Good day, ladies and gentlemen, and welcome to Pixelworks, Inc. Third 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 tuning into today's call. With me on the call, and joining from China 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 third 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, October 29, 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 – 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 participating on today's call. I'm joining you today from Shanghai. Even though it was a difficult journey during the pandemic and associated travel restrictions, the company has seen increasing activity and opportunities for our technology here, including multiple exciting and recently announced developments. First, as announced last week, we completed the agreement on a private placement to facilitate an investment by MTM-Xinhe Investment Limited in the amount of $6.6 million. MTM is a china-based consortium comprised of strategic investors from the Chinese semiconductor and mobile ecosystem with deep industry experience and expertise. The investment brings significant value to Pixelworks as we continue to prioritize China and Asia as key regions for growth opportunities in our future success. As a financial invested partner MTM will contribute local resources and relationships that will enhance our ongoing strategic efforts. Separately, we also announced appointment, an Executive VP and President of Pixelworks China, Dr. Alan Zhou, who will oversee and drive expansion of our operations in the region. With over 30 years of experience in wireless communications, he previously served in multiple roles at global companies such as Qualcomm, Agere Systems, Lucent Technologies and AT&T Bell Labs. Alan is a significant addition to our team, and brings extensive China-based leadership to the Pixelworks organization. In addition to supporting our growing customer engagements and organization in the region, both the appointment of Alan and MTM Investment strengthen our strategic position in China as we execute on our mobile growth initiatives. As outlined in today's press release, our Q3 results were in line with our expectations and reflected the challenging environments, continued impact on end-market demand, especially in our mature markets of projector and video delivery. Other customers have continued to place orders demand has continued to be…

Thank you, Todd. Revenue for the third quarter of 2020 was $8.2 million, compared to $9.3 million in the second quarter of 2020, and compared to revenue of $18.4 million in the third quarter of 2019. As Todd indicated in his opening remarks, third quarter of 2020 revenue primarily reflected the inventory corrections in the digital projector and video delivery markets compounded by lower end market demand, resulting from the global pandemic across each of our target markets. The breakdown of revenue in the third quarter was as follows. Revenue from digital projector was approximately $4.9 million. Video delivery revenue was approximately $1.9 million. Revenue from mobile was approximately $1.4 million comprised largely of sales of Iris visual processor and software solutions. Non-GAAP gross profit margin equals 55.6% in the third quarter of 2020, compared to 59.2% in the second quarter of 2020 and 53.9% in the third quarter of 2019. The year-over-year increase in gross margin primarily reflects our ongoing initiatives to drive product cost improvements, especially on newer products. Non-GAAP operating expenses decreased to $8.9 million in the third quarter of 2020, compared to $9.3 million last quarter and $10.3 million in the same period last year. The decline in operating expenses reflects our combination of our previously taken actions to reduce cash expenses as well as our ongoing cost containment across our business. Adjusted EBITDA for the third quarter of 2020 was a negative $3.5 million, compared to a negative $2.9 million in the second quarter of 2020 and a positive $0.5 million in the third quarter of 2019. On a non-GAAP basis, third quarter 2020 net loss was $4.5 million or a loss of $0.11 per share, compared to a net loss of $3.9 million or a loss of $0.10 per share in the prior quarter…

Thank you. [Operator Instructions] And our first question comes from the line of Charlie Anderson of Collier Securities. Your question, please.

Yes. Thanks for taking my question. Good morning over there in China, Todd. So I wanted to start with the investment, the strategic investment, and then also the new hire in China. I wondered, Todd, if you could -- obviously, you guys have made good progress in China to-date with Iris. But I'm sort of curious, what you see in terms of the relationships, enhancements that you get with the new hire, and when also the new investor? What are some of the relationships that you gain that maybe you didn't have before? Maybe just if you expand on that? And then, I've got a follow up.

Okay. Good morning. You hear me okay, Charlie?

Absolutely.

Okay. So, I don't know, Alan's pretty well known within the investment community. If you look at Alan's background, he's a -- he got a doctorate from MIT. He came in and really focused on fab development at AT&T Microelectronics. This is a time when both of us were back there, long ago. And he traveled around as we were expanding fab capacity around the world, both in China and Madrid. He evolved out of that into effectively running the business in China for Lucent Micro at the time, and then various other companies here. The last, maybe, half a dozen years, he transitioned into an investment role, the last four or five years at a private equity firm here in China that was focused in -- heavily in focused investment in the compound semiconductor industry, which they call here Semiconductor 3.0, which they have a big initiative to try to -- they feel that the table is not been set on market share there, and there's an opportunity for China to participate in a much bigger way. It remains to be seen if they get there. But Alan was focused in this area for the last four or five years. So, I've known Alan for a while. Highly energetic, extremely well connected. If you look at his near term focus, clearly, Alan -- Alan can come in and help with bringing localized investment to China, and help get our story -- most of our mobile customer base, if -- 90-plus-percent of all of our design activity for mobile is here in China. There is some activity outside of China, but still in the Asia domain, and have an investment focused in Pixelworks works that, that is on the ground here. And understands the dynamic environment is extremely helpful, extremely…

Great. Thank you. Thank you for the color.

Do you have follow-up Charlie?

Yeah. For my follow-up, I want to ask about projector, this time year, you guys are doing $12 million, $13 million. Now you're down around 5, obviously, there's a big gap to fill there. For all the reasons we're aware of. So I guess I'm curious, in your commentary, it sounded like there are some geographies that are recovering, others are going to take until mid next year. So I wonder, are those geographies that are recovering enough to fill a portion of the gap, a small portion of the gap, just kind of lay out for us how you think projector trends over the next year? Thanks?

Well, remember, this is one of those markets that has a long reaction time to abrupt movements, usually, there's not that this big of an abrupt movement for a market like projector. But there’s inventories of existing product makeup of all different -- from $500 projectors to $10,000, $20,000 projectors throughout the world for large companies like us and others. And when you have an abrupt movement like this, the customers will back off, if you go all the way back to food chain where they buy advanced silicon from us. We are at least six to nine months down the chain from that projector being sold. And so they had gone into this thing with a fairly robust view that 2020 was actually going to be a rebound year of somewhat slow 2019. And so they had started at the tailwind of 2019 and 2020 to build up the order book with us and to build up their channel. And then you have this abrupt dislocation in the market. So what's happened over the last six months is -- is the industry has basically been holding off on refilling the channel. In addition, they have decided to put their R&D to work, to migrate to where they feel the markets going to be. So a lot of the new product development, slightly different projectors high luminance, laser-based connectivity, high resolution. So what they want to do is bleed-out the old inventory of all those channels and then fill the new. And I think what you saw so far is, is where we're feeling the impacts of that as they bleed-off that channel. So what they're seeing now is that the uptick is starting to happen in China first and foremost. I mean, I'm -- I've been here a little over a month now, although I spent the first couple weeks in quarantine, which means I just stayed in the hotel for two weeks. But upon getting out, this place is vibrant and happening. I mean, the business is back here. And they've figured out how to contain at least in the large cities and the cities are back and vibrant and moving. And so tools are back in. The educational tenders are being offered and you're seeing business here for the projector market. You're starting to see it in the U.S. to some degree. You probably had had some inklings of it kicking back-off in Europe, although that may slow down again. But emerging markets, you know, Southeast Asia, India, et cetera, they still they haven't bounced back at all. And so I think that's what the market seen and you know, the inventories will be lean. So as the markets pop back on, we should see demand kick back in. We're expecting a rather robust turn back on, you know, by Q2 of next year. But you know, a lot can happen between now and then.

Got you. Okay. Thanks, Todd

Yeah.

Thank you. [Operator Instructions] The next question comes from the line of Richard Shannon of Craig-Hallum. Your question, please.

Thanks, guys. Thanks for taking questions. Maybe more of a technical question on the guidance for the fourth quarter. I haven’t been able to run the math here in my head, or on Excel here very quickly here. But -- the gross margins here at this level and your discussions would suggest most of the growth dollar-wise, it comes from mobile? Should we expect video up at all? Or should we think about that flat, I guess, looking at from the mid-point of view? And then from an OpEx point of view, it wasn't clear to me to the degree to which the restructuring has made an impact in here, because it seems like midpoint is a little bit higher than last quarter. So, you kind of help us out on the ran rate here, that'd be great.

You want to kick-off this one Elias and I can fill in if you need help?

Yes, let me give you a rundown on the on the OpEx return. In Q4, we will be initiating all the amount increases, so that's -- that has increased in that. We have Iris 7 starting in Q4, we're spending on that in Q4. So, really, if you look at the mid-range of the OpEx the guidance, it's about 9.5. That's basically what's happening. Those are the two big ticket items that are happening in the fourth quarter. Okay.

Okay.

I'll take a question regarding the mix and margin. Yeah, I mean, clearly the margin guidance given where we just came out of the last two quarters where margin was really healthy, which suggests that a much bigger portion of the revenue is coming out of mobile. We also indicated that projectors sequentially -- we think is going to be sequentially up. So, clearly, video would be flat to down.

Okay, that's helpful. Second question, kind of a -- perhaps a two-parter in mobile here. You talked about some wins with your Iris 6 even before it was taped out? Can you help us understand the reasons for success? How broad will this be -- its success here versus some of the other prior wins? And then are you seeing any benefit from -- to some degree, whatever, we're calling it the wind down of Huawei's small business that could help your other customers?

So, I'll take the second question first. Yeah, there's a mad scramble right now, in anticipation that that Huawei will have a significant market share loss in the next six months to a year in their consumer business. And so there's a view -- prevailing view that most of those gains -- if you go look at the last six months of Huawei's business, we don't do business with them, but I am an observer. I think they still maintain a very healthy position in the global market. I think as of the end of Q2, they were the second largest mobile phone, but they had concentrated a lot of that growth near-term here back in their home turf, in China. And so as they are unable to address the market demand because of the supply chain issues, a big chunk of their market is going to go to the other local suppliers, right? And this is Xiaomi, Oppo, and Vivo. And as you know this is where we've concentrated a lot of our effort and internationally, all these companies have had -- they started a big push and they are accelerating that push to try to capture some of the market that Huawei held in Europe and Southeast Asia. All these companies were already strong market share participants in India, but they now are looking at an opportunity to capture share where they hadn't really participated and improve their position here in China. And so with that said, I don't think it's just me, we're a small company. But I think the large participants in this market are probably seeing strong order coverage over the next six months, probably to the tune where they're a little nervous that everybody thinks they're going to win that share. My guess is,…

Okay, excellent Todd. I appreciate all the detail. I’ll step out of the line.

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

Hi Todd, hi Elias. so maybe following up on following questions with some of the China guys trying to export take some of the share in Europe and so forth. Is there a difference we should think about of your content for domestically targeted phone for China customers versus export phones, or should we think of them as fairly fungible?

Well, and little bit I mean, I wouldn't, I wouldn't let me put it this way. It's traditionally, on the tier ones. Two customers that are now up in commerce, and I mentioned TCO previously, but no keys in this category and others, they had focused on trying to use us to differentiate in the mid tier pricing for so what you'll see is these large tier one OEMs. The first and foremost area that they're trying to expand in is the flagship in high performance. arena, if they trying to enter into Europe, et cetera, they're trying to go take some of that business that Huawei had in the flagship space, you'll see them follow up with mid tier. Plus, I think, you clearly see a shift to lower ASP phones. I mean, some of the phones here, you know, I've gone around, and I've visited, you know, there are some Xiaomi has all their own stores, there are others that are appeals where people should sell through the quality of a $2 to $500 phone, Android phone here is incredible. I mean, it doesn't have the newest APs, it may not have a 2k 120 hertz display or the best camera subsystem. But it is amazing, it will have a six and a half inch full HD plus screen, it'll have a pretty good AP, all the connectivity. I think it's going to be harder and harder for companies to sell a device over $1,000 just because -- not because people won't want to spend the kind of money, but because the differentiation between a $500 phone and $1,000 phone is not as great as it once was. It just isn't. And so there's going be a lot of effort to go differentiate in this mid tier pack. But to get back to your original question, I think you'll see these companies go off and try to establish with the flagship and the gaming high performance, but they'll follow up with them.

Got it. Okay. And maybe you could kind of circle back to the investment you got recently from MTM and what the implications are for your China Mobile and true cut businesses, what that perhaps unlocks in terms of relationships so forth? We could cover that, again, that'd be helpful.

Well, you know, I'm not going to go into any specifics. Maybe give you just a broad understanding. One of the things I've noticed here is which is different than what I see in the U.S. is, well, as you become a public company, I mean, really, we this company, if you look at today's environment, it's like a startup. Okay? We're a startup that happens to be a public company that's been funding these growth initiatives through up to this point. Since my tenure here, we've been doing it through the cash flow through our mature businesses, right. And by doing some scrappy things with IP, et cetera, and raising cash outside of looking at outside investment. Now, recently, you know, we've gone out outside. The industry here, where it may invest in public or private companies is very much like, so the private equity is an active participant in a way that Venture Capital is an active participant in private companies in the U.S. And I think that's a nuance that's just might be lost a little bit. You know, once you become public in the U.S., most of the investment as it comes in are professional investors. Professional investors aren't really trying to help you improve your business. They're trying to figure out how they put your portion of the investment into a portfolio that serves their client base. Much different here, right? They're here. They're a little longer term focused. They see a big shift going over the next decade. They're betting for the next decade, not for the next quarter or year. And they also are well connected with the ecosystem and industry and if they can help your business and thus their investment, they'll do so.

Okay

I don’t want to be specific here, but I’ve taken investment here is the reason. The reason we went and pursued that investment here is because of the attributes I just explained.

Okay. Fair enough. All right. Thanks, guys.

Thank you. At this time, I'd like to turn the call back over to management for closing remarks.

All right, well, thanks for the interest. It's early morning here and I'm going to go get a second cup of coffee. Enjoy your afternoon in the U.S. Thank you.

Thank you.

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