Pixelworks Inc (PXLW) 2020 Q1 法說會逐字稿

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

Thank you.

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

With me 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 first 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 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, April 30, 2020.

The company undertakes no obligation to update any such statements or reflect events or circumstances occurring after today.

Please refer to today's press release and 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'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 income loss and net income loss per share.

Non-GAAP measures exclude gain on sale of patents, 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, 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 income 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, Elias, and good afternoon to everyone joining us on today's call and webcast.

I hope that you and your families have stayed safe and remained healthy during these unprecedented times.

My sympathy and well wishes go out to all those who have suffered loss or hardship associated with the COVID-19 pandemic.

I also want to sincerely thank the many individuals serving on the front line to heal and care for others in the countless communities that have been impacted.

Given the current environment and heightened uncertainty, we accelerated our reporting this quarter by disclosing preliminary Q1 results in early April along with a simultaneously published shareholder letter that provided real-time context on how the company was performing as well as responding to the COVID-19 pandemic.

Consistent with our preliminary indication, our first quarter results were in line or above our original guidance.

A few of the notable highlights from our Q1 financials included: mobile revenue grew 64% year-over-year; non-GAAP gross margin expanded to approximately 52%; and we successfully implemented cost reductions resulting in operating expenses coming in approximately 10% lower than the midpoint of our guidance.

While I would encourage our long-term shareholders refer to our recent filings and read my April 7 letter in its entirety, I want to take this opportunity to briefly reiterate several of the key points.

Pixelworks has operations in a number of countries with physical locations spanning across Asia and North America.

During the quarter, we proactively responded to the global spread of the COVID-19 pandemic, making the safety and well-being of our roughly 225 employees our single highest priority.

Beginning in China, which was impacted first and then subsequently in other locations, we facilitated and effectively utilized remote working procedures to maintain all critical functions.

Following the extended Chinese New Year, we reopened and gradually ramped up staff in our Shanghai and Shenzhen offices.

They have been fully operational since early March, including active engagement and support of our customers as well as ongoing new product development efforts.

Our employees in Taiwan, Japan and North America have remained fully operational throughout.

However, with the exception of Taiwan, we're continuing to work remotely, consistent with the current local and national guidelines in these geographies.

Since the onset of the pandemic, our team has demonstrated tremendous agility and dedication to providing uninterrupted support to Pixelworks' customers.

Without question, the impacts of COVID-19 pandemic have been extraordinary and widespread, resulting in a more challenging business environment and heightened uncertainty for both customers and suppliers.

In preparation for what is likely to be a more prolonged recovery of the global economy, we recently implemented a series of actions to further contain costs without impairing our ability to support customers and continue executing on our mobile growth initiatives.

To briefly summarize, several of the key actions taken include: Elias and I have both taken a 10% reduction in our base salary.

The executive staff has agreed to a salary reduction of 10% in exchange for restricted units -- restricted stock units.

The executive bonus program for 2020 was eliminated.

All other bonus and sales incentive programs remain in place.

The Board of Directors have agreed to receive RSUs in lieu of cash director fees for the full year of 2020.

Annual merit increases for all employees will be delayed by 1 quarter.

All new hiring has been temporarily put on hold with the exception of a few critical open reqs.

With the exception of critical customer-related travel within China, all corporate travel has been suspended.

We extended the program offered to senior management to exchange up to 10% of quarterly base salary for RSUs to the rest of our organization, and the program was well received with 55% of all of our employees participating.

As a result of these collective actions, we immediately reduced cash operating expenses by more than 10% from the midpoint of our Q1 guidance.

In further support of preserving cash, the company applied for and recently secured funds as part of the PPP loan program in the United States.

I'll let Elias provide details.

However, I will say that we are actively pursuing other similar relief programs in multiple geographies in which Pixelworks operates.

Turning to a brief update on each of our businesses, starting with digital projector.

As discussed extensively in recent quarters, the broader projector market has consistently been confronted with a series of headwinds, resulting in the continuation of a prolonged inventory correction.

Additionally, the first quarter has been a seasonally soft quarter as Japanese OEM customers seek to reduce inventory prior to the fiscal year ending in March.

During the quarter, the impact of these underlying market dynamics was further exacerbated by the recent challenges associated with COVID-19.

More specifically, some of our projector customers are currently production-constrained due to a factory shutdown and/or limitations on supply of certain projector components.

To be clear, none of these constraints involve components provided by Pixelworks.

However, we do expect these challenges to moderate production orders by certain customers in the near term.

Despite these challenges, design and activity has continued to move forward as we actively migrate all of our projector customers to new SoC platforms, all of which have more favorable margin profiles than the previous generation SoCs.

Although end demand and production has been impaired in some areas, customers are still ordering and tender activity in China has started to pick up in recent weeks.

In our Video Delivery business, as anticipated, we saw a continuation of the inventory correction for our customers, consumer PVRs and set-top boxes in Japan.

Although revenue from video delivery increased sequentially in the first quarter, Japan has since taken more aggressive steps in response to the pandemic to control the spread of the outbreak.

In addition to putting downward pressure on consumer demand in the second quarter, the recent actions by the Japanese government increased the uncertainty on the timing and magnitude of the recovery of sales of PVRs in Japan.

Despite the headwinds to the end market demand, we remain closely engaged with existing customers and are supporting new program development.

Additionally, in Q1, we signed a development contract with a new, well-known consumer electronics brand in Japan to utilize our advanced 4K transcoder SoC for a Video Delivery platform.

Here in the U.S., sales of our OTA transcoders for cord-cutter devices, including the AirTV 2, remains solid following record revenue from OTA in the fourth quarter.

Also, during the quarter, we announced our newest collaboration with Qualcomm on a joint reference solution to incorporate OTA HDTV broadcast with 5G wireless broadband service offerings.

More specifically, this jointly developed platform combines Pixelworks' industry-leading OTA transcoder and Qualcomm's Snapdragon X55 5G Modem-RF System, enabling network operators, Internet service providers and OEMs to rapidly deploy a fully integrated and optimized solution in future home media equipment.

Shifting to updates on TrueCut and our broader Mobile business.

We continue to make tangible progress on our TrueCut content mastering and delivery platform, and we generated significant momentum on multiple engagements with prospective customers and partners going into March.

Although work-from-home mandates have slowed the pace of TrueCut customer evaluations, particularly those in California and Hollywood, we've remained focused and continued to advance the internal R&D development efforts.

In China, we have largely resumed engagements with multiple prospective customers, including on-site visits and evaluations.

We also recently completed the migration of the core TrueCut tools to our advanced GPU platform and the first build of our new, stand-alone, on-prem, GPU-centric processing system, together bringing over 100x performance improvement, resolution support up to 8K and frame rates up to 120 frames per second.

These systems are now ready to be installed in support of evaluations by select studios and postproduction partners once their facilities reopen, and it can be done in a safe manner.

In our broader mobile business, we demonstrated a significant increase in the adoption of our Iris visual processors and software across expanded number of customers.

Over the last 2 months, Pixelworks digital processors, our Soft Iris solution or a combination of both enabled advanced display quality in 10 smartphones launched by 5 different customers, together exceeding the number of devices and customers announced for the full year in 2019.

Six of these newly launched devices represent expanded adoption by existing customers, including the Black Shark 3 and 3 Pro gaming smartphones.

As Black Shark's latest generation of devices specifically targeted at gamers, the flagship gaming phones leveraged Qualcomm's Snapdragon 865 Mobile Platform and were the first-ever smartphones to incorporate our newest fifth-generation Iris processor.

Then building on the initial devices introduced last year as part of our ongoing collaboration agreement, in March, HMD Global launched the Nokia 8.3 5G, featuring its PureDisplay-branded viewing experience powered by Pixelworks visual processor.

And in April, we announced an extension of our partnership with TCL Communications in conjunction with the launch of 3 new TCL-branded smartphones, the TCL 10 Pro, the 10L and the TCL 10 5G.

Also notable were a series of recent launches by new customers.

As the first device is developed under our previously announced multi-year collaboration agreement, in early March, OPPO launched the Find X2 and the X2 Pro.

Both of the flagship smartphones incorporate impressive 120-hertz variable refresh rate displays enabled by Pixelworks fifth-generation visual processor and include market-leading, content-optimized motion processing and always-HDR viewing -- video viewing.

Also unique to the devices, every Find X2 series display is factory-tuned with Pixelworks' highly efficient color-calibration software to provide industry-leading accuracy.

This has resulted in the Fine X2 Pro receiving the highest A+ rating from DisplayMate, being touted as having "close to textbook-perfect calibration accuracy and performance that is visually indistinguishable from perfect."

And then most recently, OnePlus aggressively raised the bar on display quality for the entire smartphone industry with the launch of its OnePlus 8 and OnePlus 8 Pro, featuring our most advanced display processing solutions.

The OnePlus 8 Pro features 120-hertz AMOLED Fluid Display with QHD+ resolution capable of up to 1,300 nits of peak brightness, and it is the first-ever smartphone to incorporate Pixelworks' patented Dual MotionEngine technology.

Pushing the boundaries of the smartphone visual experience, the 8 Pro also includes Always HDR video, DC dimming, true flesh tones, tone adaptive display and Pixelworks color calibration.

While earning the highest A+ rating from DisplayMate, the OnePlus 8 Pro shattered 13 industry records for visual quality, taking mobile entertainment to a whole new level.

As a group, effectively all of the recently launched smartphones have received excellent reviews for their display quality and performance considering the sheer size and resources available to the mobile industry as a whole.

The industry-leading displays featured on many of these devices serve as a broad validation of Pixelworks technology, our value proposition as well as a testament to our display expertise and the execution of our engineering and support teams.

While we've observed the timing of certain customer programs slipped out slightly over the past few months, we are still on track to be incorporated in at least 12 devices launched during the first half of 2020.

In terms of how the remainder of 2020 plays out in our mobile business, we are currently cautiously optimistic.

The overwhelmingly positive reviews of Pixelworks-enabled displays on recently launched smartphones have created excitement and incremental interest in our advanced display technology.

We continue to have a very solid pipeline of customer engagements, and we are actively working to secure new and accelerate existing follow-on programs with current and prospective customers.

Yet with all of the seemingly positive indicators, customer sell-through of newly launched devices and consumer-end demand are still less than certain in the near term given the current global economic backdrop.

That said, overall, we believe the future momentum remains extremely positive.

To close out my prepared remarks, it goes without saying that COVID-19 pandemic has brought about significantly more challenging business environment as well as increased uncertainty.

The management team of Pixelworks is focused on what we can control and will rapidly respond with proactive and definite actions to minimize the potential impact to our stakeholders.

As a result of our recent and ongoing actions, I firmly believe that we've positioned the company positively given the current environment while preserving the ability to regain strong momentum as the global economy and end market demand recover.

I would also remind our shareholders that our customer base and revenue contribution across our end markets is largely comprised of Tier 1, multi-national companies.

Moreover, Pixelworks is often a sole source provider of processors and solutions to many of our customers, and under a scenario in which the environment becomes more challenging, the majority of these companies and their need for Pixelworks technology is not going away.

Just as it had a beginning, this pandemic will also have an end.

As an organization, we have an incredibly determined and capable team that is focused on the continued execution and positioning Pixelworks to thrive in a post-COVID-19 world.

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

Thank you, Todd.

Revenue for the first quarter of 2020 was $13.8 million compared to $16 million in the fourth quarter of 2019 and compared to revenue of $16.6 million in the first quarter of 2019.

First quarter 2020 revenue reflects a combination of seasonality and the ongoing inventory corrections in the digital projector and video delivery markets, partially offset by the anticipated year-over-year growth in the mobile market.

The breakdown of revenue during the first quarter was as follows: revenue from digital projector was approximately $8 million; video delivery revenue was approximately $3.2 million; revenue from mobile was approximately $2.6 million, comprised largely of sales of our Iris visual processors and Soft Iris solutions.

Non-GAAP gross profit margin was 52.1% in the first quarter of 2020 compared to 48% in the fourth quarter of 2019 and 53.3% in the first quarter of 2019.

Non-GAAP operating expenses were $9.7 million in the first quarter of 2020 compared to $10.4 million in the fourth quarter of 2019 and $10.3 million in the first quarter of 2019.

Adjusted EBITDA for the first quarter of 2020 was a negative $1.5 million compared to a negative $1.7 million in the fourth quarter of 2019 and a negative $0.5 million in the first quarter of 2019.

On a non-GAAP basis, first quarter 2020 net loss was $2.6 million or a loss of $0.07 per share compared to a net loss of $2.3 million or a loss of $0.06 per share in the prior quarter and a net loss of $1.5 million or a loss of $0.04 per share in the first quarter of 2019.

Moving to the balance sheet.

We ended the first quarter of 2020 with cash, cash equivalents and short-term investments of approximately $20.4 million compared to approximately $14.2 million at the end of the fourth quarter of 2019.

The sequential increase reflects a combination of collections on a significant portion of accounts receivable from certain customers in the first week of January and a drawdown of approximately $5.2 million from our $10 million line of credit with Silicon Valley Bank during the quarter.

As Todd outlined, we have proactively taken a series of actions to strengthen the company's financial position for a potentially more prolonged economic recovery.

This included a meaningful reduction in operating expenses from our previous quarterly run rate.

Additionally, we have recently completed applications for multiple government-backed stimulus programs across the geographies in which Pixelworks operates.

We have successfully secured the Paycheck Protection Program loan, PPP, and received the associated funds earlier this week totaling $797,000 with favorable terms of 1% over 2 years and the first payment of this loan deferred for 6 months.

We also received relief from the Chinese government in the form of lower employee benefit payments covering February through June 2020 in the amount of approximately $150,000.

We plan to continue actively pursuing participation in other government programs across all applicable geographies.

As disclosed in our 8-K filed in early April 2020, with the exception of the CEO and CFO, the compensation program previously offered to the executive team was recently extended to all employees to receive RSUs in lieu of a salary cut of 5% or 10%.

The response was very positive with 55% participation, which we expect to result in cash savings to the company of approximately $300,000 in Q2.

We will continue to offer this program every quarter until we're past this pandemic.

In terms of other balance sheet metrics for the first quarter, days sales outstanding were 58 days at quarter end compared with 61 days at the end of the fourth quarter.

Inventory turns was 5.2x in the first quarter compared to 7.8x in the prior quarter.

Now turning to our guidance for the second quarter of 2020.

We expect the near-term environment to remain challenging as customers across our end markets work to navigate unique hurdles associated with the COVID-19 pandemic.

We believe the impact on our customers would be varied but meaningful in the second quarter due to heightened uncertainty related to end-market demand as well as potential supply and demand imbalances for certain components unrelated to those provided by Pixelworks.

As such and based on current order trends and backlog, we expect revenue in the second quarter to be in a range of between $8.5 million and $11.5 million.

We expect non-GAAP gross profit margin of between 54% and 57%.

The anticipated improvement in gross margin primarily reflects our expectation of particularly favorable product mix and product cost improvements in the second quarter.

We anticipate operating expenses in the second quarter to range between $9 million and $10 million on a non-GAAP basis.

Lastly, we expect second quarter non-GAAP EPS to be in a range of between a loss of $0.06 and a non-GAAP loss of $0.14 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.

Thank you.

(Operator Instructions) First question will be coming from the line of Charlie Anderson with Dougherty & Company.

Yes.

I'm glad to hear everyone is safe in this environment.

I want to start with just a question about the mix of business in Q2 relative to Q1.

Obviously, we're going to see inventory rebalancing all over the place, but curious, by segment, how it looks.

And then you're calling for a higher gross margin and you'd call it mix.

So do you agree that those are related?

If you could speak to that.

And what also, within the higher gross margin, is sustainable?

Meaning we've taken product cost out and within the segments, we'll have higher gross margins going forward.

And then I've got a follow-up.

I'll take it initially, and maybe Elias can follow up.

Hi, Charlie.

How are you doing?

Great.

Great.

Glad to hear it.

So margin is improving because we have been -- on our projector business, which is still, I would say, a meaty part -- the largest part of our revenue, we have migrated all of our customers, not just our largest customer but all of our customers to various, different percentage levels of our newest SoC platform, right?

And the margin profile on those new SoCs is significantly higher than the old margin profile.

In some cases, the ASPs are about the same, and in some cases, the ASPs are lower.

So it provides some revenue headwind.

But from a margin perspective, it's significantly higher.

And the reason I went through that level of detail is to answer the second part of the question.

Is it sustainable?

In the projector business, it absolutely is sustainable.

When the projector business bounces back, we expect those margins to stay intact if not go even a little higher in the projector space because we'll have -- a higher percentage of the overall business will be the new platform out in time.

So probably a similar story with video delivery.

We have migrated -- we improved both costs there and migrated customers to slightly better margin product portfolio.

We expect that to also be sustainable.

So the -- what I'll call the legacy business of video delivery and projector, as the revenue comes back, as the inventory corrections from the displacement of COVID-19, we get past them, we'll have revenue accelerating at a higher gross margin profile.

Mobile, we've got a mix there.

We are starting to ship a couple of platforms that are pure Soft Iris.

Soft Iris' gross margin is very good.

Clearly, the ASP for those phones is not as high as if we sell a full solution, a full Iris-based solution.

But the margin profile is pretty good.

Our midrange mobile processors, the margin is pretty good.

And in our highest-end processor, it's the highest ASP but the margins are the lowest.

On average, it's still closer to this quarter's corporate averages depending on mix.

So on a go-forward basis, I expect the margin profile to probably look more like what we're guiding into Q2 even as we grow.

I think there was one last piece about your question about mix.

We really don't forecast the mix on a go-forward basis, but I will give this bit of color.

Every one of our businesses is going through headwinds or inventory correction in Q2 compared to what we had planned for.

We usually plan our annual operating plan late December, and we sort of ink it.

And if I look at -- those are not public.

Our annual operating plan is what we internally manage to.

But if I sort of look at Q2, every business is down compared to that plan.

The mobile -- you didn't ask the question but I'm going to offer the answer.

People will want to know, with all these launches and I mean very good reviews -- I mean the OnePlus 8 Pro sold out again.

I still can't get my own version.

We have several in the company, but I want my own personal version.

Why would they be doing -- why would we see an inventory correction in Q2?

And I just need to remind people that on -- if you go back to the December quarter, the Q4 2019, we had a -- 25% of our revenue was mobile.

We had -- that was in anticipation of many of these launches that we talked about and one additional high-volume program with OPPO.

It wasn't announced at the time that it was OPPO.

It was a large ODM but it was OPPO.

But we -- it was a very short circuit, a very small time frame to capture that design, and we did not have enough time to capture that design with the solution.

But the customer did a shared-risk agreement to build and they took a lot of that inventory.

So they had to build up the inventory.

They had continued to build up inventory in Q1 for these launches.

And many of them were delayed 1 month to 2 to even 3 months.

And then we'll see how robust the demand is.

I mean these are -- they're flagship phones, both the OPPO Find X, X2 Pro and the OnePlus phones.

And demand for OnePlus seems very good.

The OPPO phones were high priced.

Demand is pretty good for those phones.

But these are global-based phones, not just China-marketed phones.

And as much as China is back, I'm not sure the rest of the world is really back from a demand standpoint yet.

So maybe that gave some of the color you were looking for there on mix, but we're not going to outline it on specifics.

Great.

Very helpful color on all fronts, Todd.

So I wanted to just revisit.

You had the goal initially of exiting the year with mobile being potentially the majority of revenue.

I know so much has changed since then.

I wonder if you could maybe just revisit that point.

And then also, along with that, it sounds like things are, by and large, still on schedule, maybe a few exceptions on mobile the rest of the year.

I'm sort of curious.

The ability of the team to work virtually in the cases where you can still be hands-on, is everything progressing the way you would like it to?

Or are there some things you're not able to do in terms of working with the customers to get their phones launched?

Okay.

Yes.

Good questions.

Let me try to give guidance on it.

So yes, I would say that our pipeline, if you really look at all the action we've taken, I wanted to hire significantly more software and support people going into this exact time frame.

We have postponed that hiring.

That hiring was to support the pipeline of customer programs specifically in mobile, a bit into TrueCut.

We've redeployed some of our -- like our Toronto-based team.

Some of the activity in video delivery slowed down even though we signed on a new customer.

We repurposed some of the individuals there to work on mobile.

All of our mobile programs today, all the designing activity is in China.

China is back.

Our Shenzhen office is fully engaged.

Our Shanghai office is fully engaged.

Travel between Shanghai and Shenzhen, Shanghai and Hangzhou and a few other towns is warming back up.

And I have people that actually travel on a weekly basis either through train or through airplanes.

Beijing has not really opened up for travel, although I found out yesterday, I think, within 2 weeks, we'll be able to travel to Beijing.

So we have a few customers that were difficult to support in Beijing.

But to me, to get to the specific question of what our goal is, our goal to still have mobile be more than 50% of the total revenue of the company by Q4, well, the goal is absolutely intact.

Whether we can achieve it in Q4 or not, I would say that the odds went up against us that it's going to happen in Q4.

It's not completely out of the question, but it would take -- we would have to close on most of the pipeline of activity that we have for the second half of the year going into the first quarter of 2021.

If that happened, then it probably still could happen.

I'm worried that if we -- we have several new customers that we're engaged with.

And if all of them turned on with the same level of intensity that we had over the last 6 months, we may be resource-constrained.

So we are prioritizing the programs we're working on with that in mind.

I think the -- even if the goal is not achieved in the fourth quarter, it's not more than a quarter or 2 out after that.

Next question is coming from the line of Richard Shannon with Craig-Hallum.

I guess maybe a question on kind of supply chain risks here.

Maybe if you can kind of help us understand where they may be coming from.

I know you said it's non-Pixelworks-related, but any view into what those are and how long that may continue might be helpful.

We've heard some other calls here last week with earnings that have suggested some areas, but I'd love to hear your thoughts on that, too.

So the ones that I know about -- and I may not know about them all, but the ones that I know about that are impacting our customers.

In projector, it's the -- what we call the optical subassembly, which is the lenses and mirror subsystem that go in the projector.

Some of the suppliers were in Wuhan of those optical subsystems for not only our largest customer but a couple of other customers.

And Wuhan's back up and running, but there was a good period of time the factories were down.

And so they're probably trying to catch up on inventory there.

Our largest customer has multiple factories.

They have one in the Philippines and one in -- one large in China.

They have a couple of factories in Japan as well.

Japan, even though they have shelter-in-place orders, the factories are located outside of Tokyo.

So I think they're still working on somewhat skeleton crew.

The Philippines was down for 3, 4 weeks.

I think they're supposed to get back up and running in the next 2. China is up and running.

So it's sort of hit-and-miss across the factories and sub components for the projector space.

In mobile, the one area that I think maybe we're a little bit more exposed to -- and I'm not sure that it's a severe impact, but a lot of people are trying to migrate to very high-frame-rate, high-pixel-count displays all simultaneously.

There may be -- I wouldn't -- I'm not sure it's even a COVID-19 constraint, maybe just overall demand constraint, too much too soon.

With that said, I think those are probably the main impacts for us.

Okay.

That's helpful perspective.

You mentioned briefly on TrueCut that engagement has been slowed down by the work in place in California.

Has that improved?

Or is there other ways to work around that?

Or is that kind of a continuing delay there?

And I think you've kind of implied -- or maybe that's my inference that you thought you might be able to announce and retain some business later this year.

Is that kind of time frame at risk?

It's hard for me to tell whether it's at risk or not.

It does seem like in California, Southern California is -- if you look at the infection counts, et cetera, it doesn't look like we're on the abatement yet, on the downside of the slope.

Northern California definitely is.

We're probably 3 to 4 weeks out in Northern California.

Southern California could be longer.

There is a great deal of pressure.

The way that the -- that industry is structured on the postproduction side of production.

A lot of these postproduction house studios, et cetera, use experts at that part of the filmmaking process.

But many of these experts are 1099 contractors.

Almost all of these contractors are effectively on furlough right now.

And the locations that they would go to work on a regular basis, they're no longer available to go to work for now.

There is some postproduction work, I think, they're doing remotely, but it was only on content that was pretty much wrapped up and ready to go.

There's going to be a delay.

I'm worried that there might be a delay for us.

As they ramp up, as they start to come back to work, production continues, postproduction continues, there will be a surge in trying to get content out.

I mean this is happening at the same time that everybody -- all these new streaming services were trying to launch with original content and have a lot of content available, a lot of original content available to attract subscribers to their service.

So there's going to be a high degree of demand for these same individuals when they come back to work.

With all that said, there was a lot of interest in our technology.

The team has been very creative on how we continue some of the engagements.

For example, I'll give you one creative technique that they did.

I mean a lot of the times, we demonstrate TrueCut-rendered content.

It's either on like a very fancy Sony X300 monitor or a very large CLED screen from Sony.

But another way to do it is on high-end LG OLED TVs.

And so in order for us to demo some of this content, we actually created a TrueCut app that's on -- I mean you could probably go online and look at the LG app site and you'll find a Pixelworks TrueCut app.

You have to have a password and login to get in.

It's not for consumer, but it is a way for us to allow some of our targeted customers to actually view content on their home TVs.

So with all that said, it's definitely slowed us down.

Whether this year major announcements are out of the question or not, too soon to say on that.

Okay.

That's a great perspective.

One last question.

Although I love getting your detailed responses, hopefully this will be a shorter one, Todd.

You mentioned in your prepared remarks and in past calls about hopefully to see kind of a halo effect of phones getting into the market with good reviews and inspiring and encouraging other OEMs to accelerate their plans to adopt Iris in their mobile phones.

You had some great ones here like with the OnePlus and others.

Any examples that you can describe about the reactions you've seen from some customers either that you have been working with or accelerating plans or ones that have come to you since then?

Twofold.

We've recently hired a couple of basic engineers and some software engineers, which were part of the critical reqs that I had announced.

And the individuals we hired were very qualified.

And when I dug into why these individuals came to us -- because we compete for people in Shanghai with many other companies trying to hire.

And many of them said because of the reviews on the products.

They got -- they wanted to work at a company that was at the advent of changing the display experience in mobile.

And then yes, customers -- we have several new customers in the pipeline that -- we knew who they were, they knew who we were, but I would say that the validation by these phones hitting the market with extremely positive editorial review and performance reviews was part of the equation.

(Operator Instructions) Next question will be coming from the line of Suji Desilva with Roth Capital.

Maybe a follow-up -- a similar question to maybe what Richard was asking.

Given that this is a value-add feature that seems very valuable, the high-quality viewing of content, have you seen the customer sell-through kind of indicate that those -- the phones that you're enabling have kind of more interest among the consumer base, the mix?

Has that evidence started to play out now that you have several models in the market and have been there for a few quarters?

Any color there would be helpful.

So some of our customers actually -- some of the features we provide are always on, calibration, some of the tone mapping.

They're always-on features.

The customer doesn't have the ability to turn on or off the feature.

But some of the features we provide, the customer has the ability to turn it off and not view it or turn it on, depending on the content they're watching.

And so we do have end customers that track consumer behavior and how often they turn it on or if they turn it on and leave it on.

And what we've seen is positive evidence there that people -- that consumers that bought these phones want to keep the features on.

And more people, as they discover them, will keep them on, which is -- it's a good indicator, right?

And then as far as a halo to new customers, I think the previous answer I gave is a good one.

I mean to me, the right halo will be -- as you can see, we have customers both in the midrange phone product line and we have customers at the flagship level.

And one of the indicators that we're looking for and we're pushing for hard is to have the halo effect of these high-end flagships and all the benefit that we're bringing there to be demanded by the product management teams of the midrange phones that are marketing to their end markets.

And we have seen recently -- I would say previously, before these announcements, we had some product marketing managers of these large phone companies that manage the midrange phones really focused on cost, cost, cost, not differentiation.

Now adding our midrange processor does really not add that much to the cost, but if you're so focused on cost, you don't really open up your mind.

We have seen, especially in India, where they care about the cinematic experience, where they view a lot of video content over their phones, the product marketing teams wake up and demand this kind of experience in midrange phones.

We'll see if that spreads out to design wins in that category, but the preliminary indicator looks good.

Now that's a great kind of color I was looking for.

And then a question on -- I mean, Todd, you've been through enough of these phone cycles in your career to know -- is this a cycle where if things continue to be difficult that the phone companies think about despec-ing the phones, reducing the cost of display, going to lower refresh rates?

Or is that just not an option for them given that 5G upgrades or the like might demand this and -- even cost elasticity, price elasticity is not the driver of the phone upgrades.

Any thoughts there would be helpful as well.

Right now, the way I see this is I don't see it going backwards.

We have a customer that approached us, a new customer, but they predominantly target low-cost phones, right, for Africa and Southeast Asia.

And they were not a customer I thought would approach us about a high-frame-rate display, but they want to put a high-frame-rate display and I think they're targeting an under-$125 phone.

And there's a different set of challenges that they have to go through to do that high-frame-rate display and they're seeing if we can help them there.

I think -- I just put that as a proof point down.

I feel that the advent of high-frame-rate displays is not a flash in the pan that -- just like 5G is not a flash in the pan.

Within 3 years, my guess is 2/3 of the phones sold will be 5G phones.

I believe that within that same time frame, at least half the phones sold will have at least a 90-hertz screen on it or more.

So we're in the middle of this wave.

Now the question is do people want to have -- just putting a 90-hertz screen or a 120-hertz screen, it actually creates some problems.

It makes the experience a little smoother in certain areas but it creates problems.

Our solution solves many of those problems.

So the question is how many of those people that put high-frame-rate screens want to continue to solve the other problems and deliver an overall premium display experience.

And that's -- we're going to try to make that as large of an attach rate to those high-frame-rate displays as possible.

Okay.

So not really an optional option.

(Operator Instructions) We don't have any further questions.

Please continue, presenters.

All right.

Thank you, operator.

I think we'll just conclude at that -- at the last question.

For everybody listening, stay safe.

Thank you for your continued interest in Pixelworks, and we look forward to updating you in the future.

And with that, this concludes today's conference call.

Thank you, everyone, for your participation, and you may now disconnect.