Good day, ladies and gentlemen, and welcome to Pixelworks, Inc. Third Quarter 2022 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 of Shelton Group, Investor Relations.

Thank you, Andrew. Good 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 third quarter of 2022. 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 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, Monday, November 7, 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, our annual report on Form 10-K for the year ended December 31, 2021, 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 expense, net loss, and net loss per share. Non-GAAP measures exclude amortization of acquired intangible assets, and stock-based compensation expense. The company uses these non-GAAP measures internally to assess our operating performance. We believe these 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 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.

Thanks Brett and welcome to everyone joining us on today’s call. Starting with our reported results, we delivered another solid quarter with revenue at the midpoint of guidance and growing 16% year-over-year during what continues to be a very challenging environment for the broader semiconductor industry. The Pixelworks' team has continued to execute despite the various macro challenges and this quarter marks the sixth consecutive quarter of double-digit year-over-year growth in both our Mobile and Projector businesses. Total revenue year-to-date is up 38% over the first nine months of 2021 and we expect to close out 2022 with a full year growth in excess of 25%. Despite inflationary cost pressure throughout the year and our mobile growth contributing to an increasing portion of our total business, we've maintained healthy gross margins that were at 50% in the third quarter. Additionally, both OpEx and EPS for the quarter were better than the midpoint of guidance, reflecting our careful cost management and attention to improving bottom-line results over time. In addition to our solid operating performance, during the quarter, we closed a strategic investment in our Shanghai subsidiary at nearly two times the valuation of the previous investment round. Our ability to execute this transaction in the current environment highlights the recognition and growing opportunity for our visual processing technology across Asia. It also enabled us to further strengthen our balance sheet in support of driving continuous momentum in our mobile business and our growth initiatives for the TrueCut Motion platform. Turning to updates on our primary end markets. As expected, mobile business was down sequentially from the record quarter revenue we posted in the second quarter, primarily reflecting the start of a broadly acknowledged inventory correction in smartphones and weaker consumer demand in China. With that said, we maintain solid growth…

Thank you, Todd. Revenue for the third quarter of 2022 was $17.6 million, down 8% sequentially from $19.1 million in the second quarter and representing an increase of 16% from $15.2 million in the third quarter of 2021. Our topline results for the quarter were driven by a combination of continued strong year-over-year growth and our mobile business and sustained custom more demand in our Projector business, with Projector revenue once again reaching the highest quarterly level since the onset of the pandemic. The breakdown of revenue in the third quarter was as follows; revenue from Mobile increased more than 25% year-over-year to approximately $6 million, which represented just over 34% of total revenue in the third quarter. Similar to recent quarters, sales of our integrated circuits were the largest contributor to mobile revenue this quarter. Revenue from Projector was approximately $9.9 million, increasing 5% sequentially and 10% year-over-year, again reflecting sustained customer demand. Video delivery revenue was approximately 1.6 million in the third quarter. Non-GAAP gross profit margin was 49.8% in the third quarter of 2022, compared to 49.3% in the second quarter of 2022 and compared to 53.1% in the third quarter of 2021. Non-GAAP operating expenses were $12.2 million in the third quarter compared to $12.9 million last quarter, and $10.1 million in the third quarter of 2021. On a non GAAP basis, third quarter 2022 net loss was $3.2 million or a loss of $0.06 per share compared to a net loss of $3.3 million or loss of $0.06 per share in the prior quarter and a net loss of $2.2 million or a loss of $0.04 per share in the third quarter of 2021. Adjusted EBITDA for the third quarter of 2022 was a negative $2.1 million compared to a negative $2.4 million last quarter…

Thank you. [Operator Instructions] Our first question comes from the line of Suji Desilva with ROTH Capital.

Hi Todd, hi Haley. I was hoping you could about the delivery, how much revenue benefit [ph] you'll see last time buys in the fourth quarter?

I can let Haley answer that, but I don't think I'm going to break out exactly how much it is, but she'll give you I think--

Yes, I think for Video Delivery revenue in the fourth quarter, you can expect it to increase over 100%.

Got it. And then with the -- congrats on the Shanghai equity valuation, it's certainly going well. How much -- what percentage are you willing to potentially sell it out pre-IPO? Like, that could be a source of funding for you guys as well, understand?

Well, I mean, listen, so this particular financing was a unique financing. Well, I mean, one thing that we did with this financing is we actually sold our equity, Pixelworks Inc.'s ownership equity to a new round of investors versus dilutive event to all the investors in Pixelworks Shanghai. And so the net cash from that financing actually all came back to the US to Pixelworks Inc. And so that was nice, because we want to make sure not only do we have great balance sheet, but we want to have a great balance sheet for both here in the US, but also for our China subsidiary, and making sure that both are properly financed for their strategic goals. And so I would say, we were very focused on that event. And that event had to be completed before we completed the conversion of the joint stock corp. And so it was a lot in that financing. We are now post conversion, pre IPO. It doesn't prevent you from doing financing. There's some limitations about doing financing in this particular window. I haven't really thought about how much -- I know at the end, how much we would still like to own after we finance the public offering and we will still control a large percentage of the subsidiary post financing.

Okay, that's helpful. And then looking ahead to the gross margin guidance for 4Q, what areas are the licensing benefit coming from? Is that from Mobile, is that true -- the anticipated?

We're not going to break that out at this time. As you know, we've had software licensing in the past, we've had some true cut licensing in the past. And on the earnings call, I talked about IP licensing from our Mobile group, we now have inbound interest for IC -- IP licensing. And all of those would still be rolled up underneath our Mobile revenue. So, we're not going to -- we may break out at the -- after the quarter is over how much of Mobile revenue in total was licensing revenue, but I don't think we're going to break it out on individual basis at this point Suji.

Okay, well, that’s helpful color. Todd last question on the -- I guess this is more broader trend of new model designs being pushed out X7 designs being swapped in for X5 to work that inventory. I'm curious on that what might be the margin impact of having to kind of put X5s through versus having got the uplift for maybe newer X7 models, any thoughts there would be helpful. Thanks.

I would say that where we were trending with that, we still had -- we've already launched an X7 phone and -- with Realme, and we have several new phones that have designed in the X7, they'll be launched in early 2023 or they're in the process of designing. I look at where we are with pricing on those and where we are with X5 and there's not a big difference today in the big -- in the gross margin profile.

Okay, great. Thanks, guys.

Thank you. And our next question comes from the line of Sam Peterman with Craig-Hallum.

Hi, Todd, Haley, thanks for taking my question. I want to ask first on mobile, just kind of curious, a lot of companies in the industry are talking about maybe fourth quarter is kind of where mobile sales in China kind of bottom and maybe there could be a little bit of growth from the first and second quarter next year. So, I guess I'm curious, just broadly, how you're seeing kind of inventory trends in China with phones? And then specifically to your Mobile business, if I do the numbers, it looks like -- it seems like you're guiding to maybe Mobile being down quarter-over-quarter in December and you kind of talk to where you see that segment in the fourth quarter that'd be great too?

Okay, so first of all, I think I got -- the question -- the first part of the question, Sam was specific to the mobile market, the end market. You are seeing I think you saw a slightly better sell-through in Q3 versus Q2, but in Q2, Shanghai was locked down. And there was there was quite a bit of fear in Shanghai. We expect that Q4 will be better than Q3 and then as you go into Q1, I think it's somewhat depends on the position of the COVID policy. And if they start to come out of it, I think you could see the consumer come back. We still see -- there's certainly finished good inventory with the mobile OEMs there. But the bigger issue that they're having is, it depends on the components. They went in the environment where we were highly constrained to trying to buffer inventory, and order a lot of components. And so depending on the components, they have quite a bit of inventory that they have to pull through, and they have to push it in the new model. So, the bigger impact is, if the OEM has made a decision, that they don't want to write-off any inventory, then they will have to try to use the existing component inventory, whether they be APs image signal processors, displays, so on and so forth. And so what I mean is they're going to focus on putting models out in the market that probably don't have a lot of differentiation than previous models. In our particular case, we -- our distributor really doesn't have much inventory, most of it has already been sold to the OEMs. One particular OEM has quite a bit of X5 inventory, that's why they decided to put many more models with X5 than they originally anticipated to burn off that inventory, but we have other customers that have no inventory, and are migrating to X7. And our next-generation solutions that we have in [Indiscernible]. So, for us, I'm not really worried about an obsolete inventory issue. I'm worried about when the demand comes back and it comes back strong enough that the OEMs have burned through all the various inventory decisions. And they can be more agile in how they market their new phones. Some OEMs will be there early; I think they may take market share. Some OEMs are going to take longer to get through but I don't believe that will be through by the end of Q4. I believe the end of Q1 if the earliest, would linger into Q2 of next year.

Okay, that's helpful color. Thanks for that, Todd. I guess also on Mobile, just broadly, with X7, maybe some of those designs are being pushed out, but can you talk about, I guess, just what you're seeing from OEMs, in terms of the enthusiasm for differentiating phones based on gaming performance, is that focus shifting at all with kind of the macro being weak? Are you still seeing just as strong of interest in engagement with kind of mobile gaming being a key factor?

Well, I think for the amount of -- so these OEMs, that we do business with do business globally, they don't do much business here in America, but they do business globally. Their largest position for all four of them, is in China. Honor is, probably the most concentrated in China. Xiaomi has the most business outside of China. But they all have a large chunk of business in China. China mobile gaming is still very big area of differentiation that they want to put in phones, especially their premium ones. So, I think I think there's still a big focus there. I think, as we have made -- we've done very well with ecosystem engagement. The content providers -- the mobile gaming content providers -- leading mobile game content providers, and they want to put out more immersive versions of their games for the mobile environment, not just the desktop environment. And they see the same issues, the system level issues, the heat issues, the battery issues, and the framerate issues. And so they see us is a great opportunity for them to reach their goals on how to bring a more immersive AAA gaming experience to them. So, the more content providing ecosystem we can create, the more games that get announced supporting our platform, the more pool we'll get from our OEMs with our solutions.

Got you. Thanks for that Todd. If I can ask one more just quickly on TrueCut. You had a nice comment in the press release about it, but I'm curious, just with Avatar having been released and getting to see some of the reviews of that. Can you talk about how, I guess, like engagement in the industry has been since that? Whether that's with other content creators or with streaming services or anything like that, any follow there would be great?

We have been -- so, twofold. There's like -- there's two things going on with the team. We have a small team in TrueCut and they're very busy. And they're busy, twofold. One, they are focused -- we tried to enable third-parties with this announcement with Pixologic and we talked to others to leverage the capability of bringing TrueCut Motion grading to the content creators, but not just have to do it ourselves. With the first couple of engagements we've done, people have wanted to work with us directly. So, all the work on Avatar was done with Pixelworks employees. All the work that's going on with Titanic, and the other content that we're working on right now is with Pixelworks employees. So, we have a very good team. Not that large, but it's extremely busy doing this content creation and making a good, better [ph] film. And then we have another team that's out trying to do demand creation and demand creation is twofold; one is we are engaged with -- there has been a lot of studio engagement since the release of the Avatar. And then secondly, we're very focused on getting the streaming and device ecosystem I've been running. Effectively, what we've done is we created movies to look really good at high frame rate and 4K HDR in the field. We have the ability to make that same content look really good for the home entertainment ecosystem, we stream to the home entertainment ecosystem. We have not licensed the ability for any of this content to be TrueCut Motion streamed yet. We are working very hard to--

Okay, thanks, Todd. That's it for me.

Great. Thanks, Sam.

Thank you. And our next question comes from the line of Nicholas Doyle with Needham & Company.

Hi guys, this is Nick Doyle on for Raji Gill. Thanks for taking my question. You just gave really good color on my earlier question -- enhanced markets, so thanks for that color. So, my question would be, if you could just talk a little bit more about the Projector business, a couple moving pieces into next year. Customers won't be as supply constrained, and then we have kind of the offset with the macro and environment dragging production, but then we have the new SOC coming maybe late end of the year. Just if you could give more color in the direction of that business. I think last quarter, you mentioned that 4Q would be a flattening out or something along those lines. So, any more detail there would be great.

Yes, Nick, thanks for the question. I appreciate it. So, on Projector, we normally have a seasonality where Q3 is usually been our highest in the past over the last five years and Q1 is the lowest, mainly because most of our Japanese customers run off a fiscal year that ends in March. And they try to lean their inventories, whatever they may be going into the March quarter. We sort of bucked that, that seasonality this year. Going into next year, you might see it. It's somewhat being offset by -- they have this built up demand for systems that they couldn't deliver. I mean, if I looked at it combined, it's about -- if you look at how many devices we shipped to our OEMs for a quarter, I think these guys have built up demand that they can address because of past shortages of at least a quarters worth of ship, right? That's about the severity of where their shortage is costing in the past, not by us we kept in front of it. But by other component vendors predominantly [Indiscernible] and panels. We see that freeing up now. The question is, it's a good question with the macro environment softening. Will that demand stay there until it gets fulfilled? Or will it erode as they come out of the supply challenges? We don't have an indicator of it yet, tight? So, far the demand has stayed strong. Even with zero COVID in China, they've had a reasonable bounce back to the end markets for Projector demand in China. Both -- the US was very strong, will that subside now, with the economy going down? Europe was starting to slide mainly because of what's going on there. So, I don't -- that will sort of dictate how Projector will look in the front half. It doesn't look doom and gloom. It could be good, but I think it's too early to tell to tell you the truth. And then the new SOC, we'll be sampling the customer in the front half of the year, but it takes them a good, they've got identified programs that they want to ramp quickly, high volume programs. But even if they move quickly, we'll take them at least six months after we have approved silicon in their hands to start ramping those models. So, the soon as we start to see us ramp that volume would be -- from the new SOC would be probably Q4, maybe a little bit Q3, but most likely Q4 of 2023.

Okay, that makes sense. Thanks. And then just to nitpick just a little bit, I guess, the gross margins, they were up quarter-over-quarter, but they are maybe -- or I guess the non-GAAP gross margins were just what 20 basis points below? I mean, is that just -- is that all mixed?

It's mixed. It's -- the Q2 and Q3 what we had was, we had strong mobile business on a comparative basis. And we -- in Projector, we pretty much passed through all price increases that the industry has seen, the supply chain has seen price increases from fabs from assembly from test, you name it, right? Several. In our Projector -- Video Delivery businesses we passed all that. In the Mobile business, we passed most of that, but not all. There was -- we're trying to get a broader attach rate in mobile, we just didn't want to push it to a limit where it would hit somebody trying to use it. So, the margins compress a bit in Mobile. And so the more Mobile business we do, it is a downward compression on our combined gross margins. We believe though that these price increases from the supply chain will start to stabilize, whether they start to go down or not, I think will depend on the demand -- some of the SaaS [ph] facilities need to be full. If they can stay full without lowering prices, they will do that. If they can't stay full without lowering prices, we will start to see prices come down on the supply. That should help us a bit in the mobile. But what's really going to help us on an aggregate basis is if we supplement with licensing and all the areas that we've talked about before, so software licensing [Indiscernible].

Thank you.

Thank you. I'll now hand the call back over to management for any closing remarks.

Nope. Thanks to the analysts for some good questions. Thanks everybody else for attending. We'll keep you posted on our progress. Thank you for your time.

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