Pixelworks Inc (PXLW) 2019 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to Pixelworks' Inc.

Third Quarter 2019 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.

Thank you.

Good afternoon, everyone, and thank you for joining us today.

With us on today's 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 third quarter of 2019.

Before we begin, I would like to remind you that various remarks we make on this call, including those about our projected future financial results, economic and market trends and our competitive position constitute forward-looking statements.

These forward-looking statements and all other statements made on this call that are not historical facts are subject to a number of risks and uncertainties that may cause actual results to differ materially.

All forward-looking statements are based on the company's beliefs as of today, Thursday, October 31, 2019.

And we undertake no obligation to update any such statements or 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, 2018, and subsequent SEC filings for description of factors that could cause forward-looking statements to differ materially from actual results.

Additionally, the company's press release and management statements during this conference call will include discussions of certain measures and financial information in GAAP and non-GAAP terms, including gross margin, operating expenses, net income loss, and net income loss per share.

These non-GAAP measures exclude gain on sale of patents, deferred revenue, fair value adjustments, inventory step-up and backlog amortization, amortization of acquired intangible assets, stock-based compensation expense, restructuring expenses, discount accretion on convertible debt fair value and gain on extinguishment of convertible debt.

We use these non-GAAP measures internally to assess our operating performance.

The company believes 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, 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 income loss and GAAP net income loss to adjusted EBITDA, which provide additional details.

With that said, I would now turn the call over to Todd for his opening remarks.

Thank you.

Thank you, Elias, and good afternoon to those joining today's call over the phone and webcast.

The third quarter played out largely as expected with revenue of $18.1 million coming in above the midpoint of our guidance range.

We continue to execute well across all areas of the business and Mobile revenue grew 87% sequentially, becoming a larger portion of our overall revenue mix.

Gross margin was approximately 54% and operating expenses in the quarter were $10.3 million, resulting in an adjusted EPS of $0.01 loss.

All of which were also at or near the midpoint of our guidance.

Throughout this year, we've remained focused on meaningfully advancing our growth initiative in Mobile.

This has included expanding our portfolio of visual processing solutions to now include multiple Iris visual processors with select feature sets at compelling price points as well as the introductions of our software-only solutions, Soft Iris, and also our innovative end-to-end cinematic video platform, TrueCut.

We've also secured a number of key strategic partnerships that are contributing to our current co-marketing efforts and the further development of ecosystems that encourage increased adoption of Pixelworks' technology.

Together with our broader portfolio of visual processing solutions, we have significantly expanded Pixelworks' total addressable market resulting in a growing number of wins at existing and multiple first-time mobile customers.

Taking a closer look at our Mobile business in the third quarter.

As I mentioned, revenue from Mobile grew 87% sequentially and was up over 66% year-over-year to a quarterly record.

It was comprised almost entirely of revenue contribution from our Iris solutions, including the first commercial revenue from our Soft Iris solution.

As further evidence of our consistent growth momentum, the third quarter represented the eighth consecutive quarter -- eighth consecutive quarter of year-over-year growth and Mobile revenue for the first 9 months of 2019, which grew 90% over the same period over 2018.

During the third quarter, we formerly announced a total of 5 design wins on newly launched smartphones across 4 different mobile OEMs, one of which, TCL, was the first-time new smartphone customer.

I discussed 2 of these wins as part of our second quarter conference call, the Shark 2 Pro, which was Black Shark's fourth device to include our Iris visual processor and the ASUS launch of the ROG Phone 2 in conjunction with Tencent Games.

As a reminder, both of these leading smartphones targeted for gamers leverage Qualcomm's Snapdragon 855 Plus mobile platform.

And specific to the ROG Phone 2, it is the first smartphone to incorporate our Soft Iris solution.

More recently, we announced wins on the Nokia 7.2 and Nokia 6.2 smartphones as part of our continued collaborative partnership with HMD Global.

Both devices were launched in September at IFA 2019 and feature PureDisplay technology enabled by Pixelworks' Iris visual processor to deliver a premium mobile display experience at an affordable price.

As compared to similarly priced Android smartphones, the Nokia 7.2 and Nokia 6.2 render a 64-fold increase in color tonality through a full 10-bit certified HDR display and produce up to 3x improvement in video contrast by leveraging dynamic backlight control in combination with Pixelworks' industry-leading Tone Mapping technology.

Also launched in IFA was the TCL PLEX smartphone, which utilizes our Iris visual processor to provide a range of premium features, including HDR10, SDR to HDR conversion, advanced sharpness and contrast enhancement as well as auto-adaptive display.

As the world's largest or second largest TV manufacturer, TCL chose to leverage Pixelworks' technology and expertise as part of a relaunch into the mobile market and bring a market-leading TV experience to its first TCL branded smartphone.

In addition to representing a new mobile customer, this win with TCL also serves as further validation of our advanced visual display technology for mobile devices.

All of these recently launched smartphones that incorporate either our Iris visual processor or newly introduced Soft Iris solution have received excellent reviews and recognition for having uniquely high-performance displays.

They each contributed to Mobile revenue during the quarter and we expect to ship in support of follow-on orders from these customers in the fourth quarter, which I'll discuss more towards the end of my prepared remarks.

Also complementing our longer term growth initiative in Mobile is TrueCut.

Since our commercial introduction of this innovative end-to-end solution for cinematic motion and HDR earlier this year, our primary focus has been on expanding the platform's market reach as well as the amount of content available on TrueCut format.

Through ongoing close collaboration with our lead customer YOUKU, we've continued to make consistent and substantial progress on several key metrics.

Over the last quarter, the amount of video content available in TrueCut format has more than quadrupled from 2,500 hours to more than 10,000 hours of available content.

Additionally, Pixelworks has expanded the number of TrueCut-enabled smartphones utilizing the YOUKU app from approximately 70 existing models across 6 mobile OEMs at the end of June to now over 100 existing smartphone models across 9 different mobile OEMs.

Collectively, these metrics translate into having successfully extended the reach of TrueCut content to well over 100 million mobile device users and to more than 55% of all daily average users of YOUKU in China.

As a result, we firmly believe that Pixelworks' TrueCut solution is enabling the single most comprehensive ecosystem for creation, delivery and viewing of high-quality HDR video in mobile devices in China -- on mobile devices in China.

Today, YOUKU now has a more standardized process in place for efficient conversion of its existing content library and they also remain committed to developing new high-quality HDR content mastered in original TrueCut format.

In addition to Pixelworks' continuing to qualify additional existing mobile devices to stream high-quality HDR video content, exclusively through the YOUKU app, we are actively pursuing direct engagements for the TrueCut certification of next-generation devices with mobile, TV and set-top-box OEMs.

I've discussed previously, TrueCut's value proposition and total market opportunity extends well beyond the mobile device market, a fundamental part of the end-to-end platform solution that we have developed with TrueCut is a set of software tools designed to expand the boundaries for the creators of high-quality cinematic motion and HDR content.

With this in mind, I want to once again acknowledge our TrueCut team following the recently announced Entertainment Technology Lumiere Award from the Advanced Imaging Society for TrueCut Motion Grading tools.

This second prestigious award serves as further recognition of TrueCut's innovation and unique value it provides to content creators seeking to deliver superior quality content.

Shifting to our Video Delivery business.

Following several consecutive quarters of double-digit growth, revenue was up slightly in the third quarter on both the sequential and year-over-year basis.

The growth of Video Delivery in recent quarters has been driven by initial customer ramps of new ADSB-compatible 4K PVRs and set-top converter boxes for the Japanese consumer electronics market.

Early in the third quarter, we observed a notable decline in forward bookings as our lead customers experienced a much softer pull-through from consumers, particularly for set-top box converter products.

As a result, we believe our OEM customers are focused on reducing existing inventories in the fourth quarter and through their fiscal year that ends in March of 2020.

On the positive side, during the quarter, we experienced a meaningful uptick in orders of our XCode transcoders from a leading OTA customer.

This increase was in support of initial builds of new dual- and quad-tuner OTA devices in advance of our customers' planned product launches during the next several quarters.

Based upon the current bookings associated with these new product launches, we currently expect to generate record revenue from OTA transcoders in the fourth quarter.

Although, this anticipated increase in OTA revenue will be more than offset in the near-term by an inventory correction of the Japanese consumer electronics market, looking several quarters out, we remain well positioned with multiple engagements on new programs for next-generation in-home media and OTA devices.

Additionally, we believe that the increased availability of high-quality broadcast content, particularly around Japan's hosting of the Olympics in 2020 and new introductions of feature-rich, 4K ADSB-compatible devices will contribute to a broader consumer adoption and the potential for renewed growth in Video Delivery during the course of next year.

Turning to a brief update on digital projector.

As expected, revenue declined sequentially and year-over-year, primarily reflecting increased caution among customers in reaction to prevailing macroeconomic headwinds.

More specifically, the demand profile of several end markets has continued to remain soft, particularly in China where government spending on education can account for as much as 2/3 of this projector end market demand.

Although, we had remained hopeful that the lower-than-normal book-to-bill entering the third quarter could firm up as the year progressed, we have yet to see a sustainable uptick in order demand from customers.

Instead, the current market environment within projector is more indicative of a prolonged inventory correction.

Also contributing to the headwinds and our cautious near-term outlook for projector, we expect our large co-development customer to start transitioning to our next-generation SoC in the beginning of the fourth quarter.

Although, we still anticipate this customer's transition to play out over at least several quarters, the new chip's lower ASP will serve as an additional headwind to the project revenue in future quarters.

As such, we continue to expect lower-than-historical seasonal demand in the Digital Projector business through at least early next year.

Looking forward and also circling back to my comments from last quarter, regarding our engagement with a Tier 1 mobile customer targeting a product launch before year-end.

As a result of the tremendous effort put forth by our team in recent months, the depth and scope of this engagement has expanded beyond the first program.

This involves further prioritizing our resources, both on-site at the Tier 1 customer's location and expanding our local team by approximately 10 software and application engineers.

Additionally, we negotiated a shared risk agreement with this customer that led to booking significant Iris 5 backlog in anticipation of a ramp of a series of programs through Q1 of next year.

Although, we are building this inventory in preparation for a positive outcome on all of the programs, it increasingly looks like the launch schedule for the first program may be too aggressive for our Iris 5 digital processor to be included.

As such, our guidance for the fourth quarter assumes no contribution from this first in a series of program engagements with this Tier 1 customer.

Given the concentrated effort we are making at this Tier 1 customer, in addition to supporting our previously announced customers, we've had to become highly selective on further expansion of Mobile customer engagements in the near term.

As you may have read, China's 3 mobile service providers today launched their 5G service in 50 cities throughout China.

As of today, there is a limited number of 5G mobile devices available from the leading Chinese smartphone OEMs.

And there is a race to see which OEM can fill out their 5G product line first.

In addition, there's a race to incorporate high frame rate, high-performance displays in conjunction with this 5G rollout.

This has created a conducive environment for our Visual Processing solutions.

We are seeing strong interest from additional customers for both our premium, mid-range and software solutions, including from additional Tier 1 mobile OEMs.

As such, we are aggressively working to position new and existing resources in order to address some of these additional engagement opportunities during the course of 2020.

In closing, and specific to our outlook for the fourth quarter, our guidance reflects the combined impact of a softer macroeconomic environment, seasonality and more pronounced than anticipated inventory corrections across both our Projector and Video Delivery businesses.

We expect these headwinds to be somewhat offset by a continued ramp and another quarter of solid sequential growth in Mobile.

Specific to the ongoing ramp in Mobile, I want to emphasize that we do not expect the overall macroeconomic backdrop to meaningfully influence the near-term ramp either positively or negatively.

Additionally, based upon the current bookings associated with the anticipated design wins, we believe that Mobile will account for up to 20% of our revenue guidance in the fourth quarter.

And finally, Mobile revenue beyond the fourth quarter will be heavily dependent on 2 critical factors.

Our continued execution on the technical requirements between now and year-end.

And also the market uptick of our Tier 1 customer's planned launch of these new devices.

With that, I'll turn the call over to Elias for a review of our third quarter financial results as well as a more detailed guidance for the fourth quarter.

Thank you, Todd.

Revenue for the third quarter of 2019 was $18.1 million compared to $18 million in the second quarter of 2019 and revenue of $21.5 million in the third quarter of 2018.

Revenue for the third quarter of 2019 reflects continued sequential and year-over-year growth in both our Mobile and Video Delivery businesses, partially offsets by weaker-than-normal seasonal demand in the digital projector market.

The breakdown of third quarter revenue by end market was as follows.

Revenue from Mobile was a record $1.6 million, predominantly from the sale of Iris solutions.

Video Delivery revenue was approximately $3.7 million.

Revenue from digital projector was approximately $12.8 million.

Non-GAAP gross profit margin in the third quarter of 2019 was 53.9% compared to 54.1% in the second quarter and 54.7% in the third quarter of 2018.

Non-GAAP operating expenses in the third quarter of 2019 were $10.3 million compared to $9.6 million in the second quarter of 2019 and $8.9 million in the third quarter of 2018.

Adjusted EBITDA in the third quarter of 2019 was $452,000 compared to EBITDA of $1 million in the second quarter of 2019 and $3.8 million in the third quarter of 2018.

For third quarter of 2019, the company reported a non-GAAP net loss of $518,000 or loss of $0.01 per share compared to non-GAAP net loss of $97,000 or breakeven on a per share basis in the second quarter of 2019 and non-GAAP net income of $2.7 million or $0.07 per diluted share in the third quarter of 2018.

Moving to the balance sheet.

We ended the third quarter with cash, cash equivalents and short-term investments of approximately $22.3 million, a decrease of approximately $1 million from the prior quarter.

Other balance sheet metrics included days sales outstanding of 44 days at quarter end compared with 37 days at the end of the second quarter.

Inventory turns during the third quarter of 2019 were 11x the same level as in the prior quarter.

Turning to guidance.

For the fourth quarter of 2019, we expect revenue to be in the range of between $15 million and $17 million.

This guidance reflects an increase in Mobile revenue, which is expected to represent up to 20% of total revenue in the fourth quarter.

The increase in Mobile revenue will be offset by geopolitical and macroeconomic headwinds and weaker end market demand contributing to inventory corrections in both the digital projector and video delivery markets.

Additionally, we anticipate non-GAAP gross profit margin in the fourth quarter to be in the range of 48% and 50%.

We expect non-GAAP operating expenses to be in the range of between $10 million and $11 million.

Finally, we expect non-GAAP EPS in the fourth quarter to be in the range of between a loss of $0.05 and a loss of $0.09 per share.

That concludes our prepared remarks, and we will now open the call for questions.

Operator, please proceed with managing the Q&A session.

(Operator Instructions) Our first question comes from Sujeeva Desilva with Roth Capital.

Todd, how are you?

Elias, congratulations on the Mobile progress here.

So starting with the Mobile segment, it sounds like it could be up to 20% of revenues in the fourth quarter.

That's a nice sequential move here.

And that would exclude the Tier 1. So maybe you can give us a sense of whether the growth, ex the Tier 1, is coming from the existing customers or new models?

And then maybe some idea of the magnitude of what the Tier 1 could do on layering on top of that.

So first, let me be clear, that does not exclude the Tier 1, that excludes the program from the Tier 1 that was targeting a fourth quarter launch.

It is not done yet.

There's still a chance that, that could happen.

We -- what we've done is we signed into a risk-sharing agreement, we have booked and built over the last 4 months and continuing for the next 2 months, enough ships to accommodate multiple product launches, including the fourth quarter product launch.

The fourth quarter product launch was on an accelerated schedule that given this race to 5G in China, most of the OEMs are accelerating their launch plans to try to catch it.

And integration of our product and making sure that what we do to a display in combination of what they're trying to do with these new 5G phones is not an insignificant development.

And so to hit the criteria that the customer wanted, we were on a very short schedule.

We are coming to the end of that schedule.

If -- right now, I'm assuming that we will not make the cut on that program, but we have bookings for follow-on programs.

Some of the revenue in Q4 are basically any revenue that's in -- currently in our guidance for the Tier 1 as well as other customers would be for the follow-on programs.

Okay.

And just to be clear, you're building up ship inventory for those programs, the models may go into the market in early '20.

Is that the way to think about it?

Not only am I building up, I have backlog.

The problem is the backlog could shift out into 2020, right?

Today, it was shorter term backlog.

Okay.

Okay.

And that's helpful.

This sounds very exciting.

And just to be clear, this Tier 1 is not one you've talked about in the past.

It is a new customer to Pixelworks' Mobile, is that correct?

We have not had a Tier 1 by my definition.

Yes.

So as such, this is a new customer.

Outstanding.

Okay, good.

Shifting over to Soft Iris.

I don't know how we should think about the magnitude of the opportunity relative to your revenue run rate?

Clearly, ASUS is doing it.

Is there a pipeline beyond ASUS?

And how should we think about the revenue margin opportunity being material or not to you guys?

Actually, one of the multiple opportunities with Tier 1, and I'm not going to say how many there are.

There are multiple.

And it's more than -- multiple means more than 2. I'll give you that, okay?

One of them is a Soft Iris.

And then we have some follow-on Soft Iris opportunities with the existing customers.

It could start to -- first of all, it's pure profit.

And it could start to actually -- it will definitely contribute to the gross margin line as it accelerates, which right now, we're thinking back half of 2020 when it actually impacts the gross margin line.

Okay.

And then a couple of more questions.

On the Japan weakness is the driver type from where you sit, macro, consumer sort of caution in the current environment?

Or are there other factors to the Japan pause?

You got it.

That's a long answer to a short question.

I'll just separate the 2. Projector, I think it's a combination of twofold, I think, one pricing of flat panel displays has dropped -- large flat panel displays has dropped dramatically in the last 12 months.

This has corresponded at the same time when we've seen -- I mean, we will finish the year off at probably below a 20% decline in our projector business.

Now, we had forecasted a slight decline.

We did not forecast that large of a decline.

I do not think the majority of it is contributed from the large flat panel pricing.

I think the majority is contributed from the global economic environment, specifically in China, China infrastructure.

If you think about it, most of the projectors that we are in today, get put around globally, in new offices, most people don't upgrade their projectors in existing offices.

They move to a new office, they build out a new office, that's when these systems go in or if it's large venue, et cetera.

If that type of construction and build out slows down dramatically, projector acquisition slows down dramatically.

And so I think that's the #1 contributor, right?

But I also do think that this -- I mean, probably a year ago, a 75-inch flat panel display or a 65-inch, let's say that's even more aggressive, was probably to the tune of $1,200 to $1,500 on an average ASP.

I would say that it's almost half that right now.

And so I think that is providing some headwinds.

And I'd love to be optimistic.

There are some new markets that projector -- our projector customers are going after that will show growth.

They're pivoting.

But you add it all together, and I'm believing that over a 5- year trend projector is a flat market.

Our next question comes from Charlie Anderson with Dougherty & Company.

Kind of a 2-parter on Mobile, one that's sort of precise and one's big picture.

You're sort of on the precise aspect, you mentioned the 20% in Q4.

I wonder, Todd, if you have any early thoughts on 2020 in terms of Mobile as a percent of revenue?

And then as you've gotten a lot more clarity on these programs in China.

I wonder if maybe you have sort of any updated views on the size of the TAM for you guys over the next few years in terms of what's out there?

And then I've got a follow-up.

Okay.

So first, I said up to 20%, okay?

So there's still a variability.

And because of the way I articulated this engagement with the customer, there's still uncertainty on all this, right?

This is a new engagement.

It's a very intense engagement, and it's during a very chaotic time as this acceleration to 5G and high frame rate displays happens.

So because of that uncertainty, we have a wide revenue guidance range.

And I'm saying, up to 20%.

As far as next year, let me tell you what the -- I'm not going to make any comments, I'm not going to give 2020 guidance.

But what I will say is the goal of all 220 people at Pixelworks today is to exit 2020 with Mobile being the majority revenue business from this company.

Great.

And then sort of a follow-on to that, the gross margin guidance for Q4, you're going to step down from the level you're at.

Mobile is a larger portion of the mix.

I wonder if that's a -- how much of that is the factor versus maybe just a lower overall business from everything else?

And then maybe big picture view on where you see the trend of gross margin as you go through this transition?

Yes, that's a really good question, Charlie.

So first of all, I don't know the exact numbers, but my guess is at least 100 basis points is probably due to absorption, low revenue number, et cetera.

But that would still say that there is a significant downtick in our overall product mix, gross margin, that's an attribute of 2 things.

One, our projector video delivery business have a higher gross margin than our mobile product line.

We are ramping our mobile product line, we're ramping a new product hard.

You usually go through a learning curve and yield.

I mean, when you're ramping this hard, you will throw away some wafers, right?

And you will improve your yields.

And so we're going through that.

And then even within our light projector portion of our guidance, it is weighted heavily towards our co-development customer, which is a lower margin profile than the other customers.

So a combination of all of the above is why you see the margins guided where we are.

To the second part of your question, I've said that even though we have the headwinds with this co-development customer with this new product.

It's a lower ASP, but it's a higher margin.

If you really look out in time, if we are successful with the mix of mobile that we're pursuing, we're able to maintain the ASPs, we think we can maintain in the mobile market.

We shift this projector customer to the -- this large projector customer to the new chip and it's the predominant shift that they would buy in the back half of the year.

And then we get the headwind of not a lot, but some Soft Iris and TrueCut revenue, which is pure software.

If we exit where we want to exit, we're going to exit 2020 at a higher corporate gross margin than we exited 2019.

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

Let me follow-up quickly on the Mobile commentary on the fourth quarter being up to 20%.

Todd, do you wish to provide a floor for that number?

Zero.

I mean, no.

I'm being flippant.

I'm sorry, Richard, I'll put it this way.

We are currently over 100% booked for the quarter on the guidance we gave you.

So the uncertainty is not bookings.

The uncertainty is how many of those bookings we'll ship in Q4 or not.

Okay.

And it's all related to that one engagement, which you're just trying to rush out to market in China?

For Q4, yes.

Okay, interesting.

Maybe step back here and take a look at the Tier 1 OEM that you're talking about here.

Maybe if you can kind of talk a little bit about the history of this customer here, how long you've been engaged with them at any length?

How long has it been serious?

What's kind of pushed them over the edge?

And maybe you can describe the breadth of their engagement?

What are they looking at?

Any -- we can characterize type of phone, it's probably not gaming or anything, but any way you can characterize the phone would be helpful.

Richard, you are bold today.

That was bold.

As you know, I'm not going to answer that question.

But I appreciate you asking that level of detail.

I'll give you a very broad stroke.

We've been engaged with this, first of all, if you consider the sales and marketing process, we've engaged with this customer for probably 2 years.

If you consider when they thought they needed visual processing technology to be included in their product portfolio, I would say, less than 6 months.

Beyond that, I just don't want to talk about the scope.

I mean, there's still some uncertainty in this.

We're still having to prove ourselves.

There's nothing guaranteed in this world.

And every one of these Tier 1s that still exist are fighting for their own survival, even if they're a large company.

And so given that level of uncertainty.

And until they roll out products with our visual processor, I just don't want to give a lot of insight.

Sorry.

Okay.

That's fair.

Certainly understand but just wanted to go to the edge of what you're willing to.

That's helpful.

I appreciate it.

I appreciate it you asking.

Some very interesting topics here.

I'm sure if you can talk about more we'll probe even deeper.

So with that said, let me jump into to TrueCut.

You obviously introduced this in April, gave an update last quarter.

Maybe if you can just kind of discuss the engagements since the last quarterly updates, where you're seeing some pick up here from streaming guys or content guys or studios or wherever you're seeing and maybe give us a thought process?

And when can we see a kind of a major milestone public announcement relative to one of those leaders in those categories?

Ladies and gentlemen, please stand by.

Your conference will resume momentarily.

Speakers, you may resume.

Richard, sorry, about that pause.

Looks like we dropped.

I'm sorry.

Can you hear me now?

I can.

So you were just starting your next question, and we dropped so.

Sure.

So I asked a question on TrueCut.

Wanted to get a sense or an update over the last 3 months since your last conference call and what's going on there?

If you can discuss any -- characterize any engagements or in discussions with the major players that you wish to engage with like streaming guys, content guys, studios?

And what kind of time frame could we see a, kind of, a major milestone public announcement that kind of confirms traction with TrueCut?

Well, I consider the YOUKU announcement and then the fact that they've converted 10,000 hours of content and reached the majority of their mobile customer base, and then now they are out marketing heavily, this advanced format.

I consider that already validation.

So if you're talking about further validation.

Well, how about say it from western or U.S. companies.

How is that?

Okay.

So you're talking about North America.

I mean, listen, we are -- we're very focused as a reflection from the awards I've announced.

Awards don't pay bills.

But what those awards do is they create a very -- first of all, you don't get an award like that unless -- these are -- you go through a technology review process, right?

And it's -- this technology is reviewed by a peer group of people that are deep in the creative process of Hollywood.

And we won a couple of awards.

And so what that does is that helps influence the people that need tools that we have.

I mean, let's just make sure we scope the problem.

Today or up to today, most of the content produced was originally target -- I'm talking about cinematic content was originally produced to be displayed first in cinema and then either sent out in the old days on DVDs or VHS to consumers or played on premium networks or today, streamed -- via the streaming services.

As we move forward, I don't know what the actual number is, but we're getting close to the crossing point that most cinematic video is either prepared to be delivered directly to streaming customers or quickly thereafter after a cinematic release.

And when you do that.

When you deliver via streaming, you're delivering to devices, whether they're mobile devices, whether they're tablets or whether they're TVs.

And all of these devices are at higher frame rate and a brighter environment and with ambient light around them than a movie theater.

And a movie theater is a controlled environment.

And so, as more content is being delivered to this uncontrolled environment and to these high frame rate displays, the content creators are now very conscious of how do I create my content, so it is seen as I intended it to be seen on those new devices.

In addition, they are moving the technology in the cinema itself, even though it's a controlled environment, they are moving it to high frame rate displays and brighter in HDR.

And so as they do that, they ran into problems.

How do you keep the cinematic feel when you want the cinematic feel?

And then how do you best display motion or action?

And through that whole process, retain the viewer, retain their attention.

And so that's the problem we're trying to solve.

The problem we're trying to solve is to give them the tools to do exactly what I just said.

So that not only they can make sure that creators intent reaches all their customers, no matter where they're viewing their content, but does it in a manner that they can be proud of.

And so getting these awards and then influencing the people that that have to deliver that technology, not just the story, but the technology.

These are directors of photography, they're cinematographers, and they're colorists.

We have been trying to influence this group of ecosystem here in North America as well as China for over a year.

Through that influence, we have been directly going to -- and I'm not going to name any of them, but there's a lot of them, but there's probably only 6 or 7 large streaming companies here in North America.

Many of these streaming companies fund their own studio work, right?

And many of them buy a lot of content.

But for this to really work, those streaming companies are becoming very powerful.

Some of them are already powerful.

An endorsement of this technology makes all the difference in the world.

And so that is where we're focused.

We're first focused in influencing the creative ecosystem and then targeting directly these large streaming companies, the large streaming -- if you get an endorsement of a large streaming company, the device manufacturers, it's almost a done deal.

And we've done preliminary discussions with many TV set-top box and, of course, mobile device manufacturers.

And they're very interested in the TrueCut format.

But they want us -- what they're interested in is that the large streaming guys are supporting it.

And so it really comes down to that.

If we get that kind of adoption and recommendation then what we believe we have is validated in North America.

We believe we somewhat have already done that in China.

And remember, China is a mobile-first market.

I hope that answered your question.

To a great extent, you did talk in a lot more detail, and I appreciate that.

I'm not showing any further questions at this time.

I would now like to turn the call back over to Todd DeBonis for any closing remarks.

Well, thanks for joining us today.

Obviously, we are disappointed by these corrections, the inventory corrections that we're anticipating in the short term, but at the same time, we're extremely excited about our Mobile and TrueCut initiatives.

This has been our focus for a long time, and we're starting to see some real traction on it, and it's a lot of hard work, but we're having fun.

Thank you.

Ladies and gentlemen, this concludes today's conference call.

Thank you for participating.

You may now disconnect.