Good day ladies and gentlemen. And welcome to Pixelworks Inc.'s Second Quarter 2016 Earnings Conference Call. I will be your operator for today's call. At this time, all participants are in a 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 would now like to turn the call over to management and your host Pixelworks' Chief Financial Officer, Mr. Steve Moore.

Good afternoon, and thank you for joining us. With me on today's call is Todd DeBonis, Pixelworks' 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 second quarter ended June 30, 2016. Before we begin, I would like to remind you that various remarks that 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, July 28, 2016 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, 2015 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 as well and certain charges related to the company's announced restructuring earlier this year. We use these non-GAAP measures internally to assess our operating performance. The company believes that 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. Included in the company's press release are definitions and reconciliations of GAAP to non-GAAP net loss and GAAP net loss to EBITDA, which provide additional details. With that said, I will now turn the call over to Todd for his opening remarks.

Thank you, Steve, and good afternoon to those joining us on today's call. As a framework for the call today, I'll begin with a brief high level recap of our results, followed by a few notable developments during the quarter and then I'll provide a structured update on five focus items that I outlined as part of our last quarter's call. Starting with results, revenue in the quarter was $12.6 million above our guidance range of $11.5 million to $12.5 million. Both gross margin and operating expenses came in better than expected resulting in a loss per share improving to $0.06 on a GAAP basis and $0.03 on a non-GAAP basis. Reflecting on these results, there are two key takeaways that like I'd like to highlight. First, the quarter came in at or above guidance or guidance on all metrics. So, we delivered what we said we were going to do. And two, despite second quarterly revenue being $2.5 million lower year-over-year, we cut loss per share in half compared to the year ago quarter. I would like to highlight these two aspects of our second quarter results. As they demonstrate beginning of a meaningful shift to put the company on a path towards profitability. Admittedly, it's only one quarter and we have plenty work ahead of us, but I'm pleased with our team's execution during the quarter and we expect to build on this progress over the coming quarters. Turning briefly to product announcements. We announced two new Asus products during the second quarter that incorporate Pixelworks Iris too. First the Asus ZenFone 3 Ultra, which features a 6.8 inch LCD panel with full HD resolution display. This represents a first-ever launch of a smartphone that incorporates Pixelworks' Iris device and True Clarity video display processing technology. Also during…

Thank you, Todd. Revenue for the second quarter of 2016 was $12.6 million compared to revenue of $11.2 million in the first quarter. The sequential improvement in Q2 revenue reflected increased sales of chips sold into both our digital projection and mobile markets as well as a relatively stable revenue contribution quarter-over-quarter from legacy products that we sell it to our TV panel market. The breakdown of revenue during the second quarter was as follows. Revenue from digital projection was $11.2 million, mobile revenue was approximately $350,000, and revenue from legacy chips sold into the TV panel market was approximately $1.1 million. As previously indicated, we expect we expect the contribution from this legacy business to decline in future following certain end-of-life orders that we anticipate to largely play out over the next three to four quarters. Non-GAAP gross profit margin was 51.6% in the second quarter compared to 48% in the first quarter of 2016. Non-GAAP operating expenses were $7 million in the second quarter compared to $9.2 million in first quarter of 2016. Restructuring charges excluded from non-GAAP gross margin and non-GAAP operating expense totaled less than $100,000 during the second quarter compared to approximately $4.3 million in the first quarter. Adjusted EBITDA was a positive $296,000 in the second quarter of 2016 compared to a negative $2.9 million in the first quarter. A reconciliation of adjusted EBITDA to GAAP net loss may be found in today's press release. On a non-GAAP basis, the company reported a net loss of $756,000 or loss of $0.03 per share in the second quarter of 2016 as compared to a non-GAAP net loss of $4 million or a loss of $0.14 per share in the prior quarter. In addition to excluding stock-based compensation expense, the net loss in the first quarter…

Our first question is from Brian Alger with ROTH Capital Partners. Your line is open.

Hi, guys. Good afternoon. Nice quarter. Congrats on a pretty sharp turnaround in outlook here. A couple of quick questions. As it pertains to the guidance, if we're going to see essentially the same type of levels from the mobile market and the growth is coming from projector. Looking at the gross margins, is it -- I guess, mathematically correct to infer than the projector business has a lower wanted gross margins given that sequentially we're looking at a decline in gross margins?

No. The change in gross margin is really just related within the -- the mix within projector. I think that the big impact has to do with the mix between number of products that we have within projector and has very little to do with the any change in revenues related to mobile.

Okay, great. Good clarification. Thank you. And then as we go through with these end-of-life [Indiscernible] whether it's for legacy projector products or whether it's for the legacy television products or monitor products. How are those going to be handled from a revenue line? Is that going to be something that we see as a booster revenue or is that something that's going to be shown net in other income as it as a discontinued operation?

No, that will be shown as revenue. It is -- it's not a discontinued operation. We're not providing -- as I think you're aware we provide guidance a quarter in advance. I think it's very likely that we will provide some much better color if not absolute guidance for Q1 next quarter whereas we would normally only provide guidance stuff for Q4. And the reason being is we -- at this point, we have estimates of what the additional revenue will be created in Q1 and perhaps into Q2. But we'll have a much better idea at that point and feel it's large enough that it's important that our investors have a better idea sometime earlier. But yes we do expect it to be an increase to revenue.

Okay. Right now it's just -- good to have a plan and I appreciate bringing it up as early as you are. I think it's very helpful from a transparency standpoint. Todd a quick question with regards to the focus on mobile. Clearly, the be dual approach of selling silicon and in addition to pursuing an IP licensing is noteworthy, but I'm curious if there's other strategic decisions you made within that. For instance, are we looking at supporting all operating systems, are we looking at supporting certain segments of mobile, is there a screen size, or a type of device that may be -- is it within the natural target area that you're are pursuing? What -- how much focus are you assigning to this dual-pronged approach?

No, no. I mean so Brian so I know you recently picked this up and when we had our previous conversation, we might have gone through this. I had mentioned a little bit about it in the first call I was on back in, I guess, it was March or April. And back then we had made a decision -- even before this relook at the strategy, we made a decision to focus our mobile resources around Iris. Towards the android, away from Windows and predominantly focused on QUALCOMM platforms. And we continue to do that. We are very focused and the -- and that I would say both smartphones and tablets, but in the android, QUALCOMM environment.

Okay. So, from a licensing perspective, we've seen a lot of activity coming specifically from the silicon manufacturers within China. Am I correct in interpreting what you just said is you're more focused on supporting the one silicon provider, one SoC provider as opposed to a multitude?

Well, okay, so let me sure I separate it. For our own device sales, for the Iris family and roadmap of products, there's a great deal of software support that goes along with our video processing. We develop a lot of the drivers for the customers tie-in right into their UI and really need to understand their video processing pipeline. It depends which version of android they are using et cetera, so one support for one customer could be very different than another customer even in that environment. So the decision to focus our resources were predominantly software support resources for our Iris family products. When you go look at licensing, which now we're going to talk about in a more go-forward basis. First of all, we're looking at longer term. Anything we do in licensing over the next 12 to 18 months may not generate especially since it's -- when you do licensing deals, you can do in front end loaded, you can do go back end loaded, you can do a combination thereof. Anything that would be royalty based or backend loaded would take you know even longer term after that to hit our financial model. So, from a licensing perspective as much longer term and for licensing perspective, our core technology is really independent. There I would not just -- if I'm looking at where we're having our discussions. It is not limited to that environment that we were focusing our Iris sales or vice-verse. That give you a little clarity there.

Yeah, that's exactly what I was looking for.

In fact, one follow-up I give you because I probably get the question if I don't note is. I wouldn't even say that our licensing effort is focused only mobile.

Okay.

We believe and we've had others tell us -- others that we -- that understand this market. We have these state-of-the-art technology when it comes to frame rate conversion. We also have a strong patent portfolio around that frame rate conversion [Indiscernible]. And we continue to evolve that core technology that could be used in a broader set of markets where we choose to focus on taking that core technology adding other image and picture quality enhancement features and trying to solve a problem with our chip sales right now is with Iris in the mobile effort and in the projector market. But you could use that for technology in applications outside that. And from a licensing perspective, we're going broader than mobile and projector.

Great. That's an important distinction. I appreciate that. thank you very much. And congrats on getting off to a good start.

Thank you.

[Operator Instructions] Our next question is from Jorge Rivas with Craig-Hallum. Your line is open.

Thank you for taking my question. So, first portion regarding your projector business. As you transitioned customers to new-gen SoCs. I'm just wondering how -- what is that going to affect your operational results. I understand you're looking for high growth and higher margins, but is that going to require additional R&D expenditures in the future?

Jorge, we're not modeling, we're modeling a certain level of R&D effort for specifics projector and a certain level of software and support for the projector market. By us streamlining our product line, we're able to focus our resources on a smaller newer, more feature-rich product line, but only a handful products. And so right now, we have modeled the cost structure to support all those new developments with customers over the next I don't say 18 months, that's already in our financial model.

Okay. One question on a mobile. Just wondering whether you have any progress with other customers. Customers having been talking to the past few months and you know as we saw with Asus and Verizon, do you think you need to engage with carriers as well as it was the case with Verizon?

My past experience is that as the carriers get more involved in video streaming, I think that interaction with carriers to better understand how far technology can improve the quality at the end device of a bit of a strange video I think is important. And so we will continue to be involved with carriers and probably ramp that up. I wouldn't expect that to result in a direct relationship carriers that may or may not, but that's just to make sure that the carriers are aware of our capability.

Okay. And then one last question for you Steve. What's the minimum cash level that you guys will feel comfortable with operating forward-looking places?

Well, I think that where we have -- the resources that we have are now cash and the ability to borrow -- certainly sufficient for us to meet her objectives and grow the company on remind you that we have a revolving line of credit that up to $10 million on top of the cash that we have. So, without directly answering the question with a minimum is we model during levels of revenue and very levels of results for cash balances and we're quite comfortable that we have cash to meet our objectives.

Okay, great. Thanks for the colors guys. That's all from me.

Sure.

[Operator Instructions] Our next question is with Jessica McHugh with Dougherty & Company. Your line is open.

Hi, there. Thanks for taking my question. Could you just talk about the early signs you're seeing with the resources that you put in separate in China they pursue mobile and how that's paying off?

Well, I mean, Jessica, at this point, I mean if it had resulted in announced design wins, you would have seen an announcement. So, what I give you is generalities. Right now the team is fully engaged with multiple opportunities and we're stretching the limits of our current organization and supporting all those. It's an exciting time for Pixelworks right now.

Okay. Thank you.

Our next question is from Richard Shannon with Craig-Hallum. Your line is open.

Hi, guys. Thanks for taking my question. I jumped on the call late, so chartered into all of your prepared remarks and in terms of evolving go-to -market strategy. But I have one question I wanted to ask. This topic was brought up on your last conference call regarding the -- and watched all of the architectural change is required for [Indiscernible] general to use Iris chip. I think you mentioned that some of M-source struggling -- maybe not the exact word used, but I think that's the fair one what I understand. Strategy taken to account, those struggles are you coming up with ways to make easier on OEMs, or are they struggling so much that they are not willing to use the architecture around which your lose to original Iris has developed.

Well, I think what chips do you have to get to the customers early when they are defining the architecture of the firm and the number thing we have to do is make they believe adding Iris is compelling. If they believe it's compelling and they believe it will differentiate their phone in and what is firming up as is a tough market. a slower growth market where were they do need to differentiate. Looking to get early on, the fact that it is an architectural change isn’t a big deal, all right. They bought in early. If you come in late, it's tough, coming late the process and then secondly by focusing our resources really on QUALCOMM-based processors and in the android environment. We can offload some of the adoption and software work early on that that they would need to do. Those are the things that you have to do get in front of it.

Okay. Fair enough. I think all my other questions have been answered. So, I will jump out of line guys. Thank you.

Thank you.

Thank you. And I'm not showing any further questions at this time. So, I'll now turn the call back over to management for closing remarks.

Okay. Well, thank you everyone for joining us, and we look forward to having you on our next call next quarter. Thanks. Bye now.