Kopin Corp (KOPN) 2003 Q3 法說會逐字稿

Good day and welcome, everyone, to the Kopin Corporation third quarter 2003 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 8:00 p.m.

Eastern Time through Wednesday, October 29 by dialing 719-457-0820.

And entering confirmation code 618723.

You may also access an archived version of the call on Kopin's Web site at www.kopin.com.

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

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

Please go ahead.

Good afternoon, everyone, and thank you for joining us for Kopin's 2003 conference call.

I will begin by reviewing our financial results for the third quarter of 2003.

John will update you on our recent operational achievements and share our outlook for Q4.

We will then take your questions.

Before we begin, I want to remind everyone that during today's call, taking place on Thursday, October 23rd, 2003, we will make forward-looking statements as defined in the Private Security Litigation Reform Act of 1995.

These statements are based on the company's expectations, projections, beliefs and estimates and are and 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 in its manufacturing facilities and other factors discussed in the Company’s 10K, for the year ended December 31, 2002 and 10Q for the three months ended June 28, 2003, and other documents on file 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's available on our Web site at www.Kopin.com or you can contact Sharon Merrill Associates, 617-542-5300 and a copy will be sent to you.

Turning to our finacnial results total revenue for the third quarter of 2003 was $17.5 million, down 10% from Q2 revenue.

And in line with our expectation of a 10% to 20% sequential decline in our last conference call.

ThreeFive revenue in the third quarter of 2003 was $6 million, down from $8.7 million in the second quarter of 2003, and $9.9 million in the third quarter of 2002.

As we discussed on our second quarter conference call, our large HBT customer has transitioned 100% of its business to Kopin under a multiyear agreement.

This transition created a decline in Q3 HBT revenues as the customer burned through inventory from its second source.

As of today, we believe the second source inventory is effectively exhausted.

HBT sales for wireless Lan applications continue to be in excess of 10% of HBT sales, which is consistent with the first and second quarters.

Our CyberDisplay product generated $11.5 million in revenue in the third quarter of 2003.

Compared with 11.2 in the immediately preceding quarter and $12 million in the third quarter of 2002.

Net loss for the third quarter was $3 million or 4 cents per share.

This compares with a net loss of $1 million or 1 cent per share, in the sequential second quarter, and net income of $600,000 or 1 cent per share in the third quarter of 2002.

Cost of goods sold in the third quarter of 2003 represented 85.5% of product revenue, versus 76.2 in Q2, and 72.5% one year ago.

The increase in costs of goods sold as a percentage of sales is a result of low revenue from our fixed cost base.

Research and development expense was $3.3 million or 19% of revenue in the third quarter, which is in line with our projections.

We expect R&D expense to continue in the 15% to 20% range of revenue - 15% to 20% of revenue range in Q4.

Selling general and administrative expenses in Q3, 2003, were $2.4 million, or 14% of revenue, and more in line with our guidance at $2.5 to $2.9 million.

We expect SG&A to be in the range of 2.4 to $2.7 million in the upcoming quarter.

During the third quarter, we sold $100,000 shares of Micrel stock and realized a gain of approximately $300,000, which is included in interest and other income.

For the nine months ended September, 27, 2003, total revenue was $55.4 million, versus $60.3 million for the same period of 2002.

Revenue from ThreeFive products was $24.2 million, compared with $27 million for the nine months ended September 28, 2002.

Revenue from CyberDisplay products was $31.3 million compared with $33.3 million in the same period a year ago.

Kopin's net loss for the first nine months of 2003 was $6.2 million, or 9 cents per share, based on $69.4 million shares outstanding.

This compared with a net loss of $16.7 million or 24 cents per share based on $69.3 million shares outstanding for the first nine months of 2002.

Included in the 2002 nine-month loss was a cumulative effect of a change in accounting of $12.6 million or 18 cents per share.

Our balance sheet remains strong.

As of September 30, 2003, Kopin had cash and marketable securities of $114 million, compared with $118 million as of December 31, 2002, and $114 million as of June 28, 2003.

In addition, at September 27, 2003, Kopin owned approximately 400,000 shares of my Micrel Semiconductor Inc.

Cash flow using operating activities in the third quarter was approximately $511,000.

DSOs are running approximately 50 days compared with 46 in Q2.

For the quarter, company-wide fabulization, excluding CyberLite, was approximately 70%.

CAPEX for the quarter was $1.3 million, and $5.2 million for the first nine months of 2003.

We have lowered our CAPEX expectations for 2003 to $5 to $7 million from $7 to $10 million to reflect availability of capital equipment at lower costs than we initially anticipated.

Depreciation and amortization was approximately $2.5 million in the Q3.

Based on current trends, market conditions and the outlook for our end markets in the fourth quarter, we expect total revenues to increase sequentially by approximately 20%.

With that, I'll now turn the call over to John.

Thanks, Rich.

Let's start by discussing our ThreeFive businesses.

The So Soft (ph) transition we told you about in July has -- is largely being completed.

And we look forward to HBT business to snap back.

On the wireless LAN front, WI-FI sales remain strong in third quarter reflecting the strong market potential for wireless LAN applications.

We continue to expect this to be a growing trend for the Kopin ThreeFive revenue.

In addition, as the technology develops, we may start seeing WI-FI technology in handsets, which would in turn dramatically increase the number of power amplifiers needed to perform.

Also, this would not likely --would not likely to begin to happen for another year.

There's a growing buzz about the potential of WI-FI chips to be incorporated in handsets.

Turning to CyberLite.

During the quarter, we continued to enhance the overall performance of our LEDs, and we were qualified by a second customer.

But in the context of a -- of talking about this product, I think it’s important to spend a few minutes discussing the current market conditions.

As many of you know, in the second quarter of this year, the SARS outbreak in Asia had a negative impact on worldwide demand for many electronic devices.

Which reduced component demands, including LEDs.

The Taiwanese suppliers reacted to this situation by lowering (ph) their LED prices to win as much business as was available.

The sudden drop in price in lower end chips caused disruptions in the marketplaces and may have sparked the Nichia’s current patent infringement lawsuit against Epistar, a large Taiwanese LED manufacturer.

Our responses have changed to the market environment has been to continue to work closely with our partners on shipping our present-day products, and intensify our R&D efforts improving our current products.

We're making rapid advancements in the performance of our chips.

We continue to ship significant amounts and quality of our products both blue and green wavelengths to our customers.

Let me now talk about CyberDisplay.

During the third quarter, we continued to execute on our products by diversifications (ph).

An example of this diversification (ph) is sales of our color -- CyberDisplay 320C (inaudible) Ingenio for the Company’s Eyetop by cop (ph) high fashion sunglasses.

This new monocolor application allowed wearers to privately view DVD's and other video entertainment. it's a display on a full color screen without blocking the direct view or the view field of vision.

We expect our product and customer diversification efforts will continue to bear fruit and in this quarter, we expect to secure multiple design wins for CyberDisplay color view products and commercial applications including digital cameras.

We expect to begin initial production shipments for these applications in this quarter.

It should be pointed out that the current display product revenues have primarily been monochrome displays to color applications.

As the color displays start production, it is our expect expectation that by the end of the year 2004, our color display revenue will exceed the monochrome display revenue and we'll have a variety of new exciting applications.

Here, we would like to amplify our display marketing strategy.

There's no question that mobile and personal age is coming rapidly.

The wireless broadband and 3D's and WI-FI, have provided the high-speed wide speed bandwidth needed for the real mobile age.

The content and applications are now emerging rapidly.

All of these developments have lead to the need for higher resolution, lower power consumption, full color micro displays and we believe our patented and proprietary display technology is perfect for this market trend.

As a reminder, our display technology creates (inaudible) transistor active matrix LCD's.

TFT-LCD's with the same architecture as those used in the current LCD monitors and TV's.

Except there are high quality silicon transistors allow us to condense our displays to thousands of times smaller than those used in the laptop screens and with many times lower power consumption.

Our new color-suited display technology provides wonderful vivid color.

Interestingly, a few years ago, camcorder viewfinders were really the only large form (ph) applications for micro displays.

It was to replace the monochrome micro CRT used in those days with our (ph) monochrome CyberDisplays.

And we have been very successful in this application space.

Now the new application will be digital still cameras.

In this case, the unit volume is higher already than the camcorders.

The digital still camera sales are projected to over 40 million units in 2004 while camcorder unit sales are expected to be around $12 million.

Currently, there are very few digital still cameras using electronic viewfinders with micro displays.

However, the market is changing, especially in the high-end digital still cameras, which are now moving to electronic view viewfinders.

Of course, our digital still cameras were preferred full color displays.

Our newly introduced color, (inaudible) Have been aimed at the digital still camera applications.

As we stated earlier, we're very encouraged by the response of our customers.

We expect multiple design wins for digital still cameras in the current quarter.

Also, we'd like to emphasize we expect that that digital still cameras will be followed by other applications such as cell phones, games, additional industrial and medical applications.

The most important point of this is that we have demonstrated we -- via our camcorder marketing success be that Kopin can produce high volume, high quality cost effective LCD displays and our continued technical innovations allows us to make the highest resolution, smallest, lowest power consumption color display for a whole variety of current and emerging applications.

On the mercury side perhaps, the best example of CyberDisplay success is the Raytheon light thermal weapon site, which we are now shipping for deployment.

The CyberDisplay enhances mission performance by providing soldiers with the ability to see clearly through their challenging battlefield conditions.

We expect infrared silver (ph) imaging applications to remain strong growth drivers for our display business.

In summary, we're now positioned well for growth.

Our revenue is expected to grow, especially about --approximately about 20% sequentially in the current quarter.

And we actually anticipate a very good 2004.

Operator, we are now ready to call for questions.

Thank you.

Ladies and gentlemen, if you would like to ask a question at this time, press star, 1 one on your touch-tone telephone.

Again, star, 1 for any questions or comments that you may have.

If you are using a speakerphone, please make sure that your mute function is turned off to allow the signal to each our equipment.

Again star,1.

We'll wait only moments for everyone to queue.

We'll take our first question from Blaine Carroll with Adams, Harkness and Hill.

Hello, guys it's Jed Dorsheimer for Blaine Carroll.

I guess to start with your ThreeFive business, can we talk about the pricing dynamics, both in the HBT as well as in the CyberLife there and what you are seeing and what bringing on your largest customer, if that will change pricing in that environment at all?

Well, we're not going to get into specifics of the contract, but we don't see any change in pricing trends -- any different change -- any different trends in pricing than we haven't seen in the last couple of years, which has normally been about 10% to 15% down, and of course, that's all dependent on volume.

You don't meet certain volumes, the prices actually go up.

Great.

And will the ramp in the wireless LAN or the strength in the wireless LAN HBT revenues have any impact in pricing?

Not that we know.

I think that right now we noticed some -- this John Fan speaking.

We noticed some new customers for us on the wireless LAN.

Some of the customers are new.

The volume still are smaller and therefore, the pricing is actually very good for us.

Great.

In your CyberLight business, congratulations on qualifying a second customer.

Thank you very much, Brian (ph).

Did I hear you correctly, are you shipping green in production right now?

Yes.

We are shipping green.

As I mentioned, I'm sure many of you -- many people know that the low end chip pricing has been under stress these last few months.

So, but green is not.

Green is still very much desired.

And for many cases, many of the Taiwanese suppliers have difficulty providing good quality green.

Great.

We are shipping, yes.

We are shipping.

I must tell you right now on the LED's continue to lift the bar providing a higher and higher quality and higher performance chip, and I think that's very intensive activities at this point.

And is the green chip that you are shipping, is it the same market, primarily the cell phone market at first, or is that shipping it to other markets.

That's a very good question.

I would say primarily still for the cell phone, and what they call three in one, that's the RGB ones, the chips used in the RGB.

But there is a trend going away going addition decisional to blue or white.

People want RGB which allows you to get different colors.

So

Great.

RGB requires green.

And then one last question, and then I'll pass it on to somebody else, in the CyberLight, you had mentioned the Nichia and the litigation between Epistar over in Taiwan.

I guess your feeling on pricing and what that may do, and then also, could you comment on --although you're using sapphire, your patents -- I guess you don't fall into any sort of litigation risk or patent infringement risk correct?

Well, that's a very -- that's a good question.

I'll say, you know, we use nanotechnology and in NanoPockets, and we have our own 200 patents.

So, we don't feel that the I.P. situation is pretty strong, but in this case in the I.P., there's nobody can say never is never.

I'm not even sure that Nichia can say that.

But, we feel quite comfortable that we are okay.

Great.

Thanks, guys.

Thank you.

We'll go next to Earl Lum with CIBC World Markets.

Congratulations on getting your second customer qualified there.

You mentioned on the HBT wireless LAN, that it was greater than 10% of your HBT revenues, is that correct?

That's right.

And is there -- do you expect that to continue to grow as a percentage of your HBT or now to back off because your largest customer is going to come back online in Q4

I think both of them will continue to grow.

I think wireless LAN is definitely a growth sector for us, and we're seeing continued strong activities there, meanwhile, our -- our customers snap back, so we should see that denominator also increasing.

So, both would be good, and I think the wireless is recovering yeah.

OK.

Then, Rich, on the cash flow for the quarter.

Can you give me that number again?

We used from operations about 511,000.

OK.

Year-to-date, we're up a total of -- we have generated about $200,000.

Okay.

And then, John, if you look at the thermal weapons site, at this point, are you anywhere near the 10% level of total revs (ph) for your CyberDisplay.

Do you expect that to be anywhere near that in the near term, or is that – or will it continue to be more in the niche area of the revenue side?

The government contract business is not yet 10%.

OK.

And then also one final thing John, you mentioned that you thought next year color would exceed black and white.

That's right.

So, assuming that black and white continues to stay -- does that assume that black and white stays stable, or are you assuming that now we're going to start seeing a swap-out over the next 12 months from the black and white to the color.

You always ask the right questions. (laughter) I think that monochrome black and white will decrease somewhat not dramatically, but color will grow dramatically.

Okay, so we're going to have an incremental layering effect on your revenues for the display.

Oh yes.

If you can (indiscerbible) for example, we are very bullish on display right now.

Okay.

Great.

Thank you, gentlemen

The next question will come from Pierre McCogneel from Needham & Company.

Hello, John and Richard

Pierre.

Hi John and Richard.

Can you give us some idea of what was the revenue for the CyberLite?

We are not disclosing.

We only disclose the product group, which is the ThreeFive revenue.

Okay.

Well, at least, can you say did it grow versus last quarter.

As I said we’re just going to disclose the ThreeFive product revenue.

I think the key thing is we are still shipping significant amounts.

Okay, and the brightness level right now, are you competing very much with Taiwan, or are you above the Taiwan brightness level.

Could you give us some idea there?

Yes, I think the question is are we above the Taiwan situation?

When we are shipping keypads when we first introduced our display, we go to a keypad.

On the brightness level, of course, is the same as theirs, but our voltage is much lower, which is very important.

So, the answer is the brightness side, because they don't want bright ones in fact, they want the intensity there for use on keypads, but everybody is looking for low voltage, which we provide.

So right now, most of your --most of your LED's are going to keypads?

Currently, yes.

But, as I say, we are now providing new product for additional stuff like green is not for the -- green is not for the keypads.

Green is for the other applications inside the phone.

OK.

Are you doing any for traffic light?

I'm not aware that we're going to do traffic lights.

I think the design cycle is a little bit longer.

OK.

And when do you expect that you might be able to go into the display part of the phone?

I hope soon.

See, I would -- our display always needs some LED's, so we have a captive audience here.

OK, but I mean in terms of getting the brighter LEDs, I mean, are there big hurdles, or any issues that you are having right now?

There are hurdles, but I stated here, we're very happy with our progress right now.

OK.

And regarding the CyberLite, could you give us an idea of the breakdown between color and black right now?

CyberDisplay?

Yes

Right now, I think the color display is probably about only a few percent.

That's correct.

Yes.

A few percent of total revenue.

Right now, almost 90-some percent is all black and white.

However, we stated that by the end of next year, we will have majority -- at least over 50% from color.

OK.

And your ASP's there, they're also going at a normal ASP decline?

That's correct.

On the monochrome.

Yes.

What is it?

Can you state what is it now?

The ASP?

Yes.

We don't give ASP's on the display.

But the client is semiconductor around 15%.

Roughly.

The price decline has been as John said, around 10% to 15%.

And, the current pricing for the high-end color is actually significantly higher than what we're getting for the monochrome right now.

Yes.

Okay.

And finally, you had an HBT, what is it a third generation HBT process.

How is that coming along.

Are you introducing that, or are you selling that?

We asked -- I would say we're selling samples, and you are talking about gaining HBT's.

We're supposedly, which I would believe it, would give a higher power efficiently efficiency and lower voltage turnout (ph).

We have some good data, again, and I think a couple of our partners are really working very hard on it.

Probably it's not a good place for me to talk about technical successes here right now, but things are going on pretty well.

The customers are having a good reception there?

Yeah.

People are very happy with it so far.

Okay.

Do you think that ultimately, that generation -- that will take over the older generation, or – Is it difficult to say?

It appears -- I think, for instance, like, it took us three years to get (inaudible) depends upon how the final advantages are, and if there is demand in the market.

There is some demand in the market as they go into etch devices.

The etch devices are mostly on, so the power efficiently becomes very -- essentially an important effect.

So, it depends how fast some of the advances become adopted.

If it does – adoption comes fast and the power efficiency is in fact can be demonstrated well, I think it can be coming very quickly otherwise, you will push back a year or two, but regardless, I think that that's the next generation, people need it.

The question is how soon they need it.

OK.

Final question.

And then the break-even revenue for EPS is the same, it's changed?

No.

It's the same that we have been quoting since the beginning the year on $21 to $22 million.

The revenue.

Thank you.

Thank you, Pierre.

We'll go next to Tom Sepenzis at ThinkEquity Partners.

Hi, guys.

Just one question in the September quarter, obviously, you lost, you know, quite a bit sequentially.

From your largest customer.

You know, 60% to 70%, and I'm just wondering, it seems as though the guidance for December is a bit modest considering they're coming back up 100%.

I'm just wondering if could you talk to that, and why that --the gas number seem as little bit light?

Well, it's a mixture of a couple of things.

One historically, Q4 has been sequentially down from Q3, because, you know, we typically ship more in Q3 for the Christmas build, so there's always that element to it, but quite frankly, after that, Tom it's really based upon the projections that we're seeing right now, as what wireless is going to be.

And so, it's based on the best numbers that we have today.

OK.

And I think Richard is right.

As we say, as of today, we feel that the inventory is already gone (ph).

You stated that your capacity utilization is at 80%, is that correct?

70%.

70%.

OK.

Thank you.

Thanks, Tom.

We'll go next to Chris Versace with FBR.

Good afternoon, guys.

Hello, Chris.

Just a couple of housekeeping questions and then one or two meatier questions.

Rich, you said you sold – was it 100,000 shares of Micrel in the quarter?

That's correct.

And, what was the gain, again?

$300,000, approximately.

And I noticed that interest expense was up sequentially.

Could you kind of walk through what that was?

Interest expense?

That's where the $300,000 is.

OK.

I’m sorry - interest expense?

Yes.

Oh, I’m sorry.

Yeah, that was foreign exchange gains and losses.

All of it?

Yes.

Couple hundred thousand of it, additional foreign exchange gains and losses that we haven't had before.

Okay.

Is that because, the dollar is moving one way and do you expect that to continue, or are you guys?

No.

It's a condition that we have disclosed in our 10K for the last couple of years, and that is that our Korean subsidiary, all of our transactions are denominated in dollars.

But they have to pay their employees and suppliers in Taiwan.

Therefore, there's always a disconnect there.

OK.

And then just on the -- to get a better sense of the HBT business any sense of the split between InGaP and AlGaAs?

Yeah, InGaP, year to date is running 65% for the quarter, it was 70%.

OK.

And then just trying to understand the CyberLite – sorry – the CyberDisplay potential incremental ASP you might get.

If you guys assume a 50-50 mix next year of color and monochrome, any sense in terms of the magnitude of the price that you are getting today or compared to today?

Then you have to really start tearing it apart a little deeper and getting into the color, and is that VGA, 113 or 180 K?

-- and the volume.

-- and the volume.

So, those will have big impacts.

VGA, which is a very high-resolution display, goes for very, very nice dollars.

No one really out there in the marketplace who can match it.

So, we’ve got that spot all to ourselves right now.

And then the 113 K, the whole theory behind that is that although the ASP is lower, it's about half the size on a surface basis of the -- of our current.

So, the cost of sales is much less, so we actually end up with better margin.

OK.

And then just getting back to the gas question for a minute, are they -- the HPT, question, at first blush, I was kind of surprised, too, with the guidance when I understand what you guys are saying.

What I'm wondering if there's something else there, did you guys ship more than you expected to to Skyworks in the quarter or your largest customer – sorry?

No.

Okay.

Were they a customer in the quarter?

Skyworks, yes, they were a customer in the quarter.

Thank you.

And once again, ladies and gentlemen, as a final reminder, for any questions or comment that you may have, press star, 1 on your touch-tone telephone.

We do have a follow-up from Blaine Carroll with Adams Harkness and Hill.

Just a follow-up on the CyberLite.

Could you talk about capacity there and are you seeing all of your improvements through yields and what are yields?

With the CyberLight, both in the blue and the green.

We never tell anybody what our yields are.

I'm sorry, let me rephrase that. (laughter) Are the yields -- are the yields still at low levels?

No.

The yields are improving.

But meanwhile, we are working very hard, as I say to get the new products, which our customers are working with us, obviously, to get it ready, so, it's a very exciting time here.

So, your growth, is that mainly coming from yield improvements, or are you currently capacity constrained at your ?

No, we are not capacity.

Not at all.

Almost everything is going --a lot of things are going to improving the quality and performance.

Great.

Thanks, guys.

We'll go next to Jane Hoindoll (ph) with Mownews Christy (ph).

Hello, guys.

This is Reenie (ph) Batticiaria (ph) for Jane.

Hello.

I just had one question for you.

I was wondering how you expect the mix between monochrome and color to shift throughout 2004 as you see color growing to more than half of the CyberDisplay business?

The question is how is the color and the monochrome going to shift as time goes on.

I think that it's -- it's a very interesting quarter for us, as many of you probably gathered.

We are spreading quite a lot of interesting new design wins for new applications, and a lot of new applications are -- the majority of new applications are based on color.

So, we are going to start seeing color begin to take place this quarter.

And exactly how it is all going to grow and I mean -- there was a previous question about average price for the color next year is a little bit harder because we are seeing all of these things coming on, and --customers give us a range of how many they will need for next year.

We're going to see how it comes out, because it's all a new product for them, I mean, new stuff for them, so I would think that we will see color starting this quarter, and the continuously the ratio will change, and the -- and by the end of next year, the color will -- the color will be the majority, assuming over 50%.

The monochrome, the previous question was asked, it will come down from -- it's not -- it's not going to come down dramatically.

It's going to come down.

And then the color is the one that's coming up quickly.

OK.

Thank you very much.

We'll go now to a follow-up from Pierre Maccagno.

Two questions.

One, how many greater than 10% customers did you have for the quarter, and who were they, if you could say that?

We only disclose 10 percents at the end of the year.

And there were two with one very close.

OK, and for your guidance, how much turns business are you assuming?

All our business, quite frankly, is turns.

That’s the way we’ve always run it.

OK, so no bad look (ph) much?

We get 90-day forecasts, but the SEC. definition of backlog is non-cancelable and all of the orders are cancelable.

Ok.

Thanks.

And, ladies and gentlemen, we have no further questions.

At this time, I'd like to turn the conference back over to Dr. Fan for any additional or closing comments.

Thank you for joining us for our third quarter conference call.

And we look forward to talk to you again.

Thank you.

Once again, ladies and gentlemen, that does conclude today's call.

Thank you for your participation.

You may disconnect.