Kopin Corp (KOPN) 2004 Q3 法說會逐字稿

Good day and welcome, everyone, to the Kopin Corporation third quarter 2004 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 1 p.m.

Eastern today through midnight Wednesday, November 3rd, by dialing 888-203-1112 in the United States or Canada, or area code 719-457-0820 internationally and entering the conference code 867339.

You may also access an archived version at the Kopin website, which is www.kopin.com.

With us today from the company is President and Chief Executive Officer Dr. John C.C.

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

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

Please go ahead, sir.

Good morning, everyone, and thank you for joining us.

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

John will then update you on the recent operational achievements and share our outlook for the remainder of 2004.

Then we'll take your questions.

Before we begin, I want to remind everyone that during today's call taking place on Thursday, October 28, 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 31, 2003, and Form 10-Q for the period ended June 26, 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 have not received a copy of today's news 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 third quarter was $22.9 million, an increase of 30 percent year-over-year and a decline of approximately 3 percent sequentially but in line with our guidance.

CyberDisplay revenue of $13.2 million was essentially flat for the second quarter of 2004 but increased 15 percent year-over-year in the third quarter of 2003.

III-V revenue in the third quarter of 2004 was $9.7 million representing a decline of 7 percent from the second quarter of 2004.

The sequential decline in III-V revenue is entirely attributable to lower LED sales.

On a year-over-year basis, III-V revenue increased 62 percent compared with 60 in the third quarter of 2003.

Kopin reduced its net loss in the third quarter of 2004 to $1.1 million, or 2 cents per share.

This compares with a net loss of $2.3 million, or 3 cents per share, the sequential second quarter a net loss of $3 million, or 4 cents per share in the third quarter of 2003.

The net loss per share for Q3 2004 was calculated based on approximately 70 million shares outstanding, while the per-share figure for Q3 2003 was calculated based on approximately 69.5 million shares outstanding.

Cost of goods sold in the third quarter of 2004 represented 77.8 percent of product revenue versus 87 percent in Q2 and 85.8 percent one year ago.

Our cost of goods sold improved because of yield improvement, especially the color displays and the sale of higher-margin military products offset by the negative gross margins we are experiencing with our CyberLite product group.

Research and development expense was $3.5 million, or 15 percent of revenue in the third quarter compared with $3.5 million, or 15 percent, in Q2 of 2004 and $3.3 million, or 19 percent of revenue in Q3 of 2003.

We anticipate R&D expense to be in the range of $3.5 million in the fourth quarter of 2004.

Selling, general, and administrative and other expenses in Q3 2004 were $2.9 million, or 13 percent of revenue.

SG&A expenses were 12 percent of revenues in Q2 of this year and 14 percent of revenues in the year-earlier period.

We would expect Q4 2004 SG&A expenses to remain in a $2.7 million to $2.9 million range.

As of September 25, 2004, our cash and marketable securities balance is $110 million compared with $111 million as of June 26, 2004.

In addition, we held shares of Micrel Semiconductor valued at approximately $4.2 million.

Inventory at September 25, 2004, was $10.6 million compared with $10.8 million at the end of Q2.

DSOs were 41 days at the end of Q3 compared to 39 days in Q2.

Depreciation and amortization was $2.4 million in Q3 and $7.3 million for the year.

During the quarter we purchased approximately 103,000 of shares of Kopin stock under our buyback program.

For the nine months ended September 25, 2004, total revenue increased to $68.8 million versus $55.4 million for the same period in 2003.

Revenue from III-V products was $2.9 million compared with $24.1 million for the same period last year.

Revenue from CyberDisplay products, $39.2 million compared to $31.3 million in the same period a year ago.

The net loss for the three quarters of 2004 was $6.8 million, or 10 cents per share, based on 70.1 million shares outstanding.

This compares with a net loss of $6.3 million, or 9 cents per share based on 69.4 million shares outstanding for the first nine months of 2003.

Turning to our guidance for the fourth quarter, we expect to experience customary seasonality in the wireless handset and consumer electronics market.

In addition, we expect Q4 military shipments to be lower than Q3, as our customers smooth out their supply line for other system components.

We have purchase orders from our military customers, but we've been asked to postpone the shipments until they resolve some other supply line issues.

As a result, we expect total fourth quarter revenue to be in the range of $18 million to $20 million.

With this guidance, we will have achieved growth in the range of 13 percent to 16 percent for the full year.

I'll now turn the call over to John.

Thank you, Rich.

Good morning, everyone.

First, thank you for joining us today.

I know this isn't our usual conference call time, but we moved it to the morning because I was initially planning to participate in a roundtable discussion about future wireless devices at the Mobile Imaging Summit in Monterey, California.

Unfortunately, I had a scheduling conflict, but we have sent one of our senior managers in my place, and Kopin will be well represented there.

I will comment soon on the guidance that Rich gave you in a moment, but first let me walk you through some of the highlights of Q3.

The seats that we intend to play in Q4 and how we position ourselves on long-term growth.

We will start it with CyberDisplay.

Our long-term strategy for CyberDisplay product group always has been to spend its applications base in the consumer, industrial, and military electronics area.

This will reduce our reliance on the camcorder market, as the products initial primary growth driver.

We've been very successful today as evidenced by the number of design wins we have obtained in recent months and in the past year or so.

A primary example of a diversification plan is evidenced in our performance in Q3.

As we expected, initial volume shipments to military customer offset much of the softness in the camcorder market.

One of the primary reasons we believe the camcorder market is experienced softness is digital still camera.

Consumers are becoming less likely to purchase a digital camcorder when they can purchase a lighter, more compact camera that, in this case, in many of the new models of cameras, can offer much of the same features, including video.

I have recently spent a great deal of time in Asia, and, in fact, I just returned several days ago, and I have met many current potential partners, customers, suppliers, and even competitors to get a sense of what the hottest trends are coming and make sure that Kopin stays on the cutting edge of computer manufacturing.

Several years ago, we recognized the digital still camera market was a growing opportunity for us, one that requires considerable efforts to develop the product line, particularly to convince the OEMs the electronic viewfinder with a Kopin display has significant performance and size advantage over currently used optical viewfinders.

To give you a reference, currently, very few digital still camera models use electronic viewfinders.

But with a new digital still camera model coming out with high zoom features, that those cameras -- a lot of them will be starting using electronic viewfinders, and many of those new models will now start coming out in the year 2005.

We have identified the trend and have dedicated extensive resources to the digital still camera market, and our efforts are starting to pay off.

In addition to design wins we have announced for Konica, Minolta, SpyPair (ph) and T-Card (ph), I think I can say with confidence that Kopin is working with nearly all the large OEMs as well as some contract manufacturers in an effort to secure many design wins for our full family of colored viewfinders in the new digital camera models starting to launch in 2005 and 2006.

We are making very significant progress, and we expect to announce significant design wins in the next couple of quarters.

Volume production is expected to commence in the first half of next year.

Outside digital still camera and digital camcorder area, a number of new applications are being developed for CyberDisplay, a tremendous utility.

This includes model display systems and eyewear for portable entertainment systems, virtual reality gaming, cell phones, and for multi-function image storage devices.

Last quarter we announced that our CyberDisplay had been integrated Phillips Electronics' new keychain camcorder, a miniaturized multi-function device roughly the size of a salt shaker.

This quarter we announced that a micro-display system featuring Kopin CyberDisplay was selected by Accupix for their multimedia, virtual reality, movie theater eyewear systems designed to enable users to watch DVDs in the portable environment.

That system is now currently available in Korea and it will be start selling in the rest of the world soon.

In addition to that, Kopin also has announced there is color view to CyberDisplay 180K was selected by Nokia for the color kaleidoscope one innovative new picture viewing storage device for digital still cameras and camera-equipped wireless handsets.

Consider that one of Kopin's long-term goal continue to be getting CyberDisplay integrated in next-generation wireless handsets, we view this as a very exciting collaboration for Kopin.

This is a time new applications we're targeting as part of our diversification efforts and also into the new growth areas.

We expect additional design wins in the next couple of quarters that further demonstrate our success in penetrating additional segments of consumer electronics market.

Mobile video is coming via cell phones, via portable MF4, portable DVD players, et cetera.

Kopin color displays, being the tiniest and highest-resolution display in the world, are ideally suited for those applications.

Turning to the military segment, the third quarter was our first quarter shipping CyberDisplay in high volume.

That is a high volume relative to our military market.

This is the beginning of actual volume military deployment.

We thought you would know is a big deal.

In this case, to race for similar weapons sites.

Military electronic represent another significant opportunity of growth for Kopin, given the continuous advances in military demand.

Our shipments to Raytheon continue to ramp the next few quarters.

We are the cyber display of choice by the military.

I mentioned before about staying on top of market trends and remaining on the cutting edge applied to Kopin's R&D efforts in Q3.

We introduced two new low-voltage CyberDisplays that give customer additional micro display options will enable us to penetrate a broader segment market for portable device where battery life is of most importance.

As you can see, we have a lot of things on the plate for CyberDisplay.

Our long-term opportunities are stronger than ever, as we give further traction to our target markets, we believe our revenue growth will accelerate.

Turning to our III-V business, the performance of our HBT product in Q3 generally reflect our customers.

While some customers experience solid growth in the quarter, others experienced slight decline in business.

As a result, we are experiencing a slight increase in HBT revenue in Q3.

With regards to our wireless LAN activities, we believe the market will develop and will continue to develop with large foreign usage in 2006.

On a product development part, potential customers continue to sample our GAIN transistors and are pleased with the enhanced performance they are getting in the tests.

Our goal remains to secure a design win by the end of this year, which suggests production shipments in mid or late 2005.

Turning to CyberLite -- we said last quarter it was clear the current business model was not sustainable in the long run due to the sustained price erosion for LED for handset applications.

We have a number of different business models that will enable us to enhance our competitive position in the high-brightness LED market.

Our objective is to pair Kopin's superior technology with a lower-cost manufacturing base.

Just to give you an update on where we stand with that, we have made considerable progress with several strong opportunities that will enable us to achieve our objective, and we still intend to complete our variation by the end of the year.

At the same time, we'll continue our strong efforts to enhance CyberLite technology, which we believe will help us when the time comes to make a decision about the future of our product line.

We are also making good progress in this area.

So to summarize, in the near term we expect combination of (indiscernible) and the lower military sales to negatively affect our fourth quarter results though we still have achieved significant growth for 2004 over 2003.

However, for the long term, Kopin is very well positioned, and we remain very optimistic.

The level of CyberDisplay activity is the highest we have ever seen, and we continue to be very successful with our diversification efforts, both in terms of introducing new differentiable products and broadening the addressable markets.

We believe both of these will set us well for considerable growth in the future.

In III-V, our HBT performance continues to track with our best customers.

On the whole, we expect to grow, and wireless LAN will be our next growth driver in HBTs.

Customers continue to sample our GAIN transistors, and the transistor has shown significant benefits.

We should stress that we are the actual leading in CyberDisplay HBT, both in areas and market shares, new products, and innovative technologies.

In LEDs we are working on a rewarding solution for our CyberLite business.

We continue to expect a decision by the end of the year.

We believe this decision will lead to a lower cost structure for Kopin and a return to profitability.

Overall, our prospects remain bright.

We have a right mix of unique products and people to take advantage in the change in the next step of technology and will be the agent of change for a number of exciting new applications in the new emerging markets.

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

(OPERATOR INSTRUCTIONS)

Our first question today comes from Mr. Jed Dorsheimer (ph).

Please go ahead.

Hi, guys, congratulations on the quarter.

A couple of quick questions, I guess, for Rich, maybe we can start.

When you look at the CyberDisplay and you look at the III-V, and you talk about seasonality -- of the two, which one would experience greater seasonality into Q4?

Actually, they both are about the same.

What happens is that somewhere around the end of September, maybe the first week of October, we can still ship -- and if our customer hot lots it, they can get the product through to a Christmas shelf.

But normally we go into a lull in October and November through Thanksgiving, and then, based upon forecasts of what they think Christmas is going to be, we start ramping up again in December for what would be Q1 sales for our customers.

And they both follow kind of the same pattern.

All right, great.

Is it fair to say that you're basically not shipping any LEDs at this point?

No, that would not be correct, but the volumes are very much diminished.

They're diminished, all right.

And then, John, I thought original expectations were to have the CyberLite issues resolved by the end of this quarter, and I'm wondering, you know, obviously this is a critical decision.

I was wondering if you could elaborate a little bit on, I guess, what the -- and you did a little bit in the script, but what's taking longer than expected to resolve this issue?

Well, I'm trying to recall -- I think that we always advise that we will resolve it by the end of this year.

I assume that everybody will hope that it is resolved by then, but we always anticipate it would take until the end of the year to resolve.

So I don't think we are delayed there.

However, having said that, as you well know, it is really a quite complicated matter.

What we are trying to do is combine our superior technology with a low-cost manufacturing base, and what's happening is, and I think this is fair to say, is once we announce our intention, I would say we were actually bombarded with many proposals.

We obviously are very much sought after by people.

So we are -- I am faced with, shall we say, a buffet table with a lot of dishes on the table.

So we need to pick what is best for the company.

Well, maybe -- I guess what I'm getting at is could you give us a little bit more color on perhaps what is going to differentiate your solution, and when you look to partnerships, you know, over in Asia, you look to Asian packagers.

How, I guess, when you move away from handsets and look to the high-power LEDs, how is Kopin going to be able to differentiate versus some of the other low-cost suppliers over there and make this venture successful?

The question is how are we going to differentiate our venture if there is a venture different from anything that's in the market?

It's a very good question.

I think that we are looking at what the strength is.

We have very good technology.

Our products ship to tier 1 customers, so that part with good IPs.

What happened, if you look in the existing marketplace, most of the strong players are based either in this country or in Japan, and almost none of them have very low-cost manufacturing base.

I think a combination of technology and low manufacturing base will be probably the first one ever happened.

And if it does happen, then you have to sort of kind of kick it and eat it, too.

You have a very high technology, high performance product with very low manufacturing cost.

And that will really -- in fact, that's what's happened here.

Everybody came to us say, "That is what we want."

Now, why do they look at us, and every one of them come to us, and we have to make a decision.

Our goal, as you well know, there are many ways to solve this problem.

You can exit the business, you can sell the business, but we don't intend to if we don't have to, because we think our technology is good, the market is still growing, we just have to have a good partner to have good manufacturing cost.

And I think we anticipate we will get that achieved.

Great, one last question -- Rich, along those same lines, you know, if you are keeping this business, I think if you were to exit this business, you would get a nice pop in gross margins.

Doing the math, it looks like close to 10 percent, but I guess if you're looking at a partnership, how should we look at going forward to modeling purposes, what kind of increase or margin expansion opportunities would you be able to get immediately and then sort of longer term?

Well, we have indicated it's running at a negative gross margin.

Unfortunately, I can't give you a specific answer, because we have, as John said, a number of different alternatives and different business models that we're evaluating, and each one results in a different answer.

I think, quite frankly, probably the biggest pop we get out of it would be that we spend a significant amount of our R&D money on CyberLite development, and I would see a significant decrease in that as it is absorbed by a different entity, and that's probably where we get the biggest boost towards profitability.

Thank you, sir.

Our next question comes from Mr. Earl Lum with CIBC World Markets.

Please go ahead.

Yes, just a following on Jed's question earlier, Rich.

If you look at your R&D seedings, are we expecting to see that to be a substantial portion of that $3.5 million that we're looking at on a go-forward basis, or how much is going to come out of cost of goods?

And then as a follow-on to John on the LEDs, if we're looking at a joint venture or something in terms of a complete disposal, could you talk a little bit about what kind of IP would be associated with that?

And then I have a couple of follow-on questions.

Regarding the question -- the majority of R&D is CyberLite-related, and so you get a very good savings there.

And Jed mentioned that a 10-percent pop in gross margin.

Again, I can't say whether that's the right number or not, because it depends on what form we ultimately take in this venture or whatever it might be.

Okay, and then, John, if you can --

(multiple speakers)

I just came back from Asia, and one thing I do notice is we are visiting, in this particularly case, I visited quite a few cities in China.

I just could not believe how much LED is being used in China.

They are using LED in more applications than you can imagine.

So there is a huge market there, and the cost of -- as you well know, many of us that visit China, the cost of labor is very low.

So our feeling is that a manufacturing base, especially based in China with a strong IP and technology base of ours, will form a very good combination.

Now, of course, Richard mentioned that we actually have more than this type of combination proposed to us.

People in Asia obviously very much look forward to our technology.

So on the IP issues, of course, in a joint venture, obviously we'll be able to help them raise their technology base for their manufacturing and products.

But we will not be continuously doing the R&D.

We think if that's what you are implying is that.

And once it's done, everything should be moved to the joint venture or like.

Okay, and then, John, just a follow-up -- certainly, there's been a lot of talk about Gallium Nitride deposition technology as a key U.S.-based technology from an export-prohibitive standpoint into China.

Are the restrictions with regards to either the MOCVD equipment or the Gallium Nitride technology itself that would be a potential roadblock in doing something on the mainland?

It's a very good question.

I think, as you well know, Gallium Nitride equipment, of course, is already in China.

If you go to China, many cities already have Gallium Nitride equipment -- growth equipment in there.

So I don't think that is an issue.

But it's really not a measure of -- about necessarily critical technology by the government.

It's more whether the infrastructure is ready for taking Gallium Nitride growth in China.

And but that, in many ways, is resolved there.

So I think -- there also, in some way, has slightly complicated the matter how to arrange everything to be sure it pass all the musters.

So your question is one of the things that had to be considered and taken care of, and our potential plan is we are very, very carefully working on the details.

Okay, and then if we shift to the CyberDisplay, the military weakness that we're going to see in the fourth quarter -- are we expecting this to be just the one-quarter correction and then things are going to continue at a normalized pace going into calendar '05 or how long do you think this inventory situation is going to last at the customer?

Yes, at this point in time, as I indicated, we have purchase orders, our customers come back and ask what the holdup because one of the other suppliers is having some problems.

We expect to resume shipping this quarter, but we're going to miss some time, and then it should just continue on a normal pace thereafter.

Okay.

And then if you look at --

I want to make a comment -- it is not inventory problem, per se.

It is a supply line problem not involved with display but just as you rev up a military product sometimes other components have to go through that similar thing.

So we think it's a short-term problem.

Okay, and then if you look at DSCs now as a percentage of your display shipments in terms of either revenues or units, where are we at or where do you expect us to be at the end of 2004, and then as we go into '05, how will that mix shift change?

Well, as of right now, the majority is still camcorder-based shipments.

John, I don't know if you want to comment on what you think 2005 will look like.

Yeah, 2005, of course, we are looking forward in the future.

Again, the camcorder business is stagnant.

The hope that camcorder number of units are stagnant is now actually going down a little bit.

Things are shifting to digital still camera or digital video.

I think, for us, is that we'll maintain our camcorder customers, which we do.

In fact, we have a few new ones, but the market share really cannot increase any further now.

But we expect to have a very rapid rise in digital still camera.

There is a very distinct change in digital still camera arena.

To give you some idea of electronic viewfinder in digital still camera right now, it's probably this year -- probably about 6 or 7 percent of them has the electronic viewfinder.

But the new model with high zoom, many of them would really require or at least prefer to have electronic viewfinder.

So in 2005-2006, the number of percentage of electronic viewfinder camera will increase from 6 or 7 percent now to 30 percent.

And we hope to be -- in almost all of delta -- increased.

And it is so.

Everybody think our display being the smallest, highest-resolution display in this (indiscernible) which allow very simple optical design.

We are the preferred one, and so I spend next year -- you will see a very large change or application space from our camcorders to digital still camera.

And then, going further, I think the eyewear and those portable devices that attach to cell phones and others, will really become rare (ph).

So on CyberDisplay, we really have three platforms -- big application platforms.

One is a camcorder, which will cost what we started with.

The next one is the digital still camera.

The numbers are much higher than the camcorders, and then followed by, I think, all the new eyewear, which will be even higher than digital still cameras.

So we have real high hope on display.

And, at this point, we have actually very little competition.

So we are working very hard on that.

Okay, and just one follow-up -- obviously, color is where the direction is going.

What percentage did you end Q3 on color?

And how much of a margin improvement would we expect to see as you, number one, transition away from the camcorder market towards some of these other applications that are using higher-end product from you, and when -- will we expect to see that towards the second half of next year in terms of the margin bump or how can we characterize that, Rich or John?

All the new applications are coming out in color, and actually although color has a nice premium over the monochrome, the biggest margin expansion we're getting is out of the military products, which has a significant margin expansion.

If you go to our website -- to give you an order of magnitude -- the catalog price for military display is $315, and the cost for a display -- basic monochrome display -- you're talking $6 or $7.

So, really, the big margin expansion, we're hoping for next year, is going to come through military sales.

Okay, and then just as a kind of quick percentage of color versus black and white?

Well, the number is kind of skewed because of the military, because technically I'm not sure how I saw it -- as a color or a monochrome.

But suffice to say, 50 percent is probably color.

The military shipments are still more images is actually a monochrome display.

So, therefore, each kind of skewed the whole thing.

But the key -- I did want to make a comment to a couple of things.

As you well know, we started with a color manufacturer the beginning of this year, and we mentioned that we go through the year improvement.

We have achieved that.

Our year improved to a level that we really targeted for.

So we are very pleased with that.

Second is that new applications of digital still camera and also the newer applications require color, high-resolution displays -- higher than we use for camcorder.

And all these are a part of the process that spin up gross margin.

Thank you, sir.

Our next question today comes from Mr. Noel Ryan (ph) with Pacific Growth.

Please go ahead.

Hi, gentlemen, this is for Sandy Harrison, Noel Ryan.

I just had a couple of housekeeping questions, more specifically, I saw you guys did the share repurchase announced today.

What do you expect share count to look like next quarter?

And then I have a second question.

At this point in time, we're at 70.1 million shares outstanding.

We have a program in place and, quite frankly, it depends a lot on the stock price and the volume of stock.

As you know, there are very specific rules as to what we can go into the marketplace and buy.

The board of directors has approved a purchase up to 15 million shares, but you can't just completely execute that.

I don't expect a lot of -- we're not doing a stock offering, so I don't expect, long story short, that the number will be significantly different than what it is today -- somewhere around the 70 million share mark.

Great, and then, real quickly, on LED -- I know it's going to be minimal, but do you guys have a dollar number as far as what that was this past quarter?

From a revenue standpoint?

Yes.

That was about $600,000.

(OPERATOR INSTRUCTIONS)

Our next question comes from Mr. Jed Dorsheimer.

Please go ahead.

John, just a follow-up -- you know, as you look at the LEDs and the power chips, you guys, you know, started off for keypads, which, you know, have different dynamics as far as chip size, power, light extraction, et cetera.

Does the nanotechnology or NanoPockets that you had, does that transfer over into the power LEDs, and have you actually manufactured chips 1 mm square for those power devices?

Sounds, again, a very good question.

As you well know, when we started LED, we were focusing on the keypad applications through our NanoPocket.

It turns out it was a very, very successful introduction in the beginning.

Unfortunately, the price point got to a point that it was totally non-profitable for us to manufacture in this country.

That's why we no longer market it.

Of course, we'll still supply our customer, and that's why the revenue that Richard has talked about, assisting customer with support, but we do not look for a new customer in the keypad.

Meanwhile, all our research is spent to increase and improve the performance of the LEDs to be much higher-powered, much more efficient.

I cannot go into detail here, but, as I said in the script, we are working very hard on it.

We still spend a significant amount of R&D money, and we're making very good progress in it.

I think the NanoPocket will be still used, but maybe a few more interesting twists to make it very good.

It will be differentiable, and I think what we found out is on our tour, in Asia we are extremely well respected.

We have many, many people want to work with us because they think our technology is differentiable, it's different with our own set of IPs, and we are very innovative.

So combined with some of the stuff they have, we will probably make very formidable competitors in the market.

And then when you use the term "power LED" what is your definition of that?

Are you looking at sort of half-watt, one-watt devices?

Or are you looking at a high-powered smaller chip in the sort of 20 milowatt area?

It is a little bit of both.

I think -- remember, after the joint venture, if we do form a joint venture, the action will be moved to the joint venture, not us.

So it depends on which business model you are talking about.

Some people obviously will combat technology with their own kind of design for their power.

They just want basic know-how in how to grow materials, how to fabricate devices.

And some of them will, of course, adopt our product lines, but I think that -- it depends on who we choose as a partner.

So, to answer your question is, power chips are in.

There are companies who have their own design, but they are lacking certain things, which we have, and to get actually we form a good combination, and that's what's going to happen -- is that whatever deal it is, it's going to be a win-win situation for both parties.

For us, we want to have continuous upside growth possibility, but we not necessarily want to make it here in the United States.

And then, lastly, is it -- I assume that you're talking to both Chinese and Taiwanese packagers for this potential joint venture when you mention Asia.

With the power chip markets largely focused on white light, do your packagers have IP necessary for phospor deposition of the white?

Well, we are talking to everybody in Asia.

So when you're talking, there are only a few people that have IP for phosphor deposition over in Asia.

So I guess if you are looking at expanding this, how are you going to -- and this is maybe a follow-up on Earl's question -- how are you going to get around the IP for white?

Yes, maybe I answer the question in several ways.

One is, of course, we are talking to everybody in Asia, so that's one thing.

And second is, there are people who have white phosporous IPs in many countries, not just in Japan.

And, third, is there is a growing market right now for the LCD bed lights, which is really RGB-based.

So it is no longer white light now.

The market is going to grow very rapidly, and that requires very good green (ph), and we have very, very green green.

Kopin, we always stressed our green is probably one of the best in the world.

So in the growing market RGB for LCD TVs, we are uniquely situated.

Thank you, sir.

Our next question comes from Mr. Chris Versace with FBR.

Please go ahead.

Hey, guys, this is actually Brandon.

Just one quick question -- can you just discuss -- I think you mentioned at the end of the script about wireless LAN.

Can you just give a quick talk about what kind of applications you're targeting and where you are now and kind of where you expect to be next year?

Yes, as you will note, HBT, when we first introduced it in 1997, it was used as application space for power amps, initially, it was for CDMA, and then later on for GSM.

And that market growth -- enjoyed a very good growth period in the end of the '90s and beginning 2000s.

Then, of course, the market shifted, and it kind of became stabilized.

So we'll be searching for new application platform, and we are very fortunate to believe that wi-fi, the wireless LAN, will be our new platform.

So it will be, in fact, especially 11G and 11B -- I'm sorry -- 11A and 11Gs -- almost everybody now is designing with HBT in mind.

So we're seeing a lot of activities there.

So we believe that area will continue to grow.

It is not going to be just in the cell phone.

Again, you go back to Asia.

Asia are causing cell phones are much more advanced than here.

A lot of people are putting in -- are, at least, a plan to put in wi-fi in every cell phone.

So that means that the PA387 (ph), which we almost got, will have additionally we're going to have wi-fi in every cell phone.

But, more importantly, they are thinking about wi-fis in every home.

So you have a central storage space that everything comes in and then using wi-fi that's talk to everything in the house -- all the appliances including TV.

So I saw a study by a very big company in Japan, which I should not mention -- they think there will be wi-fi PAs in about 20 or 30 -- PAs of all wi-fi applications in every home.

Now, that's not in 2005 or 2006, but you will begin to see some of them in 2006, and it will grow all the way through this decade.

So this could be big.

This could be bigger than PAs for cell phones.

Thank you, sir.

Our final question today comes from Mr. Noel Ryan with Pacific Growth.

Please go ahead.

Thank you, guys, just one second question -- on the gross margin, can you give me a split in terms of what impact improved yields and military had on that on a percentage basis?

I could, but we don't disclose yield information.

Okay, and then I guess more in terms of military, I guess, you know, what are some of the driving forces, going forward there at military?

Is it going to continue to be the color displays?

I'm not quite sure I understand --

In terms of -- I know military business can be somewhat choppy at times, but, you know, over the next year or so, I mean, do you continue to see just selling monochrome displays or do you see maybe getting more into the color display market with them?

I'll let John speak to it, but we have a number of programs going on with the military right now to develop high-resolution color displays.

I think you have to separate the military market into two parts -- one is deployment, and in deployment is really a big thing, because when you start deploying and, in this case, is deploying into what we call light weapon, medium weapon, and heavy weapon.

The light weapon go to M-16 and M-1; and the medium weapons really go to soft vehicles.

So those are the ones that are going to deploy and once they sort out the supply line, these things go on for 10 years.

It is actually a very stable business.

It keeps on growing, and I think the (indiscernible) image will be a very big growth driver for us in the next few years.

But in addition to that, these are monochrome display.

There is a very active program changing everything to color, even in military, and our color future display really make a difference.

So we have a lot of activities with them.

Whether it will go into full-time deployment next year, that I cannot say.

But it will go to deployment, hopefully, in the next few years.

It really depends on two things.

One is, all these activities design in, which is continue going with it.

We have never been busier with the military right now and, secondly, is a full deployment.

That is a real big deal, and we have it now.

Now, starting in last quarter, with the first deployment, and I think this will continue for at least 10 years.

Great, thank you, John, and just one final thing would be -- as far as EPS, I didn't hear a number out there, but are you guys willing to put something out there as far as range?

No, we don't give EPS guidance.

Thank you, sir.

This concludes the question-and-answer portion of today's conference.

I'll now turn the conference back over to our host.

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

Thank you.

This concludes today's teleconference.

Thank you for your participation.