Good day, ladies and gentlemen, and welcome to Pixelworks' Inc. Fourth Quarter 2019 Earnings Conference Call. I will be your operator for today's call. [OperatorInstructions]. This conference call is being recorded for replay purposes. I would now like to turn the call over to Pixelworks' CFO, Mr. Elias Nader.

Thank you. Good afternoon, everyone, and thank you for joining us today. With us 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 Pixelworks' press release issued earlier today announcing the Company’s financial results for the fourth quarter and full-year 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, February 06, 2020. And we undertake no obligation to update any such statements or 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, 2018, and subsequent SEC filings for 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, deferred revenue, fair value adjustments, inventory step-up and backlog amortization, amortization of acquired intangible assets, stock-based compensation expense, restructuring expenses, gain on extinguishable convertible debt and discount accretion on convertible debt to fair value. The Company uses these non-GAAP measures internally to access our operating performance. We believe these non-GAAP measure 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 income loss and GAAP net income loss to adjusted EBITDA, which provide additional details. With that said, I would now turn the call over to Todd for his opening remarks. Thank you.

Thank you, Elias, and good afternoon to everyone joining us on today's call. Starting with a quick overview of our financial results for the quarter, consolidated revenue was $16 million which was at the midpoint of our guidance, and a high level activity within our respective end markets played out as we anticipated. With continued momentum and triple digit growth in Mobile, resulting in record Mobile revenue that exceeded 20% of total revenue in the quarter. We also saw the expected decline in both projector and video delivery, as those markets work through previously indicated inventory corrections. Gross margin and operating expenses were each within our target range and adjusted loss for the quarter came in at the top-end of guidance. Looking first at our Digital Projector business. The overall market and profile of the end market demand has remained very consistent with the commentary we provided on our third quarter conference call. As a result of broad global macroeconomic headwinds, ongoing trade tensions and slowing growth in China, the professional projector market declined approximately 15% in 2019, according to PMA Research. Combined with what we would characterize as the first quarter seasonality in the projector market, we anticipate subdued demand to extend through at least the first quarter. Also, in Q1, we expect to begin ramping more meaningful shipments of our next-generation SoC to our large co-development customer. As we have previously communicated, we continue to believe that this transition will happen throughout 2020. Also previously stated projected revenues will be impacted by lower ASPs of the new SoC, but we will see overall margin improvement in our projector business as all of our customers transition to our newest SoCs. Turning to our Video Delivery business. As anticipated, revenue declined sequentially in the fourth quarter as a result of…

Thank you, Todd. Revenue for the fourth quarter of 2019 was 16 million compared to 18.1 million in the third quarter and compared to a revenue of 20.5 million in prior year fourth quarter, which included approximately 1.5 million of end of life product revenue. The sequential and year-over-year decline in fourth quarter revenue reflects the respective inventory corrections in both our digital projector and video delivery end markets, which was partially offset by record revenue contribution from the mobile market. The breakdown of revenue during the fourth quarter was as follows; revenue from digital projector was approximately 9.4 million, future delivery revenue as an approximately 2.8 million, revenue from mobile was approximately 3.8 million comprised almost entirely of sales of our Iris Visual Processing Solutions. Non-GAAP gross profit margin was 48% in the fourth quarter of 2019 compared to 53.9% in the third quarter of 2018 and 55.1% in the fourth quarter of 2018. Non-GAAP operating expenses were 10.4 million in the fourth quarter of 2019 compared to 10.3 million in the third quarter of 2019 and 10.3 million in the fourth quarter of 2018. Adjusted EBITDA in 2019 was a negative 1.7 million compared to a positive $452,000 in the third quarter of 2019 and positive 1.8 million in the fourth quarter of 2018. On a non GAAP basis, we have reported a net loss of 2.3 million or loss of $0.06 cents per share in the fourth quarter of 2019 compared to a non-GAAP net loss of $518,000 or loss of one penny per share in the prior quarter. Our non-GAAP net income of 1.3 million or $0.03 per share in the fourth quarter of 2018. Moving to the balance sheet. We ended the fourth quarter of 2019 with cash, cash equivalents and short-term investments of approximately…

Well, I think we will do the Q&A.

Okay. Let's do the Q&A now. Sorry. Yes.

Thank you. [Operator Instructions]. Our first question comes from Sujeeva Desilva of Roth Capital.

Hi Todd, hi Elias Nader, congratulations on the progress here across multiple front. So let me start off maybe with mobile, obviously the exciting story here. I just want to make sure I heard correctly, you think mobile will be Todd by the end of 2020 half the revenue, just want to make sure I heard that. And if that is the case, how many Tier-1s do you expect to be embedded in that sort of growth maybe Oppo or maybe more than Oppo?

So let me make sure that I'm clear. I said our goal is in the fourth quarter to have mobile, which is a combination of TrueCut and our Iris Visual Processing Solutions to be more than 50% of our total revenue. I would suggest you that to achieve that goal, you would have to have at least two Tier-1 OEMs as part of that group.

Okay good. That helps absolutely. And then on TrueCut just maybe a subtlety here. How is the maybe perhaps the U.S. strategy you are talking about versus Asia different and as you talk about guys you are engaged with in the U.S. is it content providers like a YOUKU? Or is this the production houses for both sides of the equation there -.

So before I give you a specific answer to what you are asking, which I will. I just want to make sure that you understand the difference between China and the U.S. When it comes to content acquisition or content creation, in China, when the streaming service providers acquire the rights to content, they also acquire the rights to reformat that content. So that makes it very simple that we can structure a deal that requires reformatting of content just with the streaming provider itself, whether they created the content themselves or whether they acquire the content. In the U.S. it is different. In the U.S., most of the creators of content, do not release the reformatting rights to the streaming providers when they license them that content, that requires a new license. In addition, when you put motion rendering, when you really not just dealing with converting from SDR and HDR, but also converting from lower frame rates to high frame rate or vice versa, filming in higher frame rate and displaying in lower frame rate, this is not something that usually a streaming provider will go reformat. This will be done during the post production process of the original content. So with that said, in the U.S., what we are really focused on is the full ecosystem. We are focused on studios, Tier-1 studios, their post production partners, the creative directors and then in addition, the streaming platform providers, and then finally the devices that content would be streamed to mobile, TVs, cinema.

Okay, very helpful. And just as a quick follow-up question to that question, because the U.S. content creators is so tight about what you can do with the content. Is the streaming service provider is challenged of delivering that content even harder and it is even more of a requirement for TrueCut and Iris in the U.S. than China, where you can just down shift it and delivered it, is that a fair statement?

What I would suggest to you is well, first of all, today, the large streaming providers that there is new large streaming providers, and there is old school studios that have now become large streaming providers. In both cases, they have large studios within their ranks that produces a lot of their own content. So you can deal directly with a studio/streaming provider and provide an end-to-end solution. To say whether they are more motivated here or in China, I think they are both motivated in delivering a improved experience to the consumer. It is a highly competitive market. If one streaming provider or one studio can get ahead of another, they like the edge.

Okay, I appreciate that color Todd. And last question and I will go back in the queue. Two segments here, protector in Japan in the video delivery both recovering. I'm curious where the run rates will fall out In your opinion, versus say where they were in 2018 average or peak and, I guess the moving parts in projector of the SoC ASP versus prior and in Japan is kind of rebuilding from the initial ramp. So, any thoughts there and how their run rates might fall out in 2020 versus where they had been in 2018 would be helpful. Thanks.

So, we expect growth overall in the video delivery business from 2018, although with a slow start this year let’s call it modest growth. For digital projector, the market itself will not achieve the - I mean it is down a good 15% to 18% of units shift. And this is all the professional market including DLP. We don't really serve DLP market much. The DLP market actually had the largest market loss within the segment this year, the professional projector market. But, I expect and you never know where it is going to end, but I do not expect that we will see 2018 levels again. I expect that, we will see where we end up in 2020, I think that is sort of where the markets is going to be. Right now, my expectation, I mean you can go and get research data from PM Research, but they are probably looking at a total market down 20%. From 2018 as a reference point, alright.

Okay. Thanks guys. Congrats again on the progress on Mobile.

You are welcome Sujeev.

Thank you. Our next question comes from Charlie Anderson of Dougherty & Company. Your line is open.

Yes. Thanks for taking my question and congrats on all the solid progress on mobile design traction. Todd, I want to start on TrueCut. I wonder if maybe you could frame up for us in any way possible just sort of the revenue potential opportunity there. I know you don’t have a lot of customers, so it maybe a little bit difficult, but the degree you could maybe talk about the addressable market or how we should think about pricing relative to volume that is out there, just any color would be helpful. And then I have a follow-up.

I will try to really, you know, we are really going to compete against something that is existing in the market. We are trying to create a format let’s say or solution for delivering creators intent at high frame rate to these new devices that are now coming to the market. It is a challenge that the creators have, that they don't really have a good solution for. And as we are creating that market, it is hard for me to peg exactly how big it is. But, with that said, I can tell you, our approach is, we will be marketing the licensing of our tools and support to studios and post-production houses. We will be marketing our streaming platform, the licensing of our streaming platform to streaming providers like we did with YOUKU. And we will be marketing the end devices supporting that format. And so there is three areas that would be in our business model, those three areas. How big that market is? I mean go and tell you how much they spend on movies every year. I can go and tell you how much the streaming providers spend on their platform every year and I can go tell you how much device manufacturers, TVs, mobile devices and tablet spend each year, it is very large. So, we are just going to go in a capture a segment of that. I do expect it to be a material contributor to the business probably next year going into 2022.

Great. Thanks for all that color. And then Elias just a question on cash burn, just so I understand that, are you saying that you will end Q1 with similar level of cash that you ended Q4 and then any thoughts to the degree that you can share on just cash usage in 2020.

Exactly. No exactly what you are saying. We intend to grow cash for the second half of 2020 for sure, that is the goal and we are very comfortable with where we are at on cash. So, cash burn will be similar, Q1 to Q4.

Okay. Got it. Thanks so much.

You are welcome.

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

Hey Richard.

Hi Elias, how are you. Hey Todd.

Hello Richard.

Hi, sorry, I'm going to try not cough too much, it is coming up so apologize if I pack up along here. Excuse me. Let's see, a lot of interesting things to ask about. I guess Todd, the first thing kind of characterizing your mobile customers and how the ramp out here, you talked about 12 models with seven OEMs, three of which are new and some of them are flagships and some of them were kind of high-end premium gaming ones. Maybe if you could help us understand the extent to which these flagships can be large ones either in absolute or relative context.

Well, I mean, given where we are coming from a Tier-1 flagship is material to us at any volume, alright. I think what I will say is the flagships that are going to come out are not only incorporating Pixelworks’ technology, but they are also incorporating high frame rate displays that at a pixel count and color gamut range that have not been available on the market before. So there is a whole new visual experience that these OEMs and it is more than one are targeting to bring to the market. They do believe that this experience will be a key differentiator for consumers deciding on which flagship to upgrade to, at least in the Android community right. And there has been a lot of effort over the last two years in focuses on camera and the capabilities of the camera and sort of removing the bezel display, but not really improving the full visual experience of the display. So I think, it is new, collectively we are working with the OEMs to market these features. And you will see how that goes shortly. We clearly anticipate a material increase in revenue in 2020 versus 2019 for mobile. It is going to be highly dependent on how these models as they launch are received in the market. Some of them are targeting China, Southeast Asia. Some of them are targeting international markets including the U.S. carriers.

Okay. That is helpful perspective Todd. Thanks for that. Wanted to follow-up on the agreements you announced with Oppo last month here. I know that Oppo is part of the larger group, I think it is called BBK, which also has another large OEM and that group. Is there a possibility of kind of cross fertilization of work that you are doing at them into other affiliates within that group?

Well, I mean they operate as independent companies, but I would say that the large OEMs in China are very aware what their competitors in China are doing when it comes to new technology. And if one is going down a path of adopting technology to differentiate, the others are very aware that that is happening and it is not coming from the technology provider. It is just the nature of that community. They are very closely tied. So there is no - corporate don't read too much into it, just because OPPO is part of BBK that corporate wide they will use it. But clearly, I mean we are engage with several OEMs, Tier-1 OEMs in China, they are very aware of our technology.

Okay, fair enough. Just probably a couple of more questions from me. - TrueCut. Within the U.S. community, Todd, how would you characterize or what is your expectation of how the sales cycle will go? And what are going to be the kind of the next milestones that you should be able to report on. How should we be able to judge this going forward from here?

Well, I mean I think that that to me Tier-1 studio backing gamut or Hollywood beyond just these technical organizations that have given us awards, that have given us backing. If we now get endorsement by a large studio, I think that is a very key indicator of the progress we are making TrueCut. Subsequent, the studio and large post productions adopting the technology. The next milestone would be, in my mind would be a streaming content provider outside of China adopting the technology.

Okay. And if you look at these constituencies, studios, streaming guys, device guys, et cetera. Is there one that is kind of drives the rest of the ecosystem to move towards it. Is it the streaming guys side out of the studios or any ways you can describe were kind of your biggest focus should on?

This is somewhat new to me, but, I have spent a lot of time and energy on it recently. I would say that there are a handful of sort of evangelist, directors and creators that go out on a limb with new technology, because they believe the experience they are going to deliver with their project would be a better experience to that new technology. I think that if these people, these evangelists adopt and publicly endorse your technology, the rest follow pretty quickly.

Okay, fair enough. Last question financial one for Elias. You just reported a quarter of I think 48% gross margin. You know you are now guiding for 49% to 51%, if I remember correctly?

Yes, yes. 49% to 51%.

And we have lower revenues and I imagine a little bit higher contribution from mobile, which seems to be going contrary due to the mixture. Wonder if you could help us understand bridge the difference here? Mobile gross margin are improving more than you have had the past or any way you can help us bridge that please?

Well, it will improve, because our expectation is that, that is not going to stay at these levels of 48% to 49%. We are looking at the huge improvement for the whole year. But the mixture of Q1, the way we are looking at it is of course, contributing to these ranges we are giving you which is 49% to 51%. But for the whole year there will be an improvement, and we are very comfortable with that.

Okay, fair enough. That is all the questions for me guys. Thank you.

Thank you, Rich.

Our next question comes from Jaeson Schmidt of Lake Street.

Hey guys, thanks for taking my questions.

Hey Jaeson.

Todd, when you look at your mobile pipeline, are you seeing more interest on the chip side or in the Soft Iris side, or a combination?

So, Soft Iris is a very small subset of the features of what our chips deliver, right. But it does one thing really well, it does a couple of things, but it does one thing really well, and that is device calibration. So you can do unit-by-unit calibration at the manufacturing line in a very low test time. In fact, I mean, I think we were a third of what the competing way to do it was more accurate. So, if somebody wants to just calibrate their phone. And isn’t interested in the other features, they could have a high interest or they want to do tone mapping. They can have interest in the Soft Iris solutions, but if they really want to use the full suite of visual processing features that we bring, including motion, they have to use our visual processors. And I would suggest to you, we have some customers using both in conjunction on the same platform. And I don't want to go into too much detail why they use both, we will do that after the phones launch. At a very high level they are very focused on bringing introducing new features but trying to maintain the power budget, the use budget throughout the day. And so they have to come up with creative ways to implement some of these features that can be power intensive, but still maintain that power budget. And one way is to use both our processor and our software or Soft Iris together. But I would say, what is going to drive the revenue growth in the majority of the models that I highlighted in that, that you will see launched in the first half the majority are processors. There are a couple of Soft Iris only solutions. The grand majority use either Iris three, or Iris five.

Okay, that is helpful. And just more kind of big picture question. What do you think is really driving this acceleration in mobile for you guys? Is it, these OEMs finally recognizing the value proposition, but need through differentiation in the market, or some of these newer technologies such as the high frame rate you outlined, or really needing a way to address that? What do you that sort of kind of pushing this mobile to center stage finally?

Add 5G your three scenarios and I would say, yes, it is all of them. It is all, I mean we have been pushing for four years, we have been evangelizing the technology. And through that process, we didn't stay still with development, right. We are developing new products, even we didn't sell a lot two years ago. We still spend a lot of money on R&D, on our roadmap, and we continue to do that. And so, I think they see that. There is a level of comfort from the customers that we are not going away. We are going to be here and we are constantly innovating. There are new problems that we solve with high frame rate displays, which now they want to implement. 5G, a big part of 5G at least initially market 5G and the value proposition to consumers is in consumption and interactive video and gaming, and interactive gaming. And so you put them all altogether, that is all coming together right now at sort of a right place, right time.

Okay. That make sense. And then, just a last one from me. It still looks like the $11 million at the mid-point for OpEx, how should we think about that trending this year factoring in the recent restructuring?

Yes. It is still going to be the same range as I’m expecting you know for the short time, for the time being I should say. I don't expect OpEx to go out massively this year. I mean, we are comfortable where we are at in terms of our investments in growing business. And like you know, we are using the cash very efficiently.

Okay. Perfect. Best of luck guys.

You welcome Jaeson.

Thank you Jaeson.

Thank you. I'm showing no further questions at this time. I would like to turn the call back over to Todd DeBonis for any closing remarks.

Thank you. Thank you for joining today's call and for those investors and analysts, that will be traveling to Mobile World Congress, I look forward to meeting you there and updating on our progress. That is it.

Thank you. Ladies and gentlemen this does conclude today's conference. Thank you for participating. You may now disconnect.