Earnings Labs

Pixelworks, Inc. (PXLW)

Q1 2019 Earnings Call· Fri, May 3, 2019

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Transcript

Operator

Operator

Good day, ladies and gentlemen and welcome to Pixelworks, Inc. First Quarter 2019 Earnings Conference Call. I will be your operator for today’s call. [Operator Instructions] This conference call is being recorded for replay purposes. I would now like to turn the call over to Pixelworks’ Vice President and CFO, Mr. Steven Moore.

Steven Moore

Analyst

Good afternoon and thank you for joining us today. With me on today’s call is Todd DeBonis, Pixelworks’ 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 first quarter 2019. 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, May 2, 2019 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 period ended December 31, 2018 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 income loss and net income loss per share. These non-GAAP measures exclude gain on sale of patents, inventory step-up and backlog amortization, amortization of acquired intangible assets, stock-based compensation expense, restructuring expenses, discount accretion on convertible debt fair value and gain on extinguishment of convertible debt. 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. 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.

Todd DeBonis

Analyst

Thank you, Steve and good afternoon and welcome to everyone joining us on today’s call. Beginning with the quick overview of the numbers, as reported in today’s press release, our first quarter financial results were at or above the high-end of our guidance range. Consolidated revenue in the first quarter increased 9% year-over-year to $16.6 million. Including continued solid growth in video delivery and mobile combined with mobile related licensing revenue. As a result of the licensing revenue, gross margin came in better than anticipated and contributed to first quarter EPS at the high end of our guidance range. Additionally during the quarter, we recognized a net gain of $3.9 million on the previous announced sale of non-strategic patents acquired as part of the ViXS. Now, turning to an update on each of our end markets, our digital projector business performed largely as expected with a sequential decline reflecting typical first quarter seasonality combined with a softer demand profile due to the macro environment in late 2018, particularly in China. This resulted in an inventory correction during the quarter as work to reduce higher inventory levels in advance of the fiscal year ending in March. Although the current macroeconomic backdrop in China will likely continue to temper end-market demand, most of our projector customers appear to have made progress working down XS channel inventory. Our current booking and backlog indicate reasonable sequential growth in the second quarter and further normalization of the channel inventory and order patterns throughout 2019. As discussed in our last call, we also continue to expect our large co-development customer to begin gradually transitioning to the next-generation SoC late this year. Although this new chip will have higher gross margin profile, it also was at a lower ASP than the current generation. Currently, this product transition…

Steven Moore

Analyst

Thank you, Todd. Revenue for the first quarter of 2019 was $16.6 million compared to $20.5 million in the fourth quarter and revenue of $15.3 million in the first quarter of 2018. Revenue for the first quarter of 2019 reflects expected seasonality in the projector market and continued year-over-year growth in our video delivery and mobile end-markets. The breakdown of first quarter revenue by market was as follows: revenue from digital projector was approximately $11.1 million; video delivery revenue was approximately $3.9 million; and revenue from mobile, including sales of Iris processors and licensing revenue was approximately $1.6 million. Non-GAAP gross profit margin was 53.3% in the first quarter of 2019 compared to 55.1% in the fourth quarter of 2018 and 54.2% in the first quarter of 2018. Non-GAAP operating expenses were $10.3 million in the first quarter of 2019 compared to $10.3 million in the fourth quarter of 2018 and $7.8 million in the first quarter of 2018. Note, lower operating expenses in the year ago quarter reflected the recognition of approximately $2 million of offsets to R&D associated with our now completed co-development project with a large projector customer. Adjusted EBITDA was negative $464,000 in the first quarter of 2019 compared to positive $1.8 million in the fourth quarter of 2018 and positive $1.3 million in the first quarter of 2018. A reconciliation of adjusted EBITDA to GAAP net income loss maybe found in today’s press release. We reported a non-GAAP net loss of $1.6 million or $0.04 loss per share in the first quarter of 2019 compared to non-GAAP net income of $1.1 million or $0.03 income per diluted share in the prior quarter and non-GAAP net income of $38,000 or breakeven on a per diluted share basis in the first quarter of 2018. As a reminder,…

Operator

Operator

Thank you. [Operator Instructions] Our first question comes from the line of Suji Desilva with ROTH Capital. Your line is now open.

Suji Desilva

Analyst

Hi, Todd. Hi, Steven. Congratulations on all the progress you have made starting out the year. So couple of questions, looking ahead to second half ‘19, I know Todd you don’t like to guide specifically, but there are clearly some headwinds here, the projector customer is going to be lower ASP, the Japan will have the initial ramp and then moderate. So can you talk about the puts and takes into the second half and how you see that shaking out given that there are some things we can cite already for the second half looking ahead?

Todd DeBonis

Analyst

Well, I mean, I don’t think it’s dramatically different from the last time we gave an update. Probably, the new information is I don’t – I am not as bullish as some of my peers on China coming back in the second half, I don’t think it’s going to get worse, but I am not seeing the catalyst to truly create demand like it existed in 2018 from China. Now, some of the other parts of the world are actually doing okay, I mean, here in North America, it’s okay, it just is that the projector business itself, the second largest market and in some customers, the first largest market for them is China and we are seeing that softness and inventory correction clearly in Q1 and a little bit in Q2. I just don’t expect – I guess what the guidance we are giving you, with the verbiage we are giving you, I don’t expect a strong bounce back in the second half, I am just not seeing the catalyst. I am not seeing it down that it’s not going to be the self-correcting thing that click, that’s my estimate. As we get closer, I will give more color. On video delivery, it’s mainly – the PBR business is – I don’t expect it to really correct, it’s doing fine, but a lot of the volume we shift and lot of the growth we showed in Q4, now in Q1 and even into Q2 because we are already into Q2 is from the set-top box converters. And frankly, the cost of the converters is not that – it’s not a no-brainer to go out and buy one, you go out and buy one and it’s because you are converting this existing 4K HDR TV, probably beautiful TV, you wanted…

Suji Desilva

Analyst

Okay, that’s very helpful. Specifically, I think you called Soft Iris for Qualcomm the announcement there, what’s the timing of that starting to impact the revenues and how do we think about the magnitude of the contribution for that relative to your chip business?

Todd DeBonis

Analyst

Well, I mean, the way I look at it is now with the introduction of Iris 5 and the collaboration with Qualcomm on Soft Iris in conjunction with us, we are reducing the cost point, both the cost structure and the ASP, because I see elasticity with our fourth generation Iris, which is our lowest cost – our lower cost version of the processor. Between the three of them we have a very good family of solutions to address the mobile market and so we have expanded the total TAM, which I will tag at $1 billion for that mobile processor market. The Soft Iris right now is actually the smallest portion of the TAM partly because licensing fees will be less than what we sell our processors for, one, but two, it is only targeted today on their newest and highest end AP, the 855. The approach is we can’t do everything we are doing in software. We can do some of the things we are doing in software as long as the display pipeline is a high-quality display pipeline. The 855 has a high-quality display pipeline in it. It doesn’t have mimic. It doesn’t have some of the other features we have, but it is a good display pipeline. And if you put our calibration and some of them – our color management algorithms on that display pipeline, you have a very good experience. But today it’s very targeted, it’s not just a choice. The Qualcomm only wants to apply it there or we only want to apply it there. It’s more of an artifact of the capabilities of the display pipeline. They will be expanding the qualitative display pipeline over time through further APs, but that will take a quite a while. So, they answer your question, the software solution will see revenue – we should see revenue this year from it. This is an early announcement. This was we are collaborating with Qualcomm on delivering this to customers. So, we are just now starting to engage with those customer programs, so it’s going to take a little while. It is quick and you can do and come to a program with Soft Iris a little bit later in the game and still impacted before the product release when you are bringing in a processor and it’s got to be on the motherboard, you got to come in much earlier in the game.

Suji Desilva

Analyst

Okay, very helpful. And the last question, similar question it’s fair, the TrueCut announcement, congratulations on that in the YOUKU customer marketing announcement, congratulations on that. Well, how do we think about TrueCut from a revenue perspective, what kind of revenue model should we thinking about here or is that not the right way to think about the impact you guys have rolling out TrueCut and the partnership here?

Todd DeBonis

Analyst

Well, I think at some point, clearly, it’s going to be – it’s why we are in this business is to create revenue and profits, but short term, I wouldn’t be focused on the revenue and profits from that business, I will be focused on the engagements we announced. So just to be clear, this is a licensee model, okay, it is several facets of licensing. The thing we did with YOUKU is effectively a platform license that allows them to use the tools to convert the content, distribute the post-conversion content to their consumers and then we have enabled the phones of the consumers through the app. So, we have created an SDK for their app specifically that runs on the GPU of different APs and we have qualified – we are starting with the phones that their users that are the most – the highest volume phones of their user base and then we are working on our way down. But in the end, we will probably have – our target is to have the vast majority of their users to receive on your existing handsets, HDR content. Now, the quality of that content to some degree will be a reflection of the quality of the display of the phone. Remember, we are not put – these are all phones that are in the market today. So, they may have a good display pipeline, they may not, they certainly don’t have our processor in it. Clearly, the experience if you have a very high-quality phone or the high-quality display and our processor in it – the experience is going to be a much better experience, but we have if you compare it to just a standard dynamic range, the content today pre-conversion before they converted it, almost 100%,…

Suji Desilva

Analyst

Okay, very helpful, Todd. Thank you.

Operator

Operator

Thank you. And our next question comes from the line of Charlie Anderson with Dougherty & Company. Your line is now open.

Charlie Anderson

Analyst · Dougherty & Company. Your line is now open.

Yes, good afternoon. Thanks for taking my questions. Todd, I wonder if you could maybe expand on that a little bit, I wonder if you would be able to maybe quantify the TAM comparing the chip opportunity for you and mobile between TrueCut and then between Soft Iris? And then I have got a follow-up.

Todd DeBonis

Analyst · Dougherty & Company. Your line is now open.

Yes, it’s a very good question. I should probably even just breakdown the TAMs across all our businesses real quick. Projectors about for us what we can serve is maybe $100 million TAM, that I think last year we shipped 60 million against right and that’s probably pushing it. And then the video delivery business is probably sub $100 million and we are sub $20 million into it. The big upside there is probably OTA, but still collectively together, it’s less than $200 million TAM. If you go look at the mobile processor market, the way we look at it now that we have expanded into Soft Iris, it’s a $1 billion give or take TAM. And that we virtually are just scratching the surface on. And then you look at TrueCut and I apply it to tools, device licensing and platform licensing, it’s probably somewhere in the long run once this technology really takes off between $300 million and $500 million worth of licensing TAM. And so you can see these new areas we are focused on mobile and TrueCut, the market itself just doors what we are currently focused on or what we currently get revenue on. What we are focused on is the mobile and TrueCut. We certainly have to keep our customers happy. I am focused on the OTA initiative within video delivery, but where the team itself, where our hiring is focused, where our new technology development is focused and where I am personally focused on deal making is with mobile and TrueCut. And so we are paying for all that effort through the cash flow generated by the legacy projector and video delivery business. We try to run this very disciplined. Clearly, I would like to spend more money than that business generates to accelerate success in mobile and TrueCut, but we are public and we are going to remain fairly disciplined, the larger we get, the more we get to spend.

Charlie Anderson

Analyst · Dougherty & Company. Your line is now open.

Great. And then on licensing, it looked like that helps drive a little bit of upside in gross margin in the quarter. I wonder if maybe you could quantify how much came on the licensing side and then just expectations for the rest of the year, the relationship between licensing and gross margin? Thanks.

Todd DeBonis

Analyst · Dougherty & Company. Your line is now open.

Yes, we are not going to completely breakout the licensing. I will say it was a reasonable chunk of the mobile revenue, but since it was 100% tied to the YOUKU deal, I don’t want to really get into the details of it, because I am exposing what I consider confidential. So just say that it’s a significant amount, enough that it moved the gross margin needle, I mean, maybe Steve can comment a little bit.

Steven Moore

Analyst · Dougherty & Company. Your line is now open.

The only thing I would add though, because I agree confidentiality is very important for us and for YOUKU on this, but we certainly were within our guidance on all measures without the licensing.

Charlie Anderson

Analyst · Dougherty & Company. Your line is now open.

Maybe I will ask sort of a follow-up this way, do you anticipate any licensing revenue in Q2, is that embedded in the some of the gross margin guidance that you have?

Steven Moore

Analyst · Dougherty & Company. Your line is now open.

There is some. It’s not as significant as what was in Q1 these deals – there is actually new accounting standards that are just being applied to people that were in the licensing business before, just so happens that our first licensing revenue showed up when new accounting standards showed up. And so we were learning along the way, but there is some built into Q2. I would say as we get started probably a good way to understand this is we today have a pipeline of potential opportunities in both mobile and TrueCut that far surpasses the capability of the team to execute on – to execute both from an R&D perspective, from an application support perspective and from a deal making perspective. So what we are doing is we are prioritizing where we are absolutely going to get the most bang for our buck over the long-term. And what I mean by long-term we have a goal and we are very focused on that goal, it’s a long-term goal, it’s a 5-year goal, but that goal is to go out and achieve 10% of the market in mobile and TrueCut that I just talked about. At the early stages a big part of that is making sure we partner with the right customers, ecosystem partners, device manufactures etcetera. And so the deals we are focused on are with larger companies. They are harder to get finalized. The early deals I am trying to incentivize, the early adopter customers to use their marketing cloud to help us achieve our results. That complicates the deal-making. So what I am trying to say is I think over time the more deals that get accomplished, the easier it is for the next deal to say yes and it also as time goes by, the less I have to lean on these customers to get the marketing message out. So, the deals become cleaner. They probably become richer and they come at a quicker pace. Today, they are going to come in sporadically and it’s hard to predict how they are going to come in. And in this case, a good chunk of the licensing fee, not all of it, we put into Q1 right. So, because that’s how we have to recognize the revenue. And so it’s hard to say – it’s going to be very hard to forecast this business. So right now I just take a conservative model, no modeling.

Charlie Anderson

Analyst · Dougherty & Company. Your line is now open.

Yes absolutely. Okay, thanks so much, guys.

Operator

Operator

Thank you. [Operator Instructions] Our next question comes from the line of Gus Richard with Northland. Your line is now open.

Gus Richard

Analyst · Northland. Your line is now open.

Thanks so much for taking my question. On the Soft Iris, when would you anticipate seeing first revenue from that offering?

Todd DeBonis

Analyst · Northland. Your line is now open.

Back half of the year is what I think I alluded to, to Suji on the call, Gus.

Gus Richard

Analyst · Northland. Your line is now open.

Okay. And will that be a significant portion of the mobile revenue?

Todd DeBonis

Analyst · Northland. Your line is now open.

No, the mobile revenue for this year will still be predominantly processor revenue.

Gus Richard

Analyst · Northland. Your line is now open.

Okay. And then that would just leads into my follow-on, in terms of processor design-ins and models that you expect to ramp with your processor in the second half, can you provide any color on how that’s going?

Todd DeBonis

Analyst · Northland. Your line is now open.

It’s going well. We are focused on as I have said previously about the pipeline of opportunities surpasses our capability to engage. So, we are prioritizing what I would say our more platform deals, so multi-phone, most people engage this as or even looking for just a phone model or a year, they are looking at multiple phones over multiple years. And so we are focused on those discussions. It’s a subset of the total pipeline. We are doing some one-offs but we are having to prioritize our resources.

Gus Richard

Analyst · Northland. Your line is now open.

So, at this point how many customers and how many platforms or can you give any quantification?

Todd DeBonis

Analyst · Northland. Your line is now open.

Well, I mean, probably, if I go look at the sales guys opportunity list for, understand that some customers have multiple phones and so the sales person is going to come in and put multiple phone projects in our pipeline. If we engage with the customer and we don’t come to terms, all of those phones could go away. All of the phones could go through. So, I can certainly tell you how many projects are there. I just wouldn’t read too much into it.

Gus Richard

Analyst · Northland. Your line is now open.

Aren’t most phones locked down for the back half now?

Todd DeBonis

Analyst · Northland. Your line is now open.

Listen, absolutely, I mean that’s not what you asked and you asked me about my total pipeline. But you asked me, what phones are going to get launched in the back half? There will be phones launched in the back half. I am not going to talk about quantity.

Gus Richard

Analyst · Northland. Your line is now open.

Okay, alright. Thanks so much.

Todd DeBonis

Analyst · Northland. Your line is now open.

Yes.

Operator

Operator

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

Joe Flynn

Analyst · Craig-Hallum. Your line is now open.

Hi, this is Joe Flynn on for Rich Shannon. Most of my questions were already asked, but I guess would you mind spending on the HMD Global partnership part of the Nokia phones, from our understanding the 7.1 device that you guys were in last year did pretty good volume, got pretty good reviews and everything, but like have you since been able to leverage that into existing Nokia designs already, I guess just any update you can provide on that part?

Todd DeBonis

Analyst · Craig-Hallum. Your line is now open.

No problem. So we did announce that we signed into a multi-year, multi-phone collaboration. From the time we signed on that deal, we started working on new phones, okay, together. And that was probably three months after the 7.1 launched. They did announce some phones after the 7.1 about the time we made this announcement we are not in those phone, right. I know some people are wondering whether we are in those phones or not, we are not. The phones that are part of the multi-phone – multi-year announcement we made, you will see I think the first one lunch is in June.

Joe Flynn

Analyst · Craig-Hallum. Your line is now open.

Okay.

Todd DeBonis

Analyst · Craig-Hallum. Your line is now open.

And they were planning on multiple launches this year with Pixelworks inside.

Joe Flynn

Analyst · Craig-Hallum. Your line is now open.

And I guess just real quick when we talked about how – those are good chunk of mobiles this quarter and what the licensing component, but what’s the right run rate to be just like kind of thinking about as we transition to calendar 2019, still around 1 million, 1.5 millionish probably good levels to think?

Todd DeBonis

Analyst · Craig-Hallum. Your line is now open.

Well, I would expect mobile to go up in the back half of the year from where we are at today.

Joe Flynn

Analyst · Craig-Hallum. Your line is now open.

Okay. And I guess quick question on OpEx actually, so you said the $2 million impact, but would this be a good run-rate to think about through gathering up 2019 as well around…

Todd DeBonis

Analyst · Craig-Hallum. Your line is now open.

No, no, no, we guided to $10 million to $10.5 million, the $8 million level was when we had $2 million credit from development project. So OpEx will be somewhat lumpy as we develop devices in the beginning part of the development where acquiring IPs that go into a device depending on what device, some have more, some have less projector chips for example, usually have ARM processor, which is it’s significant one-time head, but from an annual basis, if you were to level set around where we were this quarter, 10.3 to 10.5, you are not going to be far off.

Joe Flynn

Analyst · Craig-Hallum. Your line is now open.

Great. Thank you. That’s all for me.

Todd DeBonis

Analyst · Craig-Hallum. Your line is now open.

Thank you.

Operator

Operator

Thank you. And I am showing no further questions at this time. So with that, I would like to turn the call back over to President and CEO, Todd DeBonis for closing remarks.

Todd DeBonis

Analyst

Alright. Well, thanks everybody for their time. Probably, the one thing I would like to close on is we are once again very focused on our real opportunity, our real upside opportunity, which is mobile and TrueCut. I don’t want to under-sell, there is a lot of people of this company that work hard on projector and video delivery and are focused on those markets as well the OTA initiative. But I also just – I don’t want to diminish the fact that our real upside opportunities in mobile and TrueCut, we have made some significant progress in Q1, you are going to see continued progress. This company is about fulfilling that portion of our destiny. It’s how well we do in achieving the target results in mobile and TrueCut. The next couple of years will about establishing the right partnerships, ecosystems, credible marketing partners to get us to the next level. After that, it’s about accelerated revenue and profits. Not that they may come in, not come in accelerated revenue this year, I am not sure of the profits, because if accelerated revenue comes in, we are going to hit the spend button. We are going to go out and chase that revenue. So, those investors and those analysts out there, you can model the growth, but right now we are not spending enough in mobile and TrueCut given the opportunity we have in front of us. We are disciplined. We are going to move forward in a very disciplined manner, try to grow that spend, but it will be tied to the revenue growth. Alright, thank you very much.

Operator

Operator

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.