Good day, ladies and gentlemen, and welcome to Pixelworks, Inc. First Quarter 2022 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 for business. I would now like to turn the call over to Brett Perry of Shelton Group, Investor Relations.

Thank you, Gigi. Good afternoon, and thank you for joining today's call. With me on the call is Pixelworks' President and CEO, Todd DeBonis; and Chief Financial Officer, Haley Aman. 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 2022. Before we begin, I would like to remind you that various remarks we make on this call, including those about 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 belief as of today, Tuesday, May 10, 2022. 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, 2021, 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 expense, net loss and net loss per share. Non-GAAP measures exclude amortization of acquired intangible assets, and stock-based compensation 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 core operating results and underlying cash flow dynamics. We caution investors to consider these measures in addition to, and not as a substitute, 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, we refer to net loss attributable to Pixelworks, Inc. as simply net loss. For additional details and reconciliations of GAAP to non-GAAP net loss and GAAP net loss to adjusted EBITDA, please refer to the company's press release issued earlier today. With that, it's my pleasure to turn the call over to Todd for his opening remarks. Please go ahead.

Thanks, Brett, and good afternoon to everyone joining us on the phone and webcast. Starting with the Q1 results, we've had a great start to the year with the momentum we had exiting last year continuing into the first quarter. Total revenue increased 79% year-over-year with strong growth across all of our target end markets and sales of our hardware-based mobile visual processors growing sequentially and year-over-year to another quarterly record. Gross profit also came in strong at 53% of revenue, together with OpEx and bottom line results in the first quarter that were better than the midpoint of guidance. Given the recent headlines regarding COVID related lockdowns, I wanted to begin by addressing the status of our business operations in China and how our Pixelworks Shanghai subsidiary has been navigating this difficult situation. First, I want to highlight that we have offices located in multiple provinces, and our China-based employees are not exclusively in Shanghai. Our office in Pudong has approximately 135 employees, which is a little over 50% of our global workforce. The imposed restrictions often vary by specific region. Therefore, any potential impacts are not universal. I would also emphasize that our operations team and supply chain partners are located in Taiwan. And as of today, there has been no associated impact on our ability to fulfill planned shipments to our customers. Having said that, the reported lockdowns have presented temporary challenges for a certain number of our employees and our office in Pudong is working with local officials to reopen over the next couple of weeks. The team has done a great job remaining productive and we've done our best to accommodate those employees. The organization in China has demonstrated incredible agility and dedication to maintaining program deadlines and supporting customer engagements, whether in the office…

Thank you, Todd. Revenue for the first quarter of 2022 was $16.6 million, essentially flat with $16.6 million in the fourth quarter of 2021 and representing an increase of 79% from $9.3 million in the first quarter of 2021. As Todd previously mentioned, our sequentially flat top-line results reflected demand that was significantly above the traditional first quarter seasonality. The year-over-year increase was driven by strong growth across all of the company's target end markets, highlighted by the ongoing recovery in the projector market and continued expansion of design wins and customers in the mobile market. The breakdown of revenue in the first quarter was as follows; revenue from mobile was $5.7 million, representing 34% of total revenue. We would like to highlight that revenue contribution from mobile visual display processors in Q1 grew 24% sequentially and increased over 50% year-over-year to a new quarterly record. Revenue from digital projector was approximately $7.9 million, down 3% sequentially and up more than 90% year-over-year, reflecting the significant and ongoing recovery in customer and end market demand. Video Delivery revenue was approximately $3.1 million in the first quarter. Non-GAAP gross profit margin was 53.2% in the first quarter of 2022 compared to 55% in the fourth quarter of 2021, which benefited from higher licensing revenue from mobile software solutions and compared to 43.7% in the first quarter of 2021. First quarter gross margin reflected our ongoing efforts to both mitigate and pass-through higher material costs to customers. Non-GAAP operating expenses were $11.6 million in the first quarter compared to $11 million last quarter and $10.2 million in the first quarter of 2021. On a non-GAAP basis, revenue first quarter 2020 -- excuse me, on a non-GAAP basis, first quarter 2022 net loss was $3.5 million or a loss of $0.06 per share…

[Operator Instructions] Our first question comes on the line Chris roster. Our first question comes from the line of Suji Desilva from Roth Capital. Your line is now open.

Ho Todd. Hi, Haley. So just to clarify, Todd, the China lockdowns, obviously, you talked a lot about the offices and the limiter. In terms of the end demand for the smartphone customer in China, can you just talk about the order patterns you've seen, whether you've seen more cautious ordering or whether the demand remains steady through this through the China lockdowns?

We've certainly seen customers hesitate, I would say, with – there's a lot of churn in their model lineup, how they want to configure their model lineup, what price points they want to go after. I would say it was -- it's not as convicted as it was this time last year for sure. But we've also reached a point where our value proposition where we come in is no longer, I would say, something they're speculating on. We're pretty much a proven technology now. If they want to target a certain demographic where mobile gaming and visual performance is a requirement, we are in every discussion. So I would say, yes, I've seen the order patterns change for us, I would still say the orders are stronger than -- I still – supply is my biggest issue.

Okay. That color definitely help, Todd. And then, can you talk specifically about the pairing up with MediaTek versus typically Qualcomm basebands. What -- does that open up a newer market for you, or is that just kind of a broadening of the footprint you already have? Just help us understand there.

Well, so it's not just MediaTek versus Qualcomm. It's also -- MediaTek has, over the last two years, made a conscious effort to focus on flagship performance. As you can imagine, the volume are on lower end APs, the margin -- the profit margin is on flagship quality or high-performance quality APs. MediaTek is very ambitious at going after Qualcomm's market share in that particular area. And so with that said, if you look at the phones that we're in, we're either in the flagship or sub-flagship series. And so I think it's a perfect combination for MediaTek and ourselves to collaborate. So for us, some of the -- some of the programs we've been in with MediaTek are higher volume than the Qualcomm because they've been at a slightly lower ASP. So but I expect those guys to move up the food chain over the next two years.

That's helpful to understand. And perhaps a question for Haley. Haley, could you clarify the comments you had about -- I know the overall mobile/TrueCut category was down sequentially, but you talked about mobile being up, I think it was sequentially. And just help us understand the kind of the dynamics of that segment as you expect mobile to grow again in the second quarter?

Well, yes, I think what I noted is that our hardware sales are up in mobile sequentially, and we expect that trend to continue into Q2.

Okay. Great. And just because it's declined sequentially, I'm curious what the offset was there?

Decline sequentially?

The mobile/TrueCut was $6.2 million in 4Q and $5.7 million in...

Okay. So yeah, in the fourth quarter, it included the base Soft Iris deal, which we consider mobile. So it's like a license for Soft Iris in Q4. This is why we're making the distinction this quarter that hardware grew, hardware sales, chip sales grew mobile -- on the mobile side. But Q4 did include the Soft Iris, which bumped up Q4 in total mobile.

Great. Clearly, that was a clarification going forward. And then lastly, Todd, you talked about TrueCut and the habit and then some motion pictures in the second half where you're going to play a bigger role in. Can you clarify or update the revenue model you're seeing there and how customer wins factor into that -- your inclusion in those titles? Thanks.

Yeah. That's a long -- that's a long answer to that question, which I'm probably not going to go into right now. So -- but take question, Suji. But I'll give you this. It is very important for us to be tied to what we would consider marquee theater leases. So one of the things that happened at CinemaCon, besides us just announcing our relationship with Pyxilogic and demoing, high-frame-rate, cinematic versions of the habit was that there was an announcement by Lightstorm Technologies. Jon Landau was there and James Cameron gave a video about the new upcoming Avatar 2 to be delivered to the theaters in a high frame rate and have the theaters get ready for high frame rate theatrical releases. So the reason I bring this up is because this is really setting the tone where you're going to see the movie industry move towards higher frame rate, higher resolution, HDR theatrical releases and the remaining theater companies are actually upgrading all their theaters, not all of them, but many of them, to be able to show this content as it starts to come out. So this trend that we have been pushing for a while, right is now starting to merge both the theatrical releases, and we think it's going to follow the streaming releases. So I think it's very important for -- I'm not sure all of our investors understand this, but I think it's very important if you see this trend hit, TrueCut Motion technology becomes very indispensable.

Okay, great.

And so that's probably what I'll talk about there. Okay?

Okay. That's helpful. Thanks Todd. Thanks everybody.

Thank you. [Operator Instructions] Our next question comes from the line of Richard Shannon from Craig-Hallum. Your line is now open.

Well, great. Thanks Todd and Haley for taking my questions. Well, Todd, I guess despite the fact that you said you want to talk more about Tru, I think that's exactly where all go, but I'll ask you pretty simple straightforward question, which is you talked about multiple titles coming out later this year. Can we think of these as like a test case that if deemed successful that we might see a license being signed with studios or streaming guys, or how do we think about the implications of these titles coming up?

Well, I mean, first, I just wouldn't get ahead of ourselves on what the implications are. First of all, I would say that these titles we're working on see the value of TrueCut Motion to providing a TrueCut master version of their content, and they believe that's the best way to demonstrate their content. I'm not going to go into the details of the distribution licenses and tool licenses that we have in place with these customers but assume these are formal engagements.

Okay. All right, great. Let me follow-up on a topic within mobile, you refer to Tier 1 customer, Honor. What are you expecting here in terms of engagement relative to the first two Tier 1s you already have in the funnel?

Repeat the question for me, Richard.

What's the expected engagement over the next one to two years with Honor relative to the experience you've had with your first two Tier 1?

Well, I mean, how about I speak about our experience so far engaged with them, which is probably even close to a year, okay? They are when they separated from Huawei, a great deal of their product management team and design team came with them. Their philosophy on how to strive for flagship excellence, I think, also came with them. The difference is the Honor brand typically had not been pursuing top-tier flagship quality phones. Now they are. And so we're engaged with them on those models. Q – Richard Shannon: Okay. Fair enough. Let's jump over to the X7 processor. I think I heard you say that you're expecting the first phones launched in the second half of the year. I guess maybe -- and maybe if you'd like to tie this into any success direct or indirect with the relationship there. If you can kind of talk about what we should expect to see with X7 relative to adoption of the X5 and earlier processes to see expect to see something more rapid? And also I just want to confirm that you're still expecting ASPs to be in the order of double prime generations. A – Todd DeBonis: Yes. The ASP is significantly higher than previous generations. We are engaged in several models simultaneously either in evaluation or in design and stage. The take-up will be a combination of how many of these evaluations get done early, what capacity we have and resources to engage in them. So I mean, I definitely -- if I -- if you go back and look at X5, X5 is a add of -- we were being -- the features of X5 and motion processing were not fully digested by the first couple of models that we engage with when it was…

Thank you. At this time, I'm showing no further questions. I would like to turn the call back over to management for closing remarks.

All right. For those of you who attended the call today. Thank you so much for your time and attention. We continue to move forward with our plan with plotting execution. So thanks for your time. Bye-bye.

This concludes today's conference call. Thank you for participating. You may now disconnect.