Good day, ladies and gentlemen, and welcome to Pixelworks Fourth Quarter and Fiscal Year 2021 Earnings Conference Call. I will be your operator for today. My name is Carmen. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] This conference call is being recorded for replay purposes. I would now like to turn the call over to Brett Perry with Investor Relations. The floor is yours.

Thank you, Carmen. Good afternoon and thank you for joining today’s conference 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 fourth quarter of 2021. 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, 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, Thursday, February 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, annual report on Form 10-K for the year ended December 31, 2020, 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 amortization of acquired intangible assets, stock-based compensation expense, restructuring expense and gain of loan extinguishment. The Company uses these non-GAAP measures internally to assess our operating performance. We believe these non-GAAP measures provide a meaningful perspective on our 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 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 to -- adjusted EBITDA, we would refer you to the press release issued earlier today. With that, it is now my please to turn the call over to Todd for his opening remarks. Please go ahead.

Thank you, Brett, and good afternoon or morning to everyone on the phone and webcast. As reported in today’s press release, we closed out the year with another consecutive quarter of growth and increasing momentum, entering 2022. Total revenue in the fourth quarter was up 72% year-over-year, and mobile revenue was another record, growing 29% sequentially and 194% over the year-ago quarter. For the full year, total revenue increased 35% with mobile revenue growing 203%. In addition to strong topline growth, gross margin expanded throughout the year as a result of improved overhead absorption as well as our ability to pass on a majority of the higher semiconductor material costs to customers. Gross margin was particularly strong in the fourth quarter due to product mix and recognition of licensed revenue from a mobile customer for our Soft Iris solution that covers several phone models. With regards to our progress with our China-based subsidiary Pixelworks Shanghai, we are continuing to build out a strong local leadership team. Earlier this week, we announced the appointment of two highly experienced executives to our Shanghai organization. The first is our new Senior VP of Operations, Mr. Frank Liu, who brings extensive experience from similar prior roles at Dialog Semiconductor, MStar, TSMC and Skyworks Solutions. We also appointed Linna Liu as CFO and Senior Vice President of Finance of the Pixelworks Shanghai subsidiary. Most recently Linna served as the interim CFO and General Manager for NTT Data Systems and prior was the Global CFO of Chemtex Chemical Engineering. Together with the restructuring and financing of our Shanghai subsidiary, these most recent appointments are an important element to establishing independence for our Pixelworks Shanghai subsidiary. We remain on-track to be positioned to submit our application as early as the latter part of this year. Turning to…

Thank you, Todd. It's great to be here and be joining you today as Pixelworks’ CFO. I’m really looking forward to speaking with many of you over the coming months and quarters. Revenue for the fourth quarter of 2021 was $16.6 million, an increase of 9% from $15.2 million in the third quarter of 2021 and an increase of 73% from $9.6 million in the fourth quarter of 2020. As Todd previously highlighted, the sequential increase was driven by continued growth and record revenue in our mobile business. Year-over-year, the increase reflected a combination of strong mobile growth and an ongoing recovery in the projector market. The breakdown of revenue for the fourth quarter was as follows: revenue from mobile increased 29% sequentially and 194% year-over-year to approximately $6.2 million. This represented 37% of total revenue. Although we don't provide a detailed breakout between sales of our visual display processors and software solution, both reached quarterly records, with hardware continuing to represent the majority of our mobile revenue in the quarter. Revenue from digital projector was approximately $8.1 million down single digits from the third quarter, but up 38% year-over-year, and consistent with the recovery we continue to see in customer and end market demand. Video delivery revenue was approximately $2.2 million in the fourth quarter. Non-GAAP gross profit margin expanded to 55% in the fourth quarter of 2021 from 53.1% in the third quarter of 2021 and 49.6% in the year ago quarter. Fourth quarter gross margin was at the high end of our historical range, and benefited from licensed revenue related to our mobile software solution. As communicated in recent quarters, we continue to execute on initiatives to mitigate the higher material costs that have been observed across the industry. To-date, we've largely been successful at passing through…

[Operator Instructions] We have a question from the line of Suji Desilva with Roth Capital.

Hi, Todd and Haley. Welcome to the call and best of luck in the new role. So, Todd, if you could talk about these the Tier 1 customers, the third and fourth customers you are expecting. I'm wondering if you describe perhaps the opportunity at those customers incrementally versus the ones you've already had? And what perhaps the timing of those coming online would be in mobile?

Well, the timing, I think that was rather specific. Third weeks -- we don't -- I may give an indication that we are going to -- we're engaged, we're going to land a customer, but I won't announce who it is. What it is, that much context on size and substance because I don't want to front run their marketing. In many cases, the features that we collaborate with that particular OEM can be the major differentiating features of that model. So, I think I've mentioned this many times. So, just want to be consistent with that. So, we're going to talk too much about it, too much about what to expect from it, until I can give more color, once it's officially announced, the models released, who the customer is, we'll put out PR, and then I can talk about it. But what I have said is that third Tier 1 is expected to launch that model this quarter. And what I have said is we are engaged and feel comfortable communicating that we expect to leave the year with a fourth Tier 1.

And then, you mentioned the personal display market. I wasn't sure what you were referring to there as opposed to the smartphone market? Any clarity there would be helpful.

No, I was on -- I was vague on purpose. There is so much hype out there for the new visual experiences that people will consume content, whether it be gaming content, live entertainment or traditional long form video content, let's say. And so, we have -- clearly, I'm in some very specific engagements and discussions with customers. And so, I know exactly what that personal display device is. I just don't want to talk any more detail about that.

Fair enough. We’ll have to look forward to that, Todd. And then perhaps switching over to TrueCut. Can you talk about this platform that you've launched now and maybe what new customer opportunities that might unlock that previously were not available, because the platform hadn't been available? Perhaps that's one I think of about the go-forward opportunity here?

Well, I think, listen, one of the things that we have done with TrueCut, you go back -- and we’ve been evangelizing this technology. We did an interesting deal with the Youku Group of Alibaba, almost three years ago, then we subsequently won some awards down in Hollywood from -- these are mainly technical awards. So, these are from groups that their job is to try to evaluate and bring new technology to the movie making process, and then evangelize it and make it available to the broader production ecosystem. And so, we’ve been doing that for three years where we’ve been effectively introducing the technology, making people aware that the technology is there, and getting acceptance that being able to produce high frame rate content and deliver it as the creator intended to multiple home entertainment devices, okay, or theatrical devices. We've been on that evangelism for the last three years and we talk about it periodically. What we’ve now done is sort of formalized that technology into a combination of tools for the content creator and post-production houses to use, to create this content, and to make motion rendering part of the movie making process. So, that's one element. Another element is, we worked on creating the appropriate technology for these new streaming distributors to deliver that creative content that I just mentioned. And then, finally, we've created a way to collaborate and certify devices to seamlessly and without interaction from the consumer, display that content on their device as it was intended, with no adjustments by the consumer themselves. So, what we're doing is, we are going from a technology evangelist to, okay, we are trying to be in the, I'll call it, product service business. But in order for this product service to really work, it's not one ended. We can't just go and sell it to the device manufacturer. We can't just go create tools that enable the content creator to create this content. We have to go deliver multiple pieces to the ecosystem and bring the ecosystem to a form of maturity simultaneously.

Our next question comes from Raji Gill with Needham & Company.

Yes. Thanks. And congrats on the great momentum. And, welcome Hale. A question for you, Haley. When you're thinking about the revenue going into Q1, I know it's bucking seasonality overall, and it will be flat. I'm just wondering, is there -- is mobile going to be -- maybe will grow in Q1 and then the other segments will be down, or pretty much all the segments is going to be kind of flat and basically normal bucking seasonality of being down? Is there any one that stands out?

Yes. So, in mobile, specifically, our hardware will be up and the software would be down, but it should be basically flat across all the lines for Q1, because hardware will be up in mobile.

Okay. Got it. And then for the other businesses, projector and video delivery would essentially be I guess, flat?

Yes.

Okay. Got it. And then, on the gross margin, obviously, the margins benefited from more mix of software in Q4, and then the opposite is happening in Q1. When you're looking at your pipeline, any sense of how to think about the split of software and hardware as you progress throughout the year? And I know you're making low-50s. Just want to get some more details and then how to think about the margin, so we have that model correctly as best we can?

Yes. So, as we move throughout the year, that shift could change a little bit. We're trying to think of ways to maybe increase software in some areas. So, I don't want to say too much right now. But yes, we are trying to kind of get that -- get some ideas out there and work on that.

Let me add a little bit there, a little color to what Haley said. So, I think, what you're seeing is not just us, but the rest of this industry had absorbed price increases. Back half of '21 majority, I think something started increasing Q2 of '21. Most of those increases were passed on -- in fact, all those increases were passed on to our customer base. Then, in '22, again, most of the supply chain has increased costs. And we, as I think most in our space, have passed those increases on. Some people have those increases on and keep their margin when they pass them on. Some people maybe just pass the cost on, which means the effective margins may decrease a bit. I think, it depends, who you're talking to and where they're in their business cycle. Where we are in our business cycle is in an aggressive build-up of this mobile ecosystem. And so, that helps us two things. We're trying to build more content support on the software and gaming engine side, but we're also trying to get a broader expansion of models and customers that enable this unique gaming experience. And so, yes, we have transferred, many of these cost increases. But I would say, for '22, we didn't compound that with forwarding the gross margin increases. Did you get what I'm saying? Okay? So, if somebody raises your cost, let's just say $0.20, and your margins are in the 50s, if you don't want to dilutive to your margins, you got to increase prices to your customers, double that. In many cases, we didn't -- we offload cost increases but not with our margin adder. So that means we've had a headwind on margins. So, that's one thing, and we chose to do…

No, I think that makes a lot of logical sense. I appreciate that. Just my follow-up. The Iris is built on a 20-nanometer ultra-low leakage process at TSMC where the capacity he noted has been extremely tight. And you mentioned in the past had been no capacity restrictions. You probably would have shipped a lot more units last year -- or I'm sorry, you could ship more this year. Could you give us an update in terms of when the capacity is coming on line? I think in the past, you mentioned, you are committed to kind of second half of 2022 that TSMC will bring a significant amount of capacity on 22 nanometer ULLL. And that should be the right, hopefully the right timing as a lot of these models, start to kind move forward and go into production and as well as the fact that you've unveiled your i7 -- I'm sorry, your X7. So just update me out on that and I appreciate that insight. Thank you.

Yes. Well, we are seeing additional support for our growth. I would still say that for sure through the front half of '22, we are constrained. Based upon how we would like to grow in the back half of '22, we're still constrained. But I am feeling more comfortable like, put it this way, we are going to spend OpEx, like the revenues going to come, okay, because I can't wait that long to decide. And so, I'm going to drive the organization, like that capacity is going to be available to us and our new Operations VP, Frank, knows exactly that what I'm doing and he is on board. Now, there is risk. There is risks to that, but look at what we are trying to do. We have no choice. We are going to grow.

Thank you.

Thank you. Our next question comes from Derek Soderberg with Colliers Securities. Your question, please?

Yes. Hey, Todd, and welcome, Haley. So, on mobile, very nice performance and congrats on the progress there. Todd, I think in the past, you've put a number on the level of engagements. I'm wondering if you could share sort of where you are at now and where you would like to exit the year and I think there was prior related question but just with the constraints in mobile and our engagements, I guess over the next couple quarters, heavily weighted towards Soft Iris?

No, no. Actually, -- so, first of all, I would say our pipeline is stronger than it's ever been. I did not say, it was a higher quantity. And we are not really talking about quantity, because for me, the value of quantity isn't quite there anymore, right? I think early in the process, I think articulating the quantity of engagements gave comfort to our early patient investors that it was -- the reality was starting to happen. What's more important now is the quality of the engagements, right? And it's twofold when I say quality. It is, what's the volume? Which customer is it with? Which product is being designed into that customer? And does it meet not only our revenue objectives for return on our resources, but does it also meet our long-term objectives of, are they going to truly demonstrate the immersive gaming experience that we can enable, which then builds stickiness and a flywheel approach, so that more models will want to use this and more content creators will want to target their content to a Pixelworks enabled phone? So, what's important to me now and the team is the quality of those engagements. And I would say that today, what the constraint is, is probably not production capacity, although we have to be careful on where we -- how we utilize that production capacity, it's growing production capacity, we have to still be very careful how we utilize it. The bigger issue is our resources. We are dedicated resources to building out content targeted to our platform. We are -- have resources dedicated to both, existing X5 programs and the new X7 programs across multiple customers, and Soft Iris programs. And so, we're growing, but I would still say that's the larger constraint for us. So we -- those engagements that we pick and choose, which we market, and we get high demand for engagement. In some cases, we don't engage. In some cases, the customer doesn't engage. But when we get to choose, we target the highest quality to achieve both, our return on resource and our strategic intent.

And just on OpEx for the year, Haley, it sounds like a lot of activities going on in mobile and TrueCut. You've got an R&D program as well. Just curious how we should think about OpEx levels as we move sort of throughout the year, any help on OpEx would be great.

Yes. I think you should think of this next -- this year 2022 as an investment year for the Company, we're trying to grow. And you should expect to see that in OpEx as well.

It'll be controlled, but it will be growing.

Our next question comes from Richard Shannon with Craig-Hallum.

Todd, just looking backwards of your announcement from December on MediaTek, can you explain the relationship there? And then, do you still view them as a competitor in any way? And when will we see a phone that use the MediaTek X processor on it?

The last one, I mentioned in my prepared remarks that you should see one -- you should see several for multiple customers this year. I'm probably not going to give you any more color than that. But you probably should see them before mid year is my guess, at least the first one. The relationship with -- the formal relationship that we announced, okay -- so there's always a formal relationship and then there's your informal, how you deal with your partners. And in our environment, you asked, is there a competitor or not. In our environment, there's always competitive aspects almost to every partner. It's just the nature of the piece. I would say our formal relationship we announced is that we are an independent software vendor for the Dimensity 5G line of products, right, and we collaborated before they announced their products to make sure that our Soft Iris software solutions that all the benefits that those software products were bringing to the Qualcomm platforms are available on the Dimensity 5G platforms. So now, it benefits both companies, right? We're able to go out and market our software to programs that MediaTek has secured but at the same time MediaTek gets to go out and offer absolutely world leading best color calibration to their customers, and they're on equal footing with their competitor Qualcomm. So, that -- I would say, that's the formal announced relationship, and it's working well. And then, what you see is the informal relationship where remember, we have a software product, and we have a hardware product. But I've said this many times before, and sometimes it gets lost, but I want to make sure it does not, is almost in all cases, our hardware customers, our visual processor customers also use the software. So, it's part of the solution. So, making sure that your software is embedded on the AP and flawlessly working also paves the path for your visual processor to be next to that AP. So, with that said, it sort of says where we're at now. Where the relationship will go, who knows, but we have a very positive productive working relationship with MediaTek, just as we've had with Qualcomm, in the past.

Okay. Helpful perspective, Todd. My second question is, in your prepared remarks, and hopefully, I typed the wording down here, your mobile growth strategy here, one of them is to expand an ecosystem with Pixelworks' as the default. And then, in response to one of the past few questions here, just talking about creating stickiness. Can you talk about your efforts here? How that's happening, progress there? When are we going to see the ultimate outcome of this? To what degree is Unity involved with -- can you kind of talked to that ability to stickiness and default usage of Pixelworks' on mobile devices?

Well, it's one of those -- okay, so what I'm talking about is one of those goals that you never obtain what you consciously reach for. Okay? Will we ever reach the point where people just never think about an alternative, either not using us or not using somebody else, et cetera? I don't know. But it is what we strive for. Okay? And that is what I'm articulating. So, what are we trying to do? Well, first of all, we're at the forefront of this. Nobody else is doing what we're doing today. Does that mean -- I mean, given the awareness that we're creating, other people are starting to look around, giving the -- you could probably go in, and I think we would all agree, we all have smartphones, I'm not sure there's anybody on this call that doesn't have a smartphone sitting next to him right now. And my guess is, there's not a person on this call that hasn't refreshed that smartphone in less than three years. And when they went and refreshed it, there was -- they made some decisions on why they should buy that particular model and spend that particular money. For the last five or eight years, and most people on this call, I would say are U.S. based, we probably have some people in China or Asia on this call because we are creating awareness there now, so. But when I'm talking to the people here in the U.S., probably the number one decision making was probably the camera capabilities. And then the number two decision was the display capabilities. Number three decision was what ecosystem are you on, right? Our target customer base today -- now that may change over time, but our target customer base today is in…

It did, Todd. And I always appreciate the detail. So, if I had to try to summarize this, it would seem that gaming is probably the center of trying to make the experience sticky, is that -- or therefore Pixelworks inclusion is the default, that's kind of the center of that strategy. Is that fair?

It is. I mean, we will never forego that, first and foremost, to deliver all this immersive display experience we talk about, you should have a very high quality calibrated, color accurate, color rich in different ambient environment, display. And so, if you go look at what we really started off, which was delivering that promise to the customers, we will never go away from that promise. So, the first thing we do is make sure that this display is best, best-in-class. Then, we add all these other capabilities to now deliver content or part -- it's not really delivering content with gaming, you're creating the content when you're making the game -- when you're playing the game. So, now we're trying to improve that experience on top of this world class display.

Okay. Fair enough. I guess, last question and I guess we’re getting close to end of the hour here. Kind of following on one of the prior questions here, as you think about your Tier 1 customer base, how fast do you think -- or how do we think about increasing the breadth as thinking about it in terms of the tax rate of their unit base here? How do we think about that? Where's that going to go throughout the year or over the next couple of years? How would you help characterize and quantify that?

So, I had one customer that wanted to dramatically expand the product lines and the price points. The Pixelworks enabled features would be on in their portfolio of phones. The problem with that was, even though we have growing capacity available to us, we do not have unlimited capacity. If we would have gone down that path, it would have probably alienated our ability to diversify across multiple customers. So, to answer your question correctly, you have to say okay, the demand would like to expand across price points and categories of phone. This is no longer just going to be put on a gaming phone. They want to improve the gaming experience on all types of phones. Since I do not have unlimited resources and unlimited capacity, manufacturing capacity, we have to be very careful on where we go, choose and engage, and how we do it. This frustrates some customers. It makes other customers happy.

Last quick follow-up to that, Todd. When you expect to be not supply limited in your mobile business?

I think, we're going to be able to show dramatic growth this year. But we will be constrained throughout the entire year, because we're showing dramatic growth. I think, I'll be fighting for capacity throughout 2022. But, our growth -- our thirst for growth is voracious.

Thank you. And this concludes our Q&A session. I will turn it back for the final remarks.

Thank you. Well, thank you for the long call today. A lot of -- extensive prepared remarks and some interesting questions. I'd like to finish on once again welcoming Haley to the team and the conference call. Thank you very much for attending.

Thank you.

And with that, ladies and gentlemen, we conclude today's program. You may now disconnect.