Kopin Corp (KOPN) 2002 Q1 法說會逐字稿

At this time, I'll turn the conference over to Dr. Fan. Please go ahead, sir.

Thank you. Good afternoon, everyone, and thank you for joining us for Kopin's first quarter 2002 conference call. With me today is my CFO, Richard Schneider.

Before we get into the details of the quarter let me spend a moment on the format of today's call. First, I will discuss the first quarter highlights from our III-V and CyberDisplay businesses. Richard will provide a detailed review of the numbers, and share our perspective on the second quarter. I will wrap that up by talking about strategy in the coming months, and then we will take questions. First, Richard will first read the Safe Harbor statement.

Thank you, John. During today's call, taking place on Tuesday, April 23rd, 2002 we will make forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. These statements are based on the company's current expectations, projections, beliefs, and estimates, and are subject to a number of risks and uncertainties. The technical risks include, but are not limited to, demand for our CyberDisplay and III-V products, market conditions, the company's ability to ramp-up production at its manufacturing facilities, and other factors discussed in the company's 10-K for the year ended December 31st, 2001, and other documents on file with the Securities & Exchange Commission. The company does not undertake any duty to update any statements made during today's call.

And with that, I will turn the call back over to John.

Thank you, Rich. I hope all of you have had a chance to review the first quarter financial results in today's afternoon's news release. Let me start by saying that I'm very pleased with the direction of our business. Our first quarter revenue increased 14 percent sequentially, to 17.6 million, driven by the continued streams [phonetic] of our CyberDisplay product line. Our net loss improved sequentially to 3.2 million, or five cents per share in the first quarter. Now, let's look at the performance of each business, beginning with III-V. In the March quarter, typically a slow period in the industry, we had a revenue of 7.7 million, which was flat with the fourth quarter of 2001. The first quarter started out slow, [indiscernible] of our remaining inventory for the fourth quarter. But by the beginning of February our customers resumed ordering, and orders steadily increased throughout and through the end of this quarter.

Based on discussion with our customers, it appears that the wireless handset OEMs are beginning to ramp production of new multi-mode, multi-band phones designed to handle data applications. To accommodate OEM demands for handset platforms with greater flexibilities, component suppliers are designing chips that can handle different handset [phonetic] functionalities. Many of our customers are now designing their new chips with in gap [phonetic] HBTs.

Kopin, of course, is the largest merchant supplier of HBT transistor wafers in the world. We are also the largest supplier in the HBTs to PA manufacturing in the world. We expect that increased temperature stability and performance enhancement of in gap transistors will accelerate the ship to in gap's HBTs. And we believe Kopin is superbly positioned to benefit by this transition.

Concerning our next generation, which we call second generation HBTs, you may recall Kopin presented early this month at the MANTECH Conference in San Diego. At that conference, our engineers discussed the performance enhancement Kopin has recently achieved in [indiscernible] HBTs, in the [indiscernible] HBTs using new alloys and new process called Ganga X1 [phonetic].

Ganga engineering will enable us to condition our [indiscernible] competition's carefully and systematically to control the ban [phonetic] gap grading and optimizing circuit speed and power efficiencies. By engineering the ban gap characteristics of [indiscernible] within the gain, and the [indiscernible], the Kopin team has developed a 3G [phonetic] platform with increases in DC current gains, and also in current power frequencies. We expect reduced power consumptions, lowering operating voltage, and enhanced DC and I [phonetic] performances over existing PA's.

Now let me go to the CyberDisplays with you. In the first quarter we continued to expand our penetration in the camcorder market. Strong orders continue to come in for our top three customer electronics customers. Matsushita, Samsung, and JVC. In addition, we entered two new customers, MKE and Hitachi, thus [indiscernible] our CyberDisplay platform to our fourth consecutive quarter of double-digit growth. In February we announced MKE, which is really [indiscernible] North America, largest new [indiscernible] in the United States and Canada. In March we announced that CyberDisplay has been designed into four new models launched by Hitachi in the United States, Japan, and Europe.

Kopin's CyberDisplay 320M is now being incorporated into more than 30 percent of camcorders sold worldwide. Considering that we introduce our CyberDisplay for production really only short time ago around mid-1999, our [indiscernible] CyberDisplay's acceptance by consumer electronics marketplace cannot be understated.

Our ultra small, lightweight, easy-to-use, and power efficient CyberDisplays enable OEMs to reduce their time to market with new Cyber and new camcorder models, and it has given them the freedom to design models that are faster, smaller, and lighter than their predecessors.

I have already touched on the strong diversification of our camcorder customer base. But it is also important to understand CyberDisplay's platform is really not tied to a single application. Especially since we have several display products, both color and monochrome, as well as different resolutions. CyberDisplay is incorporated into a handheld GPS device offered by [indiscernible]. And as of last week we announced that we'd be shipping our CyberDisplay 640M imaging system to Diversified Optical Products based in Salem, New Hampshire. Diversified Optical is integrating our display into two new [indiscernible] imaging products. One is used by border patrol agents for night time surveillances, and the other one is used by soldiers to enhance target recognitions. Switching for CRT, which we are using now to CyberDisplay has doubled the battery life of those products. We are currently seeing a lot of activities in designing our displays for a whole wide range of variety of consumer, industrial, and military applications.

Rich will now take you through the numbers.

Thanks, John. Total revenue for the first quarter was 17.6 million, versus 15 million for the first quarter of 2001, and 15.4 million in Q4 of 2001. Product revenues were 17.4 million for the first quarter of 2002, compared with 14.4 million in the first quarter of 2001, and 14.8 million in the fourth quarter of 2001, a 17 percent sequential increase. III-V product revenues for the first quarter were 7.7 million, essentially flat compared to 7.8 million in Q4 of 2001. III-V revenues were 10.8 million in Q1 of 2001. CyberDisplay sales were 9.7 million in the first quarter, compared to 3.6 million in the first quarter of last year, and 7 million in the fourth quarter of 2001, a 39 percent sequential increase, and the third consecutive quarter of record revenue. CyberDisplay revenues were primarily driven by new camcorder customers and the strength of the consumer electronics market.

Net loss for the first quarter was 3.2 million or five cents a share, versus a net loss of 6.8 million or 10 cents a share in Q1 of 2001, and a net loss of 7.1 million or 10 cents a share for the fourth quarter of 2001. Cost of goods sold was 84 percent of product sales in the first quarter of 2002 versus 114 percent for the first quarter of 2001, and 101 percent for the fourth quarter of 2001. The decrease in cost of goods sold resulted from yield improvement, the absorption of fixed costs from increased sales volume, and lower raw material costs. Research and development expenses were 19 percent of revenues for the first quarter. We would expect R&D to be approximately 20 percent of revenue next quarter.

Selling, general, and administrative expenses were 17 percent of revenues. This was consistent with historical levels. By the second quarter we would also expect SG&A to be in the range of 15 to 20 percent of sales. Cash equivalents as of March 31st, 2002 were 104.8 million, compared with 104.4 million at December 31st, 2001. DSOs were 40 days. Included in long-term other assets is our holding Micrel [phonetic] stock valued at 20.3 million.

ASPs for HBTs were approximately $500 for the quarter. Capital expenditures are expected to be about five million for 2002. We were cash flow positive for the quarter. The John Hancock fab has been qualified by one customer, and we expect to be qualified by additional customers this quarter. We are currently running at approximately 60 percent utilizations in the HBT.

Our 10 percent customers for the quarter were Conexus [phonetic], JVC, Samsung, and Matshutsa, or Panasonic.

In the first quarter of 2002 Kopin adopted Statement of Financial Accounting Standards Number 141, Business Combinations, and Statement of Financial Accounting Standards Number 142, Goodwill and Other Intangible Assets effective January 1st, 2002. These statements require that goodwill and certain intangible assets not be amortized. And they also require the company to review them and write them down by the end of 2002 if they're determined to be impaired. The company expects to complete its evaluation by the end of the second quarter of 2002. As of March 30, 2002, we had 12.6 million of goodwill, and one million of other intangible assets which will be reviewed for impairment.

As for the outlooks for the second quarter. We expect a double-digit sequential revenue growth in each of our III-V and CyberDisplay product lines. We anticipate the demand for multi-band phones with added features for new carrying offers will fuel growth to both III-V, while strong sales to consumer electronic customers and accelerating shipments for military applications will drive CyberDisplay revenue growth in the second quarter.

And with that, I will turn the call back over to John.

Thank you, Rich. I want to leave you with three key points. First, yes, although we have a very flat quarter with III-V business in March. However, we have actually noticed our HBT customers beginning to ramp productions of their components for new wireless handsets. We expect double-digit growth, sequential growth in the second quarter.

The fundamentals of the handset business, that is new wireless services that will require better power efficiency, higher speed, and clear [indiscernible]. And we will remain the largest [phonetic] leader in the market, driving performance and processing enhancements.

Second, our CyberDisplay continues to enjoy rapid growth, fueled by diverse customers and applications. Our displays are now in over 30 percent of all camcorders sold worldwide. We are quickly gaining revenue momentum in markets such as military, law enforcement, and non-camcorder consumer electronics for one simple reason. We have established CyberDisplay as the world's best, smallest imaging devices for [indiscernible] environment.

Third, we are not and have not been resting. We've been very active in R&D, in both III-V and CyberDisplay. We are very encouraged by our advances. So we expect to continue to come out with new products and new process in the coming year, in the coming months. Thank you.

Now, before I go to Q&A, I want to remind everyone that our Annual Meeting of Shareholders will take place at 10 a.m., Thursday, April 25th, at the Fleet Boston Building, 100 Federal Street, in Boston. Please come and join us. At this Annual Meeting you will have a chance to see some of our new product demos, featuring our CyberDisplays, including the Sanyo handsets that were introduced in the SEBAS [phonetic] Show in Japan, and SEBAS Show in Germany.

Now, Richard and I would like to open up for questions. Operator.

CALLER INSTRUCTIONS.)

Michael Masdea, Credit Suisse First Boston.

Hi, this is Natalie Wright in for Michael Masdea. Congratulations on the quarter, guys.

Thank you, very much.

I just have a couple of questions. For HBT I was wondering if you can update us on your newer - how your newer customers are doing? And if there are any more customers on the horizon that you can sign-up soon? And how that would impact revenue?

Yeah, the question is, from Natalie is `how are current customers doing? And whether we have new customers in the wing?'

Our current customers are in general doing very well, especially the strong ones. In fact, this first quarter we actually did business for all our customers that were last year. Some of the customers should begin to come back.

Now, with the new customers we will be working very actively, as you well know, we added Alpha and [indiscernible], and we announced these two new customers. And we will continue to have new customers coming in, and as time is appropriate we will announce them.

Okay, great. And then I was wondering in terms of pricing pressure, where are you seeing more pricing pressure? On in gap or out gap?

The pricing pressure, whether it's in gap, out gap, Rich do you want to make a comment to that?

There - from our standpoint, we're agnostic. And as the pricing is basically the same for both products.

Okay, great. And then, in terms of CyberDisplay. I was just wondering what type of reception you've been getting for your 3G device in Japan so far?

The question is `are we making penetration to a 3G phone?' First of all, I encourage you to come to see the Sanyo phones this Thursday. We are actually making a lot of progress there. We are working with several companies, some of them we are not yet ready to announce yet. And I would say more demo models will be coming out by the end of the Summer. So a lot of activities there, too.

Great. And I just have one more last question.

In fact, to answer your question, in addition to that. We're going to see a lot more activity just on, in addition to phones. A lot of other consumer electronics applications, especially in Japan, seems to be people are designing them now.

In terms of the other opportunities, and also the CyberDisplay and 3G phones, I was just wondering how pricing and margins relate to, you know, your products that go into camcorders?

Yes. I think camcorders are doing well. Our camcorder products are monochrome. We are not creating, and we're moving more and more to color. So the color phone display is obviously much better margins. And then, of course, more military, industrial applications are 640 and 1280, they have very, very good margins. So we always have the CPU strategy to increase the resolution, and increase our margin. Even then, our monochrome display for camcorder, as you well know, we cross the line and then we are profitable now.

Great. I have no further questions.

Thank you.

Kalpesh Kapadia, Unterburg.

Congratulations, guys, great quarter.

Thank you, Kalpesh.

Question for Rich. What was the depreciation level in the quarter?

Depreciation was about $3 million.

So in other words, you could become operating breakeven next quarter?

Well, obviously that's dependent on where sales fall-out.

Right. And in terms of competitive dynamics on the HBT front, and is there any kind of market share shift between you and your nearest competitor, at any of your customers? Could you care to comment on that, John?

Yeah. The question is `our market share.' I think with this package, really the most exciting period of time to manage. But we're pretty confident, and we actually gained market share. We kept our current customers, and yet we're adding new customers which a few years, or two years ago, we had no time to really not result to service them. And so, now we're adding new customers, and kept all our old customers. And so, we are gaining market share right now.

And within your current customers, as well, I believe?

Excuse me, I'm sorry?

Within your current customers, as well, you are gaining share?

Yeah. We are absolutely getting all our current customers plus we're getting new customers. And I think this trend will continue, yeah. See, the HBT is getting, as they say, there is more subtlety there with the eyes. And I think many customers discovered that.

In terms of [indiscernible] feature, Rich?

It was about 86 percent four-inch, 14 percent six-inch.

And in terms of customer break-down, you give a little flatness [phonetic] for customer over 10 percent. Do you have actual numbers?

And the ASPs for HBTs is at 500, or six-inch ASPs are how much?

Well, we just compute an ASP for the whole business. That's a weighted average ASP. Based on a four-inch equivalent.

And what about CyberDisplays?

Around 950. 9.50.

And capital expenditure was five million for the remainder of the year, for the total 2002?

For the whole year we expect it to be about five million.

Thank you very much.

Sure.

Dale Pfau, CIBC World Markets.

Congratulations, gentlemen. Nice quarter, nice outlook.

Thank you very much.

First question on the III-V space, as you're picking-up share it looks like some of your competitors are, you know, disappearing from the scene. Could you also talk about how pricing is on wafers, and that probably is also working into your favor?

Yeah, the question is that `our vendors, the suppliers of the [indiscernible] to us?' Yes, we're seeing a very interesting also, because as we're getting so big all the mature vendors basically come to see us all the time. And we're getting, enjoying some benefit from that.

And could you talk a little bit about any shifts that you're seeing among your customer base in terms of the technologies? Are you seeing a bigger demand say from CDMA being driven by 1X? Or a bigger demand from the GPRS? And has anybody been talking to you about III-G requirements on your dye?

Yeah, the question, of course, you know, once they're removed to the ultimate user. And so we, our customers which are really the chip manufacturers share some of the cost data with us, but not all the data. So I'm just going to make some comments in general.

I think that it is very clear all our new customers, every new customer designed in in gap. There's no new out gap customer. And so that's a very important thing to know. And the reason the in gap is good is they're better similar properties which also give you good better linearity, which is necessary and is very good for advanced [indiscernible] to have.

Also, in gap also allow you to in some way [indiscernible] inside the chip manufacturers, fab. So that's one thing. A second is I think CDMA especially, which really requires in reality [indiscernible] performance, so universally almost everybody has in gap. Okay, even the out gap people are looking to in gap.

So I would say right now, as the [indiscernible] get into CDMA 1X I think that our HBTs use a lot more now. Now, whether it's a GPIS or CDMA X, I really do not know the ratio. It seems to be our customers design for a lot of things, including wide band, wireless LAN, too. We see a lot of new designs, not just for PA, for wireless handsets, so it seems to be [indiscernible] applications also. So, and they are all coming out second quarter, second half, or maybe early next year.

Great. Thank you very much, guys. Keep up the good work.

Yeah, I want to make one more comment. I think a lot of people underestimate what's going on in the second generation HBTs. I think that Tiverly is going out and getting HBTs, and really deserve a lot of attention because they're really going to have a lot of PA's in power [indiscernible] efficiency and performance, and yet our customers do not need to change really anything. Maybe it's just a [indiscernible] in their modules. So they're very important event.

Thank you.

Chris Versace, Friedman Billings Ramsey.

Congratulations, guys. Just a couple of quick questions for you.

Thank you.

If we take a look at the gross margins you posted in the quarter, you kind of weight them. Were they more due to the increased volumes in the CyberDisplay and that business, you know, passing through? And being gross margin positive? Or was it more on the III-V business?

The volume really impacted the CyberDisplay, and getting back to the question that Dale Pfau asked, the lower sub-straight pricing also helped significantly in the III-V. And there was some absorption of fixed cost also.

Thanks. And so, Rich , were both businesses profitable in the quarter? On the gross profit line?

Yes.

Okay. And then, if we take a look at the SG&A stuff announced sequentially, I know you kind of gave, you know, I think you said 15 to 20 percent, if I remember for the second quarter. What are some of the changes that allowed you guys to kind of continue to ratchet down the SG&A level, and run a little leaner? Even as you're ramping up the other fab?

Well, a big piece of it was last year we did a lot of R&D work, and there was a lot of associated legal costs, and patent costs, and some of that. And a lot of that is now behind us. And so, that was probably the single biggest issue, or reduction in SG&A this quarter.

Okay. And then just some kind of nits here. If we look at the - is there any way you can kind of give us a mix on the III-V business? How much was in gap, how much was out gap?

Yeah, in gap was 30 percent, out gap was 66 percent, and there's a few percentage for other.

Okay. And just - I know you said, somebody asked the question about the 35 ASPs, you know at $500 and it's a weighted cost. But is out gap and in gap above that, kind of in general?

Yes, only from the standpoint that our larger customers, i.e., Conexus is predominantly an out gap customer, and our pricing is really volume based. So, but for equal size order, theoretically the out gap and the in gap would be about the same.

Okay. And then just two other quick ones. The CyberDisplay, any break-out in the business there at camcorder versus, you know, John had mentioned some industrial, and military business? How much was the camcorder?

It's still predominantly camcorder.

Okay. And one last thing. John, just in terms of, you know, data points for us to think about on the progress in the CyberDisplay business, is there any kind of design wins, or anything like that you can talk about?

Yeah, I think, or course, when we have good design wins, and when the product gets to the shelf, you know, we usually announce it when the product is about to go to the shelf. We see a lot of designs. I think the next generation's design will be an interesting design. It will be non-camcorder design wins, mostly industrial design. And this is the area we are focusing a lot. And then, of course, later this year a good milestone will be a production order for 2.5-G and 3G phones. That's what we've been working for last 18 months, and the momentum is still very good there.

Okay. And then let me just sneak one or two others in. And gain HBT still at the end of the year, John?

The HBT, we of course, we are making a lot of progress. We have not officially introduced as a product. As you know, when you introduce a product you have a lot of data to back it up. But we're doing very, very quick improvement there. We expect the product will be introduced, and the people will begin designing hopefully either late this year, or early next year. And that will be - that, of course, you've got to understand that in gap and out gap is, both in our same systems. And basically, the cycle time and everything is the same. And that's why Rich say the pricing really for the same volume base is the same. But [indiscernible] because much more complex, and it is involved with multiple elements and graded, but it has a performance is so significant, so fast, people will be working with them always come back and say `wow, this is really good!' So we'll just see how it come out.

Okay, thank you.

Pierre MacCagno, Needham & Company.

Congratulations on the quarter.

Thank you.

Yeah, I had a question in terms of the inventory of the [indiscernible] wafers. How is that at this point?

It's probably a little bit lower than it was in Q4. But it's at normal levels.

At normal levels?

Yes.

And that is like - what does normal level mean?

Well, we basically look at next quarter's production, and then schedule deliveries of wafers. And so the levels depend on that.

So that's the same for four-inch, or six-inch?

That's correct.

Okay. So what's basically - I mean did this, something that happened this quarter? That's normal levels?

Yes. I mean we had talked about it all last year, that we had sort of supply agreements that we took a long-term view to the business, and we honored our supply agreements, even though some people didn't. But, so we were a little bit heavy during some of the last quarters, but now we're getting it to a more normalized level based on sales projection.

Okay. Do you have the number for your capex?

For the quarter?

Yeah.

About three-quarters of a million.

How much?

Three-quarters.

Okay.

Roughly between 18 and 20 million.

Okay. And in terms of your III-V business, what percent of that is wireless applications at this point?

It's almost all for wireless. Optical propping area, although it's not zero, it's not really that significant.

Okay. In terms of your gain on HBT, are there any competitors that have similar products at this point?

Well, I'm not aware. But people obviously are attempting it, and trying it, but this is a very, very difficult alloy [phonetic] database to do. And we've been in this area for more than a couple of years, a year and a half now. We're leading the field right now.

Okay. And can you specify a little bit better, I mean what is the real big difference? I mean is this a quantum jump in terms of performance?

Well, it depends on, you ask me the question `is it a quantum jump?' It all depends on the eye of the beholder. Suppose if this gave you five or 10 percent more efficient in the power, in the power amps, a lot of people in the field think it is very significant.

Okay.

Yeah.

And so is that the main issue, five to 10 percent.

And power, and speed, and the voltage. You also can give you much lower turn-on voltage, so battery can be much lower voltage. Maybe as much as three-tenths of a volt lower.

Three-tenths of a volt lower, huh. Okay.

Yeah, it's better. Everything, temperature is best. It is all-around profitable.

Okay.

Yeah. Remember this is still being developed, and so we shall see. But it looks good right now. Yeah.

Okay. Thank you very much.

Kalpesh Kapadia, Unterberg.

John, following up on the earlier comment, what are the, you know, the power efficiency is higher on the 2G HBT, and can you use it for the base station applications, and some of the optical applications besides the handsets?

Right.

Yes. The answer is `yes.' It's being looked at for all applications, probably by several people, yeah. It really is very interesting. It's running a higher speed, a lower voltage, high efficiency, it just seems to have a lot of interesting features.

And on the HBT side, I know you mentioned that it's predominantly a wireless handset customers. Is there anything on the testing side? Or all the optical side, like Agulent, or Nortel? Anything happening there?

We should not go to specific customers. But now we've been shipping in gap, the first generation, those in gap HBT to Nortel and Agulent for several years, both for their optical network and the industrial testers. All I can say is in the first quarter we see some activities for our old customers.

Sure. And on the, you know, two of the large players, like Sony and micro devices, that you've always dreamt of getting them both in the CyberDisplay and the HBT side. Any progress on that front?

The question is `Sony which, of course, used their own poly silicon display in their camcorders.' They have about 35 percent market share, and [indiscernible] uses out gap HBT in their [indiscernible]. And they [indiscernible] by their MBE [phonetic]. The question is `is there any chance or any progress on getting some of their business?' We always try. I think both of the customers are very interesting to us, and we will work very hard for that. And so when things are ready, we'll let you know.

Thank you. And congratulations again.

Thank you.

This does conclude our question-and-answer session. At this time, I'll turn the conference back over to Dr. Fan for any additional or closing comments.

Yeah, thank you very much, everybody, for joining us for this first quarter 2002 conference call, and we're looking forward to talking to you again. Thank you.