Good day, ladies and gentlemen and welcome to Pixelworks, Inc. Third Quarter 2015 Earnings Conference Call. I'll be your operator for today's call. At this time, all participants are in listen-only mode. Following management's prepared remarks, we will conduct a question-and-answer session. This conference call is being recorded for replay purposes. I'd now like to turn the call over to Mr. Steve Moore.

Good afternoon and thank you for joining us. This is Steve Moore, Chief Financial Officer of Pixelworks. With me today is Bruce Walicek, President and CEO. The purpose of today's conference call is to supplement the information provided in our press release issued earlier today, announcing the company's financial results for the third quarter ended September 30, 2015. 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 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, November 5, 2015, and we undertake no obligation to update any such statements to reflect events or circumstances occurring after today. Please refer to today's press release, our Annual Report on Form 10-K for the year ended December 31, 2014 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. These non-GAAP measures exclude stock-based compensation expense and additional amortization of a prepaid royalty. We use these non-GAAP measures internally to assess our operating performance. The company believes these non-GAAP measures provide a meaningful perspective on our core operating results and underlying cash flow dynamics, but we caution investors to consider these measures in addition to, not as a substitute for, nor superior to, the company's consolidated financial results as presented in accordance with GAAP. Also included in the company's press release are definitions and reconciliations of GAAP to non-GAAP net loss and GAAP net loss to adjusted EBITDA, which provide additional details. Bruce will begin today's call with a strategic update on the business, after which I will review our third quarter financial results and then provide our outlook for the fourth quarter of 2015.

Thanks, Steve, and good afternoon and thanks for joining us on our Q3 2015 conference call. I'll begin today with an overview of the quarter and then Steve will review the financial results and provide our outlook for Q4. Q3 results came in within the range of guidance with revenues of $16.6 million, representing a 10% increase in product revenue quarter-over-quarter, driven by favorable seasonality and market share gains in our projection business. All other non-GAAP metrics came in within the range of guidance and we generated positive EBITDA. Despite a challenging macro environment, design win momentum for our product lines of SoC chips for projectors was strong during the quarter, with new wins in the ultra short throw, mainstream and personal projector segments. And our co-developed SoC for the projection market continues to expand to additional platforms and drive market share gains and overall year-on-year growth. Our VueMagic platform continued its momentum as over 30 new projector models were added by major projector brands during the quarter. There are now over 100 models commercially available in the market, with additional brands and models to launch in the coming quarters. Looking forward to Q4, we are seeing slowing order patterns in our core projection and large panel product lines, driven by the effects of a slowing China and emerging markets. While the year is ending on a weak note for the projector market, we gained market share year-over-year and expect to grow product revenues from chips in the low-single-digit range for 2015, despite overall projector market likely declining versus 2014. Overall, we expect to continue to gain market share in 2016 and for the projector market to return to growth. Turning to our mobile initiative, Q3 was an outstanding quarter of progress. We introduced and sampled the second chip in…

Thank you, Bruce. Revenue for the third quarter of 2015 was $16.6 million compared to $15.1 million in the prior quarter. The sequential increase in Q3 revenue was primarily driven by market share gain and favorable seasonality in the projector market. The split of our third quarter revenue by market was 91% digital projection, 7% TV and panel and 2% mobile. Digital projection revenue was $15.2 million compared to $13.6 million in the second quarter of 2015. And revenue from TV and panel totaled $1.1 million in the third quarter compared to $1.4 million in the prior quarter. As previously mentioned, we recognized our first mobile revenue during the third quarter in conjunction with initial volume shipments of Iris. This revenue amounted to approximately $250,000 in Q3. Non-GAAP gross profit margin was 50.2% in the third quarter compared to 48.3% in the second quarter of 2015. As a reminder, Pixelworks' gross margin is subject to variability based on changes in revenue levels, recognition of license revenue, product mix, start-up costs, and the timing and execution of manufacturing ramps as well as other factors. Non-GAAP operating expenses were $8.5 million in the third quarter compared to $8.8 million in the prior quarter. Adjusted EBITDA was a positive $890,000 for the third quarter compared to a negative $521,000 in the second quarter. As previously mentioned, a reconciliation of adjusted EBITDA to GAAP net loss may be found in today's press release. On a non-GAAP basis, we recorded a net loss of $173,000 or a loss of $0.01 per share in the third quarter of 2015 compared to non-GAAP net loss of $1.9 million or loss of $0.08 per share in the prior quarter. Moving to the balance sheet, we ended the third quarter with cash and cash equivalents of approximately $29 million…

Thank you. [Operator Instructions] Our first question comes from Charlie Anderson of Dougherty & Company. Your line is open.

Yes. Thanks for taking my questions. Bruce, in the press release, you mentioned meaningful growth in 2016 and you laid out a few of the opportunities on the call here. I wondered if maybe you could give us a little bit more color on sort of what gives you the confidence about growth next year what are the drivers of that and where is the visibility behind it?

Sure. Really coming from inputs from our customers, getting their inputs on our outlook for next year after sort of this inventory correction at least in the core projection business and looking to market at least the Pacific Media Associates market estimates, they feel there's growth in the high-single digits, mid to high-single digits in the projector market. Combined with that, we'll continue to gain share in 2016 expand, I think going out of the year or in 2016, we'll be growing to about 50% market shares. So, when you kind of put those two things together that's growth out of the core business, and of course, we're expecting growth out of our mobile business as well.

Great. And on TRUE CUT, I wonder if you could help us with the TAM there. It's a new product for you, it's a new type of a customer, anything behind units ASPs would be helpful, just any color you can provide there would be good. And then these trials that you're in with China, can that materialize into revenue in 2016?

So, I want to position TRUE CUT, we'll be talking more about it and we want to expose this to investors as well since we will be demoing it and talking about it in Q1. In its first step this is really a way to drive Iris design wins in clients, in – based on Iris. So this is end-to-end solution for a carrier not really a revenue generating opportunity at the moment right now. Over time, we'll be filling in more of the pieces of the business strategy with TRUE CUT and being able to sort of give you some framework for those kind of questions. But it is first incarnation. This is really a way to provide a value proposition to a carrier and also make video great on clients in their network based on Iris.

And then last one for me: you mentioned there was a carrier win in the U.S., I think, for a tablet. Is that a carrier-branded tablet? Any more info there would be helpful.

Yes. It's not announced. We kind of wanted to try to give investors visibility on significant things that are happening on the design win front. And so, I don't want to pre-announce what this product is. Suffice to say, this was a specified – this was a specification from a carrier, a design – this is kind of what we're seeing. In fact, this is sort of a trend we've seen since the last time we had a conference call, we have a number of these opportunities we're working on as we speak. But carriers spec out tablets and things like that, and ODMs, brands, they bid on these, and we're working on a number of these opportunities. And as I mentioned in my call, this is in conjunction with SoC partners where we're going in together and we're pitching the benefits of Iris for the platform. In other cases, it's with a brand and going in, pitching the benefits of Iris, and also exposing TRUE CUT to them as well. So, it's kind of how the flow is going right now, and I think I'll just leave it at that in terms of more characterization of this. But I look at it as a significant milestone win because it's moving us into sort of the kind of upper mid-range, higher-volume opportunities that we're beginning to see in the pipeline now.

Perfect. Thanks so much.

Thank you.

Thank you. Our next question comes from Jaeson Schmidt of Lake Street. Your line is open.

Thanks for taking my questions. Wondering if you could comment on the projector market. Do you think it's an inventory issue or more just customers being really cautious on ordering?

I think it's – I mean, Steve, I'll give a little bit of color on that. We spent, obviously – in fact, we were at one of our major customers this week discussing this. I think that it's really emerging-market-driven, as we mentioned in the call. Emerging markets and China turned out to be about 40% of the market. Europe and U.S. make up the bulk. And then there's a little bit of Latin America in there. So, it's a significant portion of the market that they're seeing – they saw this slowing going into Q4. I think they're adjusting their inventories now at this point right now. I think we've seen this from time to time in the projection industry. So, I would characterize it more as a fairly sharp inventory correction that we typically see work through in a quarter or so.

Okay. And then just a clarification on the TRUE CUT product: you guys would be licensing your technology then, it wouldn't be selling a chip?

Yes. So, let me clarify. What our first offering of TRUE CUT would be essentially in the end approach where there is a software, a plug-in software that runs in the current encoder infrastructure carrier. And on the other end, a Iris-based tablet phone client that would sort of decode the TRUE CUT piece and make the video streaming experience a higher quality on that product, handset, tablet, that sort of thing, based on an Iris chip. And so, right now, it is really a way to drive preference for products based on our Iris in carrier channels. So they can offer a better video streaming experience for their service in a given product that is based on Iris. So that's our first step into the market. We'll be talking about our strategy with TRUE CUT more and layering in more of the opportunity as 2016 goes on. But just for the next quarter, we'll be demoing this. In fact, we're kind of live trials right now, at least initial trials I would characterize it and would plan to be demoing this at CES and then rolling this out and demoing this to other carriers and OEMs that build tablets, handsets and so forth as part of a marketing strategy.

Okay. Thanks a lot.

Thank you.

Thank you. [Operator Instructions] Our next question comes from Krishna Shankar of ROTH Capital. Your line is open.

Hi. Yes, Bruce. Did you say that the projector business you would expect mid-single digit sort of revenue growth next year or can you sort of clarify your outlook for the base projector business in calendar year 2016?

Yes. So, this is Pacific Media Associates' numbers, and offline we can go over those with you, Krishna. What they see is about a mid to high-single digit 6%, 7% growth in the projector market for 2016. 2015 looks like now it will be a down year. It will shrink 3%, 4%, or 5% or something like that. I think when it's all tallied, we'll see. And then, it's sort of back to 2014 levels and 2016 maybe a little better, and that would mean it's mid to high single-digit growth. So, those are PMA numbers. Those are market projections. There is one company that actually does market research on the projection industry, and then, of course, our comments that we have from our customers and their views about next year as well.

Great. And then, congratulations on the second design win of the wireless carrier. Can you give us some sense for the types of design activity you have for Iris in terms of tablet companies in China, Korea? And then also curious, can you give us some sense what the distribution of sort of Iris design wins you are working on? And what the range for mobile revenue growth might be in calendar year 2016 based on what you have in the design win pipeline?

So, I would say that from the last call we had, the pipeline has increased in quality. We're seeing some more Tier 1 opportunities. And as I mentioned, one of the other things that's new from the last time we had a conference call is that we're seeing pool from working with partners, and that's sort of going in jointly to pitch the benefits of Iris, to enhance the platform that's being presented to carriers or customers as well. And also, reference, we're working on potential reference design activity as well. So, I think that's sort of new and incremental since the last time we had a call. I think, our SoC partners and carriers and so forth are also seeing the benefits of Iris. The number of the valuations we have going on increased quarter-to-quarter, and I would say the quality of them went up as well in terms of types of Tier 1 customers that are in the pipeline improved. So, in terms of types of designs all the ones we talk about in terms of what's in the pipeline, tablets, handsets, two-in-one laptop-type things, those all are opportunities that are in the pipeline.

And is most of the design win activity for next year around Iris 2, or do you see a mix of Iris 1 and 2 in terms of revenues next year?

It's a mix, but I will say that Iris 2 has been going faster, and I think that's because we've had this product in the market for three or four quarters now. And it was a – it was a new concept when we first introduced the chip, the Iris 1 chip. Mobile, the idea of TV-level quality video and video quality in the mobile industry is a new concept. It's well known and focused on in the TV industry. But I guess if I look across the industry, it's a new concept. So that was a period of understanding, an educational process, I guess, now that Iris 2 has been going a lot faster. So, we've seen both, but I think there's quite a bit of activity on Iris 2.

Okay. Thank you.

Thank you, Krishna.

Thank you. That's it for the Q&A session for today. I'd like to turn the call back over to management for any further remarks.

Thank you for joining us today, and I'd like to point out that we'll be attending the ROTH Technology Corporate Access Day in New York on November 18, and we look forward to discussing the results of our Q4 2015 with you early next year. Thanks.