Good day, ladies and gentlemen, and welcome to Pixelworks Incorporated Third Quarter 2016 Earnings Conference Call. [Operator Instructions] 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 today. With me on the call is Todd DeBonis, Pixelworks' President & 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, 2016. 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, October 27th, 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 as 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 adjusted 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. Let's begin with a quick recap of our financial results for the quarter. Revenue in the third quarter was $13.7 million representing approximately 9% sequential growth and coming in at the higher end of our 13 to $14 million guidance range. We also did a good job of managing our OpEx for the quarter which resulted in incremental reduction of our net loss per share quarter-on-quarter. Lowering the revenue level required to achieve breakeven and ultimately profitability was one of the primary objectives behind the restructuring we implemented in the first half of the year. I'm pleased with our results and significant progress towards achieving that objective. I will let Steve speak to the specifics of our guidance for the current quarter but most importantly our expectations for the fourth quarter include us delivering on our prior commitments of year-over-year growth and achieving cash flow breakeven by year-end. While clearly those milestones aren't the endgame, they do reflect the improvement we've made to our financial model in a relatively short period of time. And more importantly going forward, the model we now have in place today has improved leverage and will allow incremental revenue growth to accelerate fall through to the bottom line. As mentioned last quarter, we substantially completed all the work associated with the restructuring and we have since shifted the balance of our efforts and focus to further solidifying our position in the projector market and strengthening our sales capabilities in support of driving increased adoption of Pixelworks' technology in the Mobile market. Although we did not make any formal product or customer announcements during the quarter, there continues to be a significant amount of positive activity across both of our businesses. Starting with…

Thank you, Todd. Revenue for the third quarter of 2016 was 13.7 million compared to 12.6 million in the second quarter. The sequential improvement in Q3 revenue primarily reflects increased sale of chips sold into our digital projection market as well as somewhat higher revenue from legacy products sold into the TV panel market. Year-over-year revenue in the third quarter reflects the 3LCD supply disruption at Sony following an earthquake in April 2016. The breakdown of revenue during the third quarter was as follows: revenue from digital projection was 11.9 million; mobile revenue was approximately 270,000; and revenue from legacy chips sold into the TV panel market was approximately 1.5 million. As previously indicated, we expect contribution from these legacy products to ultimately decline to zero in the future following our fulfillment of end-of-life orders over the next two to three quarters. I will provide additional details on our expectations related to EOL revenue as part of the guidance in a few minutes. Non-GAAP gross profit margin was 48.6% in the third quarter compared to 51.6% in the second quarter of 2016. Gross margin was lower quarter-on-quarter primarily due to a less favorable revenue mix specific to products sold into our digital projection market. Non-GAAP operating expenses were 6.8 million in the third quarter compared to 7 million in the second quarter of 2016. Adjusted EBITDA was 670,000 for the third quarter of 2016 compared to 296,000 in the second 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 438,000 or a loss of $0.02 per share in the third quarter of 2016 as compared to a non-GAAP net loss of 756,000 or a loss of $0.03 per share in the…

[Operator Instructions] Our first question comes from the line of Brian Alger from Roth Capital.

Hi guys, good afternoon. Congrats on a good quarter and obviously, a pretty good guide. It's nice to see the execution coming through with the guidance. As we look at the business Todd, in setting up for next year, are there any areas where the cost controls that you're putting in place may be hampering the growth opportunities or is really what you've been able to accomplish just aligning the resources appropriately?

Thanks for the question Brian. So, I think as we had -- we had communicated last quarter, when we did the restructuring we did it with the intent to not diminish our capabilities in either our current projector business which we - is a sustaining business even though it's a mature business, there are new devices that we're developing and new engagements with customers. And so, we restructured to not diminish that or our mobile initiative but we did it by outsourcing I would say certain functionality versus insourcing. I still believe that we are in a good position to execute on growth in 2017 with the cost structure we have in place. You know, probably the one area that if we start seeing success that we would have to respond quickly with some new hires would be in the field applications arena. But you know, I mean, we have a very good systems engineering team that backs up the FAs out in the field but the few FAs we have right now are getting thin, they're - they're - they're all engaged with activity. So that's the one area I would say that we have to respond pretty quickly. But other than that, no. I do not believe we are putting any risk on execution and I think we're positioned for growth.

Excellent. Obviously, it's - that's what we want to hear. It's - it's an impressive transition that you've been able to accomplish in a short period of time. I'm - I'm wondering as we - as we look at this you know, a kind of one-time effect over a couple of quarters here with the End-of-Life, I guess this is probably more for Steve, what kind of gross margin impact should we expect from these EOL buys? Are these running at normal margins that they would've gotten you know, over a longer period of time or is there just kind of involved there? I guess what I'm getting at is, how much of this is going to flow to the bottom line?

Good, good, question. Well first of all will get the benefit of a better absorption so one should expect our gross margins to be somewhat higher during the EOL period relative to what we're suggesting for Q4. Additionally, the mix, and we have a pretty good idea, the mix of products is actually a little bit better than I would have normally guessed, given a lot of this - most of it is legacy business and historically our legacy business has been somewhat lower our mature margin gross average. This is more in line with our average because the - I guess primarily because the lower gross margin legacy stuff is not being ordered quite as far out as some of the higher gross margin and that actually giving thought to it, it make sense. You know, if you - if you're making a medical monitor, you're probably paying a lot for the chip and you're going to want to have that chip available for years so that you have to redesign the monitor.

Sure, and not to you know, get too simplistic in this but if we're looking at -- it looks like roughly 12 million of EOL revs and you know, your corporate average is being you know, called around 50%, is this essentially bring-in or pull-forward, you know, roughly $5 million bucks to the - to the balance sheet? Is that - am I my thinking about that correctly?

You are, you are. It's pulling in something north of half a million - or $5 million in cash in - between those spreads. I would say that Q1, most of this revenue is going to be turned into a receivable at the - at the end of the quarter but we'll collect all of it in Q2 or --.

Right.

Yes, mostly all of it in Q2.

Excellent, great. That's - that's certainly fantastic and I guess just one last one for Todd, and this is perhaps a bit more strategic. The value of the Company's, technology and video processing expertise, that you talked a little bit about in your prepared remarks and the importance of video adoption, certainly ASUS has realized, how many other vendors out there are looking at video quality and the and the enhanced experience as being a differentiating factor. Is it a majority of the customers or a majority of the manufacturers or is it a small smaller sample as when you look into that kind of demographic?

Well, I mean, let me just first broaden the answer with beyond the China demographic. That is an area of focus for our bridge chip, it is an acute area of focus for our bridge chip. But I would say when you look at the IP licensing effort that we are pursuing, I would not focus on China, look on a broader scale there right. So, to me I'm looking, I think that the Company is going to put this, we're really focused at trying to catch a wave that is happening and will happen with or without Pixelworks. We believe Pixelworks can be can have a material participation but it's going to happen with or without us and what is happening is on the high end mobile platforms, every major provider is using some form of visual processing and the display technology itself to try to differentiate their high end unit. And I will give you an example, I mean it's a shame because it's the Note 7 which is probably, is no longer available but when they came out there was a series of features and functionalities that they marketed heavily as their differentiator, and one of them was the first phone capable of displaying HDR content from a streaming provider and the streaming provider that they collaborated with was Amazon. So, you could go on to their phone and if you have the Amazon app you could download UHD content, stream it directly to your phone. If you would go to any other high end phone that did not have that capability, Amazon wouldn't even make available the UHD content for download purposes. So, this, I don't believe it was Amazon's intent to do an exclusive with Samsung. What I do believe is and this is a little more than a guess, so when I say, I believe, there is some information I know is that they wanted to qualify a phone to meet certain criteria to display this UHD content. And so, Samsung worked diligently for long period of time to meet those criteria and actually, said that they did so by implementing their mDNIe technology that was originally developed for their Smart TVs and has and they are now putting this technology into their phones. And actually, they've said it before they've put this technology into phones, so this I'm using this as an example to show you one, Tier 1, high end phone, absolutely focused at video processing as a way to differentiate their phone right. We do see this expanding beyond the top two phone manufacturers. So, I hopefully that will answer your question. If you have a more specific one I can answer, Brian but.

No, that's gets to exactly what I was getting at their we're looking for in that. The opportunity is not just with the Chinese opportunity on the bridge but that virtually all the manufacturers are - at least looking at this for, minimally their high-end segment but presumably over time it's - it's the differentiation feature they expect to utilize over a broader product set, so that's good. That's what I was looking for. Guys, keep up the good work. It's a - it's good to see your progress. Thank you.

Thank you. Our next question comes from the line of Jorge Rivas, from Craig Hallum Capital. Your line is open.

Good afternoon guys, congratulations on the quarter. First, housekeeping question, I missed your revenues for Mobile; how much were revenues for Mobile in the quarter?

Revenues for mobile in the quarter were about flat with last year - with last quarter, it was --

Got it.

$270,000.

Okay, great. Thank you. And then it's nice to see the progress on your Iris chip, on the 3rd generation and it feels like you're sampling that with tablets and smart phone customers and I was wondering if you can - if you - if you can provide - probably break them out, what are you seeing more interest from customers to deploy this chip on tablets or smart phones. What do you see more interest for, as far as like the adoption of the chip?

We're seeing strong interest in both categories.

Would you say it's like 50-50?

There's only a handful of tablet guys left in the market, there's a lot more valid manufactured.

Okay. And then one - last question here, so your gross margin guidance was stronger than we've seen probably in the last three years are so. Was this mainly just driven by mix or are you seeing you know, probably some benefits also from your, you know, EOLs they are implementing?

Well, for Q4 no. It's not from EOL, it would be from mix and from absorption in the higher revenue level, absorbing our operations cost but there is - there's definitely a mix element as well that's improving Q4 to Q - from Q3.

I'd say in addition to that, you know, I think we previously announced post the restructuring that we went through a product streamlining and through that --

Right.

At some point we would see an outcome of higher ASPs and better margin mix. It is probably just starting to reflect in the numbers in Q4. We expect it to --.

Okay.

Gain prominence as you move forward into 2017.

Correct, okay, great. So, there is some element of sustainability into that. Okay guys, that's all I have. Thanks very much.

Thank you. Our next question comes from the line of Jessica McHugh from Dougherty & Company. Your line is open.

Hi there. Thanks for taking my questions and congrats on the quarter. One of your long-term goals is to having a licensing business, would you talk about the process for that. Do you have a library of IP cores, you could tell at this point?

We do, we do have multiple IP cores and most of them, they are proven in silicon and demonstrated some - some demonstrated even through past licensing efforts. I would say that you know, we've been - the Company just went through a change from fielding some inbound requests in pursuit but not really doing any outbound effort, sales effort on it, to now we are doing and outbound sales and marketing effort. That is, you know, three months into it right, I would say the initial response from the market has been positive. But those are it's a unique set of IP that a handful of people in the display processing pipeline would be interested in. And so this is not something we are going to go out and pursue 50 different customers but you know, maybe 10. And when you get a serious engagement, those engagements they go through a great deal of scrutiny and effort before they would turn into a deal. So, I would say we're early in the process and the reception from the market has been extremely positive.

OK, great. And then, the original video display processors started came out two years ago. I was just wondering how has mobile trends as well as your customers and potential customers help to shape, features and pricing for the current iteration of the Iris chip, the 3rd generation?

Probably more dramatically than any of the previous generations. The biggest single issue with the two previous generations were effectively Iris 1 was tried it tried to do way too many things. It tried to be a device that could hit Notebook, Tablet, Phone, different interfaces and as a result was extremely costly and consumed a great deal of power, and frankly it missed the target spec for almost all the target markets because of that. Iris 2 was a response to that and in some cases, some features that are now in Iris 3 were eliminated out of the thought process of Iris 2 in an effort just to go get the cost and the power down. We have now expanded the features and functionality in the Iris, the 3rd generation of Iris and still fairly dramatically brought down the power and not only the size of the chip but the entire placement size that would be required on a PCD. So, it definitely was in response to customer feedback. And, I would say the previous two generations were almost out of the game from the smart phone from day. I mean, the one smart phone we won on the 2nd generation was a very large smart phone, right with a large battery and could handle some of the power consumption requirements there. I think it would have been difficult with that generation of device, if somebody would have been extremely committed to put it into, let's call a mainstream phone, right, on a 5.2 inch screen, with the battery and power requirements that a phone like that would have available. The 3rd generation is definitely within the realm of that, so we have responded to the market.

Great, thank you.

Thank you. Ladies and gentlemen that now concludes today's question-and-answer session. I would like to turn the call back over to management for closing remarks.

OK, thanks everyone for joining and we look forward to talking with you again next quarter.

Thank you.

Ladies and gentlemen, thank you again for your participation in today's conference. This now concludes the program and you may all disconnect at this time. Everyone have a great day.