Good day, ladies and gentlemen, and welcome to Pixelworks, Inc. First Quarter 2021 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. Thank you, sir. Please go ahead.

Thank you. Good afternoon, everyone, and thank you for tuning in to today's call. With me on the 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 2021. 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, Tuesday May 4th, 2021. The company undertakes 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 year ended December 31, 2020, 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 loss, and net loss per share. Non-GAAP measures exclude 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. We caution investors to consider these measures in addition to, and 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 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, Elias, and good afternoon to those joining us on today's call and webcast. As outlined in today's press release, our first quarter financial results were in line with our expectations and with all metrics coming in at or above the midpoint of guidance. While anticipated Q1 seasonality in the projector market resulted in lower consolidated revenue sequentially, with weakness largely offset by record revenue from mobile, which expanded to 44% of total revenue. Consistent with our guidance, gross margin in Q1 was lower than historical average, due to a combination of higher supply chain costs, product mix, and a new mobile OEM that ramped during the quarter. This anomaly is now behind us and we are positioned for gross margin to return to our historical range in the second quarter. Starting in Q2, we have passed on higher material costs to customers, while also benefiting from increased unit volumes and improved product mix. Coming off a challenging global demand environment in 2020 due to the pandemic, we saw improving order patterns during the first quarter that will have a positive impact on our guidance for Q2. Additionally, we have seen a positive response to our increased lead times across all product lines and now have better visibility on product demand through 2021. Most importantly, we sustained all fundamental R&D efforts over the past year, which was critical to securing the new wins we've announced year to-date and the expanded opportunity pipeline we have today. Specific to the mobile business in the first quarter. revenue grew 91% sequentially, and was up 58% year over year to a quarterly record. This mark the third consecutive quarter of 50% plus sequential growth in mobile. We believe the mobile market is primed for growth in 2021 as the industry and end market…

Thank you Todd. Revenue for the first quarter of 2021 was $9.3 million, compared to $9.6 million in the fourth quarter of 2020. And compared to revenue of $13.8 million in the first quarter of 2020. The decline in revenue for first quarter reflected a combination of seasonality and weaker end market demand in the projector on video delivery markets, which was partially offset by strong sequential and year-over-year growth in our mobile business. The breakdown of revenue in the first quarter was as follows; revenue from mobile increased approximately $4.1 million or 44% of total revenue, driven by strong growth in sales of both visual display processors and software solutions. Revenue from digital projector decreased approximately $4.1 million, video delivery revenue was approximately $1.1 million. Non-GAAP gross profit margin was 43.7% in the first quarter of 2021, compared to 49.6% in the fourth quarter of 2020 and 52.1% in the first quarter of 2020. As previously indicated in our guidance for the first quarter, the lower than historical gross margin in Q1 was due to -- was a result of product mix an aggressive pricing that was temporarily extended to a new mobile customer. Having completed the initial ramp of this unique customer program during the first quarter, we anticipate gross margins to return to a historical range in the second quarter, then expand as mobile continues to grow and the projector market recovers. Non-GAAP operating expenses were $10.2 million in the first quarter of 2021, compared to $9.5 million last quarter and $9.7 million in the same period last year. The higher OpEx in the first quarter reflected social benefits in China returning to pre COVID levels, as well as administrative costs that are typically higher in the first quarter. On an non GAAP basis, first Quarter 2021…

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

Hi, Todd, hi, Elias. Congratulation of the very strong guidance here. The whole business is looking very good. So great execution. Just a quick question first on the segment guidance for 2Q. Can you just give us some sense about the different segments track? I know projector is coming back, mobile is going back. Any color there'll be a good helpful start?

Of your last one, projector is coming back strong, right? I mean, I think sequentially, it's going to be up over 100%.

Correct.

Year over year, it's still going to be up quite a bit. And then mobile will be up sequentially and up year-over-year.

Up year-over-year. Okay, good. And then, Todd, kind of make me to help -- help to make you do this. But can you kind of walk us through a bridge from 4Q 2019 for mobile where it was $3.7 million to the $4 million you broke now and then obviously going higher from here. What the difference is? Obviously, you have more customers and more wins all that. But just give us a sense of how the business has evolved? It's helpful to understand for the go forward look?

Well, okay. So if you go back to Q4 2019, that was a -- there were multiple programs with our first large customer, Oppo. And they were slating more than we ended up being in. Because they were trying to do quite a bit in a short period of time from an R&D perspective. So I think if you recall, we had to burn off some of that inventory in the front half of 2020. And then of course, the pandemic hit in the middle of that. So it took us a little while to burn off that inventory. We did not have as many programs. And I would suggest even in their case, their programs weren't as successful as we anticipated, the ones we weren't. So, the biggest single difference is, we don't see that right now. Okay. If you go to Q4 revenue for mobile two or one mobile revenue and now Q2 guidance mobile revenue, it has been sustained and growing. And frankly, if you listen to all the notes, you can tell, we're not even with that guidance. We are not feeling all demand. We will leave the quarter delinquent to orders for both mobile and projector. Demand was higher than what we could sustain. And we're doing a very good job with our supply chain. But not enough to clear out all delinquencies. And so, there's no inventory that needs to be burned that I can tell by any means. So that's probably the biggest single difference. A little bit of health that there's breadth across customers, some are seeing strength. One in particular seeing great strength, okay. And I'll call him out that the iQOO product line and Vivo, the way they launched this gaming experience with dramatic power reduction and heat dissipation savings…

Okay. Well, it's in the numbers. So again, great job and execution. Thanks, guys. I'll jump back in the queue.

Thank you, Suji.

Your next question comes from the line of Richard Shannon from Craig. Hallum. Your line is now open.

Hi, guys. Thanks for taking my questions. I'll offer congratulations on really nice guidance.

Thank you.

Todd, let me just peel back the onion on Suji's question here in two ways here. First of all, like guidance. And I haven't been able to run these numbers. I think you said projectors growing 100%. I'm assuming that's you expecting that to grow on a percentage basis, meaningfully higher as a mobile going to be in that range. And then kind of secondarily here, as we think about the capacity and supply constraints out there, which business is being affected more there?

So, I'll answer the latter first. So our projector business is predominantly 40 and 55 nanometer. We have some trailing edge, 90 nanometers stuff still in production. But the bulk of the businesses in 40 and 55. And if you look around at, we're probably the most acute shortage globally is for process technology. It is in the 40 and 55 domain. Most of the automotive parts that we read about every day in the newspaper are in these process nodes. DDICs are in these processes node. So that's a challenge. We've done okay, so far. But that's a challenge. Because it's a land grab for 40 to 55 nanometer process technology. The mobile today, everything is in 22 nanometre ultra low power. And that is also constrained but not to the same severity. And then your question. I didn't completely get your question on the growth projector.

Just a relative growth here for the segments here in the second quarter, especially with the mobile. If I were to guess you're not having run the numbers, seems like mobile sequential growth would be low, less than 100% you're calling out for projector, but just want to make sure?

Yes. I mean, because we've had strengthen mobile, I mean, it's sequentially continuing to grow, but it's not going to grow 100%. Projectors coming back from -- it's coming back, and so it's coming back strong. I mean, I think that particular industry, which is not all of our customers in Japan, but they're predominantly in Japan. I would suggest woke up late to the situation for supply constraints for general semiconductor process technology to be in a constraint mode. And they had bled off inventories in Q1. So, they're going to be scrambling to build up their inventories for a while. So we're seeing at least 100% growth in projector. And we expect probably that kind of year-over-year growth to continue for a little while.

Okay. And that's a good segue to my next question, Todd, which is to what degrees oftentimes, we see bookings go this far out in industries where they don't typically happen. There's some double booking. And as soon as you start meeting, supply equals demand, we started to see those disappear. Do you feel like these are not double bookings, and they're going to sustain or do you have methods to make sure that those orders sustain. They don't just disappear. I mean, are we going to see a fourth quarter drop off much more than normal as things catch up here. How do you perceive this happening?

Well, I mean, I think it's going to happen within the industry in a general nature. I think at some point, you will see that drop off. I don't know when it's going to be. For us, though, I think we have two different anomalies going on. I mean, we're first of all, we're small. But with that backdrop, projector, remember this industry was severely impacted. I mean, this is not this is not a segment of the market that had the stay at home effect, the zoom effect. Okay. This is a market that was severely impacted. And so, even though we're seeing these pretty large jumps, we aren't -- we expected this to happen, they're coming back to what we expected them to be pre pandemic. So, I don't think there's going to be a giant hangover for the projector market. Plus, I think it's going to take a while for them to build up buffer inventories. So I don't -- right now, I'm not anticipating a big inventory bubble drop in the projector segment. As far as mobile, I really don't expect it either. I mean, I can tell you that, even though we're on track, to do quite -- to announce quite a few more programs and continue to grow the business, we have had to pass on some significant programs with customers. I mean, the growth rate would have been immense. And that's just because customers today, they want to secure capacity before they even let their engineers work on the program. So if they're in that environment, I would say that for us, I don't see us -- I don't see a big buffer of inventory being built out there.

Okay. Alright, fair enough. Maybe one or two quick questions here, Todd. In mobile, as you go through the year here, do you see -- you see kind of sustained growth throughout the year? And then also, what's the kind of the construct of the customer profile here? Is it just more, adding new customers that are significant to more new models with your existing customers? How would you kind of help us think about that as we go through the year?

Well, first of all, I don't want to really give too much color on the rest of your guidance. And the reason is, is that I certainly know where the demand profile is, I could give that. But I don't know where the supply profile is. And so, we have to work through both. We have to work through demand related issues and supply related issues. I'm feeling confident. We'll show continued growth in mobile. We'll be able to support our projector customers through this bounce back. How much we can grow, I just don't know yet. And then, as far as customers go, I would say in general, we're looking for quality programs versus quantity of programs. I have two supply constraints going on. One is getting access to our wafers and assembly and test and substrates. But the other is R&D resources. When we engage with a customer, they don't just design in our chip, we have a team of applications and software engineers that become an extension of the display, engineering team of the OEM. And if we use that valuable know how, and critical resource on programs that just don't ship a lot, or we don't anticipate to ship a lot. And we may have to do that from time to time, depending on customer relationships. But we don't really want to do that. And so what we're looking for is quality of programs. And not just from a volume perspective. We're trying to build a business here. And what we want is to build the feature, the capability to where the consumer really wants to go out and buy phones that have Pixelworks technology, and they give that input to the OEM. Because if we can create that environment, we don't have a demand issue. We have different issues. And so, we're focused on the programs that we think are aligned with the OEM, they're going to go out and really embrace this high frame rate gaming or video experience that we're trying to bring to the marketplace. And so with all that said, well, what does it mean? It's not going to be about quantity of design, it's going to be that quality of design.

Okay. Good color there. Last quick question for me, Elias. How many 10% customers that you have? And were any of them mobile in the first quarter?

How many 10% customers? I don't know. I mean, I didn't guess. Do you have the numbers?

No.

My guess is we had probably 2.10% mobile customers and then we had another at least 1.10% projector customer, my guess.

About [Indiscernible] total.

Yes.

Okay. All right, guys. Thank you very much.

[Operator Instructions].

And I think that's it today. Operator?

No further questions. At this time, I'll turn it back to call to Elias.

Thank you very much for showing up, guys. We appreciate it. See you next quarter.

Thanks, everyone.

This concludes today's conference call. You may now disconnect.