Kopin Corp (KOPN) 2004 Q2 法說會逐字稿

Good day and welcome everyone to the Kopin Corporation Second 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 8:00 p.m.

Eastern Time through Wednesday, July 28 by dialing either 888-203-1112, or 719-457-0820 and entering confirmation code 781615.

You may also access an archived version of the call on Kopin's website at www.kopin.com.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 C. C. Fan, and Chief Financial Officer, Mr. Rich A. Sneider.

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

Please go ahead sir.

Thank you Stephanie.

Good afternoon everyone, and thank you for joining us.

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

John will update you on the current operational achievement, and share our outlook for the remainder of 2004, and then we will take questions.

Before I begin, I want to remind everyone that during today's call, taking place on Thursday, July 22, 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 uncertainty.

The kinds of risks include, but are not limited to demand for our CyberLite and III-V product, market conditions, the Company's ability to ramp up production in its manufacturing facilities, and other factors discussed in the Company's 10-K for the year ended December 31, 2003, 10-Q for the period ended March 27, 2004, 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 did not receive a copy of today's news release, it is available on our website at 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 second quarter of 2004 was $23.6m, up 19% year-over-year and 5% sequentially in line with our guidance.

Q-2 represented another record quarter for CyberDisplay, with revenue increasing nearly 18%, to $13.2m from $11.2m in the second quarter of fiscal 2003.

On a sequential base, second quarter CyberDisplay revenue increased 3%, from $12.8m in the first quarter of 2004.

III-V revenue in the second quarter of 2004 was $10.4m, up 20% compared with $8.7m in the second quarter of 2003, and up 9% compared with $9.5m in the first quarter of 2004.

Kopin's net loss for the second quarter of 2004 was $2.3m, or three cents per share.

This compares with a net loss of $3.4m, or five cents per share in the first sequential quarter, and a net loss of $1m, or one cent per share in the second quarter of 2003.

So in the second quarter, we made significant progress in improving our CyberLite production yields and expect this trend to continue.

Net loss per share for Q-2 2004 was calculated based on approximately 70.1 million shares outstanding, while the figure per share for 2003 Q-2 was calculated based on 69.4 million shares outstanding.

Cost of goods sold in second quarter of 2004 represented 87% of product revenue versus 86.2% in Q-1, and 76.2% one year ago.

Improvements in Display yields were offset by the continuing negative gross margins in LEDs.

We expect continued Display yield improvement in third quarter.

Research and Development expenses were $3.5m, or 15% of revenue in the second quarter compared to $3.9m, or 18% of revenue in Q-1 2004 and $2.9m or 15% of revenue in Q-2 of 2003.

We project R&D expense in the range of 17% to 20% of revenue in Q-3.

Selling, General, and Administrative Expenses in Q-2 2004 were $2.7m, or 11.6% of revenue.

SG&A was lower in the second quarter as compared to the first quarter because of the act of certain normal Q-1 expenses.

We will expect Q-3 SG&A expenses to be in the $2.5m to $2.8m range.

As of June 26, our cash marketable securities balance decreased to $111m compared with $115m as of March 27, 2004.

Cash declined primarily due to funding of working capital, specifically inventory, which was $10.7m at June 26, 2004 compared with $7.9m at the end of Q-1.

The increase in inventory is due to our transition from monochrome to color products.

We are increasing color product inventories while maintaining the monochrome.

DSOs in Q-2 were consistent with Q-1 at 39 days.

CapEx is $1m.

Our full-year Cap expectation is now $3m to $5m.

Depreciation and amortization was approximately $2.5m in Q-2.

For the six months ended June 26, 2004 total revenue was $45.9m versus $37.9m for the same period in 2003.

This was the strongest first half year performance in our history.

Revenue from III-V-V was $19.9m compared with $18.2m for the six-month period ended June 28, 2003.

CyberLite revenue was $26m compared with $19.8m for the same period a year ago.

The net loss for the first two quarters of 2004 was $5.8m, or eight cents per share based on 70.1 million shares outstanding.

This compares with a net loss of $3.2m, or five cents per share based on 69.4 million shares outstanding for the first six months of 2003.

Turning to our guidance for the third quarter, we expect revenue to increase approximately 3% from the same period in 2003, essentially flat on a sequential basis.

III-V revenue should be comparable to Q-2.

In our CyberLite business, we expect Display shipments to digital still camera and military customer to offset softness in the digital camcorder market.

As we said in this afternoon's news release, our LED product line sales are currently operating with a negative gross margin, and this negative margin, coupled with our substantial investment in development has resulted in significant losses for the product line.

Consequently, we are evaluating a number of different business models that would enable us to enhance our competitive position in the high-brightness LED market by combining our technology with a lower cost structure.

We expect to complete this evaluation by the end of the year.

And with this, I'll turn it over to John.

Thank you Rich.

Kopin saw continued top-line growth in the second quarter of this year, the third consecutive quarter in which total revenue has increased.

We experienced strong demand for our HBT products for our high-enterprise customers.

And our color CyberDisplay products continue to gain traction in the customer electronics market.

Now let's review each business in more detail.

CyberDisplay revenue increased for the fifth consecutive quarter in our Q-2 products, reaching a record $13.2m.

We experienced strong performance across the board, particularly for our .24" color filter displays, 180K, and color .16" color display 113K, the world's smallest color filter display.

In all, color display products reached about 60% of total fiber display revenue for the quarter compared with more than 50% in the first quarter of this year.

Our CyberEVF, a cyber built complete electronic viewfinder system also continue to be in high demand for customers looking for cost-effective easy to integrate solutions for display optics entirely electronic.

Two strengths demonstrate how successful we have been in penetrating the consumer electronics markets, particularly the camcorder and the digital still camera segments.

We secured three new fiber display customers in Q-2 to illustrate this effect.

First, flat-panel display pioneer Sharp selected Kopin's CyberEVF 113K for two new Digital Viewcam products, now available through this country, Europe, and Asia.

Those of you who have followed the electronic industry for a while can remember it was Sharp who successfully developed and sold the first flat-panel liquid crystal laptop display in the early '90s.

Their success is what started Kopin on the path to develop and market fiber display.

We have developed the type of technology to compress the optical crystals and create the CyberDisplay.

Needless to say, we're very excited that Sharp has chosen Kopin to be the its partner.

During the quarter, our CyberEVF 113 was also integrated into Royal Phillips Electronics' new Key Ring camcorder, a multi-purpose personal entertainment device.

The device, which incorporates the capabilities of digital camcorders to make a pixel digital camera, MP-3 player, and a USB source device.

It is another example of expanding opportunities for Kopin's CyberDisplay.

In addition to Sharp and Phillips, leading Taiwanese digital still camera manufacturer, Tekom selected Kopin's 180K CyberDisplay as the viewfinder imaging device for its new upper-mid ranged DNC model.

Kopin CyberDisplay is now integrating all three digital still camera levels, and as I will discuss in a moment, we see this market as a growing opportunity for Kopin.

On our Q-1 conference call, we told you that the record moved the color display products have [inaudible] our production use.

We say that we have intended the problem to be resolved within two quarters.

I am pleased to report that we are making very significant progress.

Although you cannot completely return to our target range, for the most part, it is well on its way.

Having just spent a couple of weeks visiting with [Konya's] perspective customers in Asia, I'm very excited about opportunities for our color CyberDisplay products in the new digital camera and portable entertainment devices.

The digital still camera market, the trend for us is that the increase of use of electronic viewfinders, which have now penetrated only about 5% to 6% of the market, but now is projected to go over 10% very soon.

Having seen even high volumes in a few years, how we expect a low tier of the DSC market to be dominated by the camera phone.

The middle tier that should move into a feature-rich camera with both high pixel counts, more memory and more important for Kopin, higher zooms and electronic viewfinders.

OEMs are eager to convince customers and consumers that they should own both a camera phone as well as a DSC.

And the way they are trying to do so is to make the middle-tier camera thin, small, and slick yet powerful and durable.

A combination of high zoom and small [inaudible] center create the ideal opening for Kopin.

We've tried to attack the middle-tier DSC market with our new color display.

We also continue to be encouraged by the response of our medium quality display, the 24" CyberDisplay 922K.

Based on current design activities, we see significant opportunities for the 922K in the new DSC models slated to go out next year.

In Asia, I also see a number of promising new portable entertainment devices, including hand model systems for viewing movies, TVs or digital broadcasts from DVD players and hard disks, storage disks.

I believe the trend towards the DSC application is solid.

Personal entertainment could be the next-best thing for our CyberDisplay.

So to sum up, our CyberDisplay is well positioned with the broadest product portfolio and technology that is the envy of the industry.

As Rich indicated in his remarks, we are cautious about Q-3 as digital camcorder and electronic customers have indicated that demands are soft.

So our products put us in a very good position for long-term growth.

In III-V business, revenue increases for the third consecutive quarter are strong HBT wafer sales.

The 20% use of unit increase in III-V underscores the steady performance of rival handset manufacturers, including Motorola and Samsung and the strength of our powerful enterprise partners in this key OEM.

On the product development part, our DHBT transistor is being sampled by a significant number of current and prospective P8 customers.

This month, based on our month's activities with [inaudible] transistor to be designed by the end of this year.

Turning to CyberLite, during the second quarter, we continued to make good technical strides improving product performance.

However, the global market remains extremely competitive, and it is clear to us that current business model for LED is not sustainable.

We are exploring a range of business models that will encourage and enable us to combine superb technology with a low-cost structure.

We hope to complete our evaluation by the end of this year.

So to summarize, orders remain strong for our HBT products.

We are seeing significant design activities for our key transistor.

We are looking at new business models for CyberLite with an eye toward making a decision on a new plan of action by the end of this year.

In CyberDisplay, [inaudible] are improving, and the percentage of revenues from color products continue to climb.

The digital camcorder market appears to be a bit sluggish.

We expect the softness to be offset by orders for digital still cameras and military customers.

Longer term, our new color filter display products put us in very good shape to win [inaudible] for digital still cameras and other new products we are rolling out in the year 2005.

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

Stephanie.

Thank you.

If you would like to ask a question, please press the star key followed by the digit 1 on your touchtone phone.

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

Once again, that is star 1 for any question.

Our first question comes from Earl Lum with CIBC World Markets.

Good afternoon gentlemen.

John a couple of quick questions.

The stuff that you're seeing right now in the camcorder market, is this something that is out of the normal seasonality that you would expect in the industry, and are we seeing consumers transitioning to some other product?

Or can you give us some insight as to what exactly is going on with the camcorder market as your customers are telling you.

Okay, the first question you have is if the softness in camcorders is it seasonality or transitioning.

I actually think a little bit of both.

I do see some transitions happening because customers, first of all, are moving to digital still camera.

As you well know, digital still camera also not can have digital video stream.

So I think that is happening.

But I don't think that is happening very strongly yet.

I do see that, as you well know and some of the [inaudible] can tell you, there seems to be a little softening in this sector.

Okay, and then with regards to the CyberLite, as you review your business models, will that also include the potential of exiting that business altogether?

Or what are you, can you give us some idea as to what you're looking at potentially as we move forward on that particular division?

Yeah, I think that on the CyberLite process, very different business models are being considered.

But I think that the way we are assuming any fault is our [inaudible] is actually very good.

And yet, making those buys in the United States we believe that in the long-term is not sustainable.

As you well know, they are low-cost manufactured in Asia.

So our goal is to see whether we can combine the two primaries, high technology for us and low-cost manufacturing systems in Asia.

And this is where the model will end at this point.

Okay, and then just one final question.

If you go back to the HBTs, are you seeing any change or shift between the in-depth product versus the out-depth, or are we still kind of at historical levels between the two flavors of those products?

It's a good question.

I think the historical level is that the shift is still not happening like we'd like.

Okay, great.

Thank you.

Yeah.

Our next question comes from Kalpesh Kapadia with C.F.

Unterberg Towbin.

Good afternoon John and Rich.

Hi Kalpesh.

Question on CyberLite.

If your yield improved in fiber display, and yet your gross margins are lower than last quarter, so that means that you sold more CyberLite products, or you sold it at a lower price?

Well, what it means is that the fixed costs associated with CyberLite continue to be significant.

And so as the volume decreases, you're not covering them, and so we've fallen to the bottom line.

So you've sold less CyberLite products this quarter than last quarter.

Well, I'm just saying that the price has gone down clearly, and so it may not necessarily be an indication of volume.

I meant sales in CyberLite were lower than last quarter.

Yeah, we don't break out CyberLite revenues specifically.

But clearly, the pricing has gone down.

So in other words, your HBT business grew faster than 9% growth.

Yeah, as we indicated HBT sales were strong.

And you track some of our customers, and we would be in line with our customers.

So that brings the next question, Rich, who are your top, are there any changes in customers, and if there were, who were they?

Well, we only give the 10% customers annually.

But it's the same as what we had at the end of last year.

Skyworks is clearly a very significant customer.

Samsung is very significant, JVC.

Okay, in terms of inventory, the $10m or so in inventory, how much of the inventory is CyberLite?

Not much at all.

Okay, and in terms of capital equipment, how much is of the total?

As we disclosed in our 10-K at the end of the year, it's around $15m.

So in other words, if you were to move overseas manufacturing, you would have to take a write-down on capital expenditure?

That is a possibility.

And lastly, in terms of Q-3 guidance do we see a total decline in CyberLite from Q-2 levels?

Well, as we said, III-V is going to be flat, and our HBT will track along with our customers.

Thank you very much, and good luck.

Yep, thank you.

Your next question comes from Jed Dorsheimer with Adams, Harkness.

Hey guys.

Rich, first question for you.

The guidance, the essentially flat, unless I'm doing my math wrong, is actually down slightly, right?

Right.

All right.

What would the gross margins have been if you exclude the CyberLite?

We don't break that out.

All right.

And how many reactors do you have in the CyberLites?

Can you break that out?

Well, I'm not sure we ever have.

We have, let's see, we have a few, about five I think.

Five?

Yeah.

I saw the [inaudible].

In the CyberLite we always try to develop our technology here, and eventually we always think we're going to move overseas for some of that stuff.

But we never installed all of our machines here.

Our CyberDisplay, our labor-intensive part has moved to Korea as planned.

It gives CyberLite the situation in the cost structure.

We just decided to move this faster.

Mm hmm, and when you say you're evaluating the business model, I think on a previous conference call you had mentioned trying to get into sort of the I guess the one-watt or half-watt.

Is that still where your focus is versus where you currently are in the selling into the hand-cut market?

Yeah, I think that our technical approach has been to increase several things.

Increase our brightness while maintaining our low BF and our high ESC.

And I think we're achieving [inaudible] activities there.

But the CyberLite has shifted from technology to cost and price now.

Sure.

And so I think that the whole model, it is no longer technology that can win now.

It's actually combined with cost and price.

And what we are trying to do is address what really happened the last six to nine months in the marketplace.

Something happened and we are addressing to that effect.

It's no longer a technology issue any more.

And John, just since you recently spent some time over in Asia, could you give us some commentary on what you are seeing over there that's causing this business to really decline?

Is it a matter of just additional customers coming in and the pricing declining at a rapid rate both on the blue and the white LEDs?

Because I think previously, you had mentioned the 400 and 16 nanometer blue was buoyed a little bit as a result of the white application.

Recently there's been some commentary that white has actually declined year-on-year.

Could you give some color as far as, since you have your hand on the pulse?

Yeah, I spent close to two weeks in Asia, and I came back with a very, very bullish display, and on the CyberLite I came up with the realization the price erosion in Asia on the CyberLite is pretty significant.

However, I do believe the market for CyberLite and LEDs will continue to grow, even though there seems to be some slowdown in the handset manufacturing, the people in China asking for LEDs for the keypad lighting.

So the East will slow down in that, but I think temporarily.

But that also continues to create more pressure on the price, that slowdown.

So I think the way to solve the problem is in fact address it head-on.

There's no way you really can use technology to win the market on results.

You have to address the cost structure, and I'm confident that something can happen.

Because the demands are there, the demands are there and people are still looking for people that have high technology.

Well I guess the demand is still there, but how does a U.S.-based company compete against some of the Asian manufacturers that are subsidized by, they're voucher-subsidized by their country, so the fixed cost is at a much lower level?

Yeah, that question is -- I was thinking on the way home on the airplane.

I said, "Wow, what can we do with this?"

I think that there are ways.

I think you can look at the structure of all assistance right now.

There are some U.S. manufacturers that do have volume, and I think that they have market that's good.

In Japan, Japan buys their IPs so they're fine.

And then you have a whole bunch of people in Taiwan, and they manufacture their chip in Taiwan.

So they have low-cost structure compared with Japan and the United States.

They need the lower cost structure.

Yeah, well when you mention Japan, and I don't mean to belabor this but if you are starting to see some of the I guess the IP-rich companies, or the leaders looking at either co-branding or a strategy of partnering since we've seen out of both [Ozran], out of [Nichia]. [Adjulant] with luma-LEDs is now focused on this market.

It looks as if, is that a consideration for Kopin where maybe a co-branding strategy with one of the low-cost Asian suppliers would be where you would want to go in the future?

That could be a way assuming it was an option.

We do have, as you well know, in Asia Kopin is a very good brand name.

Our CyberDisplay HBT has turned out to be one of the top technology leaders.

So we're definitely [inaudible] some way.

And our CyberLite with [inaudible] get very good exposure.

The key matter for us is really as I said before, technology alone is not going to win this market now.

You've got to have the cost structure.

Two last questions.

John what is the surface area of your LEDs?

Some of the LEDs for keypads could be awfully small.

So would it be less than 300 microns square?

Oh yeah, significantly less.

That's no longer the issue because about half the people also strike a [positive] side.

So you've got to believe in this world now you cannot lose the technology lead, but other people, especially in Taiwan where I visited them for a few days, I think their technology is quite good also, so they can get a very small die, and now you have small dies but they made them in Taiwan.

So there's really no difference between sapphire and silicon carbide when it comes to how many dies per wafer?

I am not going to answer that question but the sapphire dies are getting awfully small.

Gotcha.

One last, just moving over to CyberDisplay, one last question.

Rich maybe you can help me understand this.

If you're building inventory in the monochromes, but the demand is for the color, am I understanding this correctly?

Are we setting up for a write-down in the monochrome products?

No, what we've done is we have basically purchased all the monochrome we need for what we believe will be the product life cycle, which will probably be the end of this year, possibly into the beginning of Q-1 next year.

So we've kind of basically stocked up on all the materials for the monochrome.

And so that's why you have this kind of increase in inventory because we're carrying a little bit more than we normally would for the monochrome products.

We've basically done some last buys for the wafers.

And from here on in, most of the purchasing will be done for the color.

All right, and then the softening -- sorry, two more questions.

In the softening in demand, are you looking for a snap-back in Q-4 or do you think that's systemic?

I would anticipate, at this point anyway, with new [inaudible] and digital still camera and all, everything will be fine.

And lastly, I promise, Rich based on what you're seeing right now, what are your expectations for gross margin exiting 2004?

Well, that's really going to be dependent on what we do with the CyberLite, and the business model we ultimately succeed at.

Historically, the HBT has been around 25%, and the CyberDisplay has been in the high-20s, low-30s.

And we expect with the color, as the color increases the CyberDisplay will increase.

But where CyberLite fits out is really going to determine a lot where we ultimately after this year.

Since we don't have that business model, it would be just pure speculation at this point.

All right, if CyberLite went to zero, what would gross margins, what's sort of worst case?

Well again, I just gave you the numbers.

HBTs 25, if business keeps going it's a fixed-cost structure so we get very good incremental margin on HBT, upwards around 65%.

So that margin will stand.

Display to color is going to take that margin up so at that point, you could put your own numbers against those and come up with a sales mix, and then that's your weighted average.

Thanks guys.

Again, if you would like to ask a question, please press the star key followed by the digit 1 on your touchtone telephone.

And our next question comes from Chris Versace from FBR.

Good afternoon guys.

Hi Chris.

Just kind of, some things have been kind of beaten to death.

Just a couple, one or two quick questions.

Just on the HBT side, you commented that your volumes were in line with your customers.

Just curious, what was pricing like, either sequentially or year-over-year for those wafers?

Pricing this year will follow the normal trend for the last two or three years, probably down about 10%.

Pretty linear over the course of the year.

Okay.

And then if we believe what was out in the press, it sounds like one of your competitors took the lead spot with one your customers.

Was that more on quality?

Was that more on pricing?

Or was that just being very aggressive in the marketplace?

You're talking about, Chris I think they target recent announcements somebody you mentioned out there, Chinese supplier.

Correct.

Yeah, we will continue to supply to the customer, and we're happy that they remain as a customer.

Right, and then just one or two other quick questions.

Not to bring us into the CyberLite all that much, but can you guys just talk about the magnitude of either the industry decline in pricing or kind of hint around what you guys talk for your products, if it's in line with that or not?

On the CyberLite?

Yeah.

On the keypad, the value to decline is the rest of the year.

And I would say that depends on how you look at it, is anywhere effective two or a little bit more in the last maybe 15 months.

And that, of course, creates a lot of, like you say a lot of activities or consolidations, partnering, co-branding.

Everything is trying to take care of the situation.

Okay, and then just two quick last questions.

Rich could you remind us what the ANC difference is on the CyberDisplay between color and monochrome?

All things being equal, it's about 20% higher.

And then is there a similar gross margin difference as well?

Honestly, there's an improvement in gross margin most definitely.

So there's not that much significant difference in the manufacturing costs.

Great, all right.

Thanks gentlemen.

At this time, we have no further questions.

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

Thank you for joining us for our conference call, and look forward to talking to you again soon.

Bye, bye.

This does conclude today's teleconference.

We would like to thank you for your participation.

You may now disconnect.