Good day, ladies and gentlemen, and welcome to Pixelworks’ Fourth 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 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 fourth quarter and fiscal year 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, February 2, 2017 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 income loss, and net income loss per share. These non-GAAP measures exclude stock-based compensation expense, additional amortization of a non-cancellable prepaid royalty as well as certain charges related to the Company's announced restructuring in the first half of 2016. 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 income loss and GAAP net income 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 everyone on today’s call. As outlined in today’s press release, we achieved another consecutive quarter of meaningful improvement to both our top and bottom line results. Fourth quarter revenue increased 17% sequentially and 19% year-on-year to $16 million, reaching the high-end of our guidance range. Gross margin expanded 500 basis points over the prior quarter and OpEx was well contained during the quarter. As a result, Pixelworks achieved profitability in the quarter on both the GAAP and non-GAAP basis for the first time in over three years. Additionally, we generated $3 million in cash from operations, which significantly exceeded our stated goal earlier in the year to achieve cash flow breakeven by the fourth quarter. The profitability and cash flow generated in Q4 demonstrate the significant progress we have made over the last few quarters to enhance our operating model and dramatically improve the company’s underlying fundamentals. Importantly, I want to emphasize that these results do not reflect the pulling of the EOL or End of Life revenue. And that we are now fully booked to recognize in the first half of 2017. I will let Steve provide the details on our updated EOL revenue expectations. However, the contribution from these End of Life products will ultimately add approximately $8 million in non-dilutive capital to our balance sheet over the next two to three quarters. For those of you that have been following Pixelworks for a while, this is a different company than even one year ago. As we look back over the past year, we took a number of important steps that have fundamentally changed the business. Most notably, we meaningfully reduced our expense run rate and we also streamlined our product portfolio to focus our sales organization on high-value, higher margin…

Thank you, Todd. Revenue for the fourth quarter of 2016 was $16 million compared to $13.7 million in the third quarter. The sequential improvement in Q4 revenue primarily reflects increased sales of chips sold into our digital projection market as the demand strengthened and the market returned to more normal order patterns from the previous quarter’s supply channel disruption. The breakdown of revenues during the fourth quarter was as follows: revenue from digital projection was approximately $14.4 million; mobile revenue was approximately $390,000; and revenue from legacy chips sold into the TV panel market was approximately $1.2 million. Non-GAAP gross profit margin was 53.6% in the fourth quarter of 2016 compared to 48.6% in the third quarter of 2016. Gross margin was higher quarter-on-quarter primarily due to a more favorable revenue mix specific to products sold into the digital projection market. Non-GAAP operating expenses were $7.3 million in the fourth quarter of 2016 compared to $6.8 million in the third quarter of 2016. Adjusted EBITDA was $2.1 million for the fourth quarter of 2016 compared to $670,000 in the third quarter of 2016. A reconciliation of adjusted EBITDA to GAAP net income loss may be found in today's press release. On a non-GAAP basis, the Company reported a net profit of $1.2 million or $0.04 per diluted share in the fourth quarter of 2016 as compared to a non-GAAP net loss of $430,000 or a loss of $0.02 per share in the prior quarter. Moving to the balance sheet, we ended the fourth quarter with cash and cash equivalents of approximately $19.6 million, an increase of $3 million from the end of the third quarter largely reflecting positive cash flow from operating activities during the fourth quarter. Other balance sheet metrics include day sales outstanding of 18 days at quarter…

[Operator Instructions]. Our first question comes from the line of Brian Alger with ROTH Capital. Your line is open.

Hi guys, good afternoon. Congratulations.

Hi Brian.

A remarkable turnaround guys, this is obviously better than, frankly I dared to hope for. Just a clarification, in the fourth quarter you had a little bit of revenues still coming from the TV market. As we go forward, is that part of the End of Life products that were phasing out?

Yes, anything that was TV, panel, monitor would be considered End of Life. In Q4 that was about $1 million, $1.2 million I believe. We will see through the end of Life process revenues in Q1 and Q2 related to it. But after Q2 we’ll see no more of that revenue.

Right, okay. Just understood. And then of the $9 million in the first quarter, is that all product that used to be in the TV embedded space or was some of it owing to the transition and of the projector space and to call the higher value products?

It’s both. The projector market included chips that we’ve been selling for more than 10 years. And all those legacy chips have replacement chips that have better functionality and often are at a higher ASP but focusing mostly on better functionality.

Okay, great. And shifting gears to the more exciting part Todd, you had a little bit of commentary with regards to the progress in the mobile space and engagements that you currently have underway. Can we push that a little bit, it sounded like you already at least have towards the sales funnel some opportunities that could trigger in the second half?

We are chasing opportunities that if they were converted, the phone OEMs intend is to release them in the back half of 2017. We have not won them yet, more engaged.

Are these, can you maybe give a characterization of the type of products or are these low-end phones, high-end phones, high volume niche in any sort of?

Yes, I think I previously commented that for the functionality we’re adding, and partly what we do is really bring out the visual capabilities of a higher end display, those higher end displays would not be in a low-end phone. So by definition of what we do and the value-add we bring, we are targeting higher end of the market for smartphones.

Great. Well, obviously keep up the good work. It’s been impressive thus far.

Thank you.

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

Hi guys, thanks for taking my questions. Just kind of following up on that last question on the mobile side. Could you just kind of give us some color around what the main push-back tends to be from your customers on integrating your technology?

Sure, power consumption.

And that really is the only kind of push-back you’re seeing out there?

We see lots of push-back you said what the main push-back was. You want me to be more specific I’ll give you specific answer if I can.

Okay. Just shifting to OpEx then, Steve, how should we think about OpEx trending this year?

Well, Q1, we’ve guided to a higher number, mid-point about $1 million higher from last quarter. That is now our run rate level. And we would expect our run rate levels to be perhaps a bit higher than Q4 but more in Q4 kind of range. There is certain lumpiness depending on what we wind up doing in chip development. But largely we have an understanding of where our expenses are, where they’ll be, what remains to be seen is what chip we’re going to do at what time later in this year. But from a modeling standpoint I would stick with that information.

Okay. Thanks a lot.

Thanks Jaeson.

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

Hi there, congrats on the quarter. Thanks for taking my questions. Could you just talk about Todd over the next 12 to 18 months what are the major demand drivers for the Iris chip?

Our Iris mobile processors?

Yes.

Well, as what ASUS is trying to do and what other Marquee tablet manufacturers are doing on how they market display technology and video technology, we are seeing the need or at the need, the wish of Marquee smartphone manufacturers who want to differentiate their phones with the same video and display imaging capabilities. And so, our processor provides those benefits. Some of the features we offer on our processor, but not all can be offered either by on the apps processor side or on the DDI side. And so, the still manufacturer is figuring out the best, how much of the features and functionality we add, do they need to have in the next phone. And whether they can suffice with what’s being offered without adding Iris. But if they want all of those features and they want the support that they get through a Pixelworks’ engagement, the only way to do it is to put our chip, and there is really no competition for our bridge chip period. So that’s what it comes down to. And you will see launches as soon as within two to three months of Marquee smartphones that my bet is they will be highlighting some of these display features and functionality we’ve been talking about for probably 18 months. It’s starting to come out. That doesn’t mean there are processors in enabling those features but that does mean that the market has finally arrived.

Okay, great. And then could you also talk about the gross margin strength and what’s driving that?

Sure. In Q1, we’ve got it to much higher gross margins than we’ve experienced in the past. And that’s being driven by a number of things. One; is the ASPs somewhat stronger, due to the restructuring and that will continue. The other is just the level of revenue causes an absorption effect that will be experienced as long as our revenues during the $20 million level. I think at a more normal projector run rate and just their regular run rate we will not be seeing our gross margins in this range but we will be seeing them above our former range which last year we almost always forecast $48 million to $50 million and started to creep up to $50 million to $52 million. I think the $50 million to $52 million is solid and can be improved on that particularly with volume causing bit of absorption.

Okay. Thank you very much.

Thank you. Our next question comes from the line of Richard Shannon with Craig-Hallum. Your line is open.

Well, hi Todd, thanks for taking my questions as well. I’m going to follow-up on a couple of questions that Jaeson asked you a little bit ago. I think Todd, you responded with this first one regarding the biggest issue is power consumption. I’m curious if that is an issue that’s holding people back, I guess you mentioned some engagements that could come to the forum in the second half of the year? Are you planning other ways to solve those issues or are they not as big of a deal for this particular set of customers or just to understand how you overcome that issue where with your current Iris chip?

I said that it was a headwind I didn’t say it completely prevented us from getting design wins. But this is - what it becomes is if you look, if you’re designing a smartphone that has a cost structure of I don’t know between $250 and $400 and you’re going resell between $400 and $600, right. As the system designer you want to come out with camera display, processing, memory capabilities, audio capabilities that match with other Marquee phones. And you want to do this and offer a day of use as long as possible. And as the screens get bigger you can put bigger batteries in them. But there is a limit to large screen, large screen, you start to hit a limit where it’s considered a tablet right, and people don’t want to have this large device that they carry around with them every day. So, there is probably a theoretical limit, I think the high volume is upwards of 5.5 inches, right. When you’re designing those kinds of phones, there is a limit on how big the battery can be and then how the larger the PCB the smaller the battery, so there is a trade-off. So, the device, the PCB and when it goes on the PCB is Manhattan real-estate or probably New York real estate today or San Francisco real estate, right, it’s very expense real estate. And so, you are trying to convince the person that’s designing that phone that the features and functionality your device brings are worth giving it the real-estate because that means other things don’t go in that real-estate, right, there is trade-off requirements so that’s part of it. The other part of it is, do they - do you contribute to a day of use in power consumption? And…

That certainly makes a lot of sense. Todd, to that last point, you’ve been clear as you’ve come in to lead the company and reconstructing your sales force, the focus mostly on Asian OEMs. Outside of the big Korean maker I guess particularly looking at China they’re not necessarily, historically viewed as leaders in technology although I think that maybe changing. Do you see some of these previously ME-2 companies mostly in China to become one of those leaders?

So, I’ll tell you outright, I’ll call names out, Huawei is a technology leader. Oppo and Vivo are becoming technology leaders. LG has innovated in the past they may do so again, right. And the two big guys are Samsung and Apple. For the most part and last couple of years, only - primarily innovation came at Apple, Samsung started to deliver it. With the Note 7, they did add these capabilities or some of these capabilities and they were the first company to offer the ability to view HDR content in conjunction with Amazon Prime on the Note 7, the only smartphone that allowed it. So, you couldn’t, any smartphone you pick up, if you go to Amazon Prime and look at their content, you can’t view UHD, HDR content because you haven’t been proved as a phone. The Note 7 was the only phone approved as of the end of 2016. Shame it was pulled from the market, it was a beautiful phone. Samsung and Apple are the leaders. They’re the guys that innovate but they also spend money on their own technology, we’re focused elsewhere. It doesn’t mean we wouldn’t do business with those guys, but it may be in a different form of our Iris processor.

Okay. Fair enough. Todd, those were great feedback. I appreciate hearing that from you. Maybe just one last question from me more for Steve, actually maybe Todd this was in your prepared remarks. But I think you said you expect to be profitable each quarter this year, seems pretty easy with in the first half, I just want to confirm that you expect that in each of the quarters in the second half as well?

I think what Todd said was that our goal is to be profitable throughout the year. And that is certainly our goal but we’ve not given guidance to that.

Okay. Fair enough. I think that’s all my questions for now. Thanks for taking them. Thanks guys.

Thank you.

Thank you. And I’m showing no further questions at this time. I’d like to turn the call back to management for closing remarks.

Listen, thanks. It’s been an interesting quarter we did have some things go favorably for us in the quarter that made the turnaround happen a little bit quicker than we anticipated. I think we’re in a good position. I feel good about our prospects in 2017. There is still lot of work to do. Thanks for joining the call. We’ll hopefully update you with some more good news in the future.

Ladies and gentlemen thank you for participating in today’s conference. This does conclude the program. And you may all disconnect. Everyone have a wonderful day.