Good day, ladies and gentlemen, and welcome to Pixelworks, Inc.'s Third Quarter 2024 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 Brett Perry with Shelton Group Investor Relations. Please go ahead.

Thank you, [Lalla]. Good afternoon, and thank you for joining today's conference 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 third quarter of 2024. Before we begin, I'd 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 beliefs as of today, Tuesday, November 12, 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 both GAAP and non-GAAP terms, including gross margin, operating expenses, net loss and net loss per share. Non-GAAP measures exclude restructuring costs and stock-based compensation expense. The company uses these non-GAAP measures internally to assess operating performance. We believe these 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 call, 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 now my pleasure to turn the call over to Pixelworks' CEO. Todd, please go ahead.

Thank you, Brett. Good afternoon, and welcome to everyone on the phone and the webcast. We appreciate you joining us on today's call. As reported in our press release earlier today, our third quarter results were consistent with our prior expectations for moderate sequential improvement. Revenue was at the midpoint of guidance, primarily reflecting steady demand in home and enterprise as we continue to work through the near-term headwinds in our mobile business. Gross margin expanded sequentially and year-over-year to over 51%, mainly due to a product mix during the quarter. Additionally, operating expenses decreased from the prior quarter, as we began to realize initial benefits of our previously implemented cost reductions. To briefly recap our recent and ongoing cost actions, as well as expected benefits. At the end of the second quarter, we initiated a broad series of actions to reduce expenses and focus on operational efficiencies, to better align operating expenses with anticipated near-term revenue levels. This included a reduction in headcount effective June 30, resulting in expected annualized cost savings of approximately $4 million. Due to certain one-time expenses incurred in the third quarter, we expect to realize a more significant reduction in operating expenses beginning in the fourth quarter. Together with our cost containment measures that we have taken, we continue to believe our collective actions will contribute to total cost savings of approximately $10 million over six quarters through year-end 2025. For a review of end markets, starting with our mobile business. Revenue was down by 7% sequentially and 76% year-over-year, reflecting the expected multi-quarter impact from the headwinds that I discussed last quarter. Mobile revenue in the quarter was primarily comprised of shipments of prior generation mobile visual processors, in support of smartphones initially launched by customers in the first half of the year.…

Thank you, Todd. Revenue for the third quarter of 2024 was $9.5 million, which was at the midpoint of our guidance, and compared to $8.5 million in the second quarter, and $16 million in the third quarter of 2023. The sequential increase in third quarter revenue, was driven by increased sales in the home and enterprise market, while the year-over-year decline primarily reflected the previously discussed headwinds in mobile. The breakdown of revenue in the third quarter was as follows: revenue from mobile was approximately $2 million; home and enterprise revenue was approximately $7.5 million. Third quarter non-GAAP gross profit margin expanded 30 basis points sequentially, to 51.3% from 51% in the second quarter of 2024, and increased 820 basis points from 43.1% in the third quarter of 2023. The significant year-over-year expansion in gross margin reflects a more favorable product mix, and our ongoing focus to drive healthy margins. Non-GAAP operating expenses decreased to $12.4 million in the third quarter from $12.8 million in the prior quarter and $13.3 million in the third quarter of 2023. The sequential and year-over-year decrease in third quarter operating expenses reflected the initial benefit, from the cost reduction actions implemented at the end of the second quarter. However, were partially offset by a one-time expense associated with the design revisions completed on our next-generation mobile visual processor. We continue to expect to realize approximately $4 million in annualized savings from our previously taken cost reduction measures. On a non-GAAP basis, third quarter 2024 net loss was $7.1 million, or a loss of $0.12 per share, compared to a net loss of $7.7 million, or a loss of $0.13 per share in the prior quarter and a net loss of $5.7 million, or a loss of $0.10 per share in the third quarter of…

[Operator Instructions] Your first question comes from the line of Nick Doyle with Needham & Company. Please go ahead.

Yes. Thanks for taking my questions. Great to see you guys completed production and qualification with the next-gen processor. Can you talk about what customer interest has been like and engagements for this product, and expand on what the expected timeline is from initial samples to design wins to revenue? Thanks.

Yes. I don't want to get into too much detail, Nick, but I will say that we have sampled engineering samples, but they are production qualified to several Tier 1 customers, and we're going through a thorough analysis. I mean one thing to note with this device is we incorporated features that - all the previous features we've had in our visual processes are included. But in addition, we've included features that can only be enabled with our IRX-certified gaming partners. And so when we go through these evaluations with the customer, it's evaluating three sets of things: the performance of the existing set of features on a new 12-nanometer device; the performance of new features that are still one-sided, new features that we've incorporated that the OEM can enable without the support of the IRX ecosystem. And then the third set is features that can only be supported, if the IRX gaming ecosystem have enabled them. So this evaluation process will take some time. We do expect decisions for new programs will be made. We are still strongly encouraged that they'll be made positively, but there's no guarantee of that within the next several months. But that's just for programs that they have to make a decision for midyear. We expect this solution to be a valid solution for - through 2026.

Okay, yes, that makes sense. Thank you for that. And then kind of the same questions for the cost-down version. I mean, any details on the type of engagements you're having and potential timeline? Thank you.

So that engagement is right now specific to one Tier 1 customer. We know that if we introduce this solution, the way we are collaborating with this customer, it will get broad interest. I think as a reminder to everyone on the call, our flagship gaming processors targeted either what they call flagship killers or flagship devices of these Chinese Tier 1 OEMs. They're very good phones. They don't sell a ton of them. Their total market share compared to Apple and Samsung is quite small when you look at phones over $500. We do participate in those. We've done - I think in our best year, we probably shipped over 12 million units into a market that may absorb all of the premium phones and maybe 50 million units from these Tier 1s combined, if you don't include Huawei. So, going after this broader market, you're going after where the majority of the volume from Chinese Tier 1s comes from. The majority of their volume shipped comes from phones that are under $250 and as low as $100. And so this is the range that we're targeting this new low-cost derivative product. And it's not just mobile gaming. It's how do you enable several use cases, for high frame rate experience on one of these lower-end phones.

Thank you.

[Operator Instructions] Your next question comes from the line of Richard Shannon with Craig-Hallum. Please go ahead.

Well, hi Todd and Haley. Thanks for taking my questions as well. Maybe I'll follow-up on the topic in the past questions here in the mobile space and maybe just kind of take a big top down here. I know, Todd, I'm probably asking you to look a little far ahead when the mobile business generally doesn't allow you to look too far forward without a lot of confidence. But when you're starting to add processors for the lower end part of the market, how do you think your revenue and unit profile balances out when you've kind of got both product families humming at once? I mean, is this something where the premium or the higher end is still the majority, a clear majority? Or can the low end be a majority of your business over time?

I would say if you look in the near-term, which is '25, first half of '26, I would still - maybe it could be 50-50, but I'm still leaning on the high end right now. But I think beyond that, the low end will - if we're successful, the low end will be a much bigger part of the business.

Okay. And what's the relative ASP we're talking about between these two? Is it more than half the price or…?

About half - probably about half the price.

Okay. And then just any thought process on how to think about the trajectory and timing of inflection point of your mobile business back? I know we had a bit of a delay with the product development, and it sounds like you're back on track here. But obviously, it takes, I would assume, a number of months here to get there. When do you start - when do you expect to see that inflection point in your mobile business start?

Well, first step is to secure the design wins. The next step is - I mean, we've already started some preproduction runs so that we'll have inventory and be ready to go so we can move fairly quickly. So I expect probably the earliest you could see substantial contributing revenue would be late Q1, Q2, but we expect really to ramp in the back half of the year of '25.

Okay. Okay, that was consistent with what I was thinking. I just want to make sure. Maybe a couple of last questions here. Just want to understand the financial model going forward here, especially on how to think about breakeven. I think you said $4 million annual expenses - expense reductions here, but I heard something about $10 million. I wasn't sure where that came from. So I just want to make sure how to fit those two together?

So the $4 million is just referencing the reduction in workforce. That was the cost savings for those salaries period. We have done other things beyond employee reductions that combined - and that $4 million is over annually, right? So what I'm saying is $10 million over six quarters, right? It would suggest that just the employee reductions are about $6 million of the $10 million. But we have identified another $4 million of reductions that we've implemented effectively. And so, we will secure them. And actually, since that, we are now identifying further reductions.

Okay. Does that come out of OpEx mostly or other parts of the cost structure?

Predominantly OpEx.

Okay. One last question from me. You mentioned engaging a banker for early interest in Pixelworks Shanghai. I guess I just want to get a sense of the nexus of the situation here, where the interest is coming from. And does this mean anything about the lower prospects or at least near-term prospects of getting a Star listing for that subsidiary?

Well, so understand if you change the controlling interest structure, you would delay any public offering, right, okay? Possibly. Right now, they're not really open for business, right, for IPOs. So - but by the rules of the Star Exchange, if you change controlling interest, then you set back yourself a year from filing for a public offering, because it would be the new controlling interest party that would be doing the filing and all what they call a tutoring process would have to be redone with that entity, okay? So frankly, if you're looking at a structural change, it's not because you think that you're about ready to go public. It's because that you are being patient and you think that changing the ownership structure potentially, would give advantages to this entity to, one, fulfill its promise, dramatically grow revenue, become profitable, and then have a liquidity event. Given the current geopolitical state that we're in, having a U.S. public company, and a U.S. CEO of that public company be the Chairman of the subsidiary, and the U.S. public company being the controlling shareholder with almost 80% interest, it creates challenges in the environment we're in that a different structure may alleviate.

Okay. Fair enough. That's something to move on. I think that's all the questions from me. I'll step out of line, Todd. Thank you.

Thanks, Richard.

Seeing as we do not have any more questions at this time. I will now turn the call back over to management for closing remarks.

All right. Well, thanks for attending this conference call. We look forward to updating you as we move forward in the fourth quarter. A lot on our plate. As things happen, we will announce them. Thank you.

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.