Good day, ladies and gentlemen, and welcome to Pixelworks Second 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, instructions will be given for the question-and-answer session. This conference call is being recorded for replay purposes. I would now like to turn the call over to Pixelworks' CFO, Mr. Elias Nader. Please go ahead.

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 second 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, Monday, August 10, 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 comp 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 loss – net income loss to adjusted EBITDA, which provide additional results – 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 those joining us on today's call and webcast. As outlined in today's press release, our second quarter results reflected the anticipated headwinds associated with the broad impact from the COVID-19 pandemic on our target end markets. Although, revenue was at the lower end of guidance range we provided, favorable product mix as well as cost-improvement initiatives resulted in better-than-expected gross margin non-GAAP EPS at the midpoint of guidance. As our results indicate, we continue to be in a challenging environment. However, we believe it is important to clearly distinguish the ways in which Pixelworks is being impacted and the areas where we have continued to make progress. In terms of customer sell-through and end-market demand, we are seeing negative effects in all of our end markets with the projector business experiencing the largest year-over-year decline. Given that a majority of total projector unit volume is driven by large government tenders for education and corporate tenders for enterprise applications, we've naturally observed reduced customer demand as a result of the recent shifts towards working and learning remotely. We are confident that Pixelworks has maintained our leading market position in projector and the current revenue level of this business is purely a reflection of the projector customers' uncertainty and weak end market demand. Similar to the projector business, our video delivery business has been in the process of working through a prolonged inventory correction when the COVID pandemic emerged. While Japan has appeared to weather the pandemic relatively well compared to some other countries, the end products we sell into are predominantly consumer discretionary and as such demand was lower in Q2 and will continue into Q3. We have remained engaged with our leading Japanese consumer electronics OEMs in support of new programs and development…

Yes, could you please tell me where we're dropped off?

No, sir, your line just went on mute out of the blue.

Okay. Listen I'll tell you what, I'll start with closing -- my closing statement and then hand off to Elias. So, in closing, I want to reiterate that despite this challenging business environment, we have maintained our market-leading or market disruptive position in each of our target end markets. As we've done in the past, we'll continue to proactively respond to changing conditions with appropriate and decisive actions, while simultaneously remaining focused on the successful execution of our mobile and TrueCut growth initiatives. I'm extremely confident we have a winning strategy and team in place today and that Pixelworks' longer term growth prospects are still fully intact. As previously mentioned, in mobile, we have a solid pipeline of new engagements and are well-positioned to generate momentum in the second half of the year as customers incorporate more advanced displays and premium viewing devices including HCR, higher frame rate, variable frame rate, and auto adapted visual enhancements in conjunction with their introductions of new 5G-enabled smartphones. With that, I'll hand the call over to Elias one more time to review the second quarter financials and provide our guidance for the third quarter. Elias?

Thank you, Todd. Revenue for the second quarter of 2020 was $9.3 million compared to $13.8 million for the first quarter of 2020 and compared to revenue of $18 million in the second quarter of 2019. As Todd indicated in his opening remarks, second quarter 2020 revenue, primarily reflected the ongoing inventory corrections in a digital projector and video delivery markets compounded by lower end market demand resulting from the global pandemic across all of our target markets. The breakdown of revenue in the second quarter was as follows; revenue from digital projector was approximately $6.5 million. Video delivery revenue was approximately $2.3 million. Revenue from mobile was approximately $419,000 comprised largely of sales of our Iris visual processes and Soft Iris solutions. Non-GAAP gross profit margin expanded to 59.2% in the second quarter of 2020 from 52.1% in the first quarter of 2020 and 54.1% in the second quarter of 2019. The increase in gross margin reflects a combination of particularly favorable product mix in the quarter as well as our ongoing initiatives to drive product cost improvements, especially on newer products. Non-GAAP operating expenses decreased to $9.3 million in the second quarter of 2020, compared to $9.7 million last quarter and $9.6 million in the same period last year. The reduction in operating expenses reflects our continued focus on cost containment across our business. Adjusted EBITDA for the second quarter of 2020 was a negative $2.9 million compared to a negative $1.5 million in the first quarter of 2020 and a positive $1 million in the second quarter of 2019. On a non-GAAP basis, second quarter 2020 net loss was $3.9 million or a loss of $0.10 per share compared to a net loss of $2.6 million or a loss of $0.07 per share in the prior quarter…

Certainly. [Operator Instructions] Your first question comes from the line of Charlie Anderson from Collier Securities. Your line is open.

Yeah. Thanks for taking my questions. I just want to start out on the Q3 guide. I wonder if you'd be willing to talk a little bit about each of the segments. It did sound like projector and video delivery have their challenges mobile growing so maybe just relative to what we're seeing in Q2, and any additional comment there? And then also on gross margin, you did hit this very high gross margin in Q2 but it looks like it's coming back to the low to mid-50s in Q3, maybe you could talk about just the trajectory gross margin as well and some of the factors there. And then I've got a follow-up.

Thanks Charlie. So we don't usually and we probably are not going to now break down our businesses when we give forward guidance. I mean, as you know we're giving a pretty wide range and there's still several companies not giving guidance. But I will say that – yeah, I mean we expect mobile to sequentially grow and we expect projector and video delivery to not sequentially grow. And I probably won't talk about the magnitude. But with that said, we do expect Q4 with what we know today, we expect Q4 for both projector and video delivery to start coming back and we expect continued sequential growth in mobile. But that's with what we know today. And there's still a lot of uncertainty with how each of the economies is going to be affected as we move forward on this pandemic. Regarding the margins, it's partly due to mix that we come back down in Q3. Software is still helping us there. But some of the product mix the SoC product mix that we had benefit for in Q2 changes a little bit in Q3. Also, still have an absorption issue especially at those revenue levels. On a go-forward basis, we do expect corporate gross margins to continue to make progress.

Perfect. And then, you did mention the second Tier 1 mobile OEM, so that's great news and congratulations on that. I wonder, maybe if you want to maybe just reset our expectations of what this means big picture. I know, there was a view earlier in the year potentially getting mobile to half the revenue at some point. So, maybe taking that into account and taking previous thoughts on where this could all go just maybe update us on your views there Todd?

So, one of the things that we're dealing with in the mobile arena is – especially, if you look we've had a pretty targeted focus in China. And even within China, as I define Tier 1s there are four in China, and we're focused on three of them. And for the most part those three and some of the Tier 2s, especially ones that have large exposure to the Chinese market have been impacted by Huawei coming back and being very aggressive at trying to get rid of inventory in the Chinese market. Now whether that is a short-term impact or a longer-term impact, I think it remains to be seen. We believe and it's just our belief that longer term these three companies that we're focused on will maintain a reasonable market share in China, and also will grow their international business as soon as the economies that they're focused on start to emerge out of this pandemic. And all three of these companies have big exposures in India, and they are starting to put a footprint into Western Europe and elsewhere. So gaining ground at a second Tier 1 that we've been working with for a long time and then finally convincing them to take a leap on a program is a big deal for us. So far any place that we've had at least one program over time, we've been able to secure multiple. So it's no guarantee of future success, but it certainly is an indicator that one in many cases leads to multiple. So it's very encouraging for us. And then secondly, we're working on – we'll be sampling Iris 3 to customers this quarter. We taped out in Q2. We got it through the fab tool suite and so far it looks good. We…

Great. Thank you so much.

Thank you. And our next question comes from the line of Suji Desilva from ROTH Capital. Your line is open.

Hi, gentlemen. So perhaps you can talk about the dynamic in China with the flagship high end phones and the midrange phones crossing that with 5G ramp? And how that's affecting you guys constructively or whether it's a challenge?

Well, I’m trying to -- so the question is 4G versus 5G, Suji?

No. In 5G, the -- I think the customers are maybe leaning toward more of the midrange versus the flagships perhaps.

Well, I mean, I would say -- I understand now where you're coming from the question. I would say, going into late 2019, it was premium and flagship that were 5G. They are now pushing to bring 5G to a much lower price point. In fact, some of the phones that were launched by some of our customers have pushed 5G below $400. You will see -- in fact I'm trying to search right now of any forward-looking program that we're either targeting launch in 2020 or 2021. I don't think there's any 4G programs left. So everything we're working on is 5G. And I think that's a natural reaction given the economic slowdown, particular OEMs we call on are a very nimble reactive group of customers. And they're reacting to the environment they're in. And so -- and they do -- if you really look at these customers, they have launches throughout the year, but there's a big wave at the front part of the year, and there's a big wave at the latter part of the year. And so they almost have a six-month rhythm. And the launches that happened, people were focused on, because they made decisions in the back half of 2019. They were focused on higher ASP, higher-margin products. In the back half of 2020, they're clearly focused on skinner margin, lower ASP products.

Yes. And Todd, if you could just kind of follow-up on that with the impact to you guys in terms of your content and market position.

Well, we have a family of solutions. And with the introduction of Iris 6, we haven't formally announced it yet, so I'm not going to talk about the features in the price point. But what I will say is that, it falls between our previous low-cost Iris 3 solution and our high-end Iris 5. And we have done a very good job. The ops team has done a very good job of pushing the cost down of Iris 3. And so we have been very aggressive at positioning Iris 3 at low-cost mid-tier devices. So we have a family of products that can fit the gap across the board and follow our customers' reaction.

Okay. That's very helpful color, Todd. And then just one quick question on the TrueCut. I think you mentioned new programs in China. Is that some new customers or those existing customers? And is there sort of, a kind of, revenue model that you'd be able to talk about now coming out of these efforts? Or is it still early days for that?

The TrueCut programs I'm talking about would be new customers. And it's a licensing business. And like I said in the past depends on how the engagements go. They can be onetime license, they can be over multiple years. It depends who the customer and the program is. But that's probably as far as I'm going to go until we actually announce the program.

Okay. Fair enough. Thanks, guys.

Thank you, Suji.

Thank you. [Operator Instructions] And your next question comes from the line of Jaeson Schmidt from Lake Street. Your line is open.

Hey, guys. Thanks for taking my questions. I know you said you believe the projector and video delivery businesses come back in Q4. Is that confidence really being driven by expected new launches or just the inventory having been fully digested in Q3?

I'd say a combination of both. There are customers that have -- I mean, one thing I'll say is across the board the Japanese OEMs had stayed fairly focused. We haven't seen mass layoffs even though their business was way off. It's not their typical approach. And so what they usually do is hunker down and they start working on new program development. They'd already been working on some new programs and transitioning to newer products from us. And so I think the main thing will be their customers. It's not like we expect these tenders to go away, the education tenders and the enterprise tenders. We just expected them to get delayed. And the question is when do they start to come back? And we anticipate -- we've seen some green shoots of it already in Q3. We anticipate more of it in Q4.

Okay. That's helpful. And I know you mentioned 20 models this year for the mobile business. But have you seen the size of orders, the POs get downwardly adjusted at all going into the second half just given the macro environment?

Well all of our mobile business goes through our channel. And so how they adjust is they just let the channel sit on the inventory until they're ready to digest it. So the way we see it, is we see inventories at the end of the quarter not being depleted. And then we have to wait for those inventories to deplete to convince the distributors to refill. And they're not going to do it until the demand from the customers. So there are some new programs that are coming on for the second half of the year and then we're seeing inventory start to deplete in Q3. So that's why we're feeling more comfortable with mobile.

Okay. That’s helpful. Thanks a lot guys.

Thank you, Jaeson.

Thank you. And I'm showing no further questions at this time. I would now like to turn the conference back to the management for any closing remarks.

Thank you. So obviously, challenging times and a little bit of a somber day at Pixelworks. Some very good people that worked very hard over the last several years at Pixelworks, we were forced to part ways with today. And we look forward to trying to dig our way out of this and grow quickly and see where that takes us. Thank you for your time.

Ladies and gentlemen, this concludes today's conference. Thank you all for joining. You may now all disconnect.