Pixelworks, Inc Q1 FY2025 Earnings Call

Good day, ladies and gentlemen and welcome to Pixelworks, Inc.'s First Quarter 2025 Earnings Conference Call. I will be your operator for today's call. At this time, all participants are in a listen-only mode. After the speaker’s presentation there will be a question-and-answer session. 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, Kevin. Good afternoon, and thank you for joining today's conference call. With me on the call are Pixelworks' President and CEO, Todd DeBonis; and Chief Financial Officer, Haley Aman. The purpose of today's conference call is to supplement the information provided in Pixelworks' press release issued earlier today announcing the company's financial results for the first quarter of 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, Tuesday, May 13, 2025. 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, 2024, 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 its operating performance. We believe the 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, and 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 conference, we will 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 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, please go ahead.

Thank you, Brett. Good afternoon and welcome to everyone on the phone and webcast. We appreciate you joining us for today’s conference call. As reported in our press release earlier today, first quarter results were consistent with our expectations. Revenue reflected anticipated first quarter seasonality in the home and enterprise market, which was partially offset by sequential growth in our mobile business. We also realized significant benefits from our previous and continued actions to streamline our cost structure, with first quarter operating expenses down more than $2 million year-over-year. Similar to the format and flow of remarks last quarter, I'll begin with comments on our TrueCut Motion business in the U.S. and then review the development specific to our majority-owned Pixelworks Shanghai subsidiary, including an update on the strategic review process. Starting with our TrueCut Motion platform, as discussed last quarter, achieving a tipping point for broader adoption and commercialization requires creating momentum across an ecosystem comprised of filmmakers, studios, content distributors, exhibitors, and device manufacturers. We continue to make tangible progress on all these strategic fronts over the last quarter. First, with respect to the broader film industry. For the first time since the pandemic, there are indications of an uptick in activity from filmmakers and studios. This includes a positive trajectory for both the planned number and quality of new release theatrical titles, representing a positive shift in the overall industry landscape from prolonged headwinds to a tailwind. Specific to TrueCut motion content, we are still targeting to double the number of titles year-over-year from 5 in 2024 to 10 in 2025. In line with this growth in titles, we are seeing announcements of major capital investments from exhibitors in both the standard and large format premium laser theaters that benefit the most from the TrueCut motion format. As of today, our exhibition ecosystem includes over 1,500 of the world's highest-grossing premium theaters. Additionally, we have maintained our focused efforts to expand the TrueCut ecosystem in support of accelerating future content growth and scaling access to motion grading capabilities. As evidence of our most recent progress and traction, during the quarter, we formalized a strategic partnership with a market-leading post-production company. Notably, this partnership serves to bring TrueCut Motion further upstream in the larger post-production process, streamlining the accessibility of TrueCut Motion grading tools to more filmmakers. As this and other partners come on board, we will scale our ability to bring filmmaker awareness of TrueCut, leading to further growth in title releases. With our collective theatrical ecosystem efforts approaching critical mass, we've begun engaging deeper discussions with targeted leading device companies to incorporate TrueCut Motion capability and certification in future devices. On our previous conference call, I referred to active dialogue with three major device brands. What I can share today is we have recently completed rigorous certification testing with one of these brands, allowing us to start jointly engaging with streaming service providers. This robust demonstration of a major improvement in the user experience for film in the home validates our progress towards the end goal of bringing TrueCut Motion to the mass market via home entertainment devices. Turning to our Pixelworks Shanghai subsidiary, which comprises all of our semiconductor business, including open market and co-developed visual display processing chips for the mobile as well as home enterprise markets. Starting with an update on the mobile business, as expected, mobile revenue increased sequentially in the first quarter, primarily reflecting shipments of visual processors in support of customers' previously launched smartphone models. Driving renewed and sustained growth in mobile remains among our top priorities. We are making steady progress on the product transition to our latest visual processing solutions. This includes expanding our served target market with our new low-cost mobile graphics accelerator solution for mid and entry-level smartphones. Our current focus continues to be on a co-development of capabilities with a lead mobile OEM customer on multiple programs targeted for launch later this year. Separately, we also have multiple active program engagements with additional mobile OEMs for both our X7 prime solution as well as our latest flagship mobile visual processor. Alongside our focused efforts to secure new design ins for our latest visual processor solutions, we are continuing to drive innovation aimed at expanding the mobile gaming ecosystem. In April we announced our strategic collaboration with Tencent's PerfDog, a well-established platform for performing mobile gaming testing. The motivation behind this collaborative project is to help the gaming ecosystem overcome the specific technical challenges associated with objectively and reliably testing visual display performance across mobile devices that incorporate a dedicated visual processor. As a result, we jointly introduced the PerfDog Frame Generation Index, which is a multidimensional framework for quantifying and evaluating mobile gaming performance. This innovative index for performance testing provides gaming and smartphone developers with precise real-time data for benchmarking, enabling enhanced optimization and ultimately superior visual display performance for mobile gaming. Shifting to our home and enterprise business which, following our completed end-of-life shipments of transcoding products in the fourth quarter, is now exclusively comprised of our visual processor system on chips for the three LCD digital projector market. Revenue was down sequentially consistent with the typical first quarter seasonality as Japanese OEM customers managed down internal inventories in advance of their fiscal year-end. Projector-only revenue for the quarter was effectively flat year-over-year. Acknowledging the increasingly dynamic global macro and trade environment, we haven't seen any significant impacts on the projector market nor any change in order patterns from our large co-development customer. Barring any large global economic shifts, we continue to anticipate total projector business in 2025 to look similar to 2024. Apart from our primary mobile and home enterprise businesses, I previously outlined several new adjacent revenue opportunities that our team is pursuing. Today all of these engagements remain in play with the potential to contribute meaningful upside revenue in support of our focus on driving renewed growth and paving a path to profitability. Briefly recapping these opportunities and their current status. First we established a framework to provide ASIC design services and we are engaged with a large international OEM to become the first customer for turnkey services, as well as a potential licensing of our display IP. We are currently in advanced discussions including review and negotiation of technical details with this anticipated lead customer and we believe this initial design services engagement could contribute meaningful revenue as soon as the third quarter. Separately, we're continuing to advance discussions with several unrelated parties to license specific intellectual property for their products. These respective license opportunities span multiple different end markets and include the potential to accelerate our efforts towards expanding the mobile gaming ecosystem. Finally, we now have two different prior transcoding customers that have indicated interest in ordering our recently end-of-life transcoding chips that are no longer in production. Our team has recently confirmed that a limited production run of these legacy chips is technically feasible if initiated within a prescribed period. As such, we're prepared to accommodate one or both customers should they choose to move forward. Bringing everything together and looking at the big picture, we expected the first half to be challenging from a total revenue perspective. We proactively took a series of actions to significantly reduce our cost structure and streamline the entire organization. Today we have engagements across a diverse set of primary and secondary opportunities to drive renewed top line growth. Taken together, we are well positioned to meaningfully benefit from the upside revenue and we continue to believe that our Pixelworks Shanghai subsidiary is poised to reach profitability in the second half of 2025. As most on this call are aware, we engaged Morgan Stanley and initiated a formal review process in the later part of 2024 after receiving inbound strategic interest in our Pixelworks Shanghai subsidiary. Together with our financial advisor, we have since been engaged in due diligence with several qualified parties, while also continuing to evaluate potential ownership and collaboration structures to determine a more optimal scenario for enhancing Pixelworks Shanghai's long-term growth potential as well as maximizing value for existing shareholders. Although the outcome is yet to be determined, we believe the process itself is nearing closure and likely to result in a clear strategic direction for our Pixelworks Shanghai subsidiary within 90 days. In summary, we're focused on executing our strategic and operational objectives in a dynamic global macro environment. We significantly reduced our overall cost structure and expect to realize continued benefits from a more streamlined organization. With respect to our Pixelworks Shanghai subsidiary, we're encouraged by the depth of customer engagements on smartphone programs, particularly for our new mobile graphics accelerator solution. We are also continuing to advance and expect to capitalize on multiple near-term adjacent revenue opportunities over the next several quarters. Additionally, we remain committed to the path for our Pixelworks Shanghai subsidiary to reach profitability in the second half of 2025. With our TrueCut business, we are continuing to make inroads towards an expanded ecosystem and achieving critical mass required to bring the Pixelworks TrueCut Motion Platform to more consumers, both in premium large format theaters and ultimately to home entertainment devices. With that, I'll turn the call over to Haley to review financials and provide guidance for the second quarter.

Thank you, Todd. Revenue for the first quarter of 2025 was $7.1 million compared to $9.1 million in the fourth quarter and $16.1 million in the first quarter of 2024. The sequential decrease in revenue reflected a combination of anticipated first quarter seasonality in the home and enterprise market as well as the fourth quarter including higher sales of end-of-life transcoding products. These were partially offset by sequential revenue growth in mobile in the first quarter. The breakdown of revenue in the first quarter was as follows. Home and enterprise revenue was approximately $5.8 million. Revenue from mobile was approximately $1.3 million. First quarter non-GAAP gross profit margin was 49.9% compared to 54.8% in the fourth quarter of 2024 and 50.7% in the first quarter of 2024. The sequential decrease in first quarter gross margin was primarily a result of the shift in product mix between our home and enterprise and mobile businesses as well as less overhead absorption. Non-GAAP operating expenses of $10.4 million in the first quarter were flat with the prior quarter; however, decreased approximately $2.2 million from $12.6 million in the first quarter of 2024. This year-over-year decrease in first quarter operating expenses reflects our previously implemented cost reduction actions through the end of 2024. We've also taken additional cost reduction measures since the beginning of 2025, which we expect to result in further reductions in operating expenses beginning in the second quarter. Collectively, the cost reductions we have implemented over the past 12 months are expected to contribute to a total year-over-year decrease in operating expenses of approximately $10 million for the full year of 2025. On a non-GAAP basis, first quarter 2025 net loss was $6.5 million or a loss of $0.11 per share compared to a net loss of $4.3 million or a loss of $0.07 per share in the prior quarter and a net loss of $4 million or a loss of $0.07 per share in the first quarter of 2024. Adjusted EBITDA for the first quarter of 2025 was a negative $5.8 million compared to a negative $3.6 million in the prior quarter and a negative $3.2 million in the first quarter of 2024. Turning to the balance sheet, we ended the first quarter with cash and cash equivalents of $18.5 million compared to $23.6 million at the end of the fourth quarter. As previously discussed, we have and continue to take actions to reduce overall costs and preserve our existing cash balance. Shifting to our current expectations and guidance for the second quarter of 2025, based on our existing backlog, we currently expect total revenue for the second quarter to be in a range of between $8 million and $9 million. For the second quarter, we expect non-GAAP gross profit margin to be between 41% and 43%. This range primarily reflects a unique product mix that includes a newly ramping product with lower initial yields and margins that will meaningfully improve in the third and fourth quarters. With respect to our operating expenses, we expect second quarter operating expenses to be in a range of between $9 million and $10 million on a non-GAAP basis. Note that this range reflects the initial expected benefits associated with our cost reduction actions in March and anticipates only partial realized benefits from our most recent cost actions taken in early May. Lastly, we expect second quarter non-GAAP EPS to range between a loss of $0.11 per share and a loss of $0.08 per share. That completes our prepared remarks and we look forward to taking your questions. Operator, please proceed with the Q&A session. Thank you.

Thank you. Our first question comes from Suji Desilva with ROTH Capital. Your line is open.

Hi, Todd. Hi, Haley. Todd, you talked about Pixelworks Shanghai reaching profitability. Can you give us some help with what the revenue levels might be achieved at and maybe what portion of the OpEx is attributable to Shanghai so we can understand that operating model?

So OpEx is approximately, I think going into the back half of the year, will be down at $7 million a quarter, something like this, $7 million to $7.5 million for Pixelworks Shanghai. As far as revenue, it's a mix of home and entertainment coming back, projector, mobile, IP licensing, and design services. And to reach profitability, you don't need all of it to happen; you need a chunk of it to happen. And so the mix depends on how it falls in. If all of it happens the way we anticipate, then you'll be profitable, the unit will be profitable for both Q3 and Q4. But it's still early to say.

Right, understood. Okay, so OpEx for Shanghai, $7 million a quarter. Got it. And then switching over to TrueCut, I'm just curious, your device discussions, are those Chinese brands given TrueCut's early kind of traction there, or are those global, non-Chinese smartphone OEMs?

So you asked me about TrueCut and you're asking me about mobile OEMs? Well, no, no device discussions for TrueCut. Okay, okay, yes, but you mentioned mobile OEMs. I wouldn't include they're mobile OEMs, first of all. And they could be, but I wouldn't conclude that, you know. And the one that I talked about, certification testing, is not a Chinese OEM.

Okay.

And to be clear, just to give a little bit further clarity there, our focus with TrueCut is about, you know, we do want to bring it on a global basis to premium home entertainment devices. But I would say that we've been focused on content generation here in Hollywood for the most part, and we've been focused on home entertainment devices that would be marketed to North America and Europe, eventually globally. But we're very focused in North America and Europe for the home entertainment ecosystem for TrueCut.

Okay, that's helpful, Todd. My last question is about the ASIC’s design services engagements, which are relatively new. How would you suggest we assess those opportunities and the associated revenue models?

You're asking about design services? Yes, there's intellectual property involved, so I'm not entirely sure how to approach that. When we provide design services, other companies also offer similar services. We're not pioneers in this area; large system OEMs seek custom semiconductor content but may lack the in-house capabilities to efficiently design and tape out a 12 nanometer SoC. They have the option to hire external firms. In the past, we've engaged in co-development or took non-recurring engineering fees for ASICs. The key difference with design services is the flexibility of an intermix model; we can handle part of the design as a service or manage the entire process. A customer might purchase the mask set themselves, or we could handle that, and the customer might conduct assembly and testing. Essentially, we can tailor our involvement in the design process to help the large system OEM obtain the custom silicon they need. To answer your question, the revenue size depends on the extent of our work for the customer. For example, if we provided full turnkey services without handling production—if the customer manages production—it could range from $10 million to $20 million in costs, depending on the involved intellectual property within large 12 nanometer SoCs. However, that doesn't imply a full turnkey arrangement; we might only do part of it. I'm not able to provide specifics about the design project we're working on since it hasn't been finalized yet, but I wanted to offer a general idea of what design services at 12 nanometers might entail.

Okay, helpful parameters. Thanks Todd.

One moment for our next question. Our next question comes from Richard Shannon with Craig-Hallum. Your line is open.

Well, great. Thanks Todd and Haley for taking my questions. I guess the first one I'll ask here is on mobile. Todd, I think in the last call you talked about kind of a range of outcomes here. One of which would be maybe on the lower side being flat or slightly up this year, and then maybe on the high side being more like 2023. Maybe you could just help us understand how the engagements are lining up to anywhere in that range?

Well, I would say, you know, given the guidance we just gave for Q2, it would probably be hard to replicate 2023 revenue in mobile, which for everybody on the call was approximately $30 million. So we definitely expect an uptick in the second half of the year, but I would say we're probably closer to looking at a 2024 year-over-year or slightly above.

Okay, and then how do we think about the profile of this? You know, because you talked about some lower and mid-range, you know, kind of ASPs here. How do we, how do we think about this profile over this year?

It will be predominantly on the low end at those revenue levels and ASPs are sub $2.

Okay. Okay, let's jump over to TrueCut. You talked about a collaboration with a post-production house here. I guess, does collaboration mean it's a done deal or still something to be worked out here? And then how do we think about the partner here, this collaborator, in terms of how they're, how informed they are about how the ecosystem is building? Is this more of a build it and they will come thing or is this highly informed and they know something is about to happen soon?

We haven't announced the name yet because we prefer to do so alongside the projects we have worked on with a film. Until those projects are finished, we probably won't disclose the name, but there is a signed agreement. The company we're collaborating with is a well-established post-production house that specializes in color grading and other post-production services for theatrical films. They handle many of the films we're interested in, and we're aiming to double the number of films we worked on last year, targeting top-budget films. This post-production house already has access to many filmmakers, and we have connections through our studio relationships. We believe the collaboration is beneficial for both sides. While we are a smaller company, this partnership allows us to expand our reach, and the post-production company recognizes the advantages that motion grading brings to content, enhancing the premium large format experience.

I appreciate all the detail. I will jump in line guys, thank you.

One moment for our next question. Our next question comes from Nick Doyle with Needham & Company. Your line is open.

Hey guys, thanks for taking my questions. Could you just expand on the two comments you made? In mobile you talked about multiple programs with your lead customer and then additional engagements. I guess the question is, do you mean you're in multiple phones now with that lead customer and those unit shipments are getting us to the revenue levels you just talked about? And then would any additional engagements that you're working on now, would they come in 2025 or would we see revenue in 2025? Thank you.

The additional engagements we have involve design wins with the X7P. Our collaboration with the lead customer centers around a new solution that hasn't been released to the market yet. This entails a complete overhaul of the software for our visual processor, with a focus on improving not just the gaming experience but all graphical experiences. Currently, high frame rate displays are becoming more accessible due to lower costs of the panels, making 120 frames per second LCD displays comparable in price to the 60 and 90 frame per second displays. We're observing a shift toward markets priced around RMB 1,000 to RMB 1,500, targeted by Chinese OEMs. These lower-cost phones are being equipped with high frame rate displays, but the application processors in them aren't designed to maximize this new technology. Our graphics accelerator can elevate the experience to that of high-end devices. For anyone with a recent Apple phone, you'll notice it features a variable display capable of adjusting up to 120 frames per second. However, if you attempt similar actions on lower-end phones, visual issues become apparent as the GPU struggles with pixel rendering or frame generation. Our goal is to introduce an accelerator tailored for this lower-end market. In collaboration with our co-development partner, we’ve engaged their engineering and software teams to resolve numerous compatibility issues. We've reached a stage where their system engineering team endorses our solution for internal marketing to program managers and product planners. We expect this will lead to several design wins, not just with our lead customer but with multiple clients. Although we haven't secured designs yet, there are opportunities available to us this year.

Got it. And second, could you help pull out the gross margin impact regarding the yield issues? Where are the meaningful yield improvements coming from? And can that get you back to mobile gross margin levels in the mid-30s? Thanks.

So the product issues are not with mobile. The product issues are with a new projector chip we have that is not a big thing. When you ramp a chip sometimes you need to get your yield up and until you run volume, it's hard to do that. And so the first quarter or so of high volume you can experience lower than expected yields. And sometimes you recapture these devices, you don't always throw them away. Sometimes it's just enhancing your test program. But if it's within a quarter then it'll look like lower margin product. So I think what we're trying to articulate to you, this is not a pricing low margin mix issue. This is us ramping a product that we expect. We're already making yield advancements so I expect it to be back on that side, back to where our target yields were. But with that said, as we ramp mobile, mobile margins will be lower than projector, so the mix will become more important as we re-ramp mobile again.

All right, thank you.

Thanks Nick.

And I'm not showing any further questions at this time. And as such, this does conclude today's presentation. You may now disconnect and have a wonderful day.