Good day, ladies and gentlemen and welcome to Pixelworks, Inc.'s First Quarter 2025 Earnings Conference Call. I will be your operator for today's call. At this time, all participants are in a listen-only mode. After the speaker’s presentation there will be a question-and-answer session. [Operator Instructions] 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.

Thank you, Kevin. 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 first quarter of 2025. 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, May 13, 2025. 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, 2024, 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 restructuring costs and stock-based compensation expense. The company uses these non-GAAP measures internally to assess its operating performance. We believe the 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 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 will 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 webcast. We appreciate you joining us for today’s conference call. As reported in our press release earlier today, first quarter results were consistent with our expectations. Revenue reflected anticipated first quarter seasonality in the home and enterprise market, which was partially offset by sequential growth in our mobile business. We also realized significant benefits from our previous and continued actions to streamline our cost structure, with first quarter operating expenses down more than $2 million year-over-year. Similar to the format and flow of remarks last quarter, I'll begin with comments on our TrueCut Motion business in the U.S. and then review the development specific to our majority owned Pixelworks' Shanghai subsidiary, including an update on the strategic review process. Starting with our TrueCut Motion platform. As discussed last quarter, achieving a tipping point for broader adoption and commercialization requires creating momentum across an ecosystem comprised of filmmakers, studios, content distributors and exhibitors and device manufacturers. We continue to make tangible progress on all these strategic fronts over the last quarter. First, with respect to the broader film industry. For the first time since the pandemic, there are indications of an uptick in activity from filmmakers and studios. This includes a positive trajectory for both the planned number and quality of new release theatrical titles, representing a positive shift in the overall industry landscape from prolonged headwinds to a tailwind. Specific to TrueCut motion content, we are still targeting to double the number of titles year-over-year from 5 in 2024 to 10 in 2025. In line with this growth in titles, we are seeing announcements of major capital investments from both or by exhibitors in both the standard and large format premium laser theaters that benefit the most…

Thank you, Todd. Revenue for the first quarter of 2025 was $7.1 million compared to $9.1 million in the fourth quarter and $16.1 million in the first quarter of 2024. The sequential decrease in revenue reflected a combination of anticipated first quarter seasonality in the home and enterprise market as well as the fourth quarter including higher sales of end of life transcoding products. These were partially offset by sequential revenue growth in mobile in the first quarter. The breakdown of revenue in the first quarter was as follows. Home and enterprise revenue was approximately $5.8 million. Revenue from mobile was approximately $1.3 million. First quarter non-GAAP gross profit margin was 49.9% compared to 54.8% in the fourth quarter of 2024 and 50.7% in the first quarter of 2024. The sequential decrease in first quarter gross margin was primarily a result of the shift in product mix between our home and enterprise and mobile businesses as well as less overhead absorption. Non-GAAP operating expenses of $10.4 million in the first quarter were flat with the prior quarter, however decreased approximately $2.2 million from $12.6 million in the first quarter of 2024. This year-over-year decrease in first quarter operating expenses reflects our previously implemented cost reduction actions through the end of 2024. We've also taken additional cost reduction measures since the beginning of 2025, which we expect to result in further reductions in operating expenses beginning in the second quarter. Collectively, the cost reductions we have implemented over the past 12 months are expected to contribute to a total year-over-year decrease in operating expenses of approximately $10 million for the full year of 2025. On an on GAAP basis, first quarter 2025 net loss was $6.5 million or a loss of $0.11 per share compared to a net loss of $4.3…

Thank you. [Operator Instructions] Our first question comes from Suji Desilva with ROTH Capital. Your line is open.

Hi, Todd. Hi, Haley. Todd, you talked about Pixelworks Shanghai reaching profitability. Can you give us some help with what the revenue levels that might be achieved at and maybe what portion of the OpEx is attributable to Shanghai so we can understand that operating model?

So OpEx is approximately, I think going into the back half of the year, will be down at $7 million a quarter, something like this, $7 million to $7.5 million for Pixelworks Shanghai. As far as revenue, it's a mix of home and entertainment coming back, projector, mobile, IP licensing and design services. And to reach profitability, you don't need all of it to happen, you need a chunk of it to happen. And so the mix depends on how it falls in. If all of it happens the way we anticipate, then you'll be profitable, the unit will be profitable for both Q3 and Q4. But it's still early to say.

Right, understood. Okay, so OpEx for Shanghai, $7 million a quarter. Got it. And then switching over to TrueCut, I'm just curious, your device discussions, are those Chinese brands given TrueCut's early kind of traction there, or are those global, non-Chinese smartphone OEMs?

So you asked me about TrueCut and you're asking me about mobile OEMs?

Well, no, no device discussions for TrueCut.

Okay, okay, yes, but you mentioned mobile OEMs. I wouldn't include they're mobile OEMs, first of all. Okay? And they could be, but I wouldn't conclude that, you know. And the one that I talked about, certification testing, is not a Chinese OEM.

Okay.

And to be clear, just to give a little bit further clarity there, our focus with TrueCut has about, you know, we do want to bring it on a global basis to premium home entertainment devices. But I would say that we've been focused on content generation here in Hollywood for the most part, and we've been focused on home entertainment devices that would be marketed to North America and Europe, eventually globally. But we're very focused in North America and Europe for the home entertainment ecosystem for TrueCut.

Okay, that's helpful, Todd. And then my last question is on the ASIC’s design services engagements, which are relatively new here. What's the -- how would you give a framework for sizing those opportunities and the revenue models associated?

Well, so you're talking about design services?

Yes, and I guess there's IP layered in there, so I'm not sure how to…?

Well, so when you offer design services, other companies offer design services. We're not the first company to do this. Right? There are large system OEMs that want custom semiconductor content, but don't have an SoC design team that is proficient at start, efficient to start to finish, tape out of a, you know, a 12 nanometer SoC. So they can hire and outsource to other firms. We have done this as co-development in the past or taken NRE for an ASIC. The difference between design services are you can open yourself up to an intermix, a model where you can just do a portion of the design as a design service. You can do all of the turnkey for the design service. You may buy the mast set yourself, the customer may buy the mast set. The customer may do assembly and test. So what you've done is you've opened yourself up to anywhere in the process of design on how you can help this large system OEM get the custom silicon that they're looking for. So to get to your question, revenue size really would depend on how much you do for the customer. To give you -- if you did a full turnkey and didn't do production, the customer went and did the production themselves, depending on what intellectual property is involved in large SoCs in 12 nanometer, I mean they can range anywhere from probably a low of $10 million in costs to a high of $20 million in costs. Now that doesn't mean you'll do all of it on a turnkey basis. You may do part of it. So I'm not giving you clarity on the design project we're doing on because we haven't closed it yet, but I'm trying to give you a range on what design services at 12 nanometer would look like.

Okay, helpful parameters. Thanks Todd.

One moment for our next question. Our next question comes from Richard Shannon with Craig-Hallum. Your line is open.

Well, great. Thanks Todd and Haley for taking my questions. I guess the first one I'll ask here is on mobile. Todd, I think in the last call you talked about kind of a range of outcomes here. One of which would be maybe on the lower side be kind of flat or slightly up this year, and then maybe on the high side being more like 2023. Maybe you could just help us understand how the engagements are lining up to anywhere in that range?

Well, I would say, you know, given the guidance we just gave for Q2, it would probably be hard to replicate 2023 revenue in mobile, which for everybody on the call was approximately $30 million. Right? So we definitely expect an uptick in the second half of the year, but I would say we're probably closer to looking at a 2024 year-over-year or slightly above.

Okay, and then how do we think about the profile of this? You know, because you talked about some lower and mid-range, you know, kind of ASPs here. How do we, how do we think about this profile over this year?

It will be predominantly on the low end at those revenue levels and ASPs are sub $2.

Okay. Okay, let's jump over to TrueCut. You talked about a collaboration with a post-production house here. I guess, does collaboration mean it's a done deal or still something to be worked out here? And then how do we think about the partner here, this collaborator, in terms of how they're, how informed they are about how the ecosystem is building? Is this more of a build it and they will come thing or is this highly informed and they know something is about to happen soon?

So let's be clear. We haven't announced the name because we would prefer to announce the name with projects that the two of us have engaged in with a film. And so until that's done, we probably won't announce who it is, but it is a signed agreement. And the nature of the company is the company is a mature, large post-production house that does color grading and other forms of post-production processing for theatrical titles. They get to see a lot of, you know, we're targeted if you go look at what we're targeting. You know, we did five films last year, we're trying to double it this year. But these are all meant to be top 50 type budgeted films for the year. This post production house deals with many of these films already. They get access to -- I mean, we have access to some of these filmmakers through the studios that we have relationships with. They have access to the filmmakers through other means. So we believe that -- and what they see as a benefit for it, I think which is the most important thing. I mean, clearly we're small. Any way for us to expand our reach is good for us. But why would they do it? If they're a large, mature post-production company, why would they want to do it? And the reason is, is they clearly see the benefits of what motion grading does to the content and what it brings to premium large format experience. That's one, but two, they want to expand their stickiness, their capabilities to their filmmaker customers.

I appreciate all the detail. I will jump in line guys, thank you.

Thank you. One moment for our next question. Our next question comes from Nick Doyle with Needham & Company. Your line is open.

Hey guys, thanks for taking my questions. Could you just expand on the two comments you made? In mobile you talked about multiple programs with your lead customer and then additional engagements. I guess the question is, do you mean you're in multiple phones now with that lead customer and those unit shipments are getting us to the revenue levels you just talked about? And then would any additional engagements that you're working on now, would they come in 2025 or would we see revenue in 2025? Thank you.

So the additional engagements are booked design wins with actually the X7P. Right? The co-development or co-collaboration with this lead customer, this is for a new solution that we haven't offered to the market yet. And it's a complete rework of the software for our visual processor and it is focused not just on enhancing the gaming experience, but enhancing all graphical experience. So what's happening here is, high frame rate displays are moving down because the cost of the display itself, the panel, there's no adder anymore to 120 frames per second LCD display, video mode display. It is almost net parity, if not net parity with 60 and 90 frame per second displays. So what you're seeing is, it moved down to and I talk in RMB because we're talking to Chinese OEMs that target certain market segments. So this is RMB 1000 or RMB 1500 type market segment and they're sold globally, but they're low cost. And as you put high frame rate displays in these lower end phones, the APs were not designed to take advantage of a high frame rate display. So if you add our graphics accelerator, it can look like a flagship experience. And this is not just from a gaming experience standpoint. This is from like anybody that has a phone in front of them right now listening to this call, if you have, you know, a promotion display from Apple, this thing is a variable display, up to 120 frames per second. If you scroll up and down on it, the faster you scroll up and down on it, it will adjust to what you're doing. It will do high speed or it will do low speed. If you try to do this on these low end phones, you'll see lots of visual artifacts. It just doesn't, it doesn't -- the GPU doesn't keep up with the pixel rendering or the frame generation. And so what we're doing is bringing an accelerator to this low end market. What we've done with this co-development customer is worked with their engineering team, their system engineering team and software team to vet out all the little issues. There's lots of little issues between us and the AP that's involved and Android. We've reached a point where system engineering has approved the solution to be marketed internally to all the program managers and product planners that we're targeting. We're at that stage in the process. We anticipate it will generate multiple design wins not only with that customer, but eventually with multiple customers. There are no designs in the bag as of yet. There are designs that are available to us this year.

Got it. And second, could you help pull out the gross margin impact regarding the yield issues? Where are the meaningful yield improvements coming from? And can that get you back to mobile gross margin levels in the mid-30s? Thanks.

So the product issues are not with mobile. The product issues are with a new projector chip we have that is not a big thing. When you ramp a chip sometimes you need to get your yield up and until you run volume, it's hard to do that. And so the first quarter or so of high volume you can experience lower than expected yields. And sometimes you recapture these devices, you don't always throw them away. Sometimes it's just enhancing your test program. But if it's within a quarter then it'll look like lower margin product. So I think what we're trying to articulate to you, this is not a pricing low margin mix issue. This is us ramping a product that we expect. We're already making yield advancements so I expect it to be back on that side, back to where our target yields were. But with that said, as we ramp mobile, mobile margins will be lower than projector, so the mix will become more important as we re-ramp mobile again.

All right, thank you.

Thanks Nick.

And I'm not showing any further questions at this time. And as such, this does conclude today's presentation. You may now disconnect and have a wonderful day.