Good day, ladies and gentlemen, and welcome to Pixelworks, Inc's First Quarter 2024 Earnings Conference Call. I'll be your operator for today's call. And as a reminder, this conference call is being recorded for replay purposes. I would now like to turn the call over to Brett Perry with Shelton Group Investor Relations. Please go ahead.

Afternoon, and thank you for joining us on today's call. With me on the call are 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 2024. Before we begin, I'd 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 subjects 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 14, 2024. 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, the company's annual report on Form 10-K for the year ended December 31, 2023, 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 stock-based compensation expense. The company uses these non-GAAP measures internally to assess operating performance. We believe the non-GAAP measures provide a meaningful perspective into core operating results and underlying cash flow dynamics. 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 U.S. 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 reconciliation 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, I'd now like to turn the call over to Pixelworks CEO Todd DeBonis for his opening remarks. Todd, please go ahead.

Thank you, Brett. Good afternoon and welcome to everyone joining us on today's call. In terms of our overall results, we had a solid first quarter. As outlined in today's press release, total revenue was just above the midpoint of guidance. The anticipated March quarter seasonality coming off record mobile revenue in the fourth quarter. Gross margin expanded nearly 600 basis points sequentially to over 50% due to a favorable shift in revenue mix towards our newer X7 Gen2 visual processor, [ combined cost and ] efficiencies, and an increase in TrueCut revenue. Together with well-managed operating expenses, we utilized minimal cash from operations during the first quarter. For a review of end markets, starting with our mobile business, as previously mentioned, mobile revenue for the quarter, [ indiscernible ] associated with customers launch cycles for new smartphone models. Year-over-year, mobile revenue was up nearly 200% and represented a record 61% of total revenue for the first quarter. This growth was driven by increased unit shipments of our X-Series visual processors, [ indiscernible ] Gen 2 mobile visual processor, and an increase in TrueCut motion licensing and motion grading services. We have continued to expand and gain momentum with our IRX branded gaming experience and ecosystem, which serves to further differentiate the inherent performance advantage of the premium visual gaming experience that our mobile processors bring customer smartphones. Introduced in the second half of last year, IRX, which is short for Image Rendering Accelerator, is an end-to-end ecosystem solution that we established specifically for mobile gaming. The overall response and our resulting collaborations across industry-leading game engines and gaming studios have been encouraging. Since the introduction of IRX, our work with several leading gaming studios has resulted in a total of 9 IRX-certified mobile games, and we've tuned our solution…

Thank you, Todd. Revenue for the first quarter of 2024 was $16.1 million, which was just above the midpoint of our guidance. Year-over-year, total revenue for the first quarter increased 61%, driven by strong growth. The breakdown of revenue in the first quarter was as follows. Revenue from mobile was approximately $9.8 million, or 61% of total revenue, and was comprised primarily of shipments of our X5 and X7 series of visual processors, as well as revenue contributing series of recent TrueCut Motion grading services and licensing engagements. Home and enterprise revenue was approximately $6.2 million. First quarter non-GAAP gross profit margin expanded almost 600 basis points, sequentially, to 50.7% [ Audio Gap ] [ 44.8% ] in the fourth quarter of 2023, and compared to 44.1% in the first quarter of 2023. The sequential and year-over-year improvement in gross margin primarily reflected a higher mix of revenue from newer generation mobile visual processes, including TrueCut licensing revenue, as well as the benefit of manufacturing cost efficiencies with our suppliers. Non-GAAP operating expenses were $12.6 million in the first quarter, compared to $12 million in the prior quarter, and $13.6 million in the first quarter of 2023. Comparing sequential quarters, fourth quarter operating expenses reflected the final credit to R&D related to the co-development agreement with our largest projector customer. On a non-GAAP basis, first quarter 2024 net loss was $4 million, or a loss of $0.07 per share, compared to a net loss of $2.6 million, or a loss of $0.05 per share in the prior quarter, and a net loss of $8.2 million or a loss of $0.15 per share in the first quarter of 2023. Adjusted EBITDA for the first quarter of 2024 was [ indiscernible ] compared to a negative $1.9 million in the fourth quarter…

Our first question will come from the line of Suji Desilva from ROTH.

A couple of questions on the mobile. First of all, on the mobile customers, just curious how much concentration there is in the [ $20 million ] in the last 2 quarters, the customer that's having, I guess, model challenges now. And are there other large customers in mobile, just to understand the concentration there?

So of the [ $20 million ] in the last 2 quarters, a significant portion was with one large customer. We don't break out each customer because we don't want to break out too much information about the models. We're still on a handful of models on a per-customer basis. But we were overweight one particular customer, and that is the customer that is pulling back.

And then on the new chip push-out in the launch, is that a chip architecture issue? Is it a design issue? Is it a -- or software, firmware, or is it an issue with the manufacturing process? Any color there on the challenge would be helpful.

So it's not an architecture issue. I mean, this is an entirely new architecture. We put several new features and functionality in the device as we were progressing to our first chip in 12 nanometer. When you move to a new process node like this, one of the things we have is [ is ] we have mixed signal analog interfaces. Porting those to a new process technology is always challenging. Some of the new features are taking us longer to bring up. But it is not -- it's certainly not anything to do with the process technology or our manufacturing partner. It is design related. We have -- we got devices back, I think, late April. They were in good enough shape that we actually sampled devices to customers on May 8. So we wouldn't have done that if there was something architecturally or fundamentally wrong with them. But needless to say, we were already running on a tight schedule with the customers that were committed to use it in the near-term. So it was already a bit of a risk. And I would say with some of the challenges we have, it was just too much of a risk to engage on those models. So these are companies that put out new models every 6 months. And so from their perspective, risk became too high to go on the near-term. And we have ample time now to bring it up for the subsequent models.

And our next question will come from the line of Nicolas Doyle from Needham.

A couple follow-ups there on Suji's question. I guess, what gives you confidence that the large customer pausing through the third quarter? What gives you confidence that they'll come back in the fourth quarter? And then also, how big is the impact that you'll miss the design window for these new premium models? How are you thinking about that?

So, Nick, so first of all, we [ indiscernible ] by saying that, we're inferring that their order coverage will start to come back in partial third quarter. I do not anticipate we will be overweight one customer on a go-forward basis. We've had a lot of design activity over the last 6 months outside this large customer. That continues with our newest partner, Transsion, and it also continues outside of China, which is good for us. And so even though this customer will be coming back, it's not [ indiscernible ] overall, we're all waiting. [ indiscernible ] And the second question, Nick, was, can you repeat it?

Yes, how big of an impact is it that you'll miss the design window for these new premium models?

Well, for the new device, which was a very high [ SP ], it's significant. It will impact our mobile growth for this year. So we'll probably not see mobile growth this year because of that impact.

And then on the international expansion, what -- I mean, did you see any trends in the first quarter with the OnePlus Ace and then kind of moving over to Transsion and their global OEM with ties in China but focused in these emerging markets including Africa and the Middle East and I think Europe? Where are you focused on expanding internationally, and what are the biggest challenges you see there?

Okay, so the OnePlus Ace 3 was not an international. It was domestic only from OnePlus. The one phone that they did put in an international market, so they put both the domestic version and international, was their flagship, their OnePlus 13, or 12, I think it was the OnePlus 12, excuse me. Transsion -- and by the way, to go back to OnePlus, they still probably sell more domestically than they do internationally with that flagship. Transsion does not sell domestically. They are A share publicly traded company that [ indiscernible ]. They sell throughout emerging markets throughout the world. And so they were the fastest growing mobile phone customer by unit growth in Q1. I think they grew over 80% year-over-year. And all of that growth is by selling phones in what I would call low to mid-tier price ranges throughout the emerging markets. So engaging with on this design, Transsion, has been a very good thing for our international expansion. When we started with them, we had modest expectations for this first model. We believed there would be more. By the time we launched the model -- we've been working with them probably 8 months on this model. By the time we launched the model, their forecast had tripled, meaning the emerging markets they serve, there is pent-up demand for gaming-centric mobile phones. Not a lot of companies have been targeting mobile those emerging markets with these capabilities at this price point. And what we've seen is there's a strong demand for that. So let's hope that continues.

Our next question will come from Richard Shannon from Craig-Hallum.

Todd, maybe I'll hit on gaming and IRX. I think you talked about, I don't know, it was 100% or 200% increase in the number of games announced by the end of the year. Apologies, I may have missed some items, but the line was garbled at times. Is that the same numerical goal as what you talked about a couple quarters ago when you were talking about a 400% increase? I didn't have the numbers all in front of me to do the math, but is that the same goal?

It's consistent with what I think I've talked about in the past. I mean, what I said in the prepared remarks is we have 9 IRX-certified games as of today, and our current goal is to double them by the end of the year.

And then Todd, maybe...

I also said one other thing, Richard. I also said for the first time I brought up something besides certified games. I brought up what we call qualified games. And we have over 100 IRX qualified games. The difference between certified and qualified is a certified game is we work directly with the studio and they incorporate our game engine SDK to support their game playing on an IRX-enabled phone. An IRX-qualified game is where we work with the phone manufacturer to make sure that game works well with our visual processor. It's more one-sided. But we do optimize the hardware to play with that game, and we qualify it. And then the OEM whitelists those games. Today, there -- we don't have any phone manufacturer that just turns on our visual processor to play with any game that somebody can download. It's a controlled environment. So it's either a whitelisted qualified IRX game or one of our IRX certified games that we have engaged directly with the studio and collaborated with.

Maybe to touch on IRX here, obviously introduced this last summer here, and this is to a good degree a branding exercise, and obviously there's a little bit of a chicken and egg dynamic here establishing a brand, which clearly isn't very easy to do. Maybe want to get your kind of qualitative scorecard on how well that has taken hold so far, and what are the things should we look for to show further entrenchment and success there?

Was that TrueCut you were asking about, Richard, or IRX?

No, IRX.

Because we're trying to establish two brands.

I was asking IRX.

Okay. I just want to make sure. So, yes, I mean, establishing brands, how do you do it? You go out and you spend marketing dollars in making sure that that brand is recognized with the businesses that you're targeting. We can do that, but we don't have a huge budget. I think we've done a pretty good job of people talking about IRX, given the budgets that we have. The second thing we do is we leverage our customers. So when they talk about either, sometimes they call it a dual processor architecture, or they call it [ the mixer ], that they actually talk about it being an IRX-certified processor and supporting the IRX ecosystem. Most of the customer support is in that activity. And for evidence, I suggest you go see how the Infinix GT20 from Transsion, how they advertise that phone. They talk about Pixelworks. They talk about our IRX certification. he last thing we do is if you go look at these 9 games that are IRX certified, we've actually worked with the game manufacturer itself. So there is a setting in the user setting section that if you want to increase the performance of the output of the game, they have an IRX button in the menu of the game itself. And so that is another way for us to promote the IRX brand. So when you have Tencent or NetEase or Perfect World actually incorporate your IRX logo and explanation of what IRX is in their game, that gives us a lot of exposure.

My last question, I can't remember who mentioned this, but just kind of thinking past the second quarter here, and again, the comments are a bit garbled here about how to think about the second half. I think there was some expectation of sequential growth, and I wasn't sure if that was the thought was there that would happen in the third quarter or fourth quarter. I'm not sure, but [ to ] clarify what your thoughts are and what you see right now.

So what we said, I hope my answers aren't garbled. You sound perfectly clear, so I don't know what's going on, but I assume you're perfectly clear. What we said was in the second half of the year, meaning Q3 would be sequential growth over Q2, and Q4 would be sequential growth over Q3.

I certainly heard that one.

We don't give guidance out that far, but that is what we anticipate.

And I'm not showing any further questions in the queue. I'd like to turn it back over to management for any closing remarks.

All right, well, thank you. Thank you for joining Pixelworks Q1 2024 earnings call. Even though the management team is disappointed in our near-term guidance, we remain extremely confident in our long-term strategy as demonstrated by expanding our mobile system and TrueCut progress in the recent quarter. Additionally, our expanded corporate gross margins demonstrate the value that our visual processing solutions bring to customers, as well as our execution on cost efficiency initiatives. The team is very focused on the elements of the business we can control, and we look forward to progress over the next couple of coming months. Thank you.

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect. Everyone have a great day.