Kopin Corp (KOPN) 2004 Q1 法說會逐字稿

Good day, everyone, and welcome to the Kopin First-Quarter 2004 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 p.m.

Eastern Time through Wednesday, April 21st by dialing either 888-203-1112 or 719-457-0820, and entering confirmation code 333243.

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

With us today from the company is the President and CEO, Dr. John C.C.

Fan, and the CFO, 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.

I will begin by reviewing our financial results for the first quarter.

John will update you on our recent operational achievements and share our outlook for the coming year.

Then we'll take your questions.

Before we begin, I want to remind everyone that during today's call, taking place on Thursday, April 15th, 2004, we will make forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995.

These statements are based on the company's current expectations, projections, beliefs, and estimates, and are subject to a number of risks and uncertainties.

Potential risks include, but are not limited to, demand for our CyberDisplay and III-V products, market conditions, the company's ability to ramp up production in its manufacturing facilities, and other factors discussed in the company's Form 10-K for the year ended December 31st, 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 new release, it is available on our website, www.Kopin.com, or you can contact Sharon Merrill Associates at 617-542-5300, and a copy will be sent to you.

Turning to our financial results, total revenue for the first quarter of 2004 was $22.4m, up 24% from Q1 2003, and on a sequential base, an increase of 6% over the fourth quarter of 2003.

CyberDisplay continues to perform well, and sales for this product group increased for the fourth consecutive quarter.

CyberDisplay posted a record $12.8m in revenue for the first quarter of 2004, up about 49% from 8.6 in Q1 of 2003 and 3% from $12.4m in Q4 of 2003.

III-V revenue in the first quarter of 2004 was $9.5m compared with $9.5m in the first quarter of 2003 and $8.8m in the fourth quarter of 2003.

Kopin's net loss for the quarter was $3.4m, or 5 cents per share.

This compares with a net loss of $0.6m or 1 cent per share in the sequential fourth quarter and a net loss of $2.2m, or 3 cents per share, in the first quarter of 2003.

Our net loss is primarily the result of a much faster than expected customer uptake of our color CyberDisplay products.

Color sales accounted for approximately 50% of our overall CyberDisplay product sales in Q1, compared to approximately 20% in the fourth quarter of fiscal 2003.

Consequently, overall CyberDisplay manufacturing yields and efficiencies were lower, as a result of this dramatic shift in CyberDisplay's sales mix, as a surge of color products ordered outstretched both internal and supplier capabilities.

We are taking steps to bring our manufacturing yield and efficiencies in line and we're making progress in this area.

Cost of goods sold in the first quarter of 2004 represented 86.2% of product revenues versus 75.9% in Q4 and 83.4% one year ago.

The decline in gross margin and the efficiencies is primarily related to the decrease in display manufacturing yields, as we ramp up the new products.

Research and development expenses were $3.9m, or 18% of revenue in the first quarter, compared to $4.4m or 21% of revenue in Q4, 2003.

We project R&D expenses to be in the range of 15% to 20% of revenue in Q2.

Selling, general, and administrative expenses in Q1 2004 were $3m or 14% of revenue.

First-quarter SG&A expenses increased year over year due to additional marketing expenses related to CyberDisplay products, and rose sequentially due to normal seasonal spending, primarily for costs associated with Kopin's annual meeting.

We would expect Q2 2004 SG&A expenses to return to the $2.6m to $2.9m range.

As of March, 2004-- excuse me, as of March 27th, 2004, our cash and marketable securities balance was $115m compared with $120m as of December 31st, 2003.

The decline in cash and marketable securities was to support increases in working capital.

Specifically, Accounts Receivable increased $2.8m as a result of the increase in sales, and inventory increased $2m to support a wider diversification of products.

Included in ``other assets'' is 400,000 shares of Micrel stock valued at $5.3m at March 27th, 2004.

DSOs were 39 days, compared with 30 days in Q4.

For the quarter, company-wide fab utilization, excluding CyberLite, was approximately 80%.

CapEx for the quarter was $400,000.

Our full-year CapEx expectation remains at $5m to $7m.

Depreciation and amortization was approximately $2.5m in Q1.

Turning to Q2 expectations, we believe the trends in wireless handsets and wireless LAN markets are favorable.

This, combined with the initial success of our recently introduced color filter CyberDisplay and CyberEVF viewfinder system, gives us confidence that the second-quarter revenues will grow around 5% sequentially or 20% up from year-ago level.

I'll now turn the call over to John.

Thank you, Rich.

Let me spend a few minutes talking about positive market currents we're seeing in both our product lines, beginning with the CyberDisplay.

As Rich mentioned, sales of our color filtered CyberDisplays surged in the first quarter.

Indeed, the speed in which customers adopt these new products really took us by surprise.

Consequently, the rapid transition to these new products negatively impact production yields and efficiency for the short-term.

Our CyberDisplay engineering group is working on the issue, and we're already beginning to see yield and efficiency improvements.

The silver lining is that the superb performance of our color displays have produced strong customer demand, putting us well on the way towards achieving the goal we established late last year, namely, to generate 50% of our CyberDisplay revenue from our color product sales in Q4 of this year.

We achieved this goal in the last quarter, well ahead of our established goal.

As we announced this afternoon, JVC has selected Kopin color filters CyberDisplay 180K as the viewfinder display in a new line of eight mini digital video camcorders.

These products are expected to hit U.S. shelves by the end of next month.

As some of you may remember, in 1999, JVC was our first camcorder customer, incorporating Kopin's original monochrome CyberDisplay.

The conversion from monochrome to our 180 color display is very rapid, and we expect by quarter two of this year the conversion by JVC should be total.

Let's turn on to the non-camcorder consumer electronics market.

As we mentioned in my last call, one of our goals is to capture the high end, mid-end, and low end of digital still camera market.

Our strategy behind the introduction of CyberDisplay and Cyber viewfinder was to cover the waterfront with a product mix for each market segment, and we're off to a very good start.

As you know, Kopin's VGA-quality CyberEVF system has been designed into Konica Minolta's new camera, called [Digital Imaged A2 Digital Still Camera].

We're excited by the prospect of our CyberDisplay 922K in this and other [XLR-type] digital still cameras.

Our intelligence indicates that customers and industry people are very impressed by the resolution quality of the viewfinder quality, and the color camera is selling well.

In addition to the high-end digital still camera, Kopin secured its first design win in the sub-three megapixel market.

Our CyberDisplay 113K has been integrated as a new [Spy Panned] digital camera, manufactured by [Worldwide Licensing Incorporated] a German digital camera market.

Our goal is to secure additional CyberEVF design wins in high, medium, and low-end digital still cameras, a similar strategy we used to capture a leading position in the camcorder market.

Perhaps this is the proper place to point out there are three new color filter displays. 113K, 180K, and 922K are now all designed in and in volume production.

We are delighted by the rapid adoption.

Our current marketing activities should result in additional design wins and production.

Kopin's [merchant] business continued to progress nicely as well.

As I mentioned in the last call, we received a production contract for FLIR Systems Imaging in Sweden for Kopin's [ruggedized] VGA resolution CyberDisplay 640M modules.

This will be used in night vision binoculars for the Swedish and Norwegian armies.

In March, we were awarded a $3.2m military-- Department of Defense contract to develop an ultra-high resolution color micro display for the U.S.

Army's Future Warrior Systems.

This two-year development program resulted in the delivery of CyberDisplay 1280 color filter MVA display.

This is an enhanced, full-color version of Kopin's monochrome display.

With 1280 by 224 XGA resolutions, or nearly 4 million color pixels, the new display will be the highest density color display of such size in the world.

Furthermore, our patented MVA technology will provide the display with a quick contrast ratio, of about 1,000 to one, and wide viewing angles.

In fact, we have just [assembled] a variety of products developed for military and homeland security in the SPIE symposium in Florida.

We understand the reception was very good, and so the exhibit will be shown at our annual meeting next Wednesday in Boston.

Everyone one is, of course, welcome to join us at the annual meeting.

Turning to the III-V, we're encouraged by the order patterns we're seeing in the HBT transistors into both wireless handsets and wireless LAN markets.

This end market growth has served as a catalyst for Kopin's III-V revenue, which grew approximately 9% sequentially.

In the handset industry, the color screen and camera-equipped phones are driving the growth right now.

And we believe our integrated circuit panels are gaining market shares at key OEMs of both handsets.

In the wireless LAN, the market is also moving from 80.11b solutions, which are powered by silicon transistors, to 802.11abg solutions, powered by indepth HBTs.

We expect that sales of Kopin HBTs for wireless LAN and wireless applications will continue to grow throughout the year.

On the new product front, development of our GAIN HBT transistors remains on track.

Several [Isis] suppliers for wireless handsets and wireless LANs are sampling this new transistor.

As the markets evolves and manufacturing can produce products with more features and faster data transmission rate, OEM will see power amplified transistors being able to maximize the performance of these new products.

Because GAIN operates at a lower voltage than other transistor types and provides faster sensor processing speed, GAIN is the ideal component to meet the stringent transmission protocols required for the next generation wireless LAN and 3G and [inaudible] handsets.

GAIN is truly the second-generation HBT structure, and we're very excited about our progress and performance achievements -- enhancements.

Our GAIN transistors have been designed into our power amplified circuit in 2004.

Turning to CyberLite, shipments of our LED to our customers continued in the first quarter.

We have made good progress in developing our new CyberLite products.

Actually I would like to look at more broadly the LED market.

I just returned from a trip to Asia, where I visited with a number of LED industry personnel, including current and potential customers, packaging houses, OEMs, and even some of our competitors, to take the pulse of what's really happening in the industry.

The last tier one dye manufacturers and smaller Taiwan suppliers all have made significant advances in the performance of LED dyes, just as Kopin has.

Everything I heard during my trip suggests that widespread adoption of [soft LED] lighting for traffic lights, automobile headlights, offices, and other general lighting applications might be closer than we think.

It is conceivable that technology breakthroughs in [soft LED] lighting have shaved five years off the timetable for widespread adoption, potentially creating an explosive growth of LED markets within five years.

How does this affect Kopin?

Clearly we're vying to be among the companies in line to get a piece of this softer lighting pie, so we continue to invest heavily to enhance the performance of CyberLite.

We've come a long way in the last six months, and our new generation LED chips are about ready for sampling with our partners.

Turning to our outlook for the second quarter, we expect continued strength in the wireless handset and the wireless LAN market to fuel III-V revenue.

On the CyberDisplay side, shipments to new customers should continue to pace the display revenues.

Based on these trends, as Rich said, we expect the total second-quarter revenue to increase approximately 5% on a sequential basis.

Our product development and product adoption activities for all our products right now are very active.

The development activities we plan to continue to make enhancements to CyberLite and to ready the chips for sampling.

We're also prepared to have Kopin's GAIN HBTs for commercial availability in year 2004.

We have already an extensive line of new color display products, and we expect to complete the full line of color products in 2004.

Our business development activities will focus on securing additional digital still cameras and other application design-ins in our CyberDisplay product group.

In summary, the market trends are in our favor.

Wireless consumer products are in strong demand, and our nano semiconductor technology provides exciting differentiated components for this growing trend.

We are very busy in providing new products for those markets.

With this, we'd like to open the call for questions.

[Operator Instructions].

And we'll take our first question from Sandy Harrison with Pacific Growth Equities.

Thanks.

Good afternoon, guys.

Hi, Sandy.

Just, John, kind of building onto your comments on the wireless LAN market and the transition to A, B, and G, and that that market is going to tend to use, you know, compound semiconductor technology versus you know, typical silicon technology, how rapidly do you expect that to take off, and does it have to be A, B, and G?

Can it be an A and G or B and G?

Just kind of, you know, if you could fill in some more holes, because that's an interesting point that you brought up.

Yes, again, my trip to Asia really clarified a lot of feelings on that.

It seems to be that wireless LAN, at least the expectation, is really beginning to take off in the second half of this year.

We expect the second half, again, to ramp up very fast, and it's going to be like a B and G together.

Some people are saying maybe A, B, and G. But certainly, there's a mixture of this dual mode, or maybe tri-mode, WiFi chips, and especially -- what I have learned is almost universally use HBTs -- GAIN HBTs.

So -- which is a very good sign.

And I have not seen any silicon activities there.

Gotcha.

And then justb-- I think you hit it earlier, Rich, but you went over it pretty quickly -- could you talk a little bit more about, you know, utilization rates this quarter and where they went from and where they came to and where you see them kind of filling in, next couple of quarters?

Sure, Sandy.

Last quarter, we were around 70%; this quarter, we were up around 80%, and we're looking to go 85, maybe close to 90% this quarter.

A lot will depend on the success we have in getting the yields in the CyberDisplay back in line with what we historically have had.

Yeah, in fact, in the III-V area, certainly in HBT, we're thinking about increasing some of the capacity, and we're doing that now.

How easily could you do that, or how quickly could you do that, John?

We're doing it just as we speak.

OK.

All right, great.

Thanks, guys.

Thank you.

And we'll take our next question from Earl Lum with CIBC World Markets.

Good afternoon, gentlemen.

A couple of quick questions.

With regards to the split now for color, John or Rich, are we expecting now by the end of this year that you're going to be virtually all color, or how do you expect that to level off and plateau as we get beyond Q2 and Q3?

Yeah, the question is [inaudible] the conversion will be total to color.

I expect that by the end of this year, there will be very -- not very much monochrome activities.

OK, so less than 10%?

We don't want to split hairs, but I think it could be close to that, yeah.

You know, the last two months was really quite surprising to us, the conversion rate.

Since most people want color, they just don't want to look at monochrome at all, and that actually put a lot of stress to us to adjust to satisfy them, and I think that trend will continue throughout the next couple of months.

Can you give us a trend on the –- put the more military side, into any kind of specifics as to when do you expect that to be a more significant portion of the overall display segment?

Based on current projections, in Q3, it should start to ramp up significantly.

OK, thanks.

And just one final, for the guidance that you're giving, are we expecting to see both growth in both segments that you're reporting in right now, for the June quarter?

Is that the correct way to read it, to the guidance on the top line?

Right now, because of certain capacity issues, we're kind of indicating flat for III-V.

But -- so the growth will come primarily from display.

OK.

Then once you can get more capacity added, Rich, then -- does that -- you're just pretty much capacity constrained right now?

When you start hitting 80% utilization, it's really hard.

OK, great.

Thanks, guys.

Once again, please press star one to ask a question at this time.

We'll take our next question from Jason Tsai with ThinkEquity Partners.

Hi, guys, just a few questions here.

Rich, I think I missed it -- did you talk about gross margin guidance for the second quarter?

No.

I would expect 3% to 4% improvement.

OK.

And can you guys talk a little bit about the color display ASP versus monochrome and kind of how that's shaping up right now?

Yeah, that's quite frankly a very complicated question, because as you know, we primarily have one monochrome product as opposed to a large, diverse group of color products, and the VGA goes for tens of dollars, and the 113K is in the middle single digits, so it's somewhat of a mix issue, as to what the ASP is in any particular quarter.

Again, for instance, the whole strategy on the low end, 113K display, was to actually be able to sell it at a little bit cheaper price than the monochrome but because it's size is about half that of the old monochrome, we actually get gross margin expansion.

So we actually end up selling more units and it may not show up on the top line, but it's designed to improve the gross margin.

OK.

Yeah.

Well, I think that in general, the color supposedly has about a 20% more premium, if we can get the yield to go back to what we want it to be.

20% premium on top of --

20% [inaudible] monochrome by the same size.

OK.

And last question -- can you just talk a little bit more about the LED business?

How that ramped up quarter over quarter?

I don't think we break it out.

No.

We deal strictly in the 3.5 business.

OK.

All right, thanks a lot, guys.

Sure.

[Operator Instructions].

And we'll take our next question from [Jason Krashaw].

Hi.

Good afternoon, guys.

Just a question on getting the yields up to where you want them.

Is this something that we're looking at a couple of months in solving the issue, or is this a couple of quarters out?

That's a very good question.

We are already seeing the yield improving.

It's not just the yield, it's the efficiency.

As Rich was talking about, we normally, in the last year, shipping one product, monochrome, one size.

Now we're shipping multiple size, multiple products.

And it's been happening within the last couple months.

But we are gaining ground there, and we believe that it's really a one or two quarter type problem.

One or two quarters?

Yeah.

OK.

And once you address the issue or solve the issue, what do you anticipate sort of the gross margins to be on the color displays?

High 30s, low 40s.

Our gross margin goal for the end of the year is the same.

OK.

Yeah.

So really, where you are now, I imagine, I mean, your gross margin-- I mean, where is it right now on colors?

I mean, breakeven?

I mean, you must be close to zero or even negative, or no?

No.

The overall gross margin on the company this quarter was 15%--

--not on the company, but on the color displays?

Yeah, we don't provide that level of detail.

OK, but clearly, going forward, once you address the yield issue, there's a lot of scope--

Yeah, it's multiple issues.

Yield is definitely an issue, but we're also -- there are a lot of start-up costs, just with start-up going on, and a lot of marketing and technical support of our new customers, our customers, on the new displays.

So just a lot of activities going on, and some of them are one-time type of charges.

OK, all right.

Thanks, guys.

And we'll take our next question from Sandy Harrison, Pacific Growth Equities.

Yeah, just to hit a quick second on the LEDs.

Last quarter you guys kind of upped the R&D ante a little bit to get your next level of products out, or your next brightness or lower power.

Did that pay off pretty well for you in the quarter, or are you going to continue to look at that, or is this something that we might see some spending come down, now that we've made some investment?

Just kind of trying to get a handle on, you know, how the LED rollout and roadmap is looking.

Well, we are getting ready to sample our new product with our customer partners, so that part is pretty imminent.

So right now, as you well know, the whole market -- I visited Japan -- the Asia, is that the whole market is really in a very explosive stage.

Tremendous improvement occurred in many different fronts now, so I don't know whether the investment in the LED will turn out.

It shouldn't be, not right away.

The next couple of months we'll probably keep that on the same level.

Great.

Thanks.

This does conclude today's question and answer session.

I would like to turn the conference back to Dr. Fan for any additional or closing comments.

Well I thank you for joining us on the conference call, and I hope to see some of you guys in the annual meeting next week, and talk to you later.

This does conclude today's conference.

We thank you for your participation.

You may now disconnect.