Earnings Labs

Pixelworks, Inc. (PXLW)

Q3 2021 Earnings Call· Tue, Nov 9, 2021

$5.80

-0.17%

Key Takeaways · AI generated
AI summary not yet generated for this transcript. Generation in progress for older transcripts; check back soon, or browse the full transcript below.

Same-Day

+13.41%

1 Week

+19.55%

1 Month

+6.36%

vs S&P

+5.67%

Transcript

Operator

Operator

Good day, ladies and gentlemen, and welcome to the Pixelworks Inc.’s Third Quarter 2021 Earnings Conference Call. I will be your operator for today’s call. At this all participants are in a listen-only mode. [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.

Elias Nader

Analyst

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 third 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, November 9, 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 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 loss and net loss per share. Non-GAAP measures exclude 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 measures 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, and not as a substitute for, nor superior to the company’s consolidated financial results as presented in accordance with GAAP. Also note throughout the company’s press release and management statements during this conference were refer to net loss attributable to Pixelworks, Inc. simply net loss. 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.

Todd DeBonis

Analyst

Thank you, Elias, and good afternoon or morning to everyone on the phone and webcast today. As reported on our webcast release earlier today, Pixelworks had a solid quarter as we extended our recent momentum with sequential growth in each of our end markets. Mobile revenue increased for the fifth consecutive quarter to reach another quarterly record and combined with a sustained recovery in the projector market resulted in our highest quarterly revenue since the onset of the pandemic. Total revenue for the quarter was up 85% year-over-year. Gross margin expanded over the prior quarter, driven by a combination of improved overhead absorption, as well as our ability to pass a portion of the higher material cost to customers. We also held OpEx flat sequentially contributing to another quarter of improvement in our bottom line results. Also during the quarter we closed on the previously committed investments in Pixelworks’ Shanghai subsidiary from a combination of private equity and new strategic investors, as well as most of our employees. In total, we brought in the equivalent of approximately $40 million in net capital investment at a premium valuation, significantly strengthening our cash balance and overall financial position. Since our last conference call, we have continued to finalize on the strategic realignment by transforming our Shanghai subsidiary, which has served as our primary R&D center for many years into an established profit center while maintaining majority ownership by Pixelworks, Inc. To briefly reiterate the rationale, our strategic realignment accomplish several objectives that further supports accelerated long-term growth. First, it facilitates direct employee equity ownership in Pixelworks Shanghai, which provides a critical advantage for attracting and retaining key talent in a highly competitive China labor market. Second, it consolidates pixel Pixelworks resources and focus on our mobile projector and video delivery businesses in…

Elias Nader

Analyst

Thank you, Todd. Revenue for the third quarter of 2021 was $15.2 million compared to $14.1 million in the second quarter of 2021 and $8.2 million in the third quarter of 2020. As Todd previously highlighted the sequential increase in revenue on year-over-year growth of 85% reflected a combination of continued traction and record revenue in the mobile market and a sustained recovery in demand from projector customers during the quarter. The breakdown of revenue in the third quarter was as follows. Revenue from mobile increased to approximately $4.8 million representing 32% of total revenue driven by strong sales of both our visual display processors and software solutions. Revenue from digital projector increased to approximately $9 million. Video delivery revenue was approximately $1.4 million. Non-GAAP gross profit margin expanded by 40 basis points sequentially to 53.1% in the third quarter of 2021 from 52.7% in the second quarter of 2021. And compared to 55.6% in the third quarter of 2020. We anticipate gross margin to remain steady and near historical rate for the balance of the year. As we continue to pursue initiatives targeted at offsetting, generally higher material costs as well as succeed in passing through increased pricing to customers. Non-GAAP operating expenses were $10.1 million in the third quarter of 2021 flat with the $10.1 million reported last quarter, compared to $8.9 million in the third quarter of last year. On a non-GAAP basis, third quarter 2021 net loss was $2.2 million or loss of $0.04 per share. Compared to a net loss of $2.6 million or loss of $0.05 per share in the prior quarter and a net loss of $4.5 million or loss of $0.11 per share in the third quarter of 2020. Adjusted EBITDA for third quarter of 2021 was a negative $1.6 million compared…

Operator

Operator

Thank you. [Operator Instructions] Our first question comes from Raji Gill with Needham and Co. Your line is open.

Raji Gill

Analyst

Yes. Thank you for taking my questions and congrats on the great moment and the rest of the segments. Just on the mobile business, you kind of hit a record quarter in 3Q based on the guidance, it looks like it’s going to grow again, sequentially in Q4. I’m wondering if you could kind of talk a little bit about the attach rates for the X5 that you’re seeing, how would you kind of characterize that? And as you kind of look at the funnel going into 2022, how do we think about the designs going into production? It appears that the capacity constraints are more on the digital projector side, but could you maybe a little bit elaborate on kind of the capacity constraint environment, affecting the mobile business as you go into 2022, any thoughts there and how you’re going try to mitigate that?

Todd DeBonis

Analyst

Okay. So, there’s two questions, and one’s a market driven question and the other one’s a supply constraint question, and I’ll try to separate the two, Raji. So on the market demand for mobile what we set out to do – we had success on both our i6 processor and the X5 processor initial success with both, we were really focused at it proved display, quality metrics and delivering a better video experience for the most part. Even though we delivered a better gaming experience, it didn’t really focus on differentiating that gaming experience. With the iQOO brand of products, which is a sub-brand of vivo, and they’re one of the four large providers in China. The entire iQOO brand of products. And there’s probably between eight and a dozen models launched a year at various price points. With the Neo5 in the early part of this year, we went out and the two teams collaborated and worked with third-party game manufacturers to really do this offload rendering idea. So that you could bring high frame rate, an improved high frame, mobile gaming experience with, 40% to 50% longer battery life while you’re operating at higher frame rates and higher resolution. And what the brand of vivo found out is that this was a highly desired feature. And so they went from bringing it out, investigating whether the market really wanted this and would give them that pull, but they needed to differentiate in a crowded space. And they’ve come back and said, yes, we’re all in. And so what we’ve not only seen is they’re all in, their competitors targeting the same demographic are all in. And so the demand we have for X5 going into Q4, and then the first half of 2022, I gave up designs three…

Raji Gill

Analyst

Thank you for that, all that insight. That’s really helpful and Elias on the gross margins. So the margins are 4% at the midpoint, so about a 100 basis points, almost 100 basis points, sequential increase and kind of steady increases in the margins, which is great to see what driving the margins. You have all the supply constraint, all the cost on the back end. Yet the margins are kind of moving up. Is it more of a mix of Iris, is it better pricing? Is it better yield? I’m just curious, what’s driving the margins despite some of the cost pressures?

Elias Nader

Analyst

Yes. There’s a couple of factors for sure, better yield, and we kept as you can tell, we kept OpEx at a very low range and a quarter. And as Todd has mentioned in his comments, we did pass on some of the price increases. So, I’m sure that also helped. Gross margin is going to be steady and we are very pleased where we’re at and what we’re looking for.

Raji Gill

Analyst

Got it. Thank you.

Operator

Operator

Thank you. Our next question comes from Suji Desilva with Roth Capital. Your line is open.

Suji Desilva

Analyst · Roth Capital. Your line is open.

Hi, Todd. Hi, Elias. Congratulations on the progress here. So understanding Todd that there’s supply constraints, gating your mobile growth, but is there a point in time where kind of the winds flip rate from the premium phones to more of the mainstream and create potential for an inflection in the demand and unit run rates, if supply allows it, is that – what timeframe could that be potentially?

Todd DeBonis

Analyst · Roth Capital. Your line is open.

Some of the programs that are being positioned for requested for us to support our mid-tier mainstream high volume phones today. So the demand part of that inflection point is here Suji. So the question is, when do I expect supply to catch up with the demand profile that is a tougher question to answer. I’m feeling pretty good our partners are the right partners, they’ve done a very good job of supporting us in tight environments. The particular process nodes we’re in are in high demand. What our partners have done a very good job of trying to get us what, as much as they can. They did not expect this much demand from us. We gave them insight nine months ago to a demand profile. I would say the demand we’re receiving today surpasses the insight I gave him nine months ago. And we were bullish on the business.

Suji Desilva

Analyst · Roth Capital. Your line is open.

Well, I appreciate you trying to answer the difficult supply question twice. Yes, can you talk about the work you’re doing with Unity and more generally the gaming guys and have you kind of hit all the guidance ecosystem you want to, or is it, are there still more folks that you can partner with to kind of to grow the, sort of the presence of the Pixelworks products from video to gaming?

Todd DeBonis

Analyst · Roth Capital. Your line is open.

I would say we’re just scratching the surface on the gaming ecosystem right now. We have we announced this partnership with Unity. They are leading game engine provider, but there, there are people that do custom game engines and there are other game engine providers that serve a portion of the market. We are very focused, because we’re focused on, if you look at our roadmap, which, we’ll talk a little bit about as we announced the seventh-generation. We’re very focused on delivering a cinematic immersive mobile gaming experience. There’s been a big push by the content providers that, that saw this during the pandemic, this strong demand as an alternative entertainment experience to video and so many other things to go do this, this immersive cinematic gaming experience. Now, that we’re post pandemic both the consumers and the content providers want to deliver once it to experience and that the content providers deliver that same immersive experience We call them AAA games and the AAA game companies were starting to talk to because they want to overcome the current challenges that I alluded to in my prepared remarks that exists with delivering that immersive experience on a mobile platform. So, I would say today, we’re just scratching the surface with how many content providers we can engage with early on, and game engine providers. So, we ratcheted back and kept steady with our business plans through the pandemic, but I kept a lid on hiring and we – as a company, we were about 200 people in the third quarter, we added net 12 in the fourth quarter, we’ll probably add a similar amount and we’re on a growth rate. And so even though near term we’re a bit constrained by capacity. Doesn’t mean we’re not growing. It’s just, we’re not growing as fast as I would like it to grow. We are growing, we don’t believe that the supply constraints are going to last forever, and we do believe this is a multi-year opportunity. And so we’re going to go and try to expand the number of ecosystem partners and get content providers and then mobile platforms to deliver this mobile game and experience that I talked about.

Suji Desilva

Analyst · Roth Capital. Your line is open.

Okay. Appreciate that color. Todd and one last question, if you don’t mind. For TrueCut, I’m curious, we’re all kind of waiting for see that, that U.S. announcement that you would have to follow the strong China progress you have. I’m curious, just order magnitude, how many active engagements there are that you’re working in the pipeline that one of these can come out of. And you mentioned device manufacturers. I’m curious, it’s TrueCut being talked about with guys who are also visual processor customers just understand that overlap.

Todd DeBonis

Analyst · Roth Capital. Your line is open.

So TrueCut today is we’re narrowing our focus to people that really want to deliver a premium motion based experience. The number one, there’s two sides of that equation. The guys in the middle, they’re not going to be the lead in that. These are the content distributors, the ecosystem partners on both ends. So the true content creators, and we’re talking about people that are pushing the envelope of filmmaking, they’re evaluating TrueCut and its capabilities to deliver a different experience, both on a theatrical release of their content, as well as a streaming release of their content. And then all the way on the other end, the device manufacturers predominantly for the streaming end of the delivery of that same content, they are very interested in solving these motion problems. They’ve looked at alternatives to solve these problems like filmmaker mode. They concluded that is not the way to go. The particular device manufacturers were engaged with, and frankly, they’re all in at helping us build that ecosystem acceptance. But to get back to your question, which was, are they visual processor companies, which is in mobile? No, they’re Tier 1 TD manufacturers.

Suji Desilva

Analyst · Roth Capital. Your line is open.

Okay, great. Thanks, Todd.

Operator

Operator

Thank you. Our next question comes from Sam Peterman with Craig-Hallam Capital. Your line is open.

Sam Peterman

Analyst · Craig-Hallam Capital. Your line is open.

Hi guys. Congrats on the announcements. And thanks for taking my question. I wanted to follow up. Hey, Elias. I wanted to follow up on the question about Unity there. Maybe ask it a little bit different way kind of two things. I’m curious, kind of what the partnership looks like, practically speaking and kind of any, if you think there’ll be any direct financial benefit there and what that could look like over time, if it’s more just to get kind of exposure to the wider ecosystem out of your technology. And then I’m also curious kind of why that subsidiary community specifically rather than, Unity as a whole, was this sort of a testing, the waters arrangement that might lead to something bigger or any insight of the strategic rationale, there would be great?

Todd DeBonis

Analyst · Craig-Hallam Capital. Your line is open.

Okay. Well, I’m going to start with the last part of your question first. Why are subsidiary and the subsidiary in China to deal with? And that one’s a simple one to answer, our focus at delivering the cinematic mobile gaming experience is in China. The leading mobile gaming market is in China. The leading mobile game content providers are in China. So Unity China is a very important part of Unity Global to execute on our strategy. So to say that will it evolve into something bigger, but I’m not sure that doing something with the parent corporate that makes it any bigger. We’re very focused at the China mobile gaming experience and those content providers will export their content outside of China. But if it doesn’t succeed in China, it probably not going to succeed elsewhere. So this is the hotbed of where a AAA mobile gaming experience is going to be. And so one thing, so Unity, as far as adding money, et cetera, I mean, you have to bring in the more content that. So, I’m not going to lose too much because until we announced Iris 7, you won’t understand exactly why we brought in the game engine and the content providers and were only a couple of weeks away from announcing the product. So, I don’t want to get too far in front of that, but what I will say is, as we bring in the content providers, it creates much larger demand for our visual processors. So it helps create the demand profile for our visual processors. It improves the experience and the performance for the cinematic mobile gaming experience. If the content providers are on board with what we’re trying to do. And so we’ll give much more clarity on this in the coming weeks. And so that’s how we improved forms of it, but to get back to the Unity China thing, this is where the hotbed of development is going on right now. So this, our subsidiary is the one focused on this and Unity China is their group focused on solving this problem. Hopefully that answers your question?

Sam Peterman

Analyst · Craig-Hallam Capital. Your line is open.

Yes, that’s great. Thanks, Todd. And then one on mobile on your new Tier 1. I think, I just want to clarify that you said this was phone that was launching sometime between 4Q and 1Q and then I wanted to ask kind of how you would size the opportunity at this new Tier 1 relative to, what you have at the other two Tier 1. I know you said multiple models, I think, but curious for any kind of color you can provide there.

Todd DeBonis

Analyst · Craig-Hallam Capital. Your line is open.

I don’t want to get in front of the product announcements. This particular company is doing okay in the market, doing fairly well in the market. They are trying to reestablish themselves in the higher end range. And they’re going to come out with a new higher end range of products that include our products. And so when they announced, we’ll also announced, and then I’ll be able to elaborate a little bit more on it, but not until then.

Sam Peterman

Analyst · Craig-Hallam Capital. Your line is open.

Okay, fair enough. And then if I can squeeze a last one in, I wanted to ask on the soft Iris capability, you said you were expanding that to run on a new 80 platform that expands the same. I’m curious. I mean, can you talk at all about how much that improves the same and then are you guys targeting this, this new platform because you think it’s a good opportunity and it’s the right time to try to, go after this customer or did this customer kind of come to you solve a problem that they consult.

Todd DeBonis

Analyst · Craig-Hallam Capital. Your line is open.

So the AP partner we sort of discussed this and we’re coming to a conclusion on can collaboration. And then that AP partner was prodded by a common large customer to make sure they work with us. And now that effort is expanding into too, not just soft Iris development, but also hardware collaboration.

Sam Peterman

Analyst · Craig-Hallam Capital. Your line is open.

Okay, great. Thanks guys.

Operator

Operator

Thank you. Our next question comes from Derek Soderberg with Colliers. Your line is open.

Derek Soderberg

Analyst · Colliers. Your line is open.

Hey guys, thanks for taking my questions. Just curious if the new strategic investors could help you guys at all on the supply front, but also on the business side. I imagine there’s some opportunities for both, some help on the supply and business side, is that the case or should I be thinking about that partnership more, in a different way or how should I be thinking about that on the business development side on Todd, just generally, how do you hope to leverage those add new relationships?

Todd DeBonis

Analyst · Colliers. Your line is open.

So the strategic investors that came into Pixelworks’ Shanghai all had various adjacent markets that they would like us to collaborate in that were sort of non-competitive. They were all in unique areas where we have technology and they have an interest in investing. And so it was a wide range of opportunities for us. They’re all long-term for us, not short term, they were not, none of the relationships were driven by support in the supply constraint environment. I’m not sure they could even help us in the particular slot supply constraint environment we’re in right now anybody that can help us, we do leverage, but I’m not sure those strategic partners are there to leverage to help us. So it’s more on can, depending on which strategic partner it is, can we collectively focus our expertise in a particular adjacent market that we both see as being a potential and have that adjacent market grow in business, so that I would say that’s more of a multi-year opportunity for us not short term on the capacity side.

Derek Soderberg

Analyst · Colliers. Your line is open.

Okay, got it. Yes, that makes sense. And then just looking forward on OpEx, I mean, you guys have done a good job of managing expenses, but with the new operating structure, how are you guys sort of consolidating resources? Is there a sort of a point at which we can expect OpEx to come down? Or is it more the case that, this really just frees up room for you guys to invest more in the business, new products, things like that. How should we think about the move as it relates to OpEx looking forward?

Todd DeBonis

Analyst · Colliers. Your line is open.

Yes, what you’re going to see is, is we kept a tight lid on OpEx through Q3, even with the new ads that we had, we still kept a tight lid on OpEx. But as we move forward, we’re investing for this. I mean, we see a multi-year three, four year accelerated growth in the mobile domain and some of these adjacent markets. In order to fully capture that and we see only the front end of that three or four year period being capacity constraint. We’re not going to be capacity. I mean, there’s a ton of new capacity coming online, some as soon as nine months away, some 18 months away we do not believe a year to 18 months down the road. We will be in a supply constraint environment. So we are investing now for the three, four year horizon. And so you will start to see our OpEx creep up a bit. And we’re still a good steward of a shareholders’ money. We will do it in a controlled fashion. But there in my mind, there’s very little risk to invest the money. Now there’s more risks. If I don’t invest, we will miss this huge opportunity sitting in front of us.

Derek Soderberg

Analyst · Colliers. Your line is open.

Got it. That’s all. That’s great to hear. Thanks guys.

Operator

Operator

Thank you. And I’m currently showing no further questions at this time. I’d like to turn the call back over to Todd DeBonis for closing remarks.

Todd DeBonis

Analyst

Well, for those of you that are long-term investors, and I see a couple of names up there that I know have been in this as long as I’ve been the CEO of this company. It’s been a long time coming and I appreciate your patience. And for those new investors, hats off to you, you came at the right time. The company is executing on its long-term strategy and we look like we’re in good shape right now. So thank you for your patience.

Operator

Operator

This concludes today’s conference call. Thank you for participating.