About Pixelworks, Inc.

Pixelworks creates, develops and markets video display processing technology for digital video applications that demand the very highest quality images. At design centers around the world, Pixelworks engineers constantly push video performance to keep manufacturers of consumer electronics and professional displays worldwide on the leading edge. The Company is headquartered in San Jose, CA.

For more information, please visit the Company’s Web site at www.pixelworks.com.

Note: Pixelworks and the Pixelworks logo are registered trademarks of Pixelworks, Inc.

Non-GAAP Financial Measures

This earnings release makes reference to non-GAAP gross profit margins, non-GAAP operating expenses, non-GAAP net loss and non-GAAP net loss per share, which excludes restructuring charges, stock-based compensation expense and additional amortization of a non-cancelable prepaid royalty, which are required under GAAP. The press release also reconciles GAAP net loss and adjusted EBITDA, which Pixelworks defines as GAAP net loss before interest expense and other, net, income tax provision, depreciation and amortization, as well as the specific items listed above. The Company believes these non-GAAP measures provide a meaningful perspective on the Company's core operating results and underlying cash flow dynamics, but cautions investors to consider these measures in addition to, not as a substitute for, its consolidated financial results as presented in accordance with GAAP. A reconciliation between GAAP and non-GAAP financial measures is included in this earnings release which is available in the investor relations section of the Company's website.

Safe Harbor Statement

This release contains forward-looking statements, including, without limitation, statements with respect to the Company’s growth opportunities, product shipments, product demand, customer engagements, and the Company’s potential and position for the future, statements made by Mr. DeBonis about the Company’s digital projection and mobile businesses, and statements with respect to the business outlook for the fourth quarter of 2016, including revenue, gross margin and operating expenses, within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements may be identified by use of terms such as “begin,” “continue,” “will,” “believe,” “expect” and similar terms or the negative of such terms. All statements other than statements of historical fact are forward-looking statements for purposes of this release, including any projections of revenue or other financial items or any statements regarding the plans and objectives of management for future operations. Such statements are based on management's current expectations, estimates and projections about the Company's business. These statements are not guarantees of future performance and involve numerous risks, uncertainties and assumptions that are difficult to predict. Actual results could vary materially from those contained in forward-looking statements due to many factors, including, without limitation: our ability to deliver new products in a timely fashion; our new product yield rates; changes in estimated product costs; product mix; supply of products from third-party foundries; failure or difficulty in achieving design wins; timely customer transition to new product designs; competitive factors, such as rival chip architectures, introduction or traction by competing designs, or pricing pressures; risks related to licensing our intellectual property; the success of our products in expanded markets; current global economic challenges; levels of inventory at distributors and customers; changes in the digital display and projection markets; changes in customer ordering patterns or lead times; seasonality in the consumer electronics market; our efforts to achieve profitability from operations; insufficient, excess or obsolete inventory and variations in inventory valuation; the outcome of any litigation related to our intellectual property rights; our limited financial resources and our ability to attract and retain key personnel; and risks related to our restructuring plan, including whether the expected amount of the costs associated with the restructuring program will differ from or exceed the Company's forecasts and whether the Company will be able to realize the full amount of estimated savings from the restructuring program or in the timeframe expected. More information regarding potential factors that could affect the Company's financial results and could cause actual results to differ materially is included from time to time in the Company's Securities and Exchange Commission filings, including our Annual Report on Form 10-K for the year ended December 31, 2015 as well as subsequent SEC filings.

The forward-looking statements contained in this release speak as of the date of this release, and we do not undertake any obligation to update any such statements, whether as a result of new information, future events or otherwise.

PIXELWORKS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
				Three Months Ended															Nine Months Ended
				September 30,					June 30,					September 30,					September 30,					September 30,
				2016					2016					2015					2016					2015
Revenue, net				$	13,656				$	12,580				$	16,570				$	37,403				$	46,040
Cost of revenue (1)					7,099					6,165					8,292					20,839					23,561
Gross profit					6,557					6,415					8,278					16,564					22,479
Operating expenses:
Research and development (2)					4,442					4,504					6,145					14,621					18,568
Selling, general and administrative (3)					3,072					3,180					3,334					10,117					10,805
Restructuring					3					67					—					2,608					—
Total operating expenses					7,517					7,751					9,479					27,346					29,373
Loss from operations					(960	)				(1,336	)				(1,201	)				(10,782	)				(6,894	)
Interest expense and other, net					(99	)				(107	)				(105	)				(305	)				(317	)
Loss before income taxes					(1,059	)				(1,443	)				(1,306	)				(11,087	)				(7,211	)
Provision (benefit) for income taxes					183					117					(63	)				357					192
Net loss				$	(1,242	)			$	(1,560	)			$	(1,243	)			$	(11,444	)			$	(7,403	)
Net loss per share - basic and diluted				$	(0.04	)			$	(0.06	)			$	(0.05	)				(0.41	)				(0.31	)
Weighted average shares outstanding - basic and diluted					28,313					28,167					25,735					28,139					24,210
——————
(1) Includes:
Stock-based compensation				$	49				$	46				$	52				$	139				$	147
Restructuring					27					27					—					1,777					—
Additional amortization of non-cancelable prepaid royalty					—					—					(14	)				—					(14	)
(2) Includes stock-based compensation					401					392					524					1,222					1,442
(3) Includes stock-based compensation					334					268					443					495					1,401

PIXELWORKS, INC.
RECONCILIATION OF GAAP AND NON-GAAP FINANCIAL INFORMATION *
(In thousands, except per share data)
(Unaudited)
				Three Months Ended															Nine Months Ended
				September 30,					June 30,					September 30,					September 30,					September 30,
				2016					2016					2015					2016					2015
Reconciliation of GAAP and non-GAAP gross profit
GAAP gross profit				$	6,557				$	6,415				$	8,278				$	16,564				$	22,479
Stock-based compensation					49					46					52					139					147
Restructuring					27					27					—					1,777					—
Additional amortization of non-cancelable prepaid royalty					—					—					(14	)				—					(14	)
Total reconciling items included in cost of revenue					76					73					38					1,916					133
Non-GAAP gross profit				$	6,633				$	6,488				$	8,316				$	18,480				$	22,612
Non-GAAP gross profit margin					48.6	%				51.6	%				50.2	%				49.4	%				49.1	%
Reconciliation of GAAP and non-GAAP operating expenses
GAAP operating expenses				$	7,517				$	7,751				$	9,479				$	27,346				$	29,373
Reconciling item included in research and development:
Stock-based compensation					401					392					524					1,222					1,442
Reconciling item included in selling, general and administrative:
Stock-based compensation					334					268					443					495					1,401
Restructuring					3					67					—					2,608					—
Total reconciling items included in operating expenses					738					727					967					4,325					2,843
Non-GAAP operating expenses				$	6,779				$	7,024				$	8,512				$	23,021				$	26,530
Reconciliation of GAAP and non-GAAP net loss
GAAP net loss				$	(1,242	)			$	(1,560	)			$	(1,243	)			$	(11,444	)			$	(7,403	)
Reconciling items included in cost of revenue					76					73					38					1,916					133
Reconciling items included in operating expenses					738					727					967					4,325					2,843
Tax effect of non-GAAP adjustments					(10	)				4					65					(8	)				—
Non-GAAP net loss				$	(438	)			$	(756	)			$	(173	)			$	(5,211	)			$	(4,427	)
Non-GAAP net loss per share - basic and diluted				$	(0.02	)			$	(0.03	)			$	(0.01	)			$	(0.19	)			$	(0.18	)
Non-GAAP weighted average shares outstanding - basic and diluted					28,313					28,167					25,735					28,139					24,210

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