when combined with the industry's ongoing rapid adoption of more advanced display panels capable of HDR, higher resolution, and higher frame rates, mobile gaming introduces a series of system-level and display optimization challenges, most notably resulting in undesirable power consumption and excessive heat. Even the newest premium applications processors do not overcome these challenges. Just consider the iQOO smartphones that I just mentioned. The solution is a distributed visual processing architecture, utilizing Pixelworks' dedicated visual processors that offload intensive high frame rate processing and upscaling from the APU and GPU. While we've convincingly proven the benefits of our solution through a growing number of design wins for X5 visual processor, we are constantly driving to challenge perceived limitations and raise the bar on the leading edge of display innovation and high-quality high-efficiency digital processing. Our advanced algorithm team's effort and our visual processor roadmap reflect this ambition. As such, we formally introduced our X7 mobile visual processor, which we believe will redefine the immersive visual performance for gaming on a mobile device. Our X7 visual processor incorporates significant upgrades to the visual enhancement features we've offered in previous generations and also adds several completely new game-changing capabilities: Low Power Super-Resolution and our new Ultra-low Latency MotionEngine technology, which provides additional ultra-low latency and high frame rate modes while improving the overall picture quality. The low power resolution feature leverages advanced proprietary algorithms to boost content resolution from low resolution to high resolution, yet allowing the mobile device to remain in a low power consumption state. This provides users with significantly enhanced visual quality for frequently low-resolution games and simultaneously extends the length of time a game can be played before requiring recharging. Then, the Ultra-low Latency MotionEngine in our X7 processor is the most innovative and advanced feature that we've introduced in a chip to date. Based on Pixelworks' fundamental industry-leading motion estimation/motion compensation technology or MEMC, our latest MotionEngine is specifically designed and optimized for increasing the frame rate of gaming content. In addition to producing superior high frame rate motion, we've coordinated with Unity's gaming engine platform on an integrated solution to provide the X7 with a unique ability to dramatically reduce latency during high frame rate conversion while improving the overall picture quality. Unlike streaming of video, processing frames with low latency is critical for competitive gaming, where user interaction frequently and rapidly influences the next stream of content. Notably, the X7's offloading of processing from the GPU can also dramatically lower power consumption, extending the length of time a user can enjoy a sustained high frame rate gaming experience on their mobile device. Our X7 visual processor enables dramatically improved video and image quality on both LCD and OLED screens, with supportive refresh rates of up to 180 frames per second. We are on track to release our X7 for commercial production in the current quarter and expect the first models incorporating the processor to be launched in the Q3 timeframe. Our mobile growth strategy has evolved over the years and is now focused around three key objectives: first, cultivating and expanding an ecosystem that positions Pixelworks' technology as the default solution; second, the expansion of programs, customers, and applications; and third, providing unique capabilities and differentiation to each of our strategic customers. We made consistent progress in all three of these areas in the recent quarter. Related to ecosystems, we continue to actively collaborate with Unity and its game engine platform on the integration and testing of our gaming SDK that enables gaming customers to target the utilization of our X7 MotionEngine. Another element of our cooperation with Unity has been joint outreach and engagement of leading mobile game creators and studios in support of our shared goal, which is to bring an immersive gaming experience to the mobile environment. Separately, in December, we announced the new cooperation and ISV agreement with MediaTek. This is a meaningful milestone. Historically, our visual processing technology had been exclusively incorporated into mobile devices built on a Qualcomm platform. The cooperation with MediaTek represents an opportunity for significant expansion of our mobile Serviceable Available Market, as it will extend the availability of Pixelworks' advanced visual display processing to mobile products based upon MediaTek Dimensity 5G Open Resource Architecture. Thus far, our team's initial collaboration efforts have been progressing well and at a relatively fast pace. We expect several new models from multiple customers to be announced this year. More broadly with respect to the expansion of mobile programs and customers, our current pipeline of active mobile engagements is as strong as it has ever been. Our initial win with a third Tier 1 mobile OEM that we had previously mentioned is currently slated for launch in the current quarter. Additionally, we believe we can secure engagements with four Tier 1 mobile customers and expand into adjacent unique personal display markets by the end of this year. Shifting to TrueCut, which as most of you know, has been in development for several years. In mid-December, we formally launched the TrueCut Motion platform. While the underlying fundamental motion grading technology and algorithms for TrueCut have existed and been innovated upon for years, our announced launch marks the availability of a commercially ready platform capable of providing a true end-to-end solution. This includes both a new content delivery format and structure for implementing device-based certification. For those who would like to better understand what TrueCut Motion is all about, we recently published a new TrueCut section of our website, and I would encourage you to visit. In conjunction with the Consumer Electronics Show in early January, we announced another significant milestone in announcing our collaboration with TCL. TCL is the first device manufacturer to join and publicly endorse the TrueCut Motion ecosystem. In addition to being one of the world's largest and fastest-growing TV manufacturers, TCL has demonstrated a track record of technology firsts, including the first TV brand to introduce quantum dot displays, the first to introduce mini LED backlight technology, and the first TV brand to incorporate Roku TV. Today, we are actively promoting and co-marketing with the intent to expand the TrueCut ecosystem while simultaneously supporting plans to bring the TrueCut Motion platform to TCL TVs in North America. As an end-to-end platform technology, realizing TrueCut’s potential relies on firm acceptance from an ecosystem of partners, from content creators to post-production to content distributors and device manufacturers, many of which are focused on or motivated by different objectives, but with one consistent belief: that high frame rate immersive content needs to be created in order to take advantage of the technology that currently exists in display devices. This ecosystem collaboration will be able to deliver enhanced high-resolution HDR video with incredible motion, while consistently preserving the artistic intent of the filmmaker, regardless of the size of the screen, and all without the consumer having to manually adjust display settings on their device. Today and throughout 2022, our primary focus with TrueCut is on building out the supportive ecosystem. TCL is simply the first partnership that has agreed to be named publicly. However, we continue to be in various stages of discussions and evaluations with several market leaders as part of the building out of the TrueCut motion ecosystem. As we make progress, new ecosystem partners will be announced. In the projector business, we continue to see further extension of the recovery in both customer and end market demand. Although revenue was down single-digit sequentially, following a strong snap back in Q2 and Q3, our fourth quarter projector business was up over 38% year-over-year. For the full year, projector revenue grew 20%, which understates demand and largely reflects a function of supply limitations. Pixelworks' ability to supply projector SoCs has remained tight, but we've continued to be successful in mitigating any major impacts to our customers. The more prevalent real-time constraints in the fourth quarter and entering 2022 primarily relate to the broader supply chain and our customers' ability to source adequate supplies of other required components. Given this backdrop, we expect Q1 to be consistent with Q4 demand, bucking the traditional seasonality of the projector business. Looking beyond Q1, we have good visibility and strong indications from customers, including existing bookings that extend throughout the end of 2022. We also have a healthy pipeline of design activity while simultaneously working to migrate certain customers away from legacy SoCs to a smaller number of newer products. Although supply chain dynamics will dictate the pace, we believe the projector business will continue to recover with year-over-year growth in 2022. In summary, the Pixelworks team did an outstanding job during a challenging year with exceptionally strong growth in our mobile business and a recovery in our projector business. The realignment of our Pixelworks Shanghai subsidiary and continued progress in preparation for a local listing was also a significant accomplishment. Our organization has executed well as we continue to expand our executive team and bring on exceptional new talent at Pixelworks Shanghai in support of our mobile and other adjacent opportunities. Pixelworks is in a great position to execute our growth initiatives this year. Before handing the call over, I want to briefly introduce and welcome Haley Aman as our recently appointed CFO. Haley has been with Pixelworks for more than a decade and served in various financial roles during her tenure. Most recently, she was the leader of our finance and accounting team. She has also been integral to spearheading several of the organizational transitions we have undertaken as part of the realignment of our Pixelworks Shanghai subsidiary. It is great to have her as a member of the executive leadership team. And with that, I will turn the call over to Haley.

Thank you, Todd. It's great to be here and to join you today as Pixelworks’ CFO. I’m really looking forward to speaking with many of you over the coming months and quarters. Revenue for the fourth quarter of 2021 was $16.6 million, an increase of 9% from $15.2 million in the third quarter of 2021 and an increase of 73% from $9.6 million in the fourth quarter of 2020. As Todd previously highlighted, the sequential increase was driven by continued growth and record revenue in our mobile business. Year-over-year, the increase reflected a combination of strong mobile growth and an ongoing recovery in the projector market. The breakdown of revenue for the fourth quarter was as follows: revenue from mobile increased 29% sequentially and 194% year-over-year to approximately $6.2 million. This represented 37% of total revenue. Although we don't provide a detailed breakout between sales of our visual display processors and software solutions, both reached quarterly records, with hardware continuing to represent the majority of our mobile revenue in the quarter. Revenue from digital projectors was approximately $8.1 million, down single digits from the third quarter, but up 38% year-over-year, and consistent with the recovery we continue to see in customer and end market demand. Video delivery revenue was approximately $2.2 million in the fourth quarter. Non-GAAP gross profit margin expanded to 55% in the fourth quarter of 2021 from 53.1% in the third quarter of 2021 and 49.6% in the year-ago quarter. Fourth quarter gross margin was at the high end of our historical range and benefited from licensed revenue related to our mobile software solution. As communicated in recent quarters, we continue to execute on initiatives to mitigate the higher material costs that have been observed across the industry. To date, we've largely been successful at passing through most of these cost increases to our customers. We continue to closely manage these costs as well as our pricing as part of our target to maintain gross margins that are consistent with our historical range in the low 50s. Non-GAAP operating expenses were $11 million in the fourth quarter, compared to $10.1 million last quarter and $9.5 million in the fourth quarter of last year. The increase in operating expenses over the comparison periods was primarily driven by annual merit increases and increased headcount. On a non-GAAP basis, fourth quarter 2021 net loss was $1.4 million, or a loss of $0.03 per share, compared to a net loss of $2.2 million, or a loss of $0.04 per share, in the prior quarter, and a net loss of $4.9 million, or a loss of $0.11 per share, in the fourth quarter of 2020. Adjusted EBITDA for the fourth quarter of 2021 was negative $1.1 million, compared to negative $1.6 million in the third quarter of 2021 and a negative $3.8 million in the fourth quarter of 2020. Turning to the balance sheet, we ended the quarter with cash and cash equivalents of $61.6 million, and our total assets and liabilities remained largely unchanged from the prior quarter. Now, shifting to our current expectations and guidance for the first quarter of 2022. Consistent with the comments made in our preliminary results release, we expect the first quarter to be better than typical seasonality, with total revenue anticipated to be in a range of between $15.5 million and $17.5 million. This expected range at the midpoint would equate to revenue being approximately flat sequentially and represent growth of more than 75% year-over-year. Non-GAAP gross profit margin in the first quarter is anticipated to be between 50% and 52%. First quarter gross margin is expected to reflect a significantly larger mix of chip revenue versus licensing revenue as compared to the most recent quarter. Additionally, we expect operating expenses in the first quarter to range between $11.5 million and $12.5 million on a non-GAAP basis. The anticipated sequential increase in operating expenses for the first quarter primarily reflects our ongoing hiring plans as well as incremental development costs. Lastly, we expect first quarter non-GAAP EPS to be in a range of between a loss of $0.09 per share and a loss of $0.05 per share. That completes our prepared remarks. And we look forward to taking a few of your questions. Operator, please proceed with the Q&A session. Thank you.

We have a question from Suji Desilva with Roth Capital.

Hi, Todd and Haley. Welcome to the call, and best of luck in the new role. So, Todd, if you could talk about these Tier 1 customers, the third and fourth customers you are expecting. I'm wondering if you could describe perhaps the opportunity at those customers incrementally versus the ones you've already had? And what perhaps the timing of those coming online would be in mobile?

The timing I mentioned was quite specific. Regarding the third Tier 1 customer, while I can indicate that we are engaged and likely to land this customer, I cannot disclose who they are or provide too much context about their size and substance at this time, as I don't want to preempt their marketing efforts. Often, the features we collaborate on with that OEM are key differentiators for their models. I've addressed this in the past, so I want to remain consistent. We won't discuss too much about expectations until I can share more details once it's officially announced, the models are released, and we identify the customer through a press release. However, I can confirm that the third Tier 1 is expected to launch that model this quarter, and we are confident that we will finish the year with a fourth Tier 1 customer.

And then, you mentioned the personal display market. I wasn't sure what you were referring to there as opposed to the smartphone market? Any clarity there would be helpful.

No, I was vague on purpose. There is a lot of excitement surrounding the new visual experiences that people will enjoy, whether it be gaming, live entertainment, or traditional long-form video content. I am involved in specific discussions with customers, and I know exactly what the personal display device is, but I prefer not to share further details about it.

Fair enough. We’ll have to look forward to that, Todd. And then perhaps switching over to TrueCut. Can you talk about this platform that you've launched now and maybe what new customer opportunities that might unlock that previously were not available, because the platform hadn't been available? Perhaps that's one I think of as the go-forward opportunity here?

One of the key initiatives we have pursued with TrueCut is promoting this technology, which we started nearly three years ago through a partnership with the Youku Group of Alibaba. Since then, we have received several awards in Hollywood, primarily focusing on technical advancements. These honors are awarded by organizations dedicated to evaluating and integrating new technology into the film production process, making it accessible to the wider production community. Over the last three years, we have been actively introducing the technology and fostering awareness about its potential for creating high frame rate content that can be distributed to various home entertainment and theatrical devices as the creators intended. We've now formalized this technology into a set of tools for content creators and post-production companies to facilitate the creation of this content and to integrate motion rendering into filmmaking. Additionally, we've developed technology for new streaming distributors to effectively deliver this creative content. Lastly, we have established a method for collaborating and certifying devices, allowing them to display content seamlessly and as intended, without any adjustments needed from the consumer. Our transition is from merely promoting technology to establishing a comprehensive product service. However, for this service to be effective, we need to address various aspects of the ecosystem simultaneously. It's crucial that we provide a complete solution, rather than just selling to device manufacturers or creating tools for content creators.

Our next question comes from Raji Gill with Needham & Company.

Thank you and congratulations on the impressive momentum. Welcome, Haley. I have a question for you. As you consider the revenue for Q1, I understand it defies overall seasonality and is expected to be flat. I'm curious if mobile might see growth in Q1 while the other segments decline, or will all segments remain flat, adhering to the typical seasonality pattern of a downturn? Is there any segment that stands out?

Yes. So, in mobile, specifically, our hardware will be up and the software would be down, but it should be basically flat across all the lines for Q1, because hardware will be up in mobile.

Okay. Got it. And then, for the other businesses, projector and video delivery would essentially be, I guess, flat?

Yes.

Okay. Got it. And then, on the gross margin, obviously, the margins benefited from more mix of software in Q4, and then the opposite is happening in Q1. When you're looking at your pipeline, any sense of how to think about the split of software and hardware as you progress throughout the year? And I know you're making low-50s. Just want to get some more details and then how to think about the margin, so we have that model correctly as best we can?

Yes. As we progress through the year, that shift may change slightly. We are exploring ways to potentially increase software offerings in certain areas. I don't want to reveal too much at this moment, but we are working on generating some ideas and moving forward with that.

Let me elaborate on what Haley mentioned. What you're observing is not only with us but across the entire industry, which has dealt with price increases. In the latter half of 2021, and particularly from the second quarter of 2021, there were significant price hikes that were passed on to our customers. In 2022, again, the majority of the supply chain faced increased costs, and we, like many others in our industry, have passed those costs on. Some companies have passed these increases while maintaining their profit margins, while others may only pass on the costs, which could lead to reduced margins. It varies depending on the company and where they are in their business cycle. Our position in this cycle involves a significant expansion of our mobile ecosystem, which benefits us in two ways. We are working to enhance content support on the software and gaming engine side, while also seeking to expand our models and customer base to create a unique gaming experience. Although we have transferred many cost increases, we did not offset that with a corresponding increase in gross margins for 2022. For instance, if your costs rise by 20 cents and you typically maintain margins in the 50% range, to avoid margin dilution, you should increase customer prices accordingly. However, in many instances, we passed on cost increases without doubling the margins, resulting in a headwind for our margins. We made this choice because we are experiencing significant growth in our mobile business, with an 80% year-over-year increase in this quarter. Thus, we are in a growth phase. Our strategy involves offsetting the aggressive margin posture by prioritizing higher-margin licensing business. For example, although we won't separately disclose TrueCut initially, it will be incorporated into our mobile and Soft Iris licensing business. We have restructured our Soft Iris licensing approach from a royalty-based model to an upfront model. The substantial increase you saw in Q4 was partly due to a major customer we transitioned to an upfront licensing deal instead of royalties that are paid after shipping their device. This shift allows for a more predictable business model and is beneficial for the customer, especially if they have high-growth models, making it a less risky situation for them. However, during this transition, there may be inconsistencies, and predicting the performance quarter by quarter may be challenging. Overall, our aim is to aggressively develop the mobile ecosystem while maintaining margins in the low-50% range, and we will employ various strategies to achieve that. In the future, we expect to enhance our margin increasing capabilities, but for now, we prefer not to hinder demand. I hope this provides clarity for you and everyone else on the call.

No, I think that makes a lot of logical sense. I appreciate that. Just my follow-up. The Iris is built on a 20-nanometer ultra-low leakage process at TSMC where the capacity has been extremely tight. In the past, you mentioned there were no capacity restrictions, so you probably would have shipped a lot more units last year, or you could ship more this year. Could you give us an update on when the capacity is coming online? Previously, you indicated your commitment to the second half of 2022 for TSMC to bring a significant amount of capacity on the 22-nanometer ULLL, which should hopefully align well as these models start to move forward into production, especially considering you've unveiled your X7. So just update me on that, and I appreciate the insight. Thank you.

Yes. Well, we are seeing additional support for our growth. I would still say that for sure through the front half of '22, we are constrained. Based upon how we would like to grow in the back half of '22, we're still constrained. But I am feeling more comfortable like, put it this way, we are going to spend OpEx like the revenues are going to come, okay, because I can't wait that long to decide. And so, I'm going to drive the organization, like that capacity is going to be available to us, and our new Operations VP, Frank, knows exactly that what I'm doing and he is on board. Now, there is risk. There are risks to that, but look at what we are trying to do. We have no choice. We are going to grow.

Thank you.

Thank you. Our next question comes from Derek Soderberg with Colliers Securities. Your question, please?

Yes. Hey, Todd, and welcome, Haley. So, on mobile, very nice performance and congrats on the progress there. Todd, I think in the past, you've put a number on the level of engagements. I'm wondering if you could share sort of where you are at now and where you would like to exit the year. And I think there was prior related question but just with the constraints in mobile and our engagements, I guess, over the next couple of quarters, heavily weighted towards Soft Iris?

No, no. First of all, I want to emphasize that our pipeline is stronger than it has ever been. I didn't say it was about having a higher quantity. We are not focused on quantity because I believe its value has diminished. Earlier in the process, outlining the number of engagements reassured our initial investors that things were progressing. Now, what matters more is the quality of those engagements. By quality, I mean several aspects: the volume, the specific customer, the product being integrated with that customer, and whether it aligns with our revenue goals and longer-term objectives. Our aim is to showcase an immersive gaming experience that fosters loyalty and creates a cycle where more models and content creators are drawn to a Pixelworks-enabled phone. Therefore, quality is our priority now. Currently, our constraint is not production capacity, although we need to use that capacity wisely as it grows. The bigger challenge lies in our resources. We have dedicated resources focused on developing content for our platform, supporting both existing X5 programs and new X7 programs across several customers, along with Soft Iris initiatives. So, while we are expanding, this resource constraint remains significant for us. We selectively pursue engagements that are in high demand. Sometimes we choose not to engage, or the customer may opt out. However, when we have the opportunity, we focus on the highest quality engagements to ensure we meet both our resource returns and strategic goals.

And just on OpEx for the year, Haley, it sounds like a lot of activities going on in mobile and TrueCut. You've got an R&D program as well. Just curious how we should think about OpEx levels as we move sort of throughout the year; any help on OpEx would be great.

Yes, you should view this year, 2022, as a time for investment in the Company as we focus on growth. You can expect to see this reflected in our operating expenses as well.

It'll be controlled, but it will be growing.

Our next question comes from Richard Shannon with Craig-Hallum.

Todd, just looking backwards at your announcement from December on MediaTek, can you explain the relationship there? And then, do you still view them as a competitor in any way? And when will we see a phone that uses the MediaTek X processor on it?

In my prepared remarks, I mentioned that you should expect to see multiple offerings for various customers this year, with the first likely before mid-year. We have a formal relationship, which is distinct from our informal interactions with partners. In our industry, there are competitive aspects to almost every partnership, which is simply part of the landscape. Our announced formal relationship is as an independent software vendor for the Dimensity 5G product line. We collaborated prior to their product launch to ensure our Soft Iris software solutions are compatible and beneficial for the Dimensity 5G platforms. This partnership allows us to market our software alongside the opportunities MediaTek has secured while enabling them to provide top-tier color calibration to their customers, matching the offerings of their competitor Qualcomm. This formal relationship is functioning well, and alongside it, we have an informal relationship since our hardware and software products are interconnected. It’s important to note that our visual processor customers typically also utilize our software, which is essential for seamless operation. This integration supports the positioning of our visual processors alongside the application processors. Overall, we currently enjoy a very positive and productive relationship with MediaTek, similar to our prior experience with Qualcomm.

Thank you for your insights, Todd. My second question relates to your mobile growth strategy mentioned in your prepared remarks, specifically regarding the expansion of an ecosystem with Pixelworks as the default. In light of some earlier questions, I’d like to discuss your efforts to enhance user retention. Could you share updates on this progress and when we might see the final results? Additionally, how involved is Unity in fostering this user retention and the default usage of Pixelworks on mobile devices?

It's one of those goals that you may never fully achieve. Will we reach a point where people no longer consider alternatives, whether it's not using us or other options? I'm not sure. But it's something we aim for. We are at the forefront of this; no one else is doing what we are right now. Given the awareness we are generating, others are starting to take notice. Most of us have smartphones, and it's likely that everyone here has refreshed theirs in the last few years. When choosing a new model, decisions were likely based on camera quality, display capabilities, and the ecosystem. Currently, our target customers are in China. Chinese OEMs excel in their home market and are gaining strength in broader Asian and European markets. Over the past two years, when customers in these regions refresh their phones, the priority has shifted towards how well a phone can handle mobile gaming, moving away from just camera quality. This shift is recognized by AP vendors, display vendors, and OEMs, as well as mobile content creators. We've seen acquisitions by gaming content providers in the U.S. aiming to expand into mobile gaming. Our goal is to lead in this area, as evidenced by our recent announcements for products like X7, X8, and X9. We want to develop a roadmap for products that enhance the immersive mobile experience. Sometimes, the best way to solve a problem is through collaboration across an ecosystem rather than in isolation. By partnering with game engine developers, content providers, and AP providers, we can make a more immersive experience possible more quickly than doing everything independently. This captures our aspiration and intent. I hope that clarifies things.

It did, Todd. I appreciate the detail. To summarize, it seems that gaming is likely at the core of creating a sticky experience, and therefore, including Pixelworks is central to that strategy. Is that fair?

It is essential for us to provide a high-quality, calibrated, and color-accurate display that performs well in various ambient environments. Our commitment to delivering this promise to our customers remains unwavering. We prioritize ensuring that this display is top-of-the-line before we incorporate additional features to enhance the experience, particularly in gaming, where players are actively creating content. Our focus is on enriching that experience on this exceptional display.

Okay. Fair enough. I have one last question as we approach the end of our hour. Following up on a previous inquiry, how do you view the growth potential of your Tier 1 customer base, particularly regarding the expansion in relation to their unit tax rate? What are your expectations for this growth over the next year or two? How would you describe and quantify this?

So, I had one customer that wanted to dramatically expand the product lines and the price points. The Pixelworks enabled features would be on in their portfolio of phones. The problem with that was, even though we have growing capacity available to us, we do not have unlimited capacity. If we would have gone down that path, it would have probably alienated our ability to diversify across multiple customers. So, to answer your question correctly, you have to say, okay, the demand would like to expand across price points and categories of phone. This is no longer just going to be put on a gaming phone. They want to improve the gaming experience on all types of phones. Since I do not have unlimited resources and unlimited capacity, manufacturing capacity, we have to be very careful on where we go, choose and engage, and how we do it. This frustrates some customers. It makes other customers happy.

Last quick follow-up to that, Todd. When you expect to be not capacity limited in your mobile business?

I believe we will demonstrate significant growth this year, but we will face constraints throughout the year due to this growth. I anticipate that I will be competing for capacity throughout 2022. However, our desire for growth is immense.

Thank you. And this concludes our Q&A session. I will turn it back for the final remarks.

Thank you for the lengthy call today. There were many detailed prepared remarks and some compelling questions. I want to take a moment to once again welcome Haley to the team and to the conference call. Thank you all for joining us.

Thank you.

And with that, ladies and gentlemen, we conclude today's program. You may now disconnect.