Kopin Corp (KOPN) 2002 Q3 法說會逐字稿

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

Today's call is being recorded.

Please let me remind everyone that a replay of this conference will be available from 8 pm Eastern Time through Wednesday October 30th by dialing 719-457-0820 and entering confirmation code 283-097.

You may also access an archived version of the call on Kopin's website at www.kopin.com.

With us from the company is the President and Chief Executive Officer Dr. John Fan and their Chief Financial Officer, Mr. Richard A. Sneider.

At this time I would like to turn the call over to Mr. Sneider.

Please go ahead, sir.

Good afternoon and thank you for joining us for the Kopin's third quarter 2002 conference call.

We apologize for the delay and thank you for waiting.

During today's call taking place on Thursday October 24th, 2002, we will be making 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.

Potential risks include but are not limited to demand for our CyberDisplay in III-V products, market conditions, the company's ability to ramp production in its manufacturing facilities, and other factors discussed in the company's 10-K for the year ended December 31st, 2002, and other documents filed with the Securities Exchange Commission.

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

If you have not received the copy of this afternoon's third quarter financial results news release, you may call Sharon Marrow Associates at 617-542-5300 and a copy will be sent to you and with that I will turn the call over to John.

Thank you, Rich.

The format for today's call should be familiar to many of you.

I'll give you an overview of the quarter and make a few comments of our expectations of fourth quarter.

Then we'll talk about -- I will speak about two product platforms, III-V in Cyber Display.

Rich will review the numbers in more detail and discuss our Q4 outlook.

I'll comeback to make a few more comments about strategy over the next 12 months and then we'll take your questions.

I hope you have a chance to review our Q3 news release.

In a business climate that continues to be very challenging, our results were in line with the guidance that was provided in our Q2 news release and conference calls last July.

Total revenue of 21.9 millions, we're 5% higher than the sequential quarter and 78% above the third quarter of year 2001.

On the borderline, we reported a net income of 0.6 million or 1 cent per share.

These are [inaudible] a net loss of 2 cents for the second quarter of year 2002 and 14 cents for the third quarter of year 2001.

As you all know, companies [inaudible] semiconductors and consumer electronics industries, faced tremendous pricing pressure as a result of market downturn.

In many cases, inventories are being whipped down to bare low levels as companies preserve their cash and wait for business to rebound.

The challenging market environment is a bad job of our business outlook in the Q4, which typically is the time when we negotiate the surprise premium with our customers.

In an ideal world, we sail smoothly through the negotiation process and move seamlessly from one to the other one.

However, it does not seem to look this way today.

In the III-V we have an unsettled supply agreement with a large customer for the fiscal year that begin October 1st, 2002.

We are hopeful to resolve the issues amicably.

However, the lack of agreement with our customer compounded with anticipated weakness in the holiday seasons, house selling seasons has lead us to forecast the fourth quarter revenue can decline between 25-30% sequentially.

We understand the market condition of the semiconductor market and we are looking very diligently to support all our customers.

At the same time, quality and technical service has been and remains to be paramount considerations for coping.

It is important for me to point out that we have faced similar supply agreement with negotiation in the past.

Notably in the late year 2002 -- in late 2000 with a Cyber Display customer of which we offer now, we were able to resolve the issue to the satisfaction of both parties and our relationship with that customer has become stronger.

So, I believe the same thing would happen here.

While I understand they probably have a lot of questions on these issues.

We have to respect the confidentiality agreement with our customer and I ask for you to understand during the Q&A.

Now, I want to spend a few minutes discussing technology innovations resulting in some exciting new products, the subject of many -- several announcements in our third quarter.

For the past several quarters, we have talked to you about the importance of our product development initiative.

During the third quarter, we continued to deliver our promise to develop and introduce new products based on our proprietary web engineering technology.

In III-V, The innovation put the power of a highly efficient blue light emitting diode which we call Cyber Light.

While the blue [LED] has been around since early 1990s.

For nearly a decade, the industry had faced a technical hurdle.

How to get the power consumption below, power voltage below 3 volts?

Low voltage is very important not only for low power benefits, but also be compatible for battery driven appliances.

We have cleared this hurdle by using a patent pending process based on nanotechnology.

The Cyber Light is manufactured on gallium nitride compound grown on [inaudible] oxide.

The MOCVD process used to produce Cyber Light is the same process we used to produce HBT.

In developing this product, one issue we faced was defect that occur naturally on the atomic level.

Those defects impaired the performance of the LEDs.

We solved the problem by creating nanopockets, small pockets about 50 to 80 nanometers wide and between them a few nanometers deep.

It is in these nanopockets that enable Kopin to produce the LEDs a supply commercially available and that can be driven for less then 2.9 volts at 20 milliamp.

The blue LEDs can be compound with the yellow phosphorus to create white LEDs, which make the Cyber Light ideal for application such as bed lights, or wireless phones, camcorder, cameras, games, laptop, PDAs, and eventually for general lightening.

Another Cyber Light performance feature to note is ESD resistance, which we now have up to exceeding a few thousands volts.

High ESD resistance is essential for applications such as in automobile, which is a new area that's very important for Cyber Light.

During the past few months, I had spent quiet a lot of time in Asia talking with prospective customers about Cyber Light and we debuted the product at CTECH show in Japan early this month.

At this point, I can say that number of prospective customers are sampling the product and the response has been very positive.

Customers are continually put through -- putting us through with the Cyber [Light] though it is based on qualification process.

We expect to begin production shipments at the end of the fourth quarter and with volume shipments starting early next year.

On to the HBT front, we continue to achieve milestone resulting our development of advanced thin HBT wafers.

As we announced last week, our double headed junction HBT wafer are vague of PA and are able on low voltage operation, higher DCRS gains, better linearity, better temperature stability to the standard in gaps and out gaps HBTs.

We've been working with several components on these advanced HBT for several years and the structures now ready for sampling with some of our customers.

Our commitment to product development is extended to our CyberDisplay.

With the instruction of the smaller AMSED, the equipment color filter technology.

The CyberDisplay 180K is a 180,000 pixel, quarter inch display designed primarily for portable consumer electronics such as camcorders and digital cameras.

The 180K can display full motion video, is compatible with all special driver circuit chips such that produced by industry leaders Sony and Panasonic.

And as with all our products power efficiency is a must.

The 180K consumes less than 50 -- 15 mill watt of power, which translates to much longer battery life.

We have made 180 an easy upgrade for the assisting customers because they can be used with optics and plastic similar and same as the CyberDisplay, 320 enabled products.

In addition to display itself when we choose the reference design kit, the color video mode 180K.

The models -- compatibility with higher resolution components, video signals, and lower resolutions, compatible video [inaudible], the compulsive [inaudible], enabled OEM to integrate this chip into applications that use both standards.

Here I must pause and emphasize, the 180K-color display is the real technological breakthrough, enabling us combine to CyberDisplay technology with conventional color filter technology.

We expect to introduce a whole series of low power, small format color display with various resolutions and compatible with industry standard chip sets.

We continue to broader our CyberDisplay custom base including US, exciting opportunity for those products.

I am sure many of you saw our announcement last week with BMW, which -- in view a new [inaudible] amount of display featuring our CyberDisplay imaging systems.

Initially, there HMD's will be used by the BMW wheeling formula one racing team, which is headed by the star driver, Mr. Shumarker.

The near-to-eye, system enable driver to receive race data, messages on a pit crew through a two-way wireless link, by the race to racers remained focus on the track.

Our relationship with BMW_cooping for fit in penetrating new applications.

We will be optimistic of opportunity with digital collaboration into automobile and motorcycle markets.

We're continuing to look at opportunities for wireless applications, games, toys, using our CyberDisplay.

Now we will turn it over to Rich, to provide the insight on the financial our guidance for the fourth quarter.

Thank you John.

Total revenues for the third quarter were 21.9 million compared with 12.3 million in third quarter of 2001 and 20.8 million in the second quarter this year.

CyberDisplay revenue for the third quarter was approximately 12 million of 79% from 6.7 million year-over-year and up 5% sequentially from 11.4 million in the second quarter.

On a year-over-year basis, III-V revenues in the third quarter of 2000 were 9.9 million up 80% compared with 5.5 in 2001, and up 4% sequentially from 9.5 million in the second quarter of this year.

Foreign trade was accounted for approximately 75% of III-V revenue in the third quarter of 2002, while 6-inches weight was total 25%.

In GAAP, represented about 30% of III-V revenues in the quarter.

For the nine-months of 2000, revenues totaled 60.3 million compared to 36.5 million for the same period last year.

III-V revenues year-to-date are 27 million compared with 20.3 million to the compatible period in 2001.

CyberDisplay revenue were 33.3 million to the first nine-month of 2002 versus 16.2 million a year ago.

The net income for the third quarter was 600,000 or 1 cent per share compared with a net loss of 9.2 million or 14 cents per share a year ago, and then net loss of 1.6 million or 2 cents a share in the second quarter 2002.

For the nine months of 2002, the net loss was 4.2 million or 6 cents per share excluding the impact of the adoption of the statement of financial accounting standards number 142 goodwill and other intangible assets.

Including the impact of the standards 142, the net loss was 24 cents per share.

This compares with the net loss of 15.6 million or 24 cents per share from prior period in 2001.

Cost of goods sold in the third quarter of 2002 represented 72% of product revenue in the third quarter versus a 132% one year ago and 77% last quarter.

This improvement is attributed to the yield improvement and lower raw material expenses.

Research and development expenses were 17% of revenue in the third quarter inline with our guidance of 15-20%.

We expect R&D to continue to be in the range of 20-25% of revenues in the fourth quarter, as we continue our product development effort.

Selling, general, administrative expenses were 11% of the revenues in the quarter consistent with our guidance of 10-12%.

We expect SG&A to be in the range of 15-20% in Q4.

As on September 30th, we had cash in equivalence of 118 million compared with a 112 million as of June 30th 2002.

Since the beginning of the year, we've generated approximately 12 million of cash from operations.

DSL's are running approximately 30 day.

Fabutilization is currently at 60%, CAPEX year-to-date has been approximately 3.5 million and we would expect the full year to be 4-4.5 million.

Depreciation and amortization is approximately is 7.4 million year-to-date and is running about 2.5 million per quarter. 10% customers for the quarter were Skywork, Panasonic, JVC, and Samsung according to our outlook for the fourth quarter of 2002.

As John discussed during the fourth quarter we typically negotiated purchasing terms for the current year for the following year excuse me.

In III-V we have an unsold applied agreement with large customer.

While expecting this issue to be resolved, given the lack of an agreement with this customer any intense state of weakness in the holiday starting season, we expect total fourth quarter revenue to decline between 25-30% sequentially.

Kopin remains financially strong with more that 118 million in cash and equivalent and no debt.

And we expect to be cash flow positive for all of 2002.

As we noted in this afternoon news release, Kopin is currently reviewing an impairment issue related to our investment in micro-semiconductor.

In the second quarter of 2002, micro-semiconductor purchased telecommunications through the stock exchange.

Kopin had previously invested in Kenden.

Since the exchange Kopin has recorded the change in value of micro shares through evaluation account in the equity section of the balance sheet.

On the date of the exchange, micro shares were trading 29.31.

On September 28th 2002, micro was trading at 616.

Kopin is currently reviewing our micro stock, its other than temporarily impaired.

If this stock -- is determined to be impaired, valuation adjustments previously recorded, will be reported in the statement of operations.

Currently, Kopin owns 650,000 shares of Micro, which were valued at $4 million.

Since the exchange, Kopin has generated 10 million of proceeds from the sale of Micro stock.

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

Thank you Rich.

Before we go to Q&A, there are a couple of points I would like to highlight.

We continue to focus our aggressive product development initiatives.

In the III-V, we have entered the Cyber Light LED market with our new high-performance blue LED that already has achieved the industry-best combination of brightness and efficiency.

The Cyber Light has moved through the customer qualification process and the feedback has been very positive.

We expect to ramp Cyber Light to volume productions early in 2003.

Our advance doubled had (incomprehensive) expertise HBT wafers have also achieved milestone results in critical performance area such as temperature, stability, speed and [inaudible] operation.

Both components with their competitive advantage for next generation [inaudible] circuits.

We continue to expand our opportunity with CyberDisplay with the world's smallest AMLTDs with color filter technology.

The features of [inaudible] deliver ease of design target market advantages for consumer orient.

We are now ready for your questions.

Thank you gentlemen.

The question and answer session 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.

If you are on a speakerphone, please be sure your mute function is turned off to allow your signal to reach our equipment.

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.

We will take our first question from Michael Masdea: with Credit Suisse First Boston.

Please go ahead.

Hi, this is Natalie Layden for Michael Masdea with a couple of questions.

One, going back to the III-V contract negotiations, is there any way that that could be resolved in Q4 and if so, how would your guidance change?

At this point in time we hope that that it will be resolved in Q4 and when it is, we will update folks at that time, any change in guidance.

Right and are you able to tell us what percentage of customer is?

There were significant customers as we indicated.

And then is there any way you can give us an individual guidance for HBT and [Cyber] you know with HBT being down, is Cyber going to be down as well for the down 25-30% guidance?

At this point the total guidance is down 25-30%.

Great.

And then can you talk a little bit about the mix adjustment ASPs quarter-on-quarter?

Like where, how ASPs are tracking versus material cost?

As we initiated several quarters ago, we really don't talk about ASPs any more.

The reality is that we have a finite set of customers and it created all kinds of competitive havoc.

So we've stopped giving ASP guidance and overall raw materials as we indicated, expenses have been coming down, which has led to expansion in gross margins, in addition to increased volumes over fixed cost.

Great.

And then just one final question.

Can you -- are you approximately able to give us an idea what HBT units were in Q3 as opposed to Q2 and where you see them going in Q4?

No.

I don't think we have ever given wafer start information out.

Okay.

Great.

Thank you very much.

We'll take our next question from Kalpesh Kapadia from Unterberg Towbin.

Please go ahead.

Hi guys.

It seems like it is your largest HBT customer, that you have this negotiation in logjam?

Well.

This is John Fan speaking.

I have, I think that is something that we cannot comment on it.

We have confidentiality agreement with our customer.

No problem.

Who is the competitor that or alternative source that this customer would go to if you are not to negotiate the pricing with them?

You have to go after the customer.

But you must know the alternative sources in the marketplace to your solutions, right?

Well, we could speculate but we are not really going to speculate, so you have to talk to the customer.

Can you at least give us who are the competitors out there who you can speculate about?

I think Kalpesh, idea is that we would come back to what we say, quality and technical service are very, very important to us and we will always go back to where we are.

We have been into industry, as a knowledge leader and quality leader and we are not going to go to the lowest cost either.

Let me ask you this way.

Who is the other qualified supplier [of] this customer?

You have to ask them.

Okay.

I think...

I think it's important for me to make a comment on that.

As you all know, all our -- there are many customers ranging from PA's and as well as high trans-circuits using our HBTs and in the III-V area and almost all of them have been almost exclusively using our wafers, because of the quality and the technical service.

It's not true that we don't have any other competitor, there is always competitor across the board and all of them are well known.

Somehow [inaudible] for me when I had 19 of them.

Well 19 competitors.

So we have a long list.

All we will try everybody always come back to KOPN because our quality and technical service.

And I think we are going to stick by that.

It is a very difficult product.

It's not easy product.

We know where other problems could be and usually and I would believe all these people will come back to us.

Now as I recall, you know in 2000 when you had the CyberDisplay facing negotiation with one of your key customers.

That's right.

You went through one quarter was [inaudible].

That's right.

They went through one quarter across again because of confidential agreement, we did not mention the company and [Sony] was also major a customer.

It came back and we have very, very strong relationship, I think it was the agreement that both sides were happy with.

We tried to get very closely.

I anticipate and hope that will end up the same way.

Looks like you like you like take gambles?

I am not gambling there.

All right.

On Cyber Light you mentioned you are going into volume production in end of Q4.

And what should be model for next year in revenue potential from these product lines?

Are you -- you are talking about Cyber Light?

Yeah.

Which one? [inaudible]?

I think we clarified that we said that we were going to some production this quarter, but the volume production really start making Q1 of next year.

That is correct, so I am asking about next year.

What do you see in revenue potential for this product?

Well, the market itself is estimated to be between 3-5 billion in a couple of years, I mean today it's 1.5 billion.

There is some very big well-known players who do hundreds of millions of dollars of revenue, and there are some very smaller players who do much less than that obviously.

So, the market itself is larger than the markets of our current products and so any significant market share would be obviously in very large numbers.

I think the comment is what would be next year.

Right now our comment is that we are very happy with progress of qualifications.

We are in fact make other preparations of production line starting at the end of the year.

And it depends are you [inaudible] to the market going there rapidly.

It's going around 40% a year and we have very unique product, so we certainly have reasonably high hope.

Now is that with one customer volume production or multiple customers.

We cannot go into that detail right now, but we are happy with the progress right now.

And Rich, could you just clarify how much unit volume are you running at a month in CyberDisplay right now.

We are currently -- the fab is currently about 70% utilized.

And what is the installed capacity?

The install capacity for equipment or people, it's a difficult question, but then we can do millions of units out of the plant on a capacity [inaudible] people.

We don't have to that's why it's a difficult question.

We are not the personnel to do that equipment ties, facilities for that number.

I think you can pretty much look at out that from the sales we have last quarter.

Right.

As I mean you don't flee in the old days we will keep ASP's that's why we are very careful now.

You give the number dialed ASP is going to work out you know the price has become the very issue through every customer we have so we have become much more careful so that doesn't hurt our business negotiations.

So -- but we were making, surprise to say, we are making a lot of this place.

Right and what is the capacity utilization on HBT front.

About 60%.

Thank you very much.

Let take our next question from Earl Lum with CIBC World Markets.

Please go ahead.

Good afternoon gentlemen.

Rich, can you talk a little bit about where you see Cyber in Q4, is this a seasonal pattern that we are looking at and it didn't look like you saw that last year and can you comment on where things are [actually] exit Q4 or our we going to have a seasonal uptake for the displays or other product application is going to launch in to try to offset the, whatever might be there on camcorders.

Right, there is some normal seasonality, I think we've always said that historically our seasons should run Q3 strong with Q2, Q4, and Q1 but there has always been seasonality and in our absence we have factored in some degree of difficult holiday season and may be we get lucky and it doesn't happen but right now its the tea leaves telling us and so in next year I think as John indicated with the 180K display and a variety of other products we would expect both to takeoff again in the middle of the year.

Yeah, I thought we'd make it finer, I think I hope we might -- skip in my discussion I made it very clear, we are very actively moving everything from monochrome to color for every other products.

Especially, with our color filter technology, you really open a whole series of things for us, so I expect a lot more design next year with color display.

At this point, you -- can you give us any idea as to what you think might be the percentage of color as you exit '03 in terms of either volume or revenue?

Right now, I would say as '03 right now our revenue of displays almost primary all to monochrome.

A [inaudible] stay there for another quarter or so.

I am sorry, John, did you say for '02 or are you saying for '03?

'03, we actually [inaudible] [primary] of monochrome.

Okay then what kind of ASP differential would there be in terms of shifting over to color?

I'll not go back to ASP but I would say, color -- or the way we do colors, is very interesting -- I'll go back to the earlier question.

The question is -- other which did not go to the ASP discussion, [inaudible] I can tell you the cause of making display from monochrome to color -- using color filter technology that overhead to our customers [inaudible] because the chips are already out there and the chips are as about the same and we expect a much improved margin with color because it does provide a lot more value to customer and people willing to pay significantly higher prices.

Great, thank you John.

We'll take our next question from Chris Versace with Friedman, Billings Ramsey, please go ahead.

Good afternoon guys.

Good afternoon.

Just a couple of questions and Rich let me direct this one towards you.

May be I am looking at this wrong but if I go, you know, 12 million CyberDisplay with 9.9 million in III-V that gives me 21.9 million your -- total for the revenue for the quarter.

So, the R&D numbers we backed that out of the CyberDisplay numbers?

That's right.

Okay, so if we do that then...

Chris, the reason why we have done is that, we allow some of the R&D contracts, we still [inaudible] transition for some product revenue.

I think that's going increase so [it's now not doing problems] towards our total revenue because of the percent of contract revenue is becoming smaller and smaller.

Okay, my next question was, you know, if I were to back that out, it will look like Cyber were actually contracted, sequentially?

If I back out that 653k.

Contracted?

Would have been flatter of something like that?

Yeah and again that's part of the problems is now trying to [stifle] between the product revenue and the contract revenue there is some gray area there.

That's why [we accounted] to the total revenue because that rate explains all the activities that are going on in CyberDisplay.

Okay, does that mean at some point you guys will phase up the R&D revenue line.

Yes.

Okay, if we take - kind of checking that side now.

If you we were to take a look at the two businesses where they both profitable in terms of operating profit in the quarter or was one positive, one negative.

They were both profitable.

Okay, and then, what's the, you know just in terms of the III-V business, we know that we've heard from, you know some of the suppliers of the [sub street] that they are getting crumbled in terms of ASPs, and without discussing ASPs, -- are you guys seeing -- what kind of ASP pressure are you seeing?

It's pretty serious.

Is it - you know would you say that its more than you saw in the first half of the year.

Yes.

Okay, and then, just in terms of the Cyber Light.

You know, what's the strategy for bringing that to market.

I mean, should we be thinking that you guys are going to pair that with the CyberDisplay and use that as your light source or there's other things we should be thinking about in your term.

The pressure is both; the Cyber Light when the Cyber Light initially as inspections go through CyberDisplay or going to some general applications to -- with -- with general customers.

I would say we're -- pursuing all avenues but we believe our growth strategy is really through general customers, general co-partners that provide solutions for many applications not just Cyber Light, CyberDisplay.

So in general, should we think that, you know and again, I know you can't say exactly who you are working with.

Yeah.

But can you just so that we can think about a little bit, would this be existing customers potentially or would they be you know brand new set of customers we haven't even - you have never been exposed to before?

It will be with customers of course; some of them are assisting because they are such giants, so they are name for everybody.

They do everything by A to Z but some of them are quite brand new names but they are also household names.

Okay and just in terms of the fourth quarter, you know, out of the two reportable segments, is there anyone that is potentially at risk of hosting native operating profits or operating losses in the fourth quarter.

Well, given the downturn, in the III-V business, it will probably generate a loss.

Thank you.

We'll take our next question from Tom Sepenzis with ThinkEquity Partners.

Hi, just a couple of questions.

Are you expecting a downturn in the Cyber Display business in the fourth quarter or is this all coming from In Gap.

Right now, we expect Cyber Display to be relatively flat, it's mostly coming from III-V.

Okay and is some of the pressure you seeing in the III-V resulting from the move to six inch wafers.

I know you carry a hyper ASP there, but the units are significantly less, and at 75% for 4 inch and 25% for 6 inch, you see a lot less unit volume, is that the entering into the equation here?

No, I mean, actually the 4-6 inch ratio has remained relatively stable at 25-30% 6-inch over the last few quarters.

Okay, and -- and, you know, it's not to beat a dead horse, but in terms of the LSD contracts or LED business going forward, I think you had mentioned that you have already some backlog for Q1, is that correct?

No.

So you don't actually -- you haven't signed anything yet?

No, we don't have backlog.

The SEC defines backlog as non-cancelled orders.

And so we've never had backlog in our business.

Okay.

In the III-V or display range, we've never published a backlog.

But do you have, you know, handshake deals in place for the volume production in Q1?

I guess my question is, do you have any, you know, customers that are going to take the product once they finish the trials?

Okay, what we are saying is, we are ramping up our volume production beginning next year.

Okay.

And I guess, when would we expect to hear, you know, in terms of moving beyond trial phase and actual customer wins?

You know our -- this is John Fan speaking.

I think it's a very good question.

You know, our advancement is always grand; our product is ready to go on the shelf. [inaudible] for other -- similar, some other companies are.

Right now, obviously, we're very happy with the progress.

Okay and just a final question.

If you can work out the issues here with you customer in the next couple of months, would we expect to return to a more normalized run rate in III-V business in March or June of next year, or do you think that it will stay down at these levels and has to grow slowly overtime?

Well, it's certainly intention -- our intention to get it back to where it was.

Also we believe next year the wireless sector should be covered more.

But then, of course, this is all the projections we would be hearing.

So we should see.

Okay, and on the GAIN products, the HBT-GAIN products, have you -- what is the difference there in terms of ASPs versus, I mean, GAAP HBT?

And, you know, do you see that -- is anybody circling the wagons there in terms of putting that in a wireless handset?

The question is about GAIN product.

GAIN products really provide a lot of benefits.

We would really make [inaudible] amplifier more power-efficient as a bare linearity, which is required for 3G phones.

And also in many ways, we just look at [inaudible] that there may be [inaudible] is not needed for the higher level of [inaudible].

We of course is -- we do right now is do sampling phase and the price situation right now is, let me just go back to the old days of third generation HBT.

This is always normally true in semiconductor, you introduce a new product, you kept the price like this when you first introduced it and I think we've already decayed situation is that with the pricing levels is currently steeper than we would like.

We think the quality issue is important for us.

So GAIN will in fact, provide a quality that we have tried to perform is improvement, which I hope and I think people do need for the next generation of power [inaudible].

So we are working with several customers and getting them designing a sample unit right now.

Okay, thank you.

Once again, if you would like to ask a question, please press "*" "1": on your touchtone phone.

Again that's "*" "1" to ask a question.

We'll go next to Venn Lesamont with Pacific Growth Equity.

Please go ahead.

Good afternoon gentleman.

One product question, I have a little bit of background noise here on my end and so I apologize.

I just wanted to go back to growth margins, do you break that out by units, i.e., what were your margins for your HBT wafers and what were your margins for your CyberDisplays?.

Well they are about equal.

They are both in the mid 20s, mid to low 20s.

Great.

Thank you.

Okay.

I will take a follow up from Kalpesh Kapadia with Unterberg Towbin.

Hi, I think in your press release, you mentioned that CyberDisplay were 12 million up from 11.4, and that includes the contracts revenue?

Yeah.

And that 11.4 also should include the contract revenue in Q2, right?

Hopefully yes.

So apples to apples, they went up because in response to earlier questions.

Yeah.

I think it was mentioned it went down.

But when I do the math, it kind of, went up...

Yes.

I think by 6-7%.

Yeah.

All right.

Second.

And in the HBT side again, is it entirely due to this lack of agreement that you are seeing the downside or is there any kind of seasonal downtick from Q3 to Q4?

Q4 is seasonally down for us.

But it's principally between [declining].

Okay, thank you.

Yeah.

Gentlemen there are no further questions at this time.

I would like to hand the conference back over to you for any additional and closing remarks.

Please go ahead Dr. Fan.

Thank you.

Thank you for your participations.

We look forward to update you on the progress.

Thank you.

Good night.

This does concludes today's conference call.

We thank you for your participation.

You may disconnect at this time.