Good day, ladies and gentlemen, and welcome to Pixelworks Incorporated’s First Quarter 2020 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. [Operator Instructions]. 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 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 Pixelworks' press release issued earlier today announcing the company's financial results for the first quarter of 2020. 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, April 30, 2020. The company undertakes no obligation to update any such statements or reflect events or circumstances occurring after today. Please refer to today's press release and our annual report on Form 10-K for the year ended December 31, 2019, 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. Non-GAAP measures exclude gain on sale of patents, inventory step-up and backlog amortization, amortization of acquired intangible assets, stock-based compensation expense and restructuring expense. The company uses these non-GAAP measures internally to assess 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 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.

Thank you, Elias, and good afternoon to everyone joining us on today's call and webcast. I hope you and your families have stayed safe and remain healthy during these unprecedented times. My sympathy and well wishes go out to all those who have suffered loss or hardship associated with the COVID-19 pandemic. I also want to sincerely thank the many individuals serving on the frontline to heal and care for others in the countless communities that have been impacted. Given the current environment and heightened uncertainty, we accelerated our reporting this quarter by disclosing preliminary Q1 results in early April, along with a simultaneously published shareholder letter to provide a real time context on how the company was performing, as well as responding to the COVID-19 pandemic. Consistent with our preliminary indication, our first quarter results were in line or above our original guidance. A few of the notable highlights from our Q1 financials included: Mobile revenue grew 64% year-over-year; non-GAAP gross margin expanded to approximately 52%; and we successfully implemented cost reductions resulting in operating expenses coming in approximately 10% lower than the midpoint of our guidance. While we encourage our long-term shareholders to refer to our recent filings and read my April 7th letter in its entirety, I want to take this opportunity to briefly reiterate several of the key points. Pixelworks has operations in a number of countries with physical locations, spanning across Asia and North America. During the quarter, we proactively responded to the global spread of the COVID-19 pandemic, making the safety and well-being of our roughly 225 employees our single highest priority, beginning in China, which was impacted first, and then subsequently, in other locations. We facilitated and effectively utilized remote working procedures to maintain all critical functions. Following the extended Chinese New Year,…

Thank you, Todd. Revenue for the first quarter of 2020 was $13.8 million, compared to $16 million in the fourth quarter of 2019, and compared to revenue of $16.6 million in the first quarter of 2019. First quarter 2020 revenue reflects a combination of seasonality and the ongoing inventory corrections in the digital projector and video delivery markets, partially offset by the anticipated year-over-year growth in the mobile market. The breakdown of revenue during the first quarter was as follows: Revenue from Digital Projector was approximately $8 million. Video Delivery revenue was approximately $3.2 million. Revenue from Mobile was approximately $2.6 million, comprised largely of sales of our Iris visual processors and Soft Iris solutions. Non-GAAP gross profit margin was 52.1% in the first quarter of 2020, compared to 48% in the fourth quarter of 2019 and 53.3% in the first quarter of 2019. Non-GAAP operating expenses were $9.7 million in the first quarter of 2020, compared to $10.4 million in the fourth quarter of 2019 and $10.3 million in the first quarter of 2019. Adjusted EBITDA for the first quarter of 2020 was a negative $1.5 million, compared to a negative $1.7 million in the fourth quarter of 2019 and a negative $0.5 million in the first quarter of 2019. On a non-GAAP basis, first quarter 2020 net loss was $2.6 million, or loss of $0.07 per share, compared to a net loss of $2.3 million, or loss of $0.06 per share in the prior quarter, and a net loss of $1.5 million, or loss of $0.04 per share in the first quarter of 2019. Moving to the balance sheet, we ended the first quarter of 2020 with cash, cash equivalents and short-term investments of approximately $20.4 million, compared to approximately $14.2 million at the end of the fourth…

[Operator Instructions]. First question will be coming from the line of Charlie Anderson with Dougherty & Company. Your line is now open.

Thank you for taking my questions and glad to hear everyone is safe in this environment. I wanted to start with just a question about the mix of business in Q2 relative to Q1. Obviously we're going to see inventory rebalancing all over the place. But curious by segment how it looks? And then you are calling for a higher gross margin in, you told, mix. So do you think those are related, if you could speak to that? And what also within the higher gross margin is sustainable, meaning you've taken product costs out and whether the segments will have higher gross margins going forward? And I got a follow up.

I'll take it initially and maybe Elias can follow up. So, margin is improving because we have been -- on our Projector business, which is still, I would say Me part is the largest part of our revenue. We have migrated all of our customers, not just our largest customer, but all of our customers to various different percentage levels of our newest SoC platform, right? And the margin profile on those new SoCs is significantly higher than the old margin profile. In some cases, the ASPs are about the same and some cases the ASPs are lower, so provide some revenue headwind. But from a margin perspective, it's significantly higher. And the reason I went through that level of detail is to answer the second part of the question, is it sustainable? In the Projector business is absolutely is sustainable. When the projector business bounces back, we expect those margins to stay intact, if not go even a little higher in the projector space because we'll have a higher percentage of the overall business will be the new platform out in time. So probably a similar story with Video Delivery, we have migrated -- improved both costs there and migrated customers to slightly better margin product portfolio. We expect that to also be sustainable. So what I'll call the legacy business of Video Delivery and Projector. As the revenue comes back, as the inventory corrections from displacement of COVID-19, we get past them, we'll have revenue accelerating at a higher gross margin profile. Mobile, we've got a mix there. We are starting to shift a couple of platforms that are pure Soft Iris. Soft Iris gross margin is very good. Clearly the ASP for those phones is not as high as if we sell a full solution, full Iris-based…

Great. Really helpful color on all fronts, Todd. So I wanted to just revisit, you have to go -- initially exiting the year with Mobile being potentially the majority of revenue, I know so much has changed since that. I wonder if you could maybe just revisit that point? And then also along with that it sounds like things are by and large still on schedule with maybe a few exceptions on Mobile the rest of the year. I'm pretty curious, the ability of the team to work virtually in the cases where you can still be hands on, is everything progressing the way you would like it to? Or are there some things you’re unable to do in terms of working with the customers to get their phones launched?

Let me try to give guidance on it. So, yes, I would say that our pipeline -- if you really look at all the action we've taken -- I wanted to hire significantly more software and support people going into this exact timeframe. We have postponed that hiring. That hiring was to support the pipeline of customer programs specifically in Mobile a bit into TrueCut. We’ve redeployed some of our -- like our Toronto based team. Some of the activity in Video Delivery slowed down, even though we signed on a new customer, we repurposed some of the individuals there to work on Mobile. All of our mobile programs today -- all designing activity is in China. China is back. Our Shenzhen office is fully engaged. Our Shanghai office is fully engaged. Travel between Shanghai and Shenzhen, Shanghai and Hangzhou and a few other towns is warming back up. And I have people that actually travel on a weekly basis, either through train or through airplanes. Beijing has not really opened up for travel. Although I found out yesterday, I think within two weeks we'll be able to travel to Beijing. So we have a few customers that -- it was difficult to support in Beijing. But to me to get to the specific question of what our goal, our goal to still have Mobile be more than 50% of the total revenue of the company by Q4, so the goal is absolutely intact whether we can achieve it in Q4 or not. I would say that the odds went up against us, that it's going to happen in Q4. It’s not completely out of the question, but it would take -- we would have to close on most of the pipeline of activities that we have for the second half of the year, going into the first quarter of 2021. If that happened, then it probably still could happen. I'm worried that if we -- we have several new customers that we're engaged with and if all of them turned on with the same level of intensity that we had over the last six months, we may be resource constrained. So we are prioritizing the programs we're working on with that in mind. I think even if the goal is not achieved in the fourth quarter, it's not more than a quarter or two out after that.

Next question is coming from the line of Richard Shannon with Craig-Hallum. Your line is now open.

I just have a question on kind of supply chain risks here. Maybe if you can kind of help us understand where they may be coming from? I know you said it's the non-Pixelworks related. But any view into what those are and how long they may continue might be helpful? There were some other calls here last week with earnings that suggested some areas but loved to hear your thoughts on that too?

So, the ones that I know about and I may not know about them all. But the ones that I know about that are impacting our customers, in Projector is the, what we call, the optical subassembly which is the lenses and mirror subsystem that go into a projector. Some of the suppliers were in Wuhan of those optical subsystems for not only our largest customer, but a couple of other customers. And Wuhan is back up and running. But there was a good period of time the factories were down. And so they're probably trying to catch up on inventory there. Our largest customer has multiple factories. They have one in the Philippines and one large in China. They have a couple of factories in Japan as well. Japan, even though, they have shelter in place orders, the factories are located outside of Tokyo. So I think they're still working on somewhat skeleton crew. The Philippines was down for three, four weeks. I think they're supposed to get back up and running in the next two. China is up and running. So it's sort of hit and miss across the factories and some subcomponents for the projector space. In Mobile, the one area that I think maybe we’re a little bit more exposed to -- and I'm not sure that it's a severe impact, but a lot of people are trying to migrate to very high frame rate, high pixel count displays all simultaneously. There may be -- I wouldn't -- I'm not sure if it’s even a COVID-19 constraint, maybe just overall demand constraint, too much too soon. With that said, I think those are probably the main impacts for us.

You mentioned briefly on TrueCut, that engagement has been slowed down by the workplace in California. Has that improved or is there other ways to work around that? Or is that kind of a continuing delay there? And I think you’ve kind of implied or maybe that's my inference that you thought you might be able to announce and retain some business later this year. Is that kind of timeframe at risk?

It's hard for me to tell whether it's at risk or not. It does seem like in California, Southern California is -- if you look at the infection counts, et cetera, it doesn't look like we're on the abatement yet on the downside of the slope, Northern California definitely is. We're probably three to four weeks out Northern California, Southern California could be longer. There is a great deal of pressure. The way that industry is structured on the post production side of production -- a lot of these post production house studios, et cetera, use experts at that part of the filmmaking process. But many of these experts are 1099 contractors. Almost all of these contractors are effectively on furlough right now. And the locations that they would go to work on a regular basis are no longer available to go to work for now. There's some post production work I think they're doing remotely, but it was only on content that was pretty much wrapped up and ready to go. There's going to be a delay. I'm worried that there might be a delay for us. As they ramp up, as they start to come back to work, production continues, post production continues. There will be a surge in trying to get content out. I mean this is happening at the same time that everybody, all these new streaming services were trying to launch with original content and have a lot of content available, a lot of original content available to attract subscribers to their service. So there's going to be a high degree of demand for these same individuals when they come back to work. With all that said, there was a lot of interest in our technology. The team has been very creative on how we continue some of the engagements. For example, I'll give you one, one creative, technique that they did. I mean, a lot of the times we demonstrate, TrueCut rendered content is either on like a very fancy Sony X300 monitor or a very large CLED screen from Sony. But another way to do it is on high-end LG OLED TVs. And so in order for us to demo some of this content, we actually created a TrueCut app that’s our -- I mean you could probably go online and look at the LG app site and you'll find Pixelworks TrueCut app. You have to have a password and log in to get in. It's not for consumer, but it is a way for us to allow some of our targeted customers to actually view content on their home TVs. So with all that said, it's definitely slowed us down. Whether this year major announcements are out of the question or not? Too soon to say on that.

One last question. You had mentioned in your prepared remarks and in past calls about hopefully to see kind of a halo effect, your phones getting to the market with good reviews and inspiring and encouraging to other OEMs to accelerate their plans to adopt Iris in their mobile phones. You had some great ones here like with the OnePlus and others. Any examples that you can describe about the reactions you've seen from some customers, either that you have been working with or accelerating plans or ones that have come to you since then?

Twofold. We’ve recently hired a couple of basic engineers and some software engineers, which are part of the critical reqs that I had announced. And the individuals we hired were very qualified. And when I dug into why these individuals came to us because we compete for people in Shanghai with many other companies trying to hire. And many of them said because of the reviews on the products they got, they wanted to work at a company that was at the advent of changing the display screens in mobile. And then, yes, customers, we have several new customers in the pipeline that we knew who they were. They knew who we were. But I would say that the validation by these phones hitting the market with extremely positive editorial review and performance reviews was part of the equation.

[Operator Instructions]. Next question will be coming from the line of Sujeeva Desilva with ROTH Capital. Your line is now open.

Hi, Todd. Hi, Elias. A similar question maybe to what Richard was asking. Given that this is a value add feature that it seems very valuable, the high quality viewing content. Have you seen the customer sell through kind of indicate itself, the phones that you're enabling have kind of more interest among the consumer base, the mix, that has been starting to play out and now you have several models in the market and have been there for a few quarters. Any color there would be helpful?

So some of our customers actually -- some of the features we provide are always on calibration, some of the tone mapping, they're always on feature. The customer doesn't have the ability to turn on or off the feature. But some of the features we provide, the customer has the ability to turn it off and not view it or turn it on, depending on the content they're watching. And so the -- we do have end customers that track consumer behavior and how often they turn it on, or if they turn it on and leave it on. And what we've seen is positive evidence there that people -- that consumers have bought these phones, want to keep the features on, and more people as they discover them, would keep them on, which is, it's a good indicator, right? And then as far as a halo to new customers, I think the previous answer I gave you is a good one. I mean to me, the right halo will be -- as you can see, we have customers both in the mid range phone product line, and we have customers at the flagship level. And one of the indicators that we're looking for and we're pushing for hard is to have the halo effect of these high end flagships and all the benefits that we're bringing there to be demanded by the product management teams of the mid range phones that are marketing to their end markets. And we have seen recently -- I would say previously, before these announcements, we had some product marketing managers of these large phone companies that managed the mid range phones, really focus on cost, cost, cost, not differentiation. Now adding our mid range processor, this really not add that much to the cost. But if you're so focused on cost, you don't really open up your mind. We have seen especially in India, where they care about the cinematic experience, where they view a lot of video content over their phones. The product marketing teams wake up and demand this kind of experience in mid range phones. We'll see if that spreads out to design wins in that category. But the preliminary indicator looks good.

And then a question on -- I mean Todd you’ve been through enough of these phone cycles in your career. Is this a cycle where if things continue to be difficult that the phone company is thinking about de-specking the phones, reducing the cost of display, going to lower refresh rates? Or is that just not an option for them given the 5G upgrades or like demand is in -- even cost processes, price processes, not the driver of the phone upgrades. And any thoughts there would be helpful as well.

So right now, the way I see this is, I don't see it going backwards. We have a customer that approached us, a new customer, but they predominantly target low cost phones, right, for Africa and Southeast Asia and they were not a customer I thought would approach us about a high frame rate display, but they want to put a high frame rate display, I think they’re targeting under a $125 phone. And there's different set of challenges that they have to go through to do that high frame rate display and they're seeing if we can help them there. I think I’d just put that as a proof point down. I feel that the advent of high frame rate displays is not a flash in the pan, just like 5G is not a flash in the pan. Within three years my guess is two-thirds of the phones still will be 5G phones. I believe that within that same timeframe, at least half the phones sold will have at least a 90 hertz screen on it or more. So we're in the middle of displays. Now the question is, do people want to have a -- you just put a 90 hertz screen or 120 hertz screen, it actually creates some problems. It makes the experience a little smoother in certain areas, but it creates problems. Our solution solves many of those problems. So the question is how many of those people that put high frame rate screens want to continue to solve the other problems and deliver an overall premium display experience? And that's, we're going to try to make that as large of an attach rate to those high frame rate displays as possible.

[Operator Instructions]. We don't have any further questions. Please continue presenters.

Thank you, operator. I think we'll just conclude at the last question. For everybody listening, stay safe, thank you for your continued interest in Pixelworks and we look forward to update you in the future.

This concludes today's conference call. Thank you everyone for your participation. And you may now disconnect.