Kopin Corp (KOPN) 2002 Q2 法說會逐字稿

Please stand by.

The conference is about to begin.

Good day and welcome everyone to the Kopin Corporation second quarter 2002 financial results conference call.

Today's call is being recorded.

Please let me remind everyone that a replay of this conference call will be available from 8 PM Eastern time through Thursday, August 1st by dialing 719-457-0820 and entering confirmation code 632507.

You may also access an archive version of the call on Kopin's website at www.kopin.com.

With us from the company are the President and Chief Executive Officer, Dr. John C.C.

Fan and the Chief Financial Officer, Mr. Richard A. Sneider.

At this time, I would like to turn the call over to Dr. Fan.

Please go ahead, sir.

Thank you.

Welcome.

Good afternoon, everyone.

Thank you for joining us for Kopin's second quarter 2002 conference call.

With me today is our CFO, Richard Sneider.

The agenda for today's call will be similar to previous calls with me first providing an overview of Kopin's second quarter performance followed by Richard's review of the financial results.

Before opening the call for your questions, I would conclude with some comments of Kopin's strategy and direction going forward.

Before we get started, Rich will read the safe-harbor statement.

Thank you, John.

During today's call taking place on Thursday July 25, 2002, we will be making forward-looking statements as defined in the Private Securities Litigation Reform Act 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.

Potential risks include, but are not limited to demand for our CyberDisplay and [3,5] products, market conditions, the company's ability to ramp up production, manufacturing facilities, and other factors discussed in the company's Form 10-K for the year ended December 31, 2001 and other documents [filed] with the Securities and Exchange Commission.

The company does not undertake any duty to update any statements made during today's call.

If you have not received a copy of today's news release, it is available on our website www.kopin.com or even contact [Sharon Marrow] at 617-542-5300 and a copy will be sent to you.

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

Thank you, Rich.

I hope all of you had a chance to review our second quarter financial results in this afternoon's news release.

Let me start by saying I am pleased with the direction of our business.

Our second quarter revenue increased 18% sequentially to 20.8 million, driven by continuous strength of both our [product lines].

Our net loss improved sequentially to 1.6 million or $0.02 per share in the second quarter even as we continue to aggressively invest in R&D. [INAUDIBLE] look at both products starting with [3,5].

Let me remind you, that we would refer this product as [3,5] because we have to buy for elements [in threes] and five [collars] in the [INAUDIBLE] table.

In our [3,5] review, revenue for our compact semiconductor products climbed 23% sequentially in the second quarter to 9.4 million.

We saw increasing demand from power amplifier customers that we added in the last year as well as on customers whose business had been comparatively quiet in recent quarters.

It is important to know that much of those customers are still in the early stages.

They are not yet in large volumes.

Kopin is the largest merchant supplier of HBT transistor wafers in the world.

And we will continue to be one of the key differentiators.

New handsets with advanced features require more as well as high performance power amplifier per handset.

Kopin is also the largest supplier of InP HBT to power amplifiers manufactured in the world.

We expect to increase temperature performance in the performance of InP transistors to accelerate at a shift to InP HBTs.

And we believe Kopin is [supposedly] situated to benefit from this transition.

Many of our customers are now designing their new InP HBTs.

On the product development front, we continue to make significant progress where our next generation GaAs indium phosphide [INAUDIBLE] and we believe our expertise in wafer technology will enable us to provide excellent products to our [INAUDIBLE] customers.

Now, let us look at our product, CyberDisplay product line.

CyberDisplay's revenue reached a record of 11.4 million in the second quarter, representing an increase of 15% sequentially at 112% year-over-year.

We attribute much of this growth to a phase of new camcorders for [INAUDIBLE] such as JVC, Matsushita, and Samsung, each of which account for more than 10% of our total revenue during this quarter.

We have also continued our strong relationship with our two new customers, [NKE], which operates the Panasonic, North America and Hitachi.

The result is that we continue to gain market share, pushing CyberDisplay three times and into more than 30% all camcorders around the world.

Again, we would like to point out that we introduced CyberDisplay for [Warner] production study in mid 1999 and now we are shipping approximately 400,000 displays per month.

On [INAUDIBLE] in the electronic sector is much appreciated.

I already have touched on the strong divestiture of our camcorder customer base.

It is also important to understand that CyberDisplay platform is not tied to a single application especially if we have and are continuing introducing various display products both in [INAUDIBLE] and different resolutions.

Over the past several quarters, Kopin has demonstrated CyberDisplay's ability in applications beyond camcorders.

With potential contracts from commercial and military customers, including diversified optical products; we have a track in all the states.

In the second quarter of this year, we further expanded the CyberDisplay's application space and signing additional contracts, showcase-induced and CyberDisplay based products in the Society of Information Display Symposium in Boston.

The feature at this show, the emerging CyberDisplay in new products, including infrared digital camera, Nature Vision, imaging [INAUDIBLE] camera from [INAUDIBLE] designed and military surveillance camera for [FIR] systems.

In addition, visitors to our booth at the Symposium were able to wet their appetite for the future display of electronics by viewing the full color HBT quality image engine for [Kivi ElectroOptics] and the DVD quality 3-D image system for [INAUDIBLE] activities in designing of our display for a large variety of consumers, industrial and military applications.

Rich will now take you through the financials.

Thank you, John.

Total revenues in the second quarter was 20.8 million versus 9.2 million in the second quarter of 2001 and 17.6 million in Q1 of this year.

For the six months of 2002, total revenue was 38.4 million compared with revenue of 24.2 million for the first six months of 2001.

Product revenue was 20.1 million for the second quarter of 2002 compared with 9.1 million for the second quarter of 2001 and 17.4 million in the first quarter, an increase of 16% sequentially.

For the first half of 2002, product revenues were 37.5 million compared with 23.5 million a year ago. [3,5] revenues for the second quarter were 9.4 million versus 3.9 million a year ago and 7.7 million in Q1 of 2002, a 23% sequential increase and approximately 144% year-over-year increase.

For the first two quarters of 2002, [3,5] revenues were 17.1 million compared with 14.8 million in 2001.

CyberDisplay revenue was 11.4 million in the second quarter as compared with 5.3 million in the second quarter of last year and 9.9 million in the first quarter of 2002, a 15% sequential increase, excluding the impact upon [D] contracts of 700,000 and 200,000 for the second and first quarters of 2002 respectively.

CyberDisplay product revenue grew 10% sequentially.

CyberDisplay revenue for the first six months of 2002 was 21.3 million compared with 9.4 million in the prior year period.

Net loss for the second quarter was 1.6 million or $0.02 per share.

This is a net loss of 3.2 million or $0.05 per share for the first quarter of 2002 and a net loss of 15.2 million of $0.23 per share in the second quarter of 2001, excluding the net gain on the exchange of investments and impairment charge.

For the first half of 2002, the net loss was 4.8 million or $0.07, excluding the impact of the adoption of the new accounting standard on goodwill evaluation.

In the first half of 2001, net loss was 22 million or $0.34 per share excluding the net gain on the exchange of investments and the impairment charge.

Cost of goods sold was 77% of product sales in the second quarter of 2002 versus 168% for the second quarter of 2001 and 84% for the first quarter of 2002.

The decrease of cost of goods sold [INAUDIBLE] for greater fixed cost absorption for increased sales volume, yield improvement, lower raw material costs, and lower labor costs as we continue shift CyberDisplay back in packaging to our premier subsidiary.

Research and development expense were 19% of revenue for the second quarter.

The increase is attributed to new product development efforts.

Going forward we expect R&D expense to be in the range of 15-20% of revenues; that is if we continue our new product development initiatives.

Selling, general, and administration expenses were 13% of revenues.

The decrease in SG&A as compared to the first quarter relates to annual meeting expenses and certain information technology projects, which occurred in the first quarter.

SG&A is approximately 3 million lower than the second quarter of 2001 because as you may recall, in the second quarter of last year, we recorded roughly 1 million bad debt expense.

We had 500,000 of goodwill amortization, which was discontinued in 2002 with the adoption of the new accounting standard on goodwill and we had legal patent and maintenance expense of 1.1 million.

SG&A is expected to continue to be in the range of 10-12% in Q3.

Other income, net was 438,000 low in the second quarter as compared with the first because of the foreign exchange losses incurred by our Korean subsidiary resulting from the weakening US dollar.

As a reminder in the second quarter 2001, we had a $2.9 million gain on the exchange of investments.

Cash and equivalent as of June 30, 2002 were 112 million compared with 105 million at March 31, 2002.

During the second quarter, we generated approximately $3 million of cash from operations.

During the quarter, we also saw some of our micro investments, which neared approximately $4 million in cash. [ASP] for both products were consistent with normal 10-15% price decline we expected over the course of 2002.

JVC, Matsushita, Samsung, and [Skyworld] were our 10% customers during the quarter.

The DSOs were approximately 30 days and our investment in micros is currently evaluated at 9.4 million as on June 29, 2002.

The background on [3,5] four-inch wafers accounted for 80% of total [3,5] revenue and six-inch wafers accounted for about 20%.

InGaP wafers accounted for roughly 30% of sales.

Fab utilization for the company is running approximately 60%.

Year-to-date capital expenditure has been approximately 2 million and we expect this between 3 to 4 million in the second half of the year.

Depreciation and amortization ran roughly $5 million during [INAUDIBLE].

As we disclosed on January 1, 2002, we adopted the Statement Of Financial Accounting Standards No.142 for goodwill and other intangible assets.

In essence, it would require that goodwill be evaluated using a discounted cash flow method as opposed to the old method whereby goodwill is amortized over a period of time.

During the second quarter, with the assistance of an independent appraisal firm, we completed our evaluation and recorded impairment to goodwill of 12.5 million, which is shown at a cumulative effect with the change in accounting.

The outlook for 2002 third quarter.

Looking ahead into the third quarter, we expect a modest sequential increase in total revenue in both product lines.

We expect [INAUDIBLE] from HBT customers as well as orders from next generation CyberDisplay enabled consumers, military and industrial applications to fuel the increase.

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

Thank you, Rich.

Before we take your questions, I want to leave you with a few key points.

Here is the beginning of this downturn.

We have outlined our company's strategies and they are: 1) To stay close to our customers and to improve our product lines as well as to focus on active R&D for new product introductions.

We also will maintain cost controls and also improve our financial strength.

We are happy to talk that we are way much on track with our goals duly outlined.

Now, Rich and I will now open the call for questions.

Thank you, sir.

The question and answer period will be conducted electronically.

If you would like to ask a question, please do so by pressing the *key followed by the digit 1 on your touchtone telephone.

We will proceed in the order that you signal us and will take as many questions as time permits.

Once again, please press *1 on your touchtone telephone to ask a question.

We will pause for just a moment to give everyone an opportunity to signal for questions.

And we will take our first question from Michael Masdea of CS First Boston.

Please go ahead.

[MELANIE]: Hi, this is [Melanie] writing in for Michael Masdea.

We were wondering if you could possibly discuss the impact of this [Skyworld] merger in [INAUDIBLE]?

You mean the [Skyworld] merger?

[MELANIE]: Yes.

We think that the merger is good.

This is John Fan speaking.

I think it will make them stronger, there is more complete products for the customer, and we will soon see evidence of that.

[MELANIE]: Great, and then in your display business, if you strip out market share gains in new product rollouts, what rate is your core business growing at?

You mean CyberDisplay?

[MELANIE]: Yes.

Last quarter, our product revenue rose 10% sequentially and the [INAUDIBLE] was growing 30% sequentially.

So we are growing at a very rapid rate right now.

[MELANIE]: And that is the same rate it would grow as you shift out your market share gains and your new product ramps as you look at your legacy business for your core business?

[INAUDIBLE] legacy business growing?

[MELANIE]: Right.

Legacy growing is small, but it is still growing.

[MELANIE]: Great and then can you talk about linearity in the June quarter and how orders are tracking thus far in the end of the September quarter?

Rich, you want to make comments to that?

I have recorded typically one very linear and that was certainly the case then in the most recent quarter and as always we have 90 days projections from our customers, only 90 days and we are looking at another linear quarter as far as we can tell right now.

[MELANIE]: Great, and one final question.

What type of margins are you seeing for your CyberDisplay and your HBT businesses and what are impacting the margins the most with any individual segments?

We never break out the individual margins for this specific product and as far as the pricing is entirely consistent with what we originally indicated and so we are pretty much on track with improvement.

We have outlined improvement.

[MELANIE]: Right, thank you.

Our next question comes from Earl Lum of CIBC World Markets.

Please go head.

Congratulations, gentlemen on a good quarter.

Thank you, Earl.

A couple of quick questions.

If you look at where your [3,5] business is, are you seeing, when you talked about some customers are coming back, that had been quiet before, can you tell us a little bit about what kind of activity are you seeing, John, and then can you give us a better assessment of how the competitive environment is looking like as we go into the second half?

Okay, the question is that basically what is the nature of those customers coming back and is also how the competitive environment looks like.

Of course, I would not mention the names of the customers coming back, there are a lot of them, overseas customers, and there are primarily from [Thailand].

So I hope that kind of clarifies that and it seems to me, the activities is more like they already have designed and selling it through and so we are kind of optimistic, we think the momentum will continue.

With the competitive environment you know very well, competition is always there and we have been seeing this ever since we introduced HBT and so it is not any more or any less, by [INAUDIBLE] edge because we are doing a lot of R&D and are pushing ahead and good customers do want to work with the biggest player which we are.

Thanks, John and then a followup with regards to the CyberDisplay.

You are well above the 30% at this point in time.

Are you expecting continued market share gains and what would you expect to be kind of a top end limit to what kind of market share you could get just on the camcorders and can you give us an idea as to when you expect a significant percentage of non-camcorder revenues to be incurred in any particular quarter for your CyberDisplay?

I think the question is whether we will [INAUDIBLE] percent of the camcorder.

One thing I do know, I will not get over 100%.

I think that 30%, we still have some way to go, there still is some percentage, I think [INAUDIBLE] 20-30% [CRTs] are still being used.

So that cost can go and we have opened just color products coming out.

The camcorder still can go and in addition to that we are seeing a lot of new activities on non-camcorder activities and I believe that we will already have a lot of activities especially in industrial and military activities are also increasing a lot.

See what happens during this downturn, many of the other competitors, at least potential competitors are gone.

They disappeared, so a lot of activities which are there, we would be working with some applications designing those, all those guys are coming to us right now.

John, if you looked at your existing five customers for the camcorder for CyberDisplay, would you expect with the remaining 20 or 30%, is that within those top 5 or would you need to capture additional customers to get the rest of that market share and then you expect that any point in the near term that one or two of the other five camcorder suppliers would become 10% customers?

Everything is measured.

Obviously, we stick very close to our customers and [INAUDIBLE] we are trying to increase our color content in the models.

That still is the same.

You get 30% but there is still 70% out there.

So camcorders are still going around 10-15%, yes.

The overall market is growing at 10-15% within the year.

So there is still some room to grow, quite a lot of room to grow for camcorders anyway.

And besides we are seeing a slow ray of R&D designing going on and so this is it.

I think CyberDisplay is fine.

Rich, just one final question.

With regards to your R&D that you recorded in the quarter, is there any way that you can back out how much of that came from both your [3,5] and your CyberDisplay and what was purely R&D revenues versus some that the public had lumped in the book, because if you add up the few, you get to your total top-line number, but if you add in the R&D revenues, you exceed that.

So, can you strip that back out?

I really can't because what we do in the company is that we work on various projects, recap the resources of the whole company and so we have [3,5] guys and CyberDisplay guys will all help together to solve certain problems and they will charge it and [INAUDIBLE] delineation.

Historically, most of the revenue has been associated with the CyberDisplay products rather military type of applications.

So, fro the funded R&D standpoint, that clearly is the lion's share, but then for the internal R&D, it is really very much a group effort.

Great.

Thank you.

We will take our next question from Kalpesh Kapadia from C.E. Unterberg.

Please go ahead.

Congratulations guys.

Thank you, Kalpesh.

A quick question for Rich.

Did you say capacity utilization was 60% in HBT or [3,5]?

Last quarter also, it was in the same range.

Did you add any more capacity or qualified anymore the [INAUDIBLE]?

No, actually what I said was what the company's fab utilization was 60% and so between the [3,5] and the display, the weighted average was 60%.

Okay, what would it be for the [3,5]?

They both were roughly the same.

Because their revenues grew significantly in [3,5] that ...

Right and as you mentioned here we have the new facility that we are still waiting to get from the [machine] qualified and we had one qualified last quarter and there is one we believe fairly close to [INAUDIBLE] this quarter.

All right.

Okay.

John, you generally mentioned competition in both fronts.

And you have been [INAUDIBLE] gaining market share in both areas.

There is a lot of talk about potential competition from gas foundries and from overseas and in Taiwan such as [AWSC], ProCom, or V-PEC.

Are you seeing any of them in any material way or how do you describe them?

Why, I think the competition there is last year's most [INAUDIBLE] right?

This year now, to best it was all pretty much gone away.

This is much reduced.

Now, you have a bunch of Taiwanese screaming about it.

I am very close to Taiwan, I'm not worried about them.

Okay, fair enough.

How do you take as modest sequential growth term, would it be in mid-single digit, mid-to-high or low double digit?

I now wish I could tell you.

I look outside the last few weeks, everything is so choppy, nobody really dares to [INAUDIBLE] them that out, but we revise and still can grow, but if anybody [INAUDIBLE] crystal ball, let me know.

You know the world out there is pretty choppy, I mean our internal shipment is doing pretty well, we are looking at very choppy seas, so we expect and everything comes out, our customers seem to be very strong since they are very steady, but we should see how they come out.

And also, you have in your press release the mention of, you also expect some fruits from new product development effort.

Would it be on the revenue side?

I think the question is about how our new product development.

We have always been advising that we have been focusing on putting a new product line in the market.

I think our news release say that very clearly that we are making very excellent progress in these areas, so basically stay tuned.

Okay, and Rich...

Kalpesh, there is nothing in our modest growth forecast that factor in revenue...

Oh, everything is zero, everything, but we think [INAUDIBLE] pretty well.

Okay and also, Rich, if you have more sequential growth, does it mean that you will be closer to break-even in Q3.

We are always working towards that goal and actually working towards profitability, the ultimate goal right?

I think it is important to measure the last two quarters with cash flow [INAUDIBLE], with generating cash even [INAUDIBLE] R&D right now.

And also, John, you alleviate that the [3,5] customer which was kind of dormant for about a year is in [BS], coming from overseas, would it be a Japanese customer?

That will be a good guess, it will be a good guess.

Okay, thank you very much.

And now, good luck again.

Thank you.

Our next question comes from Chris Versace of Friedman Billings Ramsey.

Please go ahead.

Hi guys, just a couple of questions.

Rich, I know you don't break out the gross margins by segments, but with the CyberDisplay once again higher than the overall corporate gross margins?

Yes.

Okay and would you [say] the business is profitable on an EBIT basis this quarter?

CyberDisplay is profitable.

On a EBIT basis?

Yes.

Okay, what is the trends you guys are seeing in the six-inch [3,5] business.

Is that extraordinarily fast or is that kind of just bumping along?

Do you mean the growth of the six-inch?

Yes.

The percentage is staying roughly at 20%, but our revenues are expanding.

So, it is increasing in absolute dollars.

Is it expanding faster than four-inch or we are not really seeing that big [a three path] yet.

For the last couple of quarters it has stayed roughly 20% of our revenues.

Okay, and you mentioned before that the goal is break-even but also profitable, just remind us where the break-even revenue rate is?

Well, depending on the product mix, it is anyway between 20 and 23 million, depending on the product mix.

Okay, and that is all we got for now.

Actually, I kind of missed it, you said JVC, Matsushita, and [Skyworld].

Which was the other 10% customer?

Samsung.

Okay.

Thank you.

Thank you.

Our next question comes from Brian Alger of Pacific Growth Equities.

Please go ahead.

Hi guys, good afternoon.

Hi, how are you?

Good.

Just have a couple of quick questions.

A lot of them have been answered.

You mentioned that the competitive landscape is much the same.

But earlier you talked about some new technologies specifically with InGaP and what not.

And I am wondering if you see a shift in your market shares specifically within HBT coming down the pipeline with regards to some technological advances that you might have or should it just be factored in that you will be splitting out the HBT revenues within [3,5] kind of portion of the total market available to you?

I am trying to understand what the question is.

Rich, do you understand what the question is?

I am not, Brian, would you put the question one more time?

Sure, I'm just thinking in terms of when we look at HBT market today primarily we have view in other competitors.

But I wondering if we should, when we look at the opportunities available to you, should we expect that to change in terms of this spread, do you think there is any competitive advantage that you have or they might have that might change, perhaps the split in market share?

Okay, maybe I can answer that.

You are talking about competitor arena on the [3,5] HBT area.

Right now, there is not much split, honestly there are not much competitors out there.

Okay, so you don't really see [RFMD] or...

Well, it is actually internal, so it is not much to demarcate.

I sold everything, did never sell HBT outside, so to the extent it would always be internal than obviously, you cannot grow from that share, [INAUDIBLE] could be a main additional plus for people who merge or market them.

This is only plus.

On the other side, outside the merchant market, they are alert, they may be about seven or eight guys out there and probably a 20% divided by seven now.

Okay, separately, on the CyberDisplay side, obviously, you are doing a pretty good job on the monochrome camcorder market.

Do you see any reason for the camcorder market to move towards color down the road?

Or are you just going to continue to see your monochrome opportunity there?

Yes that is a very good question.

The question is what is the trend towards monochrome or color.

It is a very interesting question, because the last two years, the share of monochrome display inside camcorder viewfinder has increased.

I would not say that it will continue doing so, [INAUDIBLE] the monochrome share has gone up.

Going forward, I think the color display may become important if the price and resolution can match the monochrome.

The monochrome display because there is no color [floated in], they are very sharp.

And color you will find is much more fuzzy.

Now for Americans, a lot of Americans do want color.

The Europeans especially did like sharp pictures, so they prefer monochrome.

So to answer your questions, until the color display comes out with reasonable price and some resolution of closer [film] resolution as the monochrome display, people will be using camcorder in larger quantities.

Okay, thank guys.

Again, nice quarter.

Thank you.

The next question comes from [Tim Connelly] of [INAUDIBLE].

Please go ahead.

[TIM CONNELLY]: Hi.

Actually, my questions were answered but I was just wondering if you will give us a little more color on the modest growth as compared to last quarter, when you were looking out whether you think things are going to be better this quarter than they were last quarter in terms of growth?

Are you as confident this quarter as you were last?

Well, last quarter, we had 10% sequential growth, we came out to be 18 and [INAUDIBLE] you try to keep up sequential around 20% every quarter, that is going to be hit tough, especially in this new environment outside there, but sooner we will see growth sequentially.

[TIM CONNELLY]: Okay, right.

Thank you.

We will take our next question from Earl Lum of CIBC World Markets.

Please go head.

Yeah, John, just had a followup with regards to the progress you are making in InGaP.

It sort of looks like the six-inch market is coming back up.

Are you expecting 1) six-inch to increase as a percent in Q3 and then do you expect that InGaP is going to stay flat here at about 30% of total as we move forward for the back half of the year?

The question is again back to four-inch to six-inch and the InGaP [INAUDIBLE] HBT.

I think that Richard has mentioned [INAUDIBLE] increase in revenue in six-inch, but correspondingly the last quarter and I think this quarter, it would be still the same, the four-inch revenue and demand also increase.

So these things have been going on for the last two quarters.

The six-inch increase as well as the four-inch increase.

And in the same situation also [INAUDIBLE] InGaP.

The new customers of course all InGaP are increasing their demand.

By assisting customers or the previous customers which have been dormant, they are usually all outside customers.

And they [went to revive] and waking up, they also want to [INAUDIBLE].

So we are seeing a seesaw activity going on.

I think this could go on for the next couple of quarters.

Our guess is still designing to [INAUDIBLE] the performance, they are doing very well.

InGaP has a very good CDMA the new guys at InGaP.

You know we are the providers of HBTs of both, any type six-inch so we encouraged everybody to use our wafers and full time, we will see both of them are growing.

Both in the GaAs and InGaP and both in four-inch and six-inch.

We hope the trial continues, you don't find this continuing both sides right now and I will be surprised the third quarter will end with a ratio even though hopefully, this trial is going to increase revenue also.

Great, John, and Rich, with the modest sequential growth in Q3, are you also expecting some type of modest sequential growth in your margins or can you give us any type of margin guidance in your [INAUDIBLE], is that going to be roughly about the same as you got in Q2?

At this point in time, I say margins are relatively flat.

Great, thank you.

Sure.

Our next question comes from [Peter McCosnel] of Needham and Co. Please go ahead.

[PETER MCCOSNEL]: Hi, good quarter.

Thank you [Peter].

[PETER MCCOSNEL]: Could you comment on the course of your row of wafers and how that has contributed to your gross margins this quarter and also going forward what trends do you see there?

Well, the cost of raw material, [INAUDIBLE] change and we try to get the best price we can and we have been growing and that has provided us with additional purchasing power and so in this respect we have been able to use that to our advantage to get better raw material pricing and as I indicated in our prepared remarks, overall one to two costs are coming down.

[PETER MCCOSNEL]: Could you give us any idea of the trend, I mean is it 10-15% year-over-year?

The overall cost of raw material?

[PETER MCCOSNEL]: Yeah.

At this point in time, it is in excess of 10% probably around 15%.

[PETER MCCOSNEL]: Okay, thanks.

Sure.

At this time, we have one question remaining in the queue.

I would like to remind everyone that if you would like to ask a question, or if you have a follow-up question, please press *1 to signal.

We will take our next question from [Edwin Lyon] of [Lyon Investment Management].

Please go ahead.

[EDWIN LYON]: Hi, good quarter guys.

Thank you very much.

[EDWIN LYON]: My question is this.

On the CyberDisplay side, we have not heard about any progress as you guys might have been making in the digital camera area.

Does any progress seem to be being made and would that be in monochrome or color?

The question is on digital camera or for that matter also on the phone.

I think in case in both digital camera and the phone applications or [INAUDIBLE] applications, it will be in color.

And we are making good progress there too.

[EDWIN LYON]: What would you say for the timeframe that we might see some action and either one of those will support?

I am afraid, good question.

We have been working on it and I think this is a very complicated issue because of the model change, but we are very cautious and optimistic, we will be all right.

[EDWIN LYON]: Okay, thanks so much.

Thank you.

We have a follow-up question from Kalpesh Kapadia from C.E. Unterberg.

Please go ahead.

Rich, last question on [INAUDIBLE] stock, how many shares did you have exiting Q1 and how many do you have now?

We had 725,000 shares exiting and we have 625,000 shares now.

So we sold, that is the number, yes.

So, you sold about 100,000 shares?

Yeah, from what we had, yeah.

Okay, thank you very much.

Once again, if you would like to ask a question, press *1 on your touchtone telephone.

Again, that is *1 on your touchtone telephone if you would like to ask a question.

As there are no further questions at this time, Dr. Fan, I would like to turn the conference back over to you for any additional or closing remarks.

Yeah, thank you.

I thank everybody for joining us for our second quarter year 2002 conference call and we look forward to speak to you soon again.

Thank you.