Good day, ladies and gentlemen, and welcome to Pixelworks, Inc. Fourth Quarter 2020 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 Pixelworks' CFO, Mr. Elias Nader.

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 fourth quarter of 2020. 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, Thursday, February, 11, 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, 2019, and subsequent SEC filings for 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 inventory step-up and backlog amortization, amortization of acquired intangible assets, stock-based comp expense and restructuring expense. The company uses these non-GAAP measures internally to assess our operating performance. We believe these non-GAAP measure 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 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, Elias and good afternoon to those joining us on today's call and webcast. As outlined in today's press release, our Q4 results were in line with our expectations and all metrics coming in near or above the midpoint of guidance. Revenue increased 18% sequentially driven by the second consecutive quarter of solid growth in mobile, and an initial recovery of customer demand in the projector market. Reflecting on the full year, the global pandemic had a pronounced impact on end market demand across each of our target markets, which contributed to heightened uncertainty among our customers. Despite the challenging environment and lower revenue, we maintained healthy gross margins in the low to mid 50% range for the year. We also carefully managed expenses and cash while continuing to fully support our customers and without impairing any critical R&D programs. Additionally during the fourth quarter, we successfully closed a strategic private placement with the private equity investors and completed a follow on equity offering, which together generate a net proceeds of $18.9 million. As a result, we ended the year with a stronger balance sheet and $31.5 million in cash and zero debt. Mobile revenue grew for the second consecutive quarter, increasing nearly 50% sequentially. Overall conditions and visibility in the mobile market began to improve in the second half of the year, as both consumers and OEMs adjusted to the new COVID environment. Even so 2020 remained a down year for the handset industry, with global smartphone units decreasing an estimated 8% year-on-year and unit shipments in China for the full year down an estimated 20% compared to 2019. During the course of the year, OEMs delayed or cancelled numerous planned phone launches and while the rollout of 5G enabled smartphones began to gain momentum in the second…

Thank you, Todd. Revenue for the fourth quarter of 2020 was $9.6 million, compared to $8.2 million in the third quarter of 2020 and compared to revenue of $16 million in the fourth quarter of 2019. As Todd indicated in his opening remarks, fourth quarter 2020 revenue primarily reflected solid sequential growth in mobile, coupled with an initial recovery of customer demand in our projector business. The breakdown of revenue in the fourth quarter was as follows: revenue from digital projectors approximately $5.9 million, revenue from mobile was approximately 2.1 million comprised largely of sales of our visual display processor software solutions. Video delivery revenue is approximately $1.6 million. Non-GAAP gross profit margin equaled 49.6% in the fourth quarter of 2020, compared to 55.6% in the third quarter of 2020 and 48% in the fourth quarter of 2019. The sequential change in gross margin was mainly due to product mix with a higher contribution from mobile. Non-GAAP operating expenses increased to $9.5 million in the fourth quarter of 2020 compared to $8.9 million last quarter and $10.4 million in the same period last year. A majority of the sequential increase in OpEx was due to employee merit increases in China, where competition for talent is heating up unwrapping of expense associated with next generation visual processor development. On a non-GAAP basis, fourth quarter 2020 net loss was $4.9 million or loss of $0.11 per share, compared to a net loss of $4.6 million, or loss of $0.11 per share in the prior quarter and a net loss of $2.3 million or loss of $0.06 per share in the fourth quarter of 2019. Adjusted EBITDA for the fourth quarter of 2020 was a negative $3.8 million, compared to negative $3.5 million in the third quarter of 2020 and a negative $1.7…

[Operator Instructions] Our first question is from Suji Desilva from ROTH Capital. Suji, your line is open.

Hi, Todd, hi Elias good to hear the business coming back here. The first question on the supply chain tightness, any particular segment overly impacted by that or as across the board as mobile particular being impacted with some of the new customers coming out the gate?

So there is two aspects to supply chain that impact us and thus our investors. One is our ability to supply, but another is the ability of the other suppliers to our customers and will it affect models that they're trying to launch. In general what I would say is most technology that gets put on advanced smartphones today is fairly leading node technology. I mean clearly the APs and the modems are the most advanced nodes. Some of the supporting chips like ours aren’t fairly advanced nodes. Our newest chips - the most advanced node that TSMC offers for ultra low power. It's called 22-nanometer ULP. There is a clearly unforecasted demand for these nodes. But it is not as severe as some of the other legacy nodes that are out there. And so I would say our projector business we have products, that some very - some old legacy products that are on 90-nanometer, I don't think that’s much - that legacy node probably not affected 55 and 40 seem to be the most acutely affected which a good chunk of our chips are in, but we are also not someone that came in with a bunch of upside demand. Okay, we're not scrambling to qualify our chips from another fab that was in another country. We've been a long-term partner, and we're pretty stable with our forecasts. And we're - we go out a long lead time with our forecast in order. So - definitely going to feel the impact, but I don't think we're going to feel it as great as others. The question is how much demand - how much increased demand will come from projector this year, how fast the recovery will happen? If it was a quick recovery, I'm sure that we would have difficulty supplying a heavier ramp than we currently anticipate because of the supply constraints at least in Q2 and Q3. We'll see how long it takes to abate, but I mean, right now we're feeling comfortable.

Okay great, Todd. This maybe kind of a more broader general question, but I'll try it anyway. But the game developers, you said would leverage Pixelworks’ processor without being explicit kind of software tool mechanism or just implicitly as they tried to do mobile gaming? And then also things like Disney Plus and Paramount Plus, I'm curious if that's kind of driving your more bullish comments on TrueCut and mobile processor in general?

Okay, I didn't quite completely understand the second question, but let me address the first question first then we can come back for the final question. Regarding mobile gaming, what we're referring to and I don't want to go into too much detail, because at some point, we will have formal announcements with ecosystem partners and we will have product announcements. So I don't want to front run either of those too much. But what I am suggesting is, is if you really look at how games are delivered to the mobile market today - most games are developed to a game engine, okay. Some of the large game engine providers for the mobile marketplace are companies like Unity, Unreal, some proprietary gaming engines from the game companies themselves, right, like Tencent. And so they design games to a game engine, because it allows them to bring out new derivatives with those games much quicker than they would if they had to design the game from the ground up. So if we worked with gaming, the gaming engine ecosystem, to provide an SDK, that unlocked capabilities, that as long as our chip was on the phone, that would demonstrate certain performance enhancements, that otherwise you could not unlock unless you targeted that SDK that sort of what we're talking about. Okay, so the gaming manufacturers would still have to engage and want to optimize their game towards the SDK that would interface to our visual processor. But it would be much easier for them to do that, versus if we engage with the gaming ecosystem, the game engine developers. What was your last question?

Sure and I’ll just remind you everybody has position in big AMD so it’s obviously. The last question was separate really, things like Disney Plus and Paramount Plus, is that driving some of your more bullish comments on things like TrueCut and the mobile ramp?

Partly I mean, clearly the money is flowing towards large streaming service providers that also are the largest spenders of content creation. But just the money flow itself is not what's making us optimistic. What's also making us optimistic is the companies that run these large platforms have finally become aware of the - acutely aware of the problems. If you go look - usually when a technology provider comes out, they're trying to solve a problem. And we were trying to solve several problems with TrueCut. In some cases, one of our challenges early on was getting these content creators to recognize that this was an acute problem. What's making us optimistic is - as larger flat panel screens go out, and the amount of content being consumed on these flat panel screens, dramatically increases, the problems that we've been trying to educate the market on have become very apparent. And so, the people that we’re engaged with on trying to demonstrate the value proposition of TrueCut, clearly get it now. They get the problem we're trying to solve and they acknowledge our tools to solve the problem.

For our next question, we have Richard Shannon from Craig-Hallum. Richard, your line is open.

Great, thanks Todd a last for taking my questions. Maybe it’s a very quick one on the guidance here. I'm trying to read the tea leaves here. It sounds like you're suggesting mobile should be up to some degree in the first quarter and probably projectors down. I'm not sure about video delivery, is that kind of a way to think about any more detail you want to provide for us?

No, that's, that’s pretty much it, seasonally so you know, this that seasonally projectors always the weakest in Q1, given the Japanese fiscal year, okay. And we expected, they have been forecasting a rather dramatic inventory rebuild starting in Q2. They started to wake up to the supply shortages around the world. We gave them a little bit of a heads up, and I think they woke up as well. So they would, they would probably take a lot more in Q1, if we could supply it, right. But that's just because they're interested in getting in front of it. Plus, they clearly understand their prices are going up right, because that's what's going to happen in an environment like this prices go up for semiconductors. And so of course, if they could buy more prior to the prices going up, they would love to do so. But yes, traditionally Q1 is our low quarter, and then it grows from there. I think, you'll see that happen again and then video delivery is also a seasonal thing. So yes, combination of those two are, if you look at it sequentially from Q4 are - I think slightly down from maybe even a little more than slightly down, but mobile is up considerably.

Okay, that's helpful detail. Thanks, Todd maybe quick question on TrueCuts?

Maybe - wait Richard, I hate to interrupt you, I apologize. But I do want to give you one more clarification on this, because it's not just the mix between mobile and our other businesses. Our mobile business is specifically in Q1 is also heavily weighted with its program where - when we engaged with that customer in that program. We gave them a pretty aggressive price to kick the whole program off and so that pricing. I would say that our mobile margins are abnormally low for Q1. We don't expect that to continue as mobile grows, we expect actually margins to expand, okay. Because of this unique situation we have in Q1. So, sorry about interrupting you Richard.

No problem, no problem that's helpful. I was kind of getting on those case, but thanks. Quick question on TrueCut, you had some good detail on your prepared remarks, Todd. I guess I was expecting at least addressing the situation that you seem to allude to in the last conference call about progress in China it seem to largely address just the U.S. opportunity here. Can you kind of give us a sense of the relative progress in those two geographies and where you expect to see the first kind of full license with a major studio or streaming provider?

Sure, so we still have a lot of activity in China. In fact, we signed a deal with a value added reseller that is prominent in selling their tools to neither encoder or decoder tools to the broadcast market. So broadcast companies that want to take their broadcast content, and then encode it to be streamed simultaneously to the broadcast network. And they want to move to high frame rate and 4K HDR. And so they're strongly looking at - and they can do it on a channel-by-channel basis. So we've enabled a bar there to be able to resell TrueCut on a channel-by-channel basis. So there's still activity going there. And we're engaged with some of the largest short-form video providers on the planet. With formal evaluations on the technology, especially moving to high frame rate, they're very interested in high frame rates. But with that said, I think the more compelling opportunity for us is here in North America. And so that I chose to talk about North America and I would say, we're still, you know we're a small company with reasonable resources, but limited. We did raise money to make give ourselves the capability not be as limited as we were before the capital raise. And we will continue to look at partnerships, et cetera so that we can expand - in pace with the level of the opportunities we're engaged with, which could be significant. But with that said, we still have to be choosy on where we put our resources. We do not have unlimited resources. And so, we will target our resources where we feel we have the most compelling opportunity.

Okay, that's fair enough. Thanks for that detail. My last question, Todd is kind of a two part in mobile here? Obviously have a very high profile Tier 1 customer they announced about a year ago, and they just mentioned the second one, you're ramping up here. Sounds like very soon here, how do we think about first of all what’s the existing Tier 1 customer, how you're proliferating throughout their portfolio? And then how can you characterize the use case and range that you may be getting in with the second Tier 1?

Oh, I don't want to go into too much detail, because I'll front run the announcement. But I will say that the second Tier 1 - when we engage these Tier 1s, they're large, right? They have several product lines that target various different elements of the market. With Oppo, a lot of our coverage right now has been in the flagship arena, I would say right, and we're moving into the premium arena. With this new Tier 1, they are not going to go accentuate a slightly different area of the market. And they are focused on using Pixelworks to help accentuate these phones in that portion of the market. It's a big deal for them.

Okay, we'll look forward to hearing about to that isn’t, that's all the questions from me Todd. Thank you.

Thank you so much. Richard.

[Operator Instructions]

Who else is going to come?

We do have another question. It's from John Roy from Water Tower Research. John, your line is open.

Thank you. So Todd I'm very interested in the color calibration you were talking about. And so I kind of want to get a feel for how much is in use today within the 16 models that are out there? And if it's not a lot, do you see it as going to be a differentiator for you going forward, because differentiation is obviously a very key element.

John, thanks for the question, actually its pretty good question. I wasn't prepared to answer that question. I'm trying to think in my mind, how many of the 16 models actually use, we offer it to all of them, okay, but - and if they buy the solution, it's included, if they buy in our hardware, it's included, if they buy the software, that's the only reason you buy the software. We're not the own - it's not the only reason, it's the most compelling reason we do some other things with our software but that is the most compelling reason you buy the software. But it's not, you'll also have to go make a commitment to put in capabilities in your manufacturing test line to test certain color points within every screen you manufacture. Now, we do that more efficiently than anybody else that has attempted to do this. And so, we are by far the most effective way to implement this, but it still comes at a cost. Not all of our customers want to incur that cost, especially if they're targeting, $200 or $300 phones, which we have customers that target $200, they're not going to go calibrate those phones. We have some customers that I would say in the mid tier range, want to do an average calibration. So what they'll do is they can go in and take, try to take a sigma sample of their production, and they sort of have to work with a display vendor to do that. So one that hit a certain color capability of mid range color capability, or low color range capability. And then we'll calibrate those couple of phones and we'll come up with a sort of a calibration format for them that will give them better…

And your color accuracy?

We'd hope it's our color accuracy. Right now, I think I would say that we're really - I do want to be clear that we are not the only one providing color accuracy algorithms in the market. Some AP vendors bundle it with their APs. That's really the only one right now that we compete against. My guess is there could be other competitors, but we've benchmarked ourselves. We've benchmarked ourselves, not only with results, but how much - I mean how long does it take to test the phone to get the accurate results. And today, we're a third the time that our closest competitor is. So if somebody's serious about this, they use us and the story.

Great, this is perfect color. This is what I was looking for some type of barrier to entry and I don't want to say we want to lock in, but something of an element that, points to wins that you will get. Thank you very much.

I think I'll give you one follow-on that. So it is so compelling that in many cases, I get customers that we want to engage - it still takes resources from our side if we do a software-only engagement. And over time I've pushed because we would try to prioritize where our resources can go that okay, well if you're designing in a full suite of visual processor and software then we get more leverage on our resources as far as the revenue per phone.

Right.

And customers are constantly pushing me to do - in certain things they definitely want the capabilities of the hardware, but there's some phone models that they're like, wow, I sort of like the hardware, but I definitely have to have the software. But I really only want the software, can you just give me the software? I'll say no. Either you take both or none. There is others customers that I’ll say okay, I'll do it. But we're going to do it at these prices and this engagement and every customer is a battle, right. Some customers, we have a longer strategic relationship with and it's over many phones and I'll be more willing to do software only engagements with them. Other customers it's no, it's hardware or nothing.

Right.

So anyway it’s a little follow-up to you. So I would say that we have found it to be pretty sticky.

Thank you, Todd.

You’re welcome, thanks for the question.

I am showing no further questions at this time. I'd now like to turn the conference back to the management for the closing remarks.

Okay, thanks everybody for your patience and listening and definitely a patience through a very difficult 2020. 2021 is looking like a brighter future. We still have to navigate through the supply chain shortages, but it is looking pretty bright right now. So thanks for your patience and time to all those investors out there that have been with us through the thick and thin.

Ladies and gentlemen, this concludes today's conference call. Thank you all for participating. You may now disconnect.