Good day, ladies and gentlemen, and welcome to Pixelworks Inc's First Quarter 2023 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.
Thank you, Liz. 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 first quarter of 2023. Before we begin, I'd like to remind you that various remarks we make on the 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 beliefs as of today, Tuesday, May 9, 2023.
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 annual reports on Form 10-K for the year ended December 31, 2022, 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 include amortization of acquired intangible assets and stock-based compensation expense, as well as the tax effects of the non-GAAP adjustments. The company uses these non-GAAP measures internally to assess 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. 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 and 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 DeBonis. Please go ahead.
Thank you, Brett, and good afternoon, and welcome to those participating on today's call. Coming off our 27% revenue growth in 2022, we acknowledge that revenue would be down significantly in the first quarter due to a combination of the inventory correction in the broader smartphone market, as well as anticipated seasonality in the projector market. As outlined in today's press release, our first quarter financial results were consistent with our prior guidance. Today, we are confident that Q1 was the bottom of the correction for our mobile business. As of the end of March, all previous inventory of our mobile ICs, both within the channel and held by customers, was well below normal, clearing the way for renewed growth and momentum in the second quarter.
Taking a closer look at the mobile market, there's recently been ample market commentary from many of the prominent suppliers that sell into the smartphone segment. Rather than reiterating general comments on the market, we will focus on how Pixelworks and our current position is different than some of these other companies. Clearly, an inventory correction has been taking place as many suppliers overbuilt and both the distribution channel and smartphone OEMs amassed excess inventory due to the weaker than anticipated demand in 2022, which continued into Q1 of 2023. As a result, multiple component suppliers indicated that digesting that inventory could potentially extend out to the end of this year. Specific to Pixelworks, we were capacity constrained for effectively all of 2022, and with that, we managed inventory conservatively.
As a result, unlike many others today, we are shipping to fulfill current customer demand and refill depleted channel partners buffer inventory. Regarding China smartphone ODM demand, although there are differing views on the pace of the China recovery, most industry commentary suggests that the global smartphone demand is softer than previously hoped, which translates into taking longer to digest excess inventory. While softer demand may be true for the broader mobile market, the flagship and premium segments that we predominantly sell into are outperforming the broader market. In addition, the customer's models that include our visual processors are exceeding preliminary forecasts. Since February, we have received order pull-ins and upside demand from mobile customers on a combination of existing models and soon-to-be-launched mobile programs. We have had multiple tier one customers agree to cover the expedite fees to meet their revised demand profile.
To briefly recap our mobile wins announced year to date, we've been in 6 premium smartphone models launched by several of Pixelworks' multi-generational mobile customers, including OnePlus and realme, both OPPO sub-brands, as well as HONOR and ASUS ROG. Together, these models represent multiple wins with Soft Iris, X5, and X7, our latest generation visual processor. As mentioned on the previous call, the OnePlus 11 and OnePlus Ace 2 flagship smartphones were launched at the beginning of the year and were two of the first devices to incorporate our latest X7 visual processor. Both of these devices feature the industry's first solution to combine ultra-low latency MotionEngine, low power Super-Resolution, and always-on HDR. These functions have now been adapted for optimal performance on over 100 different popular mobile games.
In February, one of the fastest-growing 5G smartphone brands, realme, launched the realme GT Neo 5 smartphone, incorporating our X5 Plus visual processor. OPPO's realme GT series continues to embrace the high-quality display differentiation enabled by Pixelworks' visual processors, which this latest model coupled together with other hardware innovations, such as 240 watt fast charging capability. One of Pixelworks' first-ever mobile customers, ASUS, continued its adoption of our Pixelworks visual processing solutions in the launch of the ROG Phone 7 series, featuring our industry-leading HDR enhancement, professional color calibration, and DC dimming technologies. During the quarter, HONOR released the Magic 5 series smartphones, with both the HONOR Magic 5 Pro and HONOR Magic 5 Ultimate incorporating our advanced X5 Plus visual processor.
Subsequent to its launch, the HONOR Magic 5 Pro was tested and ranked by DxOMark, an independent third-party quality evaluation lab. The Magic 5 Pro scored an impressive 151 on DxOMark's display test, ranking it number 1 in global smartphone display performance. Complementing our work with mobile OEMs, we continue to expand our initiatives with key partners aimed at establishing an advanced mobile gaming ecosystem. Following our initial collaboration with Unity as a verified solutions partner, we are advancing engagements with other leading gaming engines, including Unreal and multiple studios' own custom gaming engines. Together with the uniquely differentiated visual performance enabled by Pixelworks' X7 visual processor and our Rendering Accelerator SDK, we are increasing momentum on further collaboration with major mobile gaming studios. We've announced two of these collaborations, the first of which was GALA Sports on their soccer simulation game, Total Football.
The latest version of this game is now being launched internationally. However, when initially launched in Mainland China last year, it ranked among the top downloaded sports games and ranked six most downloaded in the free games category. Yesterday, we announced our second collaboration with Nuverse on its latest release of Crystal of Atlan, which is developed using the Unreal Engine 4 gaming engine. Both of these mobile games incorporate Pixelworks' Rendering Accelerator SDK, which in combination with our X7 processor, delivers an exceptional 120 frames per second visual experience with low power consumption. These types of direct engagement, as well as other initiatives in our mobile gaming ecosystem, have and continue to increase the awareness and recognition of Pixelworks. Looking ahead in the second quarter and second half of the year, we have a robust pipeline of tier one mobile OEM programs.
This includes our recently secured first design in and production orders with our 4th tier one mobile customer. We will begin shipping in support of these orders this quarter. With this customer's first device incorporating Pixelworks technology scheduled to be launched in the third quarter. Taken together with our existing design ins across other tier one mobile OEMs, we expect renewed momentum accelerating into the second half of this year. Turning to an update on our TrueCut Motion platform. As we've been communicating to investors since launch, TrueCut Motion is a full ecosystem play, not a standalone solution. We continue to build out this ecosystem from the ground up, advancing the technology innovation from the 24 frames per second that's been used for decades to cinematic high frame rate will take time. We've discussed several of the reasons for this in the past.
However, over the past six months, our TrueCut Motion grading technology has been an integral part of how the biggest movies are shown in premium large format theaters. Starting with the re-release of Avatar in late last year, followed by Disney's global theatrical release of James Cameron's The Way of Water in December, 20th Century Studios' re-release of Titanic in February, James Cameron has truly awakened the industry to what's possible. In addition to each of these titles being released to theaters in 4K HDR 3D, they all featured cinematic high frame rate enabled by Pixelworks' TrueCut Motion platform. These films represent three of the three of the four highest grossing box office films of all time, which is indicative of the high level of interest and consumer acceptance of true cinematic realism.
The incredible global success of these titles has also resulted in increased demand from industry participants for additional premium large screen format content. Today, TrueCut remains the only end-to-end high frame rate solution validated by Hollywood, and with the proven capability to deliver cinematic high frame rate to any screen, and has led to a significant increase in inbound engagement from ecosystem participants. As discussed on previous conference calls, we continue to focus on establishing TrueCut Motion in the global home entertainment ecosystem. A unique and proven video experience is becoming increasingly important to streaming service providers as they look to add higher-tier subscriptions that offer superior content that recreates the premium cinematic experience that they enjoy in today's state-of-the-art theaters.
We believe the initial commercial success and high level of engagement in the motion picture industry represents an early glimpse into the significant opportunity that lies ahead for our TrueCut Motion solution. Shifting to home and enterprise market. As anticipated, revenue declined in the quarter with weaker demand, primarily reflecting typical first quarter seasonality as Japanese OEMs managed down their inventory prior to the fiscal year-end. Following the extended period of constrained supply for key projector components throughout late all of last year, projector customers have generally indicated incremental improvement in their supply chains. We currently expect it will take projector OEMs through at least the second quarter to more fully address remaining supply and demand imbalances. I'm pleased to report that the co-development project with our continues to progress well and remains on track.
In fact, we expect to deliver initial samples of this next-generation SoC during the current quarter, triggering the next milestone payment associated credit to RMD. Once released to production toward the end of this year, we expect this new SoC to become a major revenue driver within the projector business beginning in 2024 and continue through the latter part of this decade. Another highlight in the quarter that merits mentioning is our successful closing in February of the previously announced strategic investment in our Pixelworks Shanghai subsidiary. As a reminder, this transaction exchanged roughly 3% equity interest in the subsidiary at an implied valuation of more than $500 million. Following the strategic investment, Pixelworks, Inc.
continues to hold a majority equity interest of approximately 78%. The proceeds from the transaction are reflected in our quarter end cash balance of $62.8 million. In addition to helping support our broader ongoing growth initiatives, the strategic investments we secured have also served to properly capitalize Pixelworks Shanghai as we continue preparations for a public local listing on the Star Exchange in China. As an update on where we are in this multi-phase process, I'm thrilled to report that we recently retained the number one investment bank in China, CITIC Securities. CITIC has extensive expertise with listings on the Star Exchange. They will serve as an important partner through the remainder of the application and underwriting process. We currently expect our Pixelworks Shanghai subsidiary to begin the formal tutoring process during the current quarter.
In conclusion, I am proud of the team's diligent work to efficiently manage through the impacts of the macro and end market-specific headwinds during the quarter. Our prudent management of inventory has positioned us to rebound faster than many of our industry peers. Today our bookings fully support strong sequential revenue growth in mobile. We are also seeing the initial improvement in order patterns in the projector market. Acknowledging there remains uncertainty in the global economy, we are feeling increasingly optimistic about the balance of the year. We are well-capitalized to continue executing on our growth initiatives while maintaining our focus on an aggressive new product roadmap, as well as expanded ecosystems for both advanced mobile gaming and TrueCut Motion platform. That said, I'll hand the call to Haley to review financials and provide our guidance for the second quarter.
Thank you, Todd. Revenue for the first quarter of 2023 was $10 million, in line with the midpoint of our guidance. The sequential and year-over-year decline was driven by lower demand in mobile related to the industry-wide inventory correction in smartphones, combined with historical first quarter seasonality in the projector market. Additionally, as anticipated, video delivery revenue declined sequentially following higher sales of certain end-of-life products during the fourth quarter. The resulting breakdown of revenue in the first quarter was as follows: Revenue from mobile was approximately $3.3 million. Home and enterprise revenue was approximately $6.7 million. As a reminder, home and enterprise now reflects the combination of revenue from projector and video delivery end markets.
Projector accounted for approximately 90% of home and enterprise revenue in the first quarter. We expect it to continue to represent a majority of home and enterprise revenue in future quarters. Non-GAAP gross profit margin was 44.1% in the first quarter of 2023, compared to 53.3% in the fourth quarter of 2022, and compared to 53.2% in the first quarter of 2022. Gross margin for the quarter reflected a combination of product mix and reduced absorption rate associated with lower revenue. Non-GAAP operating expenses were $13.6 million in the first quarter compared to $10.8 million last quarter and $11.6 million in the first quarter of 2022.
As a reminder, operating expenses in the fourth quarter benefited from a $2.5 million credit to R&D related to our co-development project. Excluding this credit, first quarter operating expenses were largely consistent with the OpEx level in the fourth quarter of 2022. On a non-GAAP basis, first quarter 2023 net loss was $8.2 million or a loss of $0.15 per share, compared to a net loss of approximately $800,000 or a loss of $0.01 per share in the prior quarter, and a net loss of $3.5 million or a loss of $0.06 per share in the first quarter of 2022.
Adjusted EBITDA for the first quarter of 2023 was a negative $7.8 million, compared to a negative $1 million last quarter and a negative $2.2 million in the first quarter of 2022. Turning to the balance sheet. We ended the quarter with cash and cash equivalents of $62.8 million. As discussed on our last conference call, and as Todd just mentioned, during the first quarter, we closed the previously announced sale of equity interest in our Shanghai subsidiary, which was the primary contributor to the increased cash balance at quarter end. In addition to cash used from operations, a portion of the cash proceeds from the transaction were offset by the purchase of two mask sets during the quarter. Shifting to our current expectations and guidance for the second quarter of 2023.
Based on current order trends and backlogs, we anticipate second quarter total revenue to be in a range of between $12.5 million and $14.5 million. At the midpoint of this range, total revenue would represent sequential growth of approximately 35%, led by an anticipated increase in sales of ICs into the mobile market. non-GAAP gross profit margin in the second quarter is expected to be between 40% and 42%. This gross margin range reflects anticipated product mix, including higher revenue contribution from mobile. The lower than historical gross margin levels in the first half of 2023 reflect previous increases in cost of materials, a portion of which we chose not to immediately pass through to mobile customers during a period of weaker demand associated with the inventory correction in smartphones.
As demand and unit sales of ICs increase in the second half of 2023, we expect to pass through incrementally higher material costs to customers, resulting in improved gross margins, particularly in mobile. We continue to target gross margins returning to levels near 50%. We expect operating expenses in the second quarter to range between $11 million and $12 million on a non-GAAP basis. This range reflects our expectation to achieve another planned milestone related to our co-development agreement. As with previous treatment, the milestone payment will be recognized as a credit to R&D, reducing our anticipated reported operating expenses for the second quarter. Lastly, we expect second quarter non-GAAP EPS to range between a loss of $0.08 per share and a loss of $0.12 per share. That completes our prepared remarks, and we look forward to taking your questions.
Operator, please proceed with the Q&A session.
If you'd like to ask a question at this time, please press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. Please stand by while we compile the Q&A roster. Our first question comes from a line of Raji Gill with Needham.
Yeah, thanks for taking my questions and congrats on really good momentum in your business. In the mobile phone market for second quarter and kind of what you're seeing throughout the year, you're, you know, Todd, you're bucking a lot of the trends that you're seeing in the China handset market and what a lot of suppliers have been indicating that the correction is steeper and, you know, the recovery in the China handset market is gonna take longer than expected. You know, you guys are really bucking that trend. I guess my first question is, one, you know, you have managed your channel inventory pretty effectively the last couple of quarters.
Maybe you could talk a little about that in terms of where your channel inventory is. In terms of, you know, the rebound that you're seeing with your customers, can you talk about, you know, where the inventory levels are that the customers are sitting on and, just clarity on kind of how you're able to kinda diverge from those trends.
Yeah, sure. Thanks, Raji. Overall channel inventory, we went into the start of Q1 when we guided down significantly. We went in, I thought would probably be all of Q1 and some of Q2 in the channel for whatever we were projecting for mobile. By February, for the month of February, I was in there, it became clear to me that the new programs that we were included in, were ramping much harder than I anticipated. It became clear that we would burn through that inventory.
Sometime in probably April. We started, while I was there in February, ramping up new orders to our supply chain through, you know, both our foundry and assembly and test. The good news is because we're bucking the trend, getting access in short term to capacity was not a challenge this particular time, right? Even with that, going into March, those programs were doing better than forecasted. Customers were trying to expedite what we had in WIP. They had ran through inventory and then needed to expedite what we had in WIP. We have multiple tier ones for multiple programs simultaneously for both X5 and X7 that were paying expedite fees for us to get that product through our foundry quicker than anticipated. Today, the channel is lean, to say the least.
With the guidance we gave you know, we could probably beat the midpoint if we get expedited wafers quicker than we anticipate, which will be a challenge.
Okay. That demand pull is exceeding through into Q3.
It's probably too early to... I mean, we have new models being launched in the second half of the year that'll add to these models. We're optimistic, but I wanna see if that sticks through with the consumers and how China comes back. Right now, we're pretty optimistic.
Great. Appreciate it. For my follow-up, the gross margins, you kinda talked a little bit about some of the puts and takes in the near term. You know, now that you're seeing, you know, a pickup in X7, which have higher ASPs, I'm just curious how you're, or how you're thinking about the pricing environment, you know, over the next couple quarters. Thanks.
Yeah, good question. X7 does have a higher ASP, but it has a bunch of new features and definitely is a larger die than X5. Where we priced it, even though it's a higher ASP, it has a lower margin profile than X5. We kept it that way on purpose to try to increase adoption of it. When we originally priced it, we expected the price increases from the supply chain to abate. I think it's well known out there that they have not fully abated, and there's some new price increases that got extended into 2023 through the supply chain. We are no longer absorbing those.
We are now passing through price increases to all of our customers in all of our markets starting in the second half of this year.
Thank you.
Yep.
As a reminder, that is star one one to ask a question. Our next question comes from Suji Des ilva with ROTH Capital.
Hi, Todd. Hi, Haley. These new smartphone programs. Were these paused, Todd, during the lockdowns, and are they resuming now? I presume some of the newer programs, if they are coming back, they sound like from what you said, they're coming back fairly aggressively. Are they more for the X7, or is it a mix of the two?
It was a mix of the two. I mean, when we went out of 2022 with inventory, there was some X7 inventory in the channel, but if you look at the channel and the customers, it was predominantly X5. I thought for sure it would take us 6 to 8 months to burn through the X5 inventory. Some of the expedites are on X5 devices. Some of the phones that I just mentioned, and I mentioned which ones that included X5, they had such strong demand for those models, they went through our excess inventory of X5 and are expediting new wafer starts. Same with X7. Some of the models were X7. The demand was high, and they went through our inventory and now are expediting wafers through the line. They are all...
Suji, to be clear...
Yep.
All of this demand is based upon models that have been released. You know, I wanna make sure. pretty much all the demand. It's gotta be well over 95%, are models that were released from either later part of December or early January on. This is not like a rejuvenation of older models that burnt through inventory. These are all new models. You know, you understand, the customers, I think, went into these new models being conservative because they had not been conservative the year prior. In our particular case, we had, you know, four or five different models that all blew through the initial forecast. You know, when they realized they were blowing through the forecast.
We quote 26 week like these guys came in and were expediting within 8 weeks to when they needed the parts. You know, the closer you're in to that cycle time, the harder it is for us to expedite. The further out, the easier it is to expedite.
Okay. Great, Todd. Switching over to the projector market, just to understand, what's your updated view on end demand for 2023 versus a typical year? I know it's obviously had a, you know, a headwind starting the year. I'm curious what you're expecting in terms of where that demand starts to come back into normal or not this year.
We don't really want to give annual guidance, but I will say that right now, we expect mobile to finish the year as a growth business year-over-year compared to 2022, even with the trough we had in Q1. We still expect projector to probably be down, you know, low double digits, you know, just 10%-15% for the year, right? As the correction takes through. We don't give guidance on TrueCut. I do expect us to be through any inventory correction by the end of this year on projector. We're expecting this back half of the year to be for mobile, the growth, year-over-year growth business.
Okay. All right. Thanks, Todd. Thanks, Haley.
Our next question comes from Richard Shannon with Craig-Hallum.
Hi, Todd and Haley. Thanks for taking my questions. Can you hear me?
We can. Thanks, Richard.
Okay, good. Line clicked off there on me. I got on a little late, and I may have missed some comments here, so apologies for redoing some of this. Just wanna make sure I understand on the guidance for the second quarter about the moving pieces here. It wasn't clear to me whether whether you expected any growth within the home and enterprise bucket, whether that includes any last-time buyers or is it all of it coming through mobile?
No, no last-time buyers. The last-time buyers we had on the transcoding products finished up in the fourth quarter of 2022. We expect overall home and enterprise, which is projector and transcoding, to be slightly up from Q1, so sequentially up. We expect mobile to be significantly up.
Okay. If I'm running my model here, Todd, almost in real time here, it seems like that's getting close to kinda doubling sequentially then. Is that about right?
That is about right.
Okay. Okay. I might come back to that in a second here. Wanna hit a couple other topics here, specifically on gross margins. You had your numbers for the year, which I think made sense here without passing through the cost. As we think about you passing those through, I'm not sure what kind of pace you're thinking of, but what kind of a number could we think if you were trying to adjust this quarter for price increases, what could we see? Is this a couple points or a few points?
The Q2 we guided, the reason we're guiding to a low margin is we, you know, we give plenty of lead time to our price increases to our customers. That there are no price increases loaded into the Q2 numbers. That growth is all unit growth. Q3 and Q4, we're passing on price increases across the board to all markets, all customers, various different levels. Depending on the mix, you know, we're trying to get back. You know, there's two things happening. One, our mix is more mobile-centric, okay? It probably will be on a go-forward basis for the foreseeable future. It's gonna be just a much faster growing business than projector and home and entertainment.
We didn't pass through all the price increases that we absorbed or continue to absorb. We are now doing that. Now, with the goal that if we get back to a reasonable mix, it's still gonna be more mobile-centric, that we get back above a 50% corporate level gross margin with the higher mobile mix. We are still not modeling in any of this significant TrueCut revenue. TrueCut's the licensing business. Once this kicks in, we will re-advise to all the analysts what the corporate goals for our margin are, but they're significantly higher than low 50s.
That is all. One last question from me, I'll jump out of line, Todd. Obviously, you had a lot of nice milestones and events in your TrueCut business last year. You've been clear this is a, you know, a long process developing an ecosystem. Assuming you sign up a streaming customer at any point in time, I'm not trying to apply a timeframe to this, but assuming you do that, what kind of milestones would you expect to be able to announce, I don't know, with the streaming customer maybe before that with other ecosystem partners to make this a reality?
That's a good question. I think that's good for any investors that are listening on the call to see. How do you keep an eye and see if we're hitting our milestones given that we're not putting financial milestones in there? I would suggest that we are getting interest in, and strong interest in helping other studios deliver high frame rate to premium large format theaters around the world with new releases. You probably will hear some of that activity sooner than later. I think if people monitor us and see more content partners using our technology to deliver a better experience, I think that that's a telling tell.
Upon announcing our first distribution partner streaming company to then want to deliver this premium format content to the home and entertainment world, you will quickly see us announce partnerships with device manufacturers that are on the other end of that home entertainment delivery. I think once you see that's zero to one. The next question is: Does it expand beyond that first major distributor and those device partners and multiply to multiple streaming companies and multiple device partners? That's how you see it roll out, I think.
Okay.
Okay. I'm sure we'll follow up on that in the future, but I think that's all the questions from me. Thanks a lot, Todd.
Thank you, Richard.
That concludes today's question-and- answer session. I'd like to turn the call back to management for closing remarks.
For those of you attending today's call, thank you for your time. I hope it was helpful. Look forward to giving you updates as the year progresses.
This concludes today's conference call. Thank you for participating. You may now disconnect.