Edited Transcript of PXLW.OQ earnings conference call or presentation 11-Feb-21 10:00pm GMT

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Q4 2020 Pixelworks Inc Earnings Call SAN JOSE Feb 12, 2021 (Thomson StreetEvents) -- Edited Transcript of Pixelworks Inc earnings conference call or presentation Thursday, February 11, 2021 at 10:00:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Elias N. Nader Pixelworks, Inc. - CFO & VP * Todd A. DeBonis Pixelworks, Inc. - President, CEO & Director ================================================================================ Conference Call Participants ================================================================================ * John Marc Andre Roy Water Tower Research LLC - MD * Richard Cutts Shannon Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst * Suji Desilva ROTH Capital Partners, LLC, Research Division - MD & Senior Research Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Good day, ladies and gentlemen, and welcome to the Pixelworks Inc.'s Fourth Quarter 2020 Earnings Conference Call. I will be your operator for today's call. (Operator Instructions) This conference call is being recorded for replay purposes. I would now like to turn the call over to Pixelworks' CFO, Mr. Elias Nader. -------------------------------------------------------------------------------- Elias N. Nader, Pixelworks, Inc. - CFO & VP [2] -------------------------------------------------------------------------------- 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 of the 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 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 inventory step-up and backlog amortization, amortization of acquired intangible assets, stock-based compensation expense and restructuring 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 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. -------------------------------------------------------------------------------- Todd A. DeBonis, Pixelworks, Inc. - President, CEO & Director [3] -------------------------------------------------------------------------------- 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 good 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 in 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 private equity investors and completed a follow-on equity offering, which together generated 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 0 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 adjust 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 canceled numerous planned phone launches and while the rollout of 5G-enabled smartphones began to gain momentum in the second half of the year, total 5G units shipped proved to be much lower than was forecast entering 2020. Another notable trend was the introduction of the first mainstream handsets to feature higher frame rate displays, coupled with a broader shift by OEMs from LCD to AMOLED displays due to an increased availability and more competitive pricing. Against this market backdrop, we successfully drove increased adoption of Pixelworks' visual processing technology across an expanded customer base and multiple tiers of smartphones. For the year, Pixelworks technology was incorporated into 16 models launched by 7 OEMs, including our first Tier 1, OPPO. This compares to 6 smartphones launched across 4 mobile OEM customers in 2019. Another highlight of the past year was the notoriety associated with a series of smartphones launched by customers such as OnePlus and TCL, which were recognized by third-party experts as having the best display performance in several categories of merit versus models across leading OEMs at any price point. Additionally, late in the third quarter, we unveiled our sixth generation i6 processor, the first to incorporate our AI-based adaptive picture quality. This was also the first time in Pixelworks history that design-ins had been secured for a new mobile chip before it was sampled. Since formally introducing the i6, we've secured an increasing number of design-ins on customer programs, with planned launches later this year. We expect the first smartphone to incorporate our i6 processor to be launched before the end of the first quarter. One of our ongoing priorities has been to proactively utilize the shifting market dynamics as an opportunity to become more deeply engaged with our customers, on expanded programs aimed at differentiating their next-generation models with exceptional visual display quality. As one of the many positive byproducts from these efforts, in January, we announced an expanded multiyear collaboration with TCL, to incorporate Pixelworks' visual processing in their planned next-generation smartphone models featuring TCL's NXTVISION displays. As part of this collaboration, TCL will be among a growing list of customers to utilize our I6 in upcoming models that are planned to be launched in 2021. More broadly, 3 prominent trends are set to influence large portions of the mobile market in the coming year. First is the ongoing but more pervasive rollout of 5G-enabled handsets. As discussed on previous calls, the most obvious applications for leveraging the substantially higher bandwidth and low latency of 5G in mobile devices is high-quality video and gaming. Simultaneously, market data indicates that global consumer appetite for $1,000 plus phones is shrinking. As a result, we expect mobile OEMs to aggressively push 5G technology down the cost curve to lower price models, which in turn opens the value proposition of Pixelworks' visual processing to an expanded share of the total handset market. The second trend gaining momentum is around color calibration. As mobile OEMs increasingly shift away from LCD panels and a majority of next-generation models feature high resolution, high color OLED panels, customers are actively looking to differentiate these OLED displays from the competition. This trend is driving many OEMs to pay closer attention to color accuracy, which can only be achieved through color calibration of each individual handset display. A traditionally tedious, time-consuming and costly process that all but a few OEMs have historically chosen to forgo. This represents a meaningful and growing opportunity for Pixelworks, as our patented color calibration solution is a standard feature across all -- across our entire family of mobile processors in addition to our software-only solution, Soft Iris. Not only does our proprietary solution deliver the highest color accuracy scores in the industry, but it also enables more efficient color calibration of each handset during manufacturing, significantly reducing the time required for calibration testing and in turn, lowering the cost incurred by OEMs. The third and potentially most disruptive trend unfolding in the coming year is mobile gaming. While Pixelworks technology has been incorporated into many gaming phones released over the past 2 years, the influence of gaming and the estimated 2.5 billion smartphone users that play games on their mobile devices has only scratched the surface of what lies ahead. China, which accounts for 25% of the estimated $74 billion mobile gaming market, is projected to reach 637 million users by 2024, according to Niko Partners' May 2020 report. Concurrently, revenues in the fast-growing cloud gaming segment in which mobile is the largest subset, is forecast to triple from $4 billion in 2021 to $12 billion in 2025. In conjunction with extremely low latency offered by the rollout of 5G, smartphone OEMs are aiming to capitalize on this expanded segment of the market. Leveraging Pixelworks' industry-leading and patented MEMC technology, we are enabling a PC or console like gaming experience on a smartphone. Moreover, we have a meaningful and first-to-market advantage for mobile gaming, with our ability to deliver sustained higher frame rates at very low power. Unlike relying on the AP-only alternatives, our solution avoids the need to step down frame rates or other performance throttling related to thermal or power budgeting. In addition, our visual processing solution provides a unique capability to offer end user customization of display attributes on their personal device. While this mobile gaming opportunity does include new dedicated gaming phones, we are also engaged with multiple OEMs that are targeting to release mainstream devices that readily support high-performance gaming mode or use case. Taking this a step further, we are currently in advanced joint collaborations with specific OEMs and other leading platform providers within the gaming ecosystem, to enable an immersive experience in the next-generation of high frame rate mobile gaming. Imagine a scenario in which gaming content could be specifically designed to take full advantage of Pixelworks' advanced motion engine and AI-adaptive display technology. This is something we've been working on throughout 2020, and you'll be hearing more about it in the coming months. In terms of broader mobile pipeline, we remain closely engaged with an expanding customer base, and we continue to secure a growing number of design-ins on upcoming smartphones. These collective engagements are comprised of increased penetration at existing customers across multiple tiers as well as programs that are in advanced stages with 2 new customers, including our second-tier 1 mobile OEM that is scheduled to launch its first phone incorporating Pixelworks' visual processing in early spring -- in the early spring time frame. While it's still very early in the year, we are on track with active mobile programs that represent an opportunity to double the number of models launched in 2020, with the majority of these programs planning to feature high frame rate displays. With our value proposition gaining broader acceptance, we currently anticipate triple-digit revenue growth in both our visual processor and software-only solutions this year. In our markets of projector and video delivery, the weaker end market demand associated with the pandemic, which started out as an inventory correction, continued throughout last year. Following the multiyear low unit volumes in the third quarter, we began to observe improving order patterns from our lead projector customers in the November-December time frame. As a result, revenue grew sequentially in Q4 as customers started restocking unusually low inventories in response to some improving demand in certain geographies, including more normalized buying patterns in China. We have recently seen customers slowly raising their demand forecast for 2021. While we're encouraged by this recent improvement, and believe it is likely to continue in the coming quarters, we still anticipate a broader recovery in the projector market to be gradual for several reasons. First, improved demand in emerging markets is likely to lag behind those in the developed markets, such as China and the U.S. Second, education applications remain the single largest driver for total projector unit volumes globally. Therefore, the trajectory of the demand recovery will depend on the evolving decisions around in person versus remote learning at various regions around the world. Another consideration and likely factor that may slow the pace of recovery within projector is the widely reported tightness of supply within the broader semiconductor industry. While we've secured capacity to support customers' orders in Q1, challenges remain through the remainder of the year. We are actively working with both our foundry and assembly and test partners to mitigate the impact on the recovery of the projector market as well as support the rapid growth of our mobile visual processor demand. We anticipate that this effort will result in higher product costs that we will plan on passing on to our end customers. We remain well positioned in terms of design-in activity, with customers on next-generation projectors, including a growing number of innovative laser models with higher brightness and resolutions. In addition to enabling many of these advanced features, average selling prices for our projector SOC solutions have increased as customers migrate upstream towards higher-priced projector units. Regarding the video delivery market, we've begun to see renewed but gradual improvement in activity from both our Japanese OEM customers as well as increased order uptake from our leading customers for OTA devices here in the U.S. As stated in past earnings calls, cord cutting in the U.S. continues to grow as consumers abandon cable in favor of combination of OTT streaming services and live local OTA solutions. In fact, the industry forecasts another 5 million U.S. households will cut the cord over the coming year and increase by a similar number again in 2022. Shifting to an update on TrueCut. The ongoing COVID mandates in the U.S. and specifically here in California, significantly slowed the engagement process with prospective customers and partners. Absent the pandemic, I'm confident we would have been able to communicate better progress in 2020. That said, we have sustained ongoing dialogue with a number of prominent studios and streaming service providers. And we've meaningfully advanced the depth of a few of these engagements in recent months. Underpinning these engagements is growing momentum of direct consumer streaming, which is increasingly raising the stakes for the entire ecosystem. Competition among streaming service providers for a share of consumers' wallet and hours spent watching streaming content makes differentiating direct-to-consumer offerings critical, which magnifies TrueCut's value to the consumer. To our knowledge, TrueCut remains the only comprehensive and commercially scalable solution that enables content to be created, delivered and viewed with consistent artistic intent, including resolution, color tone and motion on effectively any TrueCut certified display device, from a theater sized screen, a TV or a smartphone. We believe that we're on track towards securing an important first win with TrueCut in the U.S., even though the timing remains difficult to predict. Therefore, we will continue to encourage that investors and analysts not try to model it in our forward revenue estimates. Perhaps the best way to convey our ongoing progress with TrueCut is to walk you through a current customer example. Today, we have a Pixelworks' developed server, equipped with our suite of TrueCut tools on-site at a large prospective customer. This company is actively conducting a meticulous evaluation of TrueCut's capabilities by critiquing samples of their own content remastered in the TrueCut format. And then that content is reviewed on a theater-sized, state-of-the-art LED display. While I'm not going to go and expand further on this ongoing evaluation, I believe it demonstrates the level of attention and interest that prospective customers have in the potential benefits of TrueCut. We continue to have increasing confidence this technology will be deployed in the near future. In closing, we have successfully navigated a difficult year in which the pandemic negatively impacted demand in all of our end markets. Despite the challenging environment, we maintained our existing customer base and market share in the projector market, while making significant inroads in mobile. We've recently seen stabilization and initial signs of recovery in our nonmobile business. And mobile is positioned to deliver record revenue in the current quarter and continued sequential growth in the coming quarters. We launched our newest i6 visual processor, and we remain well aligned with prevalent market trends in mobile and the road maps of our mobile OEM customers. We're starting the year with a robust pipeline of design-ins and engagement on new programs. Over the coming year, we anticipate devices to be launched by both our existing and several new OEMs, including our second Tier 1 customer. Importantly, we believe Pixelworks has a sustainable technology advantage in mobile, and we are actively working to further extend this advantage with the introduction of the new first ever gaming features for advanced mobile devices later in the year. In the more immediate term, and over the next couple of months, we are primed to benefit from a series of newly launched phones across a number of OEM customers that are seeking to challenge the existing boundaries of visual performance on mobile displays. With that, I'll hand the call over to Elias to review fourth quarter financials and provide guidance for the first quarter. -------------------------------------------------------------------------------- Elias N. Nader, Pixelworks, Inc. - CFO & VP [4] -------------------------------------------------------------------------------- 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 projector was 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 was 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. The majority of the sequential increase in OpEx was due to employee merit increases in China, where competition for talent is heating up and ramping of expense associated with next-generation visual processor development. On a non-GAAP basis, fourth quarter 2020 net loss was $4.9 million or a loss of $0.11 per share compared to a net loss of $4.6 million or a 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 a negative $3.5 million in the third quarter of 2020 and a negative $1.7 million in the fourth quarter of 2019. Moving to the balance sheet. We ended the fourth quarter of 2020 with cash, cash equivalents and short-term investments of approximately $31.5 million compared to approximately $16.8 million at the end of the third quarter of 2020. The approximate breakdown of the $14.7 million increase in our cash balance quarter-over-quarter was as follows: net proceeds of $6.2 million from the strategic private placement with M2M and combined net proceeds of approximately $13.5 million from the follow-on equity offering and sale of stock through our ATM vehicle that we completed during the fourth quarter, which were partially offset by the repayments of a previously outstanding balance of $4 million on our existing line of credit and approximately $0.5 million cash used from operations. Note, please, at quarter end, Pixelworks had no long-term debt and 0 outstanding balance on our line of credit. In terms of other balance sheet metrics for the fourth quarter, these sales outstanding were 44 days at quarter end, which compared to 60 days at the end of the third quarter. Inventory turns was 6x in the fourth quarter, up from 3.3x in the prior quarter. Now turning to our guidance for the first quarter of 2021. Based on recent order trends and our current backlog, we expect total revenue in the first quarter to range between $8 million and $10 million. We expect non-GAAP gross profit margin in the first quarter of between 42% and 45%. We believe this low anticipated range, which is below our historical trend, will be temporary and unique to the first quarter of the year due to record revenue from mobile, combined with low pricing for the first models from a new OEM and lower absorption in Q1. As we progress through the year, we expect a better margin profile from mobile as we drive cost efficiencies and ramp higher production volumes of our I6 chip. Additionally, the expected gradual recovery in our projector business would contribute to improving margins as order patterns continue to normalize during the remainder of the year. Finally, as Todd mentioned, we will be passing on the cost increases associated with the tightening of the supply chain. All of this with improved absorption due to higher revenue should result in quickly getting back to our previous year's corporate margin profile. We anticipate operating expenses in the first quarter to range between $9.5 million and $10.5 million on a non-GAAP basis. We anticipate a sequential increase in OpEx is mainly due to planned hiring in both engineering and marketing to support our expanding mobile projects in China as well as higher expected travel expenses as we get back to normalcy. Finally, we expect first quarter non-GAAP EPS to be in the range of between a loss of $0.10 and a non-GAAP loss of $0.14 per share. That concludes our prepared remarks, and we will now open the call for questions. Thank you very much. Operator, please proceed with managing the Q&A session. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) Our first question is from Suji Desilva from ROTH Capital. -------------------------------------------------------------------------------- Suji Desilva, ROTH Capital Partners, LLC, Research Division - MD & Senior Research Analyst [2] -------------------------------------------------------------------------------- The first question, on the supply chain tightness. Any particular segment overly impacted by that? Or is it across the board? Is mobile in particular being impacted, with some of the new customers coming out of the gate? -------------------------------------------------------------------------------- Todd A. DeBonis, Pixelworks, Inc. - President, CEO & Director [3] -------------------------------------------------------------------------------- So there's 2 aspects to supply chain that impact us and our -- that's 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, are in fairly advanced nodes. Our newest chips are in a -- the most advanced node that TSMC offers for ultra-low power. It's called 22nm ULP. There's 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 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 forecast, and we go out a long lead time with our forecast in order. So we're definitely going to feel the impact, but I don't think we're going to feel it as great as others. The question is, 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 cost. At least in Q2 and Q3, we'll see how long it takes to abate. But I mean, right now, we're feeling comfortable. -------------------------------------------------------------------------------- Suji Desilva, ROTH Capital Partners, LLC, Research Division - MD & Senior Research Analyst [4] -------------------------------------------------------------------------------- Okay. Great, Todd. This may be kind of a more broader general question, but I'll try it anyway. But the game developers, you said, would leverage Pixelworks' processor, would that be an explicit kind of software tool mechanism or just implicitly as they try to do mobile gaming? And then also things like Disney+ and Paramount+. I'm curious if that's kind of driving your more bullish comments on TrueCut and mobile processor in general? -------------------------------------------------------------------------------- Todd A. DeBonis, Pixelworks, Inc. - President, CEO & Director [5] -------------------------------------------------------------------------------- Okay. I didn't completely get the second question. But let me address the first question first, and 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, if you really look at how games are delivered to the mobile market today, there are -- 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 of those games much quicker than they would if they had to design the game from the ground out. So if we worked with 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's 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? -------------------------------------------------------------------------------- Suji Desilva, ROTH Capital Partners, LLC, Research Division - MD & Senior Research Analyst [6] -------------------------------------------------------------------------------- Sure. And that just reminds me of NVIDIA's position and AMD. So it's interesting. The last question was separate, really. Things like Disney+ and Paramount+, is that driving some of your more bullish comments on things like TrueCut and the mobile ramp? -------------------------------------------------------------------------------- Todd A. DeBonis, Pixelworks, Inc. - President, CEO & Director [7] -------------------------------------------------------------------------------- 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 -- acutely aware of the problems, if you go look and -- 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 solve the problem. -------------------------------------------------------------------------------- Operator [8] -------------------------------------------------------------------------------- For our next question we have Richard Shannon from Craig Hallum. -------------------------------------------------------------------------------- Richard Cutts Shannon, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [9] -------------------------------------------------------------------------------- Maybe just a very quick one on the guidance here. I'm trying to read the tea leaves here, right. 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 the video delivery. Is that kind of a way to think about it? And any more detail you want to provide for us, sir? -------------------------------------------------------------------------------- Todd A. DeBonis, Pixelworks, Inc. - President, CEO & Director [10] -------------------------------------------------------------------------------- No, that's pretty much it. Seasonally -- so you know this, that seasonally, projector is 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 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, a combination of those 2 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. -------------------------------------------------------------------------------- Richard Cutts Shannon, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [11] -------------------------------------------------------------------------------- Okay. That's helpful detail. Maybe a quick question on TrueCut. -------------------------------------------------------------------------------- Todd A. DeBonis, Pixelworks, Inc. - President, CEO & Director [12] -------------------------------------------------------------------------------- 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 a program where -- when we engage with that customer and 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. Sorry about interrupting you, Richard. -------------------------------------------------------------------------------- Richard Cutts Shannon, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [13] -------------------------------------------------------------------------------- No problem. No problem. That's helpful. I was kind of guessing that was the case, but thanks. A quick question on TrueCut. You had some good detail in your prepared remarks, Todd. I guess I was expecting at least addressing the situation that you seemed to allude to in the last conference call about progress in China, and it seemed to largely address just the U.S. opportunity here. Can you kind of give us a sense of the relative progress in those 2 geographies? And where you expect to see the first kind of full license with a major studio or streaming provider? -------------------------------------------------------------------------------- Todd A. DeBonis, Pixelworks, Inc. - President, CEO & Director [14] -------------------------------------------------------------------------------- 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 the selling their tools to -- these are encoded 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 rate. But with that said, I think the more compelling opportunity for us is here in North America. And so that's -- I chose to talk about North America. And I would say we're still -- we're a small company with reasonable resources, but limited. We did raise money to make -- give ourselves the capability to 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 as 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. -------------------------------------------------------------------------------- Richard Cutts Shannon, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [15] -------------------------------------------------------------------------------- Okay. That's fair enough. My last question, Todd, is kind of a 2-parter in mobile here. Obviously, have a very high-profile Tier 1 customer that you announced about a year ago, and then you just mentioned the second one you're ramping up here, it sounds like very soon here. How do we think about, first of all, what's the existing Tier 1 customer? How you're going about proliferating throughout their portfolio? And then how can you characterize the use case and range that you may be getting with the second-tier one? -------------------------------------------------------------------------------- Todd A. DeBonis, Pixelworks, Inc. - President, CEO & Director [16] -------------------------------------------------------------------------------- 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 with 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're 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. -------------------------------------------------------------------------------- Operator [17] -------------------------------------------------------------------------------- (Operator Instructions) We do have another question. It's from John Roy from Water Tower Research. -------------------------------------------------------------------------------- John Marc Andre Roy, Water Tower Research LLC - MD [18] -------------------------------------------------------------------------------- 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. -------------------------------------------------------------------------------- Todd A. DeBonis, Pixelworks, Inc. - President, CEO & Director [19] -------------------------------------------------------------------------------- Hey John, thanks for the question. Actually, a 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're buying our hardware, it's included. If they buy the software, that's the only reason you buy the software. We're not the -- 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 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 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 the display vendor to do that. So one that's hit a certain color capability, a mid-range color capability, a 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 color accuracy across that spectrum, but it doesn't calibrate every phone. You don't have to test every phone, right? So it applies sort of an average algorithm across the phones. And then the third element is just to calibrate every phone. And I would say, every flagship customer, every flagship phone that we've been designed into calibrates every phone. They definitely -- if they're going to play at that level, they want to do that. And I think that will continue. So even though I don't know the exact quantity, I could probably go get it to you, but that sort of gives you some answer. And -- is calibration important going forward? It absolutely is in the flagship. It's moving down to the premium level. And then if, this is where it gets really interesting. If we are successful with TrueCut, and you now are optimizing the content so that you ensure accurate creator intent to be displayed on these devices, and it will be not just phones but TVs and can theater-sized devices, et cetera, the phone manufacturers will probably be more compelled, especially if our customers are the largest streaming companies in the world, they will be more compelled to want to have their displays color accurate and calibrated. -------------------------------------------------------------------------------- John Marc Andre Roy, Water Tower Research LLC - MD [20] -------------------------------------------------------------------------------- And your color accuracy. -------------------------------------------------------------------------------- Todd A. DeBonis, Pixelworks, Inc. - President, CEO & Director [21] -------------------------------------------------------------------------------- Well, we'd hope it's our color accuracy. Right now, I think I would say that we're the lead. 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 1 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 the results, but how much -- I mean -- how long does it take to test the phone to get the accurate results? And today, we're 1/3 the time that our closest competitor is. So if somebody is serious about this, they use us, end of story. -------------------------------------------------------------------------------- John Marc Andre Roy, Water Tower Research LLC - MD [22] -------------------------------------------------------------------------------- Great. This is perfect color. This is what I was looking for, was some type of barrier to entry. And I don't want to say vendor lock-in, but something of an element that points to wins that you will get. -------------------------------------------------------------------------------- Todd A. DeBonis, Pixelworks, Inc. - President, CEO & Director [23] -------------------------------------------------------------------------------- Maybe I'll give you 1 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 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. And customers are constantly pushing me to do -- in certain things, they definitely want the capabilities of the hardware, but there are some phone models that, they're like well, 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, and I'll say no. You either -- you take both or none. There's 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. So it's a little follow-up to you. So I would say that we have right now -- we have found it to be pretty sticky. -------------------------------------------------------------------------------- Operator [24] -------------------------------------------------------------------------------- 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. -------------------------------------------------------------------------------- Todd A. DeBonis, Pixelworks, Inc. - President, CEO & Director [25] -------------------------------------------------------------------------------- Okay. Thanks, everybody, for their patience in listening and definitely your 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. -------------------------------------------------------------------------------- Operator [26] -------------------------------------------------------------------------------- Ladies and gentlemen, this concludes today's conference call. Thank you all for participating. You may now disconnect.

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