Pixelworks Inc (PXLW) 2021 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to Pixelworks Second Quarter 2021 Earnings Conference 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 day, ladies and gentlemen, and welcome to Pixelworks, Inc. Second Quarter 2021 Earnings Conference 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 second quarter of 2021.

Before we begin, I would like to remind you that various remarks we make on this call, including those about our projected future financial results, economic and market trends 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, Tuesday, August 10, 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, 2020, and subsequent SEC filings for a description of factors that could cause forward-looking statements to differ materially from actual results.

Additionally, the Company's press release and management's statements during this conference call will include discussions of certain measures and financial information in GAAP and non-GAAP terms, including gross margin, operating expenses, net loss and net loss per share. Non-GAAP measures exclude amortization of acquired intangible assets, stock-based compensation expense 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. We caution investors to consider these measures in addition to, and not as 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. Thank you.

Thank you, Elias, and good afternoon to those joining us on today's call and webcast. I'm looking forward to walking through the significant developments that we announced as part of our 8-K filing yesterday. But first, I'll provide a brief recap of our results for the second quarter. Total revenue came in just above the midpoint of guidance at $14.1 million, representing over 50% growth on both a sequential and year-over-year basis.

Revenue from Mobile set another quarterly record of $4.5 million, and we benefited from a recovery in our projector business, which more than doubled over the previous quarter. Gross margin was also in line with the midpoint of our guidance, improving to nearly 53% as we began passing through higher material costs to customers and realize the benefit of increased unit volumes. Additionally, we did a good job of managing operational expenses in the second quarter, all of which contributed to sequential and year-over-year improvement on our bottom line results.

As announced in our 8-K filing yesterday, we have completed a series of actions as part of a broader strategic plan designed to accelerate Pixelworks' future growth and success by transforming our existing Shanghai R&D center, Pixelworks Shanghai, into a profit center. This will enable us to enhance the focus of our Mobile, Projector and Video Delivery businesses on their global center in Asia, increasing our ability to access capital, ecosystem partners, customers and key talent. As part of this strategic plan to establish greater prominence in Asia, we realigned our Mobile, Projector and Video Delivery resources and established our existing subsidiary, Pixelwork Shanghai, to operate as a profit center. This does not represent a fundamental shift from our previous product strategies, but rather an optimization of our operating structure to accelerate the growth of the company.

The new structure provides the following benefits: direct equity ownership by employees through a newly established ESOP in the Shanghai based subsidiary, enhances our ability to attract and retain key talent. We had approximately 75% participation from our existing employees reporting into Pixelworks Shanghai; 2, provides access to a new source of capital that's aligned with strategic relationships and opens adjacent markets for our industry-leading visual processing technology; 3, addresses specific qualification requirements for our Pixelworks Shanghai subsidiary to pursue an initial public offering and listing of shares on the STAR Market in China; 4, further aligns our resources closer to our key customers, ecosystem partners and end markets; and 5, allows Pixelworks U.S. to increase the focus on its TrueCut business as well as other licensing opportunities.

In addition to the realignment of resources, Pixelworks entered into an agreement with a private equity fund and other strategic investors that are based in China as well as with entities owned by approximately 75% of the Pixelworks Shanghai employees, under which committed investments will be made in exchange for equity interest in Pixelworks Shanghai. The private equity funds are affiliates of M2M, to which the company sold common stock in December of 2020. And the strategic investors are funds owned by Verisilicon, Canaan and Chipone Technology.

In aggregate, the capital increase agreements consist of the commitment by employee entities to pay the amounts in RMB, equating to approximately $12.3 million in exchange for total equity interest of 5.95% interest in Pixelworks Shanghai, reflecting the pre-money valuation of approximately $173 million. And then by nonemployee investors to pay amounts equating to of approximately $30.8 million in exchange for total equity interest of 10.45% in Pixelworks Shanghai, reflecting a pre-money valuation of approximately $247 million. Following the closing of these transactions, Pixelworks would continue to hold an 83.6% equity interest in Pixelworks Shanghai.

Specific to pursuing a listing of the Pixelworks Shanghai subsidiary on the STAR Exchange, we would like to emphasize that this is a lengthy process that is comprised of meeting certain regulatory criteria and multiple periods of review. As such, we currently intend to qualify the subsidiary and apply forwards listing as early as Q3 2022, but no later than June of 2023. Longer term, we believe listing the Pixelworks Shanghai subsidiary in China will provide expanded access to future potential capital at what could be more competitive valuations.

Coming back to our second quarter results and updates on our end markets. In our Mobile business, we continue to gain increased traction across an expanding number of OEMs and launched smartphone models. And in Q2, we delivered the fourth consecutive quarter of sequential revenue growth. Mobile revenue for the first half of 2021 grew by nearly 200% compared to the first half of 2020. Year-to-date, our visual processing and enhancement technologies have been incorporated into more than a dozen models across half a dozen different OEMS, including 2 first time mobile customers and 2 Tier 1 Mobile OEMs. A number of these launched phones using Pixelworks technology, set new industry records for display performance and several have been ranked by independent third-party reviewers as delivering visual quality on par with the industry's ultra flagships, while selling at a fraction of the price. Even more important has been the very positive feedback from end user consumers on the display features and functionality enabled by Pixelworks across these launched devices.

This market validation has reinforced the value proposition of our technology and ability to influence customers' buying decisions, resulting in OEMs coming back and incorporating our solutions into more of their future devices. Further supporting our realignment to directly operate our Mobile business from within Asia, we recently recruited Leo Shen to join the company in a newly created role of Senior VP and General Manager of our Mobile business. Leo is a seasoned Mobile industry executive with over 20 years of Mobile experience, in the last 10 years in various roles for Qualcomm China. He is based in Shanghai, and he will lead our team's mobile growth and expansion initiatives throughout Asia.

During the quarter, we secured several new design-ins for our X5 Pro and i6 visual processors with multiple phones scheduled to launch in the second half of the year as well as in early 2022. In addition, we believe we are close to securing our third Tier 1 Mobile OEM customer on a device targeted for launch later this year. We've also continued to secure additional wins for our Soft Iris solution, which is serving a strategic benefit in the current hardware constrained environment. In addition to continuously increasing the value proposition of our software-only solution, our Mobile team has been actively working to expand Soft Iris's compatibility for use with a new family of application processors. Pixelworks' Mobile value proposition remains well aligned with the most prominent market trends, including mainstream adoption of AMOLED displays, higher refresh rates on those displays, and 5G-enabled mobile gaming.

As OEMs continue to convent the nontrivial challenges of combining these 3 attributes into their next-generation smartphones, they are increasingly coming to Pixelworks for solutions. While higher frame rates are fundamental to providing the most immersive and realistic gaming experience, the need to render high-resolution at ever-increasing frame rates, creates a challenging system engineering problem. When not addressed properly, it results in reduced battery life and overheating that impact device performance and the mobile gaming experience. Our visual processors utilize a distributed visual architecture to offload this intensive processing and upscaling both resolution and frame rate from the apps processor, enabling less power drain, lower operating temperature even during sustained high frame rate gaming, providing a unique mobile gaming experience.

According to recent third-party estimates, revenue from mobile gaming in 2020 exceeded $90 billion and represented just over half of the total global video game market. With the growing popularity of mobile gaming in China, an improved gaming experience has become one of the highest priorities for Mobile OEMs on their next-generation devices. Our newest and most advanced 7th generation visual processor, which we taped out last month, is specifically designed to address the fundamental challenges associated with delivering high-performance gaming on a mobile device. I'll defer a full review of the specs and industry first features until we formally unveil the chip to the market later this year. However, we will begin sampling this visual processor to select customers later this month. We already have an alpha customer committed to use this chip in a device scheduled for mid- next year.

Shifting to the Projector business. Following an initial improvement in order patterns that began early in the year, we realized a significant recovery in shipments and bookings during Q2, with revenue more than doubling sequentially and increasing 30% year-over-year. A number of factors contributed to this outsized rebound, including channel inventories that were unsustainably low after having adjusted to the weaker sell-through in 2020 due to the pandemic, coupled with improving end market demand in China and parts of the U.S. During the quarter, our operations team worked with our supply chain partners to eliminate a large majority of the supply gap going into the quarter and meet a significant portion of the customer demand in Q2. As a result of the ongoing supply-constrained environment, we have continued to extend our required lead times on orders and customers are placing orders through early next year.

As notable for our Projector business, in late July, we finalized a $10.6 million multi-year agreement to develop an advanced SoC for a large existing customers planned next-generation product family. As part of this co-development agreement, the customer will effectively fund a significant portion of the research and development expenses related to the new product, which we, in turn, expect to deliver and ramp into production at the beginning of 2023. Keeping in mind this relatively long life cycles of our solutions in the Projector market, our successful execution of this new SoC that can be repurposed and targeted to the broader Projector market represents an opportunity to solidify and extend Pixelworks' market-leading position through the majority of this decade.

Regarding the broader supply-constrained environment across the semiconductor industry and more specifically, what we're doing to mitigate the impact on Pixelworks and our ability to meet customer demand in all end markets. Our customers have responded favorably to our extending of lead times across all product lines, resulting in increased backlog and visibility for the second half of the year. We've also been making progress with our supply partners to mostly meet anticipated demand throughout the rest of this year.

Our operations team, whose focuses on all elements of our supply chain has been doing an incredible job at successfully backfilling customer demand in Q1 and Q2 and securing supply during the second half of the year. These focused efforts also include back-end assembly and test, where we recently qualified 2 additional testing houses for Projector to give us multiple sources of testing. While we currently have very good visibility into future demand, we expect supply constraints to remain an ongoing challenge and element of uncertainty. Our ability to support further upside demand in Mobile and sustained recovery in Projector beyond Q3 will continue to be contingent on mitigating the prevailing supply constraints in the latter part of this year.

Turning to a brief update on TrueCut. Following an industry-wide halt of more than a year on theatrical production due to COVID, the major studios have started to reopen and production activity is ramping up again in Hollywood. While progress has been slower during this period, our team's ongoing efforts have been very productive over the last few months, especially as it relates to building out and a supporting ecosystem for TrueCut adoption. Today, we are focused on a narrow group of existing engagements and in-depth technology evaluations with a combination of prospective TrueCut ecosystem partners. We are increasingly optimistic about securing our first breakthrough partners for TrueCut North America before year-end.

In summary, we've been extremely busy. We are executing well during a dynamic and supply-constrained environment, and we had a solid second quarter with significant growth and improved operating results. Our team continues to be aggressive and focused on securing supply from both our foundry and back-end packaging partners to support growing product demand from our customers. Entering the second half of the year, we have strong bookings from a combination of Mobile and Projector customers with orders extending into 2022. This includes a healthy pipeline of mobile design-ins on next-generation smartphones across both existing and new Tier 1 Mobile OEMs we are also on track to begin sampling our recently taped out 7th generation visual processor in the third quarter.

With the implementation of the strategic plan introduced today, we have repositioned the company to fully align with our customers in Asia and accelerate Pixelworks' growth trajectory. Although the magnitude of our growth in the near-term will depend, in a large part, on our ability to secure incremental support from the supply chain, I am confident we will deliver sustained solid revenue growth through the remainder of the year.

With that, I'll hand the call over to Elias to review the second quarter financials and provide our guidance for the third quarter.

Thank you, Todd. Revenue for the second quarter of 2021 was $14.1 million compared to $9.3 million in the first quarter of 2021 and compared to revenue of $9.3 million in the second quarter of 2020. As Todd previously highlighted, the sequential and year-over-year revenue increase of over 50%, reflected a combination of continued strong growth and record revenue in the Mobile market and a solid recovery of demand in the Projector market. The breakdown of revenue in the second quarter was as follows: revenue from Mobile increased to approximately $4.5 million, representing 32% of total revenue, driven by strong growth in sales of both digital display processors and software solutions. Revenue from Digital Projector increased approximately $8.5 million. Video Delivery revenue was approximately $1.1 million.

Non-GAAP gross profit margin increased by over 900 basis points sequentially to 52.7% in the second quarter of 2021 from 43.7% in the first quarter of 2021 and compared to 59.2% in the second quarter of 2020. As we indicated last quarter, the lower than historical gross margin in Q1 was primarily the result of product mix and temporary pricing extended to a new Mobile customer. We anticipate gross margin will remain in our historical range for the remainder of 2021, while continuing to trend higher from Q2 levels as mobile revenue expands and demand stabilizes in the projected markets.

Non-GAAP operating expenses were $10.1 million in the second quarter of 2021 compared to $10.2 million last quarter and $9.3 million in the same period last year. On a non-GAAP basis, second quarter 2021 net loss was $2.6 million, or a loss of $0.05 per share compared to a net loss of $6.4 million or a loss of $0.12 per share in the prior quarter, and a net loss of $3.9 million or a loss of $0.10 per share in the second quarter of 2020. Adjusted EBITDA for the second quarter of 2021 was a negative $1.8 million compared to a negative $5.2 million in the first quarter of 2021 and a negative $2.9 million in the second quarter of 2020.

Moving to the balance sheet. We ended the second quarter of 2021 with cash and cash equivalents of approximately $23.6 million. In terms of other balance sheet metrics for the second quarter, days shares outstanding were 41 days at quarter end compared to 54 days at the end of the first quarter. Inventory turns were 16x in the second quarter, up from 10x in the prior quarter.

Now turning to our guidance for the third quarter of 2021. Based on recent order trends and our current backlog, we expect another quarter of very strong year-over-year revenue growth in the third quarter, driven by sustained solid demand in both Mobile and Projector. We expect to remain supply constrained in Q3 for both Mobile at 22 nanometers and the Projector at 40 nanometers, and we are working with our suppliers to resolve all delinquencies by the end of the year. Specifically, we currently anticipate total revenue in the third quarter to range between 14 and $16 million.

Consistent with my previous comments, we anticipate gross margin to remain near our historical range in the third quarter, supported by sustained trends in Mobile and Projector as well as the benefits of better overhead absorption associated with higher total revenues. More specifically, we expect non-GAAP gross profit margin in the third quarter of between 52% and 55%. We anticipate the operating expense in the third quarter to range between 10 and $11 million on a non-GAAP basis. Finally, we expect third quarter non-GAAP EPS to be in the range of between a loss of $0.07 and a non-GAAP loss of $0.02 per share.

That concludes our prepared remarks. We will now open the call for questions. Operator, please proceed with managing the Q&A questions. Thank you, everyone.

(Operator Instructions) We have our first question from Suji Desilva from ROTH Capital.

Congratulations on the strong recovery here and obviously, the restructuring announcement, very exciting for the company. So the Mobile, Todd, I kind of caught in your remarks, you talked about expecting additional growth from existing and new customers. I want to get a sense of the statement about new Mobile customers. If that is an expanding opportunity versus what we might have expected or whether that's just kind of sweeping across the China OEMs that we're familiar with? Just want to get some color there.

Well, it's a new Tier 1. So -- and they're going through some particular changes where they're spending a lot of energy on a new family of flagship processors. And it looks like they're going to use Pixelworks across their flagship processors. Not done yet, but that's what I'm referring to.

And would you care to, Todd, just provide some timing, time frame of when that might come to market? Or is that still to be...

The first of the family of phones would be launched at the latter part of this year.

Okay, late '21. Great. And then the restructuring, we're all trying to, I think, get a handle around it. So is there any longer-term operating impact -- operating expense impact of this restructuring? And would you be able to provide Shanghai stand-alone operating metrics profitability? Is that a meaningful data point to help us with?

Well, we'll probably not provide that here. I mean, we'll have it because at some point in time, we're preparing financial -- an operating entity that we'll be filing to go public on the STAR Exchange and the regulators in China will want to see financials just for that entity. So we clearly -- probably the only thing that I would say short term, nothing is going to change from an operating expense standpoint, right? Longer term, we will have some added costs in finance because we'll be doing both audit in China and in the U.S. and we'll have finance teams supporting that audit in both locations. I wouldn't say it's a complete duplication, but there's added cost there. And then just the added operational cost of growth. We do expect -- right now, we're planning for fairly significant growth next year and into 2023, and we'll have to expand the organization to support the growth.

And then lastly, on the Projector business. I know, Todd, you gave a lot of color in the prepared remarks, but just the kind of the key essence, kind of elements of the driver of the sharp recovery here. And more importantly, you are comfortable with the sustainability of this recovered level of demand? Any help there would be appreciated.

So specific to Projector, you're talking about the recovery?

Correct, correct.

So I call it a snap back when it comes back to 100%. I don't think their dem -- end demand went up 100%, right? Their sell-through didn't go up 100%. Clearly, it's starting to pick up for them, but they were at very low. There's a very big whip, and a lot of it's finished good projectors around the world at distributors and resellers of their equipment. And so as we went into the pandemic last year, we saw an overcompensating because if you have this expanded whip of material throughout the process. So raw goods and materials like semiconductors from us, finished goods that they hadn't shipped out to distributors and VARs yet, and then inventories around the world of distributors and VARs. It contracts. And so we went through the contraction last year and what you just saw was a bounce back.

Now the business, the actual end business of the projector customers, I would say that oh, maybe 70% of what they expect to be normalized when we completely come out of the pandemic. And so it's snapping back to not a full utilization, okay? It's snapping back to the 70% level. And so we would expect probably over -- it really depends on a global reopening. The U.S. is fairly open, at least let's hope it stays open. Europe is reopening. Most of Asia, China is even going through some closures right now. So -- and Southeast Asia is going through fits and starts. So I would suggest that we're probably going to see another year of fits and starts. So we'll see gentle recovery from the rejector market during that year. And then as we go into latter part of 2022 and 2023, I expect then we're going to get up to full recovery.

We have our next question from Richard Shannon from Craig-Hallum.

I'll add my congratulations on the nice bounce back in very fascinating essence on strategic initiatives here. So I think I've got a follow-up on Suji's first question regarding the Tier 1 and ask for a little bit more context here. Obviously, that's the new Tier 1. I'd actually like to step back and to get a sense of how the existing Tier 1s are expecting to expand their usage of Pixelworks. I know you've had 1 that's been in place for a while and a new one, I think, earlier this year. What sense are you getting that they're going to be deploying in greater breadth? And then how would you compare that to the promise of this new Tier 1 here in size relative -- if you look a year or 2 out, how should we think about that?

Well, so I'm not going to go into too much specifics about our Tier 1s because a lot of it is confidential. But what I'll say is of the 2 Tier 1s, both are still utilizing Pixelworks technology across a broader swath of phones. I would say that the existing Tier 1s we have, were launching between half a dozen to 10 models each with various products from Pixelworks between Soft Iris and our Iris 5 -- our X5 processor, and then are focus -- both focused on the new 7th generation device. And the new OEM, I would say is, they're starting off very consistent to where we started off with the first 2.

That's a fair perspective. Second question, I think, Todd, you announced you're going to work with a new applications processing partner. Wonder if you could help us understand the drivers of that. Is this driven by particular customers like potentially the Tier 1 customer or not? And maybe just kind of give us a sense of when that will happen and when you'll see start seeing benefit from that?

So this was a collaboration that's been going on between the other apps processing company and ourselves for a while. But we needed a catalyst to really -- we're all short on resources, right? Even large modem application companies are short on resources. And so as much as the 2 parties thought it was in both their best interest to collaborate, you need that first program to put a sense of urgency behind us. And so we have one customer that put a sense of urgency behind that work.

That's fair. Let's see here. A question on -- I guess it relates to the third quarter and potentially beyond here, but you're talking about supply constraints. Any way that you could quantify how much you think you could ship this quarter if you didn't have these supply constraints?

I could but I'm not going to, but I'll try to give you a little bit of color. I'll try to give you a little bit of color. So when you say this quarter, do you mean the quarter we just closed and announced?

Third quarter.

Oh, you're talk about the quarter we're in. Because we definitely left -- the revenue that we recorded for Q2 was short of demand, okay? And the revenue in Q3 with the guidance we just gave is short of demand. And the revenue, not so much in Q2 because that -- this really started to -- we weren't really -- we were a little bit affected in Q1, more effective in Q2, but beginning that it was -- for us, it was sort of the beginning stages of constraint. We didn't turn any programs down. So I wouldn't say that's -- of revenue -- when I say we were short of revenue, that's the backlog, right? And the way that backlog exists is it just rolls over to the next quarter of backlog. We're pretty much on a go-forward basis, getting secured orders from customers out in time.

So not only are we getting longer lead time, we're getting binding orders that they can't back out of. So if we can't ship it, it doesn't go away. It rolls over. But also in Q3, I would say there was a program, as we started this year, and we understood the constraints. There were at least 1 high-volume program we had to walk away from because we could not anticipate enough capacity to support it. That's a little harder to quantify what that would be. I mean we have forecast for what it would be. But -- so if I really got down and said, how much did supply constraints affect the guidance in Q3, reasonable for backlog that's rolling over to Q4 and considerably more than we probably turned away in new design-in activity.

That is helpful. One last question for me on your funding agreement with the Projector customer. I think the last time, it was a few years ago, you had to provide a step down in ASPs as an increase in gross margins. Wondering if you're expecting similar dynamics? And then when do we see the offsets to OpEx here? Does that start later this year or next year? How do we think about that?

So you're asking me that as pro -- Mobile increases, will we see a downward trajectory in margins? Is that what you're asking me?

No, it was related to the funding agreement that I think was with the Projector customer.

Oh, the funding agreement. Okay. So this particular development has a lot of outside IP that we bring in for the system of chip, in addition to our own IP. A lot of the upfront money -- we secured, I think, about half was -- of that contract was paid upfront by the customer, or invoiced upfront. Most of that's going to go right out the door to design tools, IP providers, third-party support, right? So there'll be no offset that hits this year. I would call it, it's neutral to slightly negative for us. We may absorb more costs this year than we actually take in. Next year, it will reverse. Next year, we'll have offset.

We have our next question from Derek Soderberg from Colliers Securities.

I did have a question on Mobile. Just want to get a sense of customer response to Iris. I think, for the most part, you guys continue to reassign Iris onto the next-generation device or the refreshed version of the device. Are you seeing more discussions with your customers to move from maybe those higher-end phones to the mid-tier with higher volumes? Any update on that or detail on some of the discussions you're having would be great.

Well, so with the first Tier 1, they've kept most of the solutions that they use Pixelworks on, I would say, on higher ASP phones, maybe $600 and up. For the second Tier 1, they're actually, the first family of products that they launched Iris -- our X5 Pro on, I think ranged from just around $300 to $450. So that's new for us. That was -- and it was reasonable volume. They're following up with launches that will be announced very shortly. Those are probably a little bit higher end phones. But on a go-forward basis, we do expect that our solutions will get down to, let's call it the upper mid-range, right? We've had Tier 2 phone companies launch Iris, our solutions down into the $250 price range with several Tier 2 OEMs.

What I found is that those companies, they're struggling with volume for 2 reasons. 1, they're struggling at securing other capacity outside of Pixelworks, mainly AP capacity. And then 2, during this environment, it seems to me that we still have some markets that are service provider markets where the customers are service providers and other markets that are direct-to-consumer markets. And it seems to me, in both cases, the customers, whether they be service provider customers or direct-to-consumer models, are migrating to larger OEMs. And I think the market data you can see out there, the top 5, top 6 mobile OEMs in the world or regionally, whether you look at Europe data or China-only data or the Americas data, it's consistent data, which is the top 6 have all grown market share and significant year-over-year growth with maybe the exception of Huawei.

The other category, which is where the Tier 2s fall in, and there's a lot of them, have shrank market share and are about flat year-over-year. And last year was not a very good year. So the question was, will this trend continue? And will there be more consolidation at the top 6 or 7 OEMs or not. And will -- in some cases, these Tier 2 spend a lot of money to try to break through and ship a reasonable amount of volume to support their efforts. I would say, over the last 2 years, they haven't got a return on their investment. So the question is, do they continue to do that? Or do we see further consolidation over the next 2 years? I'm not going to answer that. Maybe the market financial will answer it. I have my own views, but anyway. So with that said, for us, it clearly would -- the more we move down into lower-priced phones, whether we use lower ASP solutions from Pixelworks or not, the more volume that would be obtained.

But I would also say, we are taking -- we treat silicon in a little more revered -- and access to capacity in a little more revered way this year and next than we probably did in the past. And so it does affect our road map, and it will affect -- if we have an opportunity to significantly grow the top line by selling higher ASP solutions but maybe lower volume because we secure more capacity that way or we secure -- we use the capacity we have on higher ASP solutions that differentiate higher end phones more, if we can grow the top line and the margin line in a better fashion by going there with our road map versus going down, we will do that. And so all of the things we just talked about, Derek, are probably affecting how we go forward, who we pursue as our customers, our ecosystem partners and the solutions that are focused on our road map.

Got it. And then just quickly on TrueCut. I think in the past, you guys have spoken about some large potential customers there. Just curious how those conversations are progressing. And I'm wondering if you can maybe size that opportunity in some sense, providing sort of pricing details there. But just generally, how are you feeling about TrueCut and some of the opportunities there?

So the conversation with the customers are going quite well. And so remember, when we say -- it's hard for me to say customers because it's a combination. The way we are trying to bring this technology to market is not a pure tools provider, which would go to content creators and post-production houses only, but we do have to go start there and get the content creators and the post-production houses brought in to the value proposition that we bring. I mean they are a key advocate. If TrueCut is going to be adopted, it's because the content creators demanded it pretty much, okay?

So if they don't come along and see the value of what we can bring to their movie-making process and what the end product would look like on all screens that they deliver to, whether theatrical or device, TrueCut will not go -- will not be a success if they don't buy-in. So it's very key that we get the content creators and the post-production houses brought in. And I would suggest that we're doing okay there. A lot of interest, a lot of interest. Then another element is you have the distributors of that content. And in some cases, the content creators have more power over the distribution of their content than others. But in the end, if you wanted it to be really successful, the distributors would also have to see the value proposition of the technology. I would say those conversations are still going.

They are -- it's clear to me that the distributors are busy doing a lot of things. And they're way more focused right now coming out of the pandemic on quantity of content. And there is a lack of talent out there creating content. And they're -- just like there's a semiconductor shortage, there is a shortage of new content coming out that they can put on their formats. There are more streaming formats that need content than there is new content coming. And for those of us that subscribe to all these new offerings, whether it be Disney or Paramount or Netflix or Amazon, Apple, you name it, Warner, I would suggest that I haven't seen near the quantity of content come on new to these platforms as we saw pre-pandemic. So there's a big pull from them. They're focused elsewhere doing that, right?

And we're trying to market technology innovation to them at a time when their #1 focus is quantity for quality content. So that's a harder discussion to have. The content people we're having discussion with really see the value proposition. If they see the value proposition enough, they maybe push the distributors to prioritize what we're doing. And then the third element of the ecosystem is the device manufacturers and licensing. And there, we're having positive conversations. And in fact, we have a very large device OEM that's engaged with us trying to go back and convince the other ecosystem partners that this is the way to solve some problems, and they want to solve those problems, and they want to solve those problems with Pixelworks.

So I think this is the first time publicly, and Derek, thank you for teeing it up that I've gotten that detailed about where we're at. What we're trying to do is not easy, but we are making good progress. And as far as the fight -- scoping the overall market, the goal would be long term, and I'm going to paint long term. Let's just say 5 to 7 years out. The goal would be that we would have licensees from device manufacturers around the world, licensing on their devices, the ability to show TrueCut master technology. And then to have content creators around the world, use our tools to create content as part of their post-production process to deliver a premium experience to all those device manufacturers. And the value would be -- put it this way, for a company our size, the opportunity is quite large.

Got it. No, I really appreciate the color. If I could squeeze another quick one in, just on the STAR Exchange. I'm not too familiar with the process. So what are sort of the next steps for that listing? And how would that impact sort of the stock trading on the U.S. markets? And are you guys going to trade on both exchanges? What is sort of the listing mean for your engagements in China? Any benefits there? Just any additional detail on that announcement would be great.

Good question. A lot of...

That's a tough one to answer. On the listing, once -- assume we are successful with the listing. So we apply, and we are approved. And we go and have a listed -- our subsidiary listed on the STAR Exchange. We have no intention of not keeping our listing in the U.S., right? So both listings will exist. Dual listed.

Not quite a dual listed because it's not an ADR or something like that. It's a subsidiary listing in China. And once again, go back to your previous question of TrueCut, depending on how big our licensing business is here, you would own -- investors in Pixelworks on the NASDAQ would own the forward-looking cash flow capability of that licensing business plus have the majority ownership in the subsidiary that's listed on the STAR Exchange. So that's the value to holding the U.S. shares, right? And then for the value of -- in China, the fact that we go do this listing, one of the key value propositions, and I'm glad you asked this question because I think it's important for people to understand, is if you're in the semiconductor business like we are -- we're not pushing the process technology envelope, but we are pushing display system engineering envelope and how to do it in a very low power way.

And so we need very good talent. And most of our organization working on that was already in Shanghai. That is where -- that is a much larger talent pool as far as electrical engineers, software engineers that work on display and people with display experience. There's a much larger talent pool there than there is here. And so it's very important that we have the ability for that talent pool to feel like they have a vested interest in the company they're working for. And they do now. I mean, not that our employees previously didn't have incentive stock in Pixelworks USA. They did. But it's very difficult for local people over there to own it long term and keep it and truly value it. They understand the value of a local listed company. And so once we announced that we were going to go do this internally, and we set up the ESOP and we went out and polled our employees, we saw incredibly strong demand for us to go do this, to make this change.

And the participation level we saw, by the way we did it, that should make any investor in this company, feel very good. When you have 75% participation, these people wrote their own checks to invest in Pixelworks Shanghai at a pre-money $173 million valuation at a time when our market cap was probably running at $150 million. And so -- and then the ability to retain new talent that we compete every day over there for, is much easier when you have -- when you're set up and organized the way we are and we have the promise of the STAR listing. So really, the -- to me, the biggest benefit is the retention and access to talent. The secondary benefit is capital. There's a lot of capital over there, and there's a lot of capital here. For a small semiconductor company, it is hard for us to get the attention sometimes of the capital markets here in North America. For a large semiconductor company, maybe not, but for a small semiconductor company, yes. For a small semiconductor company in China, it is not hard to get the attention. So hopefully that's a hint.

We have our follow-up question from Suji Desilva from ROTH Capital.

On the U.S. business, when you do the restructuring, you mentioned TrueCut and licensing. I just want to make sure if the mention of licensing along with TrueCut was purposeful in that there's a pipeline potentially of patent type opportunities that have been dormant and underserved because you've been busy. Is that the case? Or is that just meant to be a generic label for TrueCut?

It was purposeful. And most things I put -- I spend a lot of time on these prepared remarks. Okay. I'm glad you caught it, Suji. It is not about our patents. I mean, when you license IP, if you license let's say, IP that would be integrated on somebody else's system on a chip, part of what they want is the patent protection for the IP to license them. The methodology that you -- and part of what they want is your system know-how and your support, et cetera. I would say that's referring to that we've always had opportunities to license -- we have a lot of intellectual property. We used to be in the TV chipset business. We're not in it anymore, but we have a very good IP there, right?

We have some general display IP that we apply to all of our solutions, whether they be in the Projector space, Mobile or elsewhere. And then we have some very specific IP for our target markets. We've been approached on all the above to license the IP. Up to this point, I felt it would defocus the company on trying to get the momentum going in Mobile and then TrueCut, I feel like we are now at a time where we're sort of off and running, and we're hiring, and it may be okay to go out, especially if they're in adjacent markets that are noncompetitive, what are -- we feel our core businesses are, to go out and pursue some of those. And so I think that's what it was in reference to.

Great. And the other one, I'll try to make it quick, is in the 8-K yesterday, you mentioned some new investors, which were interesting, Verisilicon, Canaan and Chipone. I don't know the other 2, but I know Verisilicon pretty well. They're good at pumping out chips. Could this increase the velocity and the cadence of your product introductions going forward? Or was there any specific sort of thought on that investor base? Or any color would be helpful.

There was specific thought on every one of those. We've been in dialogue prior to the investment with every one of those companies. I'll give a little context. You know who Verisilicon is, for those on the call that don't know who Verisilicon is they're a turnkey ASIC and IP provider that recently went public about 9 months ago on the STAR Exchange themselves. And they're doing very well. Then there's Canaan, who's also went public and they're Chinese-based ASIC provider that has done both mining -- Bitcoin mining ASICs and recently, they announced a very neat Edge AI processor.

And so we're in discussions with them about some adjacent markets in collaboration. And then Chipone is a display company, but not a display processing company. They're more in the very front-end, DDICs, TCONs, analog front-end devices for large displays that you would see a lot in Asia, like advertising displays all over. And then, of course, they're getting into the Mobile Phone market, et cetera. And so we're in discussions with them about some adjacent markets. And so all of those investments was -- it was more than money at a reasonable valuation. It was also about collaboration.

There are no further questions at this time. I will hand the call over back to the presenters.

All right. Well, I'll let Elias finish in a minute, but I just want to say, listen, I'm very -- a lot to digest. I hope this was helpful for everybody, and thanks for your attendance today.

Yes.

Anything to add?

No. Just to say, thank you for participating, and we are excited about this ride we're taking. We want you guys on the same tram. Take care. Thank you.

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