Pixelworks, Inc. Q2 FY2025 earnings call

• TrueCut Motion business: Recently accredited with 3 new theatrical releases, titles using TrueCut Motion have achieved over $4 billion at the box office. Avatar: The Way of Water will return to selected IMAX screens in October using TrueCut Motion. Streaming services and home entertainment devices are engaging to roll out the format.
• Pixelworks Shanghai subsidiary: Mobile revenue had a similar profile to prior quarter with residual demand; strategy focuses on low-cost mobile graphics accelerator and premium gaming experience. Realme P4 series uses Pixelworks X7 Gen 2 visual processor. Home and enterprise revenue increased over 20% sequentially. Shanghai subsidiary targets profitability in Q4 2025. Strategic review process underway with potential new ownership structures.
• Adjacent revenue opportunities: Transcoding has a purchase order from one customer to be fulfilled in Q4; ASIC design services have a pipeline of engagements; IP licensing has expanded discussions with third parties.

In the second quarter of 2025, revenue was $8.3 million. The breakdown of revenue was: Home and enterprise revenue was approximately $7.1 million, and revenue from mobile was approximately $1.2 million. Non-GAAP gross profit margin was 46% in the second quarter of 2025, compared to 49.9% in the first quarter of 2025 and 51% in the second quarter of 2024. The sequential decrease in gross profit margin was due to a unique mix with a new product ramp in home and enterprise, but yields were better than expected leading to gross margin above the second quarter guidance range.

For the third quarter of 2025, total revenue is expected to be in the range of $8.5 million to $9.5 million. Non-GAAP gross profit margin is expected to be between 47% and 49%. Operating expenses are expected to be in the range of $8.5 million to $9.5 million on a non-GAAP basis. Non-GAAP EPS is expected to range between a loss of $0.70 per share and a loss of $1.02 per share.

Q: Maybe first, Todd, you could talk about why your mobile customers in China in the premium side are emphasizing custom ASIC versus your standard merchant products?

A: Yes. The main driver is they want differentiation. They want something that the other phone -- I mean, Suji, it's a flat market. I don't expect high growth in the overall mobile market. I expect the Chinese OEMs to try to expand globally beyond their reach where they don't have strong market shares. They're clearly very strong in China. They're reasonably strong in Southeast Asia. They're not that strong in the rest of the world. With the exception -- you could say at the very low end, like in Africa and emerging markets. But if you look in the premium segment, which is where your question is, right, they have very little position in developed countries. Those countries are dominated by Apple, Samsung and to some degree, Motorola, and Google. Frankly, Google is doing okay right now with the Pixel. So our target customers are these Chinese OEMs for the most part. We talk to others, but for the most part, Chinese OEMs. I think as we go to an IP sale, it expands that horizon for us. But if you look at the specific Chinese OEMs, they're in a hypercompetitive market. My personal belief is you'll see consolidation in that market either through attrition or M&A. There's 1 or 2 too many large or larger companies, but the market is not there to support all of them, in my opinion. So what you're going to see is a hypercompetitive environment. And in the premium segment, they're going to want to differentiate and especially in the geopolitical environment we're in showing technology leadership. And so buying a standard product that is similar across the board doesn't give them that differentiation. The current 2 AP manufacturers really don't give them much differentiation because they sell them the same APs across the board. So one way for them to differentiate, and if you go look at these customers and they're premium phones, they're not just putting a custom visual processor in. I think one of Xiaomi's last phones, they announced 4 custom chips inside their phone from pre-ISP, AI enhancement, visual processing, what they call display chip, which is their own custom DDIC. So these Chinese manufacturers are very focused on trying to bring their own intellectual property into the phone. And one way to do it is work with partners like us on custom solutions.

Q: And just as a follow-up on that, after you do this design work for a customer, would you be the one manufacturing the chips and selling it to them? Or is this meant to be more of a royalty model where the customer takes over the manufacturing?

A: There's only one Chinese -- well, that's not true. There's 2 Chinese OEMs that produce their own SoCs. In that particular case, it would be design services and IP. Although they still use external visual processors, none of them have integrated our capabilities into the AP yet. The other manufacturers are going to differentiate by ancillary chips. So to answer your specific question, if it's an ancillary chip opportunity, we would do the production. If it's somebody who is trying to integrate this into their own apps SoC, it would probably be a combination of IP and design services.

Q: And then maybe a question for Haley. The transcoding onetime customer, you have the PO now. Is that revenue hitting in the third quarter or the fourth quarter? And maybe you can give us some idea of the magnitude of how much that's helping the second half?

A: Yes, that would be hitting in the fourth quarter. Magnitude, I don't know that we're going to share the magnitude right now.

Q: And maybe one last one for Todd, and I'll pass it along. Todd, just kind of you said that Pixelworks post the -- what's going on with the Shanghai division restructuring-wise or strategically would make kind of a different post that transaction, Pixelworks. Maybe give us some sense of how Pixelworks will be different pre and post that transaction to the best of your ability. I know it's an ongoing process, but it would be helpful to understand...

A: It's too early to give any color on that, Suji. I appreciate the question, and as soon as I'm in a position to give color in that regard, I will.

Q: Really interesting commentary on the ASIC design and IP. I mean, I guess my question would be, how broad does that go with these prospective customers? Is it limited to the smartphone AP? Or can your IP be used in other components or other markets?

A: Good question, Nick. No, it is not limited to smartphone only. I mean we've already had -- some of the prescriptive engagements we've had and have been in the tablet area. There's a clear need to improve the performance -- display performance, visual performance in tablets. It's a growing segment. And then this up-and-coming AR/VR market, whether it's augmented reality glasses or complete virtual reality headsets, there is a need to utilize technology like ours in these applications. There's also people -- I mean, there's more, I'll call them, journeyman markets from LED panel walls to monitors, gaming monitors. So we clearly are too small to go build products for all these environments. But if we open up from an IT and design services and collaboration standpoint, we can pursue more of these adjacent markets.

Q: Seeing strength in the home and enterprise market, I mean, can you just talk about the product market fit with your new SoC that's driving this recovery? What about the new product is driving that strength?

A: Yes, no problem. I don't want to be misrepresented here. The overall market, we have a strong position in 3LCD, well over 90% share, okay, from what I can tell. So the overall market, even though our core sequentially -- and then even with guidance, we're going up a little bit, our overall market, I would say, is flat, okay, the market we sell into. But when we are ramping a new SoC, which happens to be a higher ASP than our old SoC, initially, the customers need to put in production-based inventory, some buffer inventory. So they'll pull harder on those new chips than they're on -- than what their actual production is, at least for a period of time, right? So we see -- the reason we're seeing some growth is partly because of the higher ASP of the mix and partly because of the stocking of this new chip. Whether that's sustained pull-through in 2026 or not, will completely depend on the end markets.