Kopin Corp (KOPN) 2005 Q1 法說會逐字稿

Good day, everyone, and welcome to the Kopin corporate first quarter 2005 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, May 4th, by dialing either 888-203-1112 or 719-457-0820.

Once again, that was 888-203-1112 or 719-457-0820 and entering confirmation code 8238449.

You may also access an archived version of this call on Kopin's website at www.kopin -- k-o-p-i-n -- dot com.

With us 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 now like to turn the conference over to Mr. Sneider.

Please go ahead, sir.

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

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

John will then update you on our recent operational achievements and share our outlook for 2005 and then we'll take your questions.

Before we begin, I want to remind everyone that during today's call, taking place on Thursday, April 28th, 2005, 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 and the company's ability to ramp up production in its manufacturing facility and other factors discussed in the company's 10-K for the year ended December 25th, 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 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 2005 was $18.9 million, which is line with the expectations we set in our fourth quarter conference call.

CyberDisplay revenue of $9.5 million declined approximately 26% compared with the first quarter of 2004 and about 4% from the fourth quarter of 2004.

The Q1 performance of CyberDisplay is the result of the softness in the digital camcorder market in recent months, a trend we noted in our Q3 call last fall, partially offset by an increase in military product sales.

As John will discuss, our strategy over the next several quarters is to replace that revenue by using our new display products to penetrate emerging consumer, military and industrial applications.

III-V revenue in the first quarter of 2005 was $9.4 million, down approximately 2% from Q1 of last year and up approximately 8% compared to the fourth quarter of 2004.

Included in III-V revenue is reimbursement of $650,000 for certain training and research and development activities related to the KO-BRITE joint venture.

Cost of goods sold in the first quarter of 2005 represented 63.1% of product revenue versus 89.1% of Q4 and 86.2% one year ago.

Gross margin improvements related to an increase in higher margin CyberDisplay sales for military applications, as well as a decrease in CyberLite LED expenses compared with both the fourth quarter of 2004 and the first quarter a year ago.

In addition, gross margins benefited from the sale of approximately $250,000 worth of CyberDisplay products which had previously been written off.

For the second quarter we expect gross margins to be in the range of 25% to 30%.

The sequential decline relates to the classification of facilities expense.

In the first quarter, the CyberLite LED portion of these expenses was included in the R&D line.

In the second quarter, since we have ceased CyberLite LED production activity but continue to produce HBTs at this facility, our facilities expense will now be included in HBT's overhead and, therefore, the cost will shift back to cost of goods sold.

Research and development expenses were $3.4 million or 18% of revenue in the first quarter compared with $3.3 million or approximately 18% in Q4 2004 and $3.9 million or 18% of revenue in Q1 of 2004.

Going forward, we would expect R&D expenses to be approximately 10% to 15% of revenue.

Selling, general and administrative expenses in Q1 2005 were $3.3 million or 17% of revenue.

SG&A expenses were $2 million or 11% of revenue in Q4 of 2004 and $3 million or 14% of revenues in the year-earlier period.

First quarter SG&A is normally higher than the fourth quarter and this year the increase between the first and fourth quarter has more to do with a lower fourth quarter than normal because we reduced our allowance for doubtful accounts in the fourth quarter of last year.

Going forward, we expect SG&A expenses to be in the range of 12% to 18% of revenue.

We are also recording an additional $517,000 impairment charge to-- as a result of an increase in the estimate to transfer and facilitate the CyberLite LED equipment in the KO-BRITE facility.

We had a small tax provision which relates to taxes for our Korean subsidiary.

We would expect taxes to be in the range of $50,000 to $75,000 per quarter.

Kopin's net income for the first quarter of 2005 was $1.2 million or $0.02 per diluted share.

This compares with a first quarter 2004 net loss of $3.4 million or $0.05 per share.

Kopin's first quarter net income performance is a result of the same factors I discussed a moment ago in the gross margin discussion, namely the $650,000 reimbursement from KO-BRITE, the sale of approximately $250,000 worth of previously written-off product and stronger sales of higher margin CyberDisplay products for military applications.

Earnings per diluted share for Q1 2005 was calculated based upon approximately 70.2 million shares outstanding, while the per share figure for Q1 2004 was calculated based on approximately 70.1 million shares outstanding.

As of March 26, 2005, Kopin had cash and marketable securities of $107.8 million compared with $111 million as of December 25th, 2004, and we have no long-term debt.

Overall, cash declined due to investments in working capital and our investment in the KO-BRITE joint venture.

Accounts receivable increased to $10.5 million at March 26, 2005, versus $9 million at December 25, 2004, because of timing of sales.

Both military and commercial sales ramped during the quarter.

Inventory at March 26, 2005, was $8.5 million versus $7.9 million at December 25th, 2004.

The primary reason for the increase is additional component parts necessary to support the anticipated military product sales.

Other assets increased as a result of our $3 million investment in the KO-BRITE joint venture.

DSOs were running at about 51 days for the quarter compared to 47 days in Q4.

Depreciation and amortization was approximately $900,000 in Q1 compared with $2.5 million a year ago.

CapEx for the quarter was approximately $100,000.

Just one more minor housekeeping item from Q1 -- under our stock buyback program we repurchased 493,600 shares of common stock for approximately $1.6 million from the beginning of the year through April 19th, 2005.

Turning to our guidance for Q2, we expect that shipments of ruggedized military-- excuse me, ruggedized displays for military applications and electronic viewfinder modules for digital still cameras will begin to ramp.

As a result, we expect total revenues for the second quarter to be between $20 and $21 million.

As we discussed in the first quarter, we will continue to incur expenses associated with the transfer of CyberLite LED to the KO-BRITE joint venture in the second quarter.

We do not anticipate any significant reimbursement of expenses in the second quarter.

And with that, I'll turn the call back over to John.

Thank you.

Thank you, Rich.

Good afternoon, everyone, and thank you for joining us today.

Let me begin by saying that I'm very pleased with our return to profitability in Q1.

Beyond the mere bottom-line number, I hope our performance provides you with a perspective on the cost advantage we're beginning to gain as we complete the transition of LED operations to KO-BRITE.

Before I discuss the quarter, I want to take a moment to tell about Vision 2005, the combination CyberDisplay conference and 20th anniversary celebration we hosted earlier this week on Monday.

The event was a tremendous success, highlighting some of the exciting new applications Kopin's CyberDisplay technology is enabling for the industrial and military, as well as consumer market.

We demonstrated a number of prototypes and commercially available products featuring our displays from ultra-small CyberDisplay 113K to QVGA and all the way to the highest resolution microdisplays in the world.

The full-color SXGA resolution CyberDisplay, 1280x1024 resolution.

[inaudible] for the first time at the SPIE -- S-P-I-E -- Defense and Security Symposium only a few weeks ago in Florida.

It was a great hit at that symposium and it was a great hit on Monday.

These card displays are only .97 inch in diagonal, the size of a postage stamp and yet it has a resolution that's higher than HDTV.

We plan to introduce this display later on this year.

In addition to the products on display, we had very scarce speakers who shared their vision of the future of the microdisplay market and particularly the mobile video where Kopin products are now featured in several of the top devices in the market.

The well-known Harvard professor, business professor, Professor Clayton Christensen, spoke about disruptive technologies and how Kopin's strategy fits into that strategy as a concept, not only with our microdisplays but also with HBTs.

His best-selling book, "Innovator's Dilemma," describes how disruptive products should enter the market first in the low-end, low-margin applications and then upgrade and upscale to higher margin and higher value applications and products.

We also had Chris Chinnock, President of Insight Media, one of the world's leading editorial voices on microdisplay market, shared his vision for emerging mobile video applications.

We had Paul Travers, President of Icuiti, who spoke about the potential for Kopin microdisplays in a wide variety of near-to-eye video eyewear applications.

Finally, we also had Fred Ichi (ph), former SVP of Sony and current Senior Executive Advisor to Sony, review the trend in TV applications and how they translate to mobile TV and microdisplays.

It was a great day and I wanted to thank the 200 people who attended the event and contributed to make it such a success.

Without question, the marriage of mobile video and microdisplays is upon us.

Instat (ph) projects that mobile video services will reach $5.4 billion in annual revenues in the United States by 2009.

Meanwhile, the near-to-eye personal microdisplay market is now forecast to hit about $1 billion in revenue by 2008, according to a report issued by market research firms Insight Media, as well as Mclaughlin Consulting Group (ph).

We believe that Kopin, which fits squarely at the intersection of both these markets is posed to benefit greatly from the wave of consumer, military and industrial applications that will combine mobile video with personal displays.

Our objective for CyberDisplay products is straightforward.

We will continue to focus on higher margin opportunities such as the military and high-value consumer applications and to continue to improve the yield and performance of our display products.

We will make-- we have made outstanding progress today.

Our strategy is to provide our unique displays as critical components to various applications.

In other words, we are the displays inside.

This strategy centers on capturing opportunity in three categories.

First, opportunities in which we compete against outmoded technology.

This is best exemplified by our success in the camcorder market where CyberDisplay displaced the bulky, inefficient CRT tubes and quickly captured about 40% market share.

The second category is opportunities in which our display enables development of an entirely new product category.

Perhaps the best example is the video eyewear where technology is helping to shape the industry.

The final category is opportunities in which our CyberDisplays [inaudible] of better and more complex solutions to our customers.

Here Kopin's advantage is represented by our CyberDisplay electronic viewfinder systems, which are replacing optical viewfinders in middle and high-end digital still cameras.

The CyberDisplay EVF has not only eliminated the distortion that plaques optical viewfinders in high-zoom mode, but also incorporates in a single module all the components OEMs would like to have assembled at one time.

Simply put, we do have the right customers.

We are in the right markets.

And we have the best technology to capture the opportunities ahead.

Several events in the first quarter illustrate those points.

To begin with, we have joined forced with a number of emerging OEMs in the mobile video market.

For example, Kopin is supplying enhanced high-resolution, high-definition color display VGA displays for Icuiti's new 3D multimedia video eyewear system.

Our 0.44 inch microdisplays deliver the sharp resolution of a 42-inch flat panel screen, creating a personal and portable theater experience.

Icuity received a special award with this eyewear in the CES show in January-- in 2005.

Our [inaudible] color-filtered VGA displays were also chosen by electronics-- Oriscape Electronics Company for the company's CyberMan video eyewear system.

The CyberMan system, which has now being launched worldwide this summer, illustrates the reach of Kopin's microdisplay technology in Asia, the home of consumer markets.

Kopin's is also forging an alliance with Eyeneo of Europe.

Our color CyberDisplay 320C serves as the eyes for the company's Eyetop portable DVD player.

We expect-- we expect these products to gain traction in the coming quarter.

We also expect to capture additional design wins with the video eyewear makers.

Mobile video is going to be a huge market opportunity for Kopin.

Our microdisplay technology is also featured prominently in the year-- in the 2005 World Exposition taking in Nagoya, Japan, that opened a month ago.

Our special customized displays are installed in handheld 3D stereo binoculars.

Kopin collaborated with Hitachi, Icuiti and Ray Corporation -- entertainment company based in Tokyo -- to produce Nature Contact, an interactive mixed-reality ride in the Hitachi pavilion.

Nature Contact has quickly become the hit-- the hit in the Expo, taking more than 8000 visitors every day on a virtual reality safari ride to [inaudible] with some of the world's most endangered species.

This is actually a huge operation, with more than 200 workers working-- operating the ride every day.

By the time the event ends this fall, it is expected more than 2 million Expo visitors will have experienced this ride through our microdisplays.

I was there 3 weeks ago and the experience was truly exhilarating.

There has never been anything like that before.

We expect additional future business from this kind of a new application.

In digital camera, we worked with a tier-one OEM to develop the world's first complete EVF system -- electronic viewfinder system -- one that would meet their needs and it's actually designed so they can be used by other digital still camera manufacturers.

We expect initial shipments of such a system to begin this quarter.

But consumer applications represent only one element of CyberDisplay's strategy.

We also are focused on identifying and capturing share in a diverse array of vertical markets.

Let me give you a few examples.

In the video security market, we recently formed a relationship with California-based Pelco, the world's largest manufacturer of video security equipment.

Pelco has integrated our CyberDisplay 180K color filter display, [inaudible] IC chips and interface electronics into its new camera setups.

CyberDisplay's technology allows Pelco to use handheld systems to configure and align cameras on site, eliminating the need to have a second person handling camera setup from a bulky monitor in a control room.

In the exciting defense arena, the CyberDisplay is the microdisplay of choice for U.S. military, which represents a significant, growing end market for our products.

In the first quarter we saw a strong increase in displays sales to U.S. military, principally relating to the ramp in production of the redesigned 640M display module to Raytheon's light, medium and heavy thermal weapon sights.

The development of new military products to make our soldier safer in the field and give them the extra competitive edge are providing substantially higher margin revenue growth for our CyberDisplay products.

We believe our position as the supplier of microdisplay to the military provides us with a distinct competitive advantage, as well.

We further demonstrated our success in this market recently with a new thermal market TWS-II contract to supply the BAE system and DRS Optronics systems with display modules for thermal weapons sights.

Design-in activities of our military display area continue to increase.

In the next several quarters we expect military sales to grow measurably as we ramp up production for our new display modules for the military.

We also expanded our military-- our market-leading product portfolio in Q1 with the introduction of full color SVGA CyberDisplays.

Our 0.59 inch SVGA display is the world's highest resolution commercially available AMLCD display of its kind.

With the new display, we now have a wide range of displays and related products to offer to our military as well as our consumer electronics customers.

As technology-enhanced content deliveries improve, microdisplays will play an increasingly important role in how information is viewed.

From capturing and sharing digital photos to watching movies and television to viewing critical information about battlefields, there's no better way to view information on the go than Kopin CyberDisplays.

So stay put-- so stay tuned for more exciting new developments.

Now let me talk briefly about our HBT product area.

We reached a milestone in the first quarter with the shipment of our 500,000th wafer.

Orders for our large-- largest customer remained strong in the first quarter.

We continue to field inquiries about new transistors, particularly our highest performance [inaudible] HBT transistors for 3G phones, wireless LAN, WIFI and wireless applications.

We see a number of opportunities for growth in our HBT products in coming years and we're eager to see Kopin products at work in some of these new applications.

To summarize, the first-- this first quarter marks a period of transition of focus for Kopin.

Our focus is to continue expanding our lead in technology innovations, product performance and market shares for both HBT and microdisplays.

From a cost perspective, we saw tangible benefits in the quarter from the reduced effects of LED operations, which helped to drive a quality net profit.

On the operations side, we saw continued momentum for our CyberDisplay product in high-margin military products and celebrated our focus on mobile media markets.

In recent months we have joined forces with emerging and established OEMs to introduce products into this market and hosted our first U.S. event focused on mobile media applications.

We have high expectations for our CyberDisplay products in consumer, industrial and military applications in the quarters ahead.

As Rich noted, our outlook for the business is bullish.

We expect a combination of increased military sales and reduced impact LED operations to continue to benefit our bottom line results in the second quarter.

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

Thank you. [OPERATOR INSTRUCTIONS] Ittai Kidron, CIBC World Markets.

Hey, guys, good numbers.

Rich, can you go a little bit again into the details of the gross margin, why going forward it will be 25% to 30% and the classification of facilities costs?

I didn't quite get that.

Sure.

In our 200 John Hancock facility, this is where we manufacture the CyberLite LED, we also have HBT production here.

All the CyberLite-- we still have CyberLite activities -- we had KO-BRITE employees here for training, we did some research and development at the behest of the KO-BRITE join venture, so those activities all ended up in the research and development line.

So all the facility expense that normally would have been in cost of sales for CyberLite migrated in this quarter down to the research and development line and next quarter when the activities for all the CyberLite have stopped -- next quarter being, excuse me, Q2, right now -- the only thing that's going to be left in the building is going to be HBT.

And so the way the accounting works is HBT now has to absorb those costs, those overhead costs, as part of its production costs.

So those costs will move back to the gross margin line from the R&D?

That's correct.

So the R&D should see a drop of roughly half a million dollars for the next quarter?

Probably a little bit more.

A little bit more?

Yes.

OK.

And, John, with regards to the display business in the military, you seem very bullish.

What's your visibility into that business over the next 6 to 9 months?

And do you think that we might see some variability?

I mean, in the past you had a few revenue-- a few quarters where revenue from the military business came in and then you had to wait a few months until the next order came in.

Is this going to be sort of a staggered growth pattern or we might still see those fluctuations from quarter-to-quarter?

Well, I think that the question is whether the quarter-to-quarter if we have a constant revenue growth on military.

I think the military activities, of course, divide into two areas.

One is some of the military contracts to develop new products.

That part, I think, would continue to be very stable.

On the deployment side, as you well know, the Raytheon thermal imaging sights started deploying the third quarter of last year.

So we have now a couple quarters of-- of activities with them.

So it's very hard for us to say how variable it is, but we believe right now the trend is in our favor.

The government and every soldier right now would like to have some thermal sights.

So we are continuing bullish about it.

Jed Dorsheimer, Adams Harkness.

Congratulations on the quarter, guys.

A couple questions for you.

Rich, I jumped on late so I apologize if you-- if you did already answer this, but 0-cost inventory, how much is left and how much is factored into the expectations for sales next quarter?

Right now there is 0 put into the forecast or expectations and I really can't give you an answer as to how much is left and the reason why is, as you know, our display, everyone of our displays is visually inspected before it is shipped against a specification agreed to with a customer.

And after a certain period of time of accumulating a certain number of rejects, we have sufficient quantity where we can go to a customer and say, "Gee, if you're willing to take a slightly lower spec, we're willing to give you something on the price."

And those are really kind of ad hoc deals that occur, but they're not really planned.

So, as I said, there's nothing forecasted for right now, but they do come up and it really depends on the negotiation with a customer as to how low a spec they'll take.

Got you.

Thank you for the explanation.

In the CyberDisplay business, you-- when you transferred to a-- to the new product, to the color products that you're offering versus the old 320 monochrome there was a-- I think that there was a geometry shift and I'm curious, have yields actually surpassed what they used to be on the 320M at this point?

Or-- I know you're not going to give us what the yields are, obviously, but are they approaching that level or where are they?

Any help there?

The yield-- the yield is approaching that level.

They're approaching that level?

We're very happy-- we're very pleased with the yield improvement.

Great.

And then last question then I'll pass it on, John, with the KO-BRITE joint venture, I'm curious what are the products that KO-BRITE will actually be focused on?

Is it-- are these going to be focused on the LEDs for display-type applications, the general lighting?

Are they 1 watt?

Are they 0.5 watt?

Are they 5 millimeter?

Just curious.

Yes, the question-- the last is what are the products licensed to KO-BRITE.

Remember, we are no longer managing the KO-BRITE any more, but the company's focus is to make LED chips for a variety of applications, all the way to general lighting as well as [inaudible] lighting.

The-- the disruptive model is that they will make money manufacturing in China with very good technology.

There's no such things like that in China right now.

Jason Tsai, ThinkEquity.

Hey, Rich, can you give us a little bit of help here on just your guidance going forward?

In particular, kind of what we should expect in gross margins?

Well, in the 25% to 30% range going forward.

A lot of it's going to depend upon the sales mix between the military and the commercial CyberDisplay.

The military has definitely better margins.

So as we increase military sales we would expect gross margin to expand.

OK.

And what percentage of display sales are coming from the military?

Less than 10%.

OK.

And do you-- I guess, what should we expect for that for the June quarter?

Around the 10%-15% level still?

Yes, that would be a good estimate.

Then we would expect it to get higher as the-- especially in '06, we expect it to be a much more significant piece.

OK, fair enough.

And then moving on to the HBT side, can you talk about any sort of pricing trends that you're seeing there, whether you're seeing any sort of strong pricing pressure?

Skyworks yesterday talked about trying to get some pricing concessions from their vendors and I wanted to see what you guys are seeing?

Well, overall, excluding military products, we expect pricing to go down 8% to 10% between HBT and CyberDisplay this year.

That's the annual price?

Yes, since January 1st of '05 through December 31st of '05, we expect about 8% to 10% price decline.

OK, got you.

So that's not too bad, then.

So 1% to 2% a quarter?

Well, we hate to give anything up.

[OPERATOR INSTRUCTIONS] Herb Meyer (ph), Winslow, Evans & Crocker (ph).

Among the things that appear to have contributed to the swing to profitability was the improved performance in your Kowan technology subsidiary and at Kopin in Taiwan.

Could you give us a progress report a little bit of outlook and color on those two operations?

Well, I can tell you-- the-- in looking at our P&L you'll see equity losses in unconsolidated affiliates.

This quarter we lost roughly $150,000 versus $300,000 in March.

The-- as we've indicated in our 10-K, the KTC investment is written off, so there'll be no further equity-- no further impact from that investment.

And the KO-BRITE remains to be seen, depending on how well it progresses whether that impact is going to be there.

John, you want to address the other one?

Yes, I think you can see that our Kowan operations actually, because of taxes, actually, in Korea is making some money.

But they're primarily assembling the display for us.

So performance really improvement actually is over high where our yield's improving.

OK.

And if I might press a little more on defense and the military question.

In response to an earlier question you said less than 10%.

I noticed in the 10-K it was at-- U.S. government was at 2%.

Are we closer to 10% than 2%?

No.

The 2% relates to government contract.

So if you look, we have a line called research and development revenues--

Yes?

--and that's the 2%.

That's strictly R&D contracts.

The 10% I'm talking about is actual shipments of product which is being deployed.

OK, good.

Which is included in the product revenue line.

OK.

And when you say that sales growth will be measurably and substantially higher margins, can you give us a little more guidance on that-- what you mean by that?

Well, we have said in the past that government margins can approach 50%.

OK.

And the kind of growth you're anticipating?

We don't break out growth by product line.

We just give overall revenue growth by quarter.

And, Dr. Fan, there are no further questions at this time.

I'll turn the conference back over to you for final questions-- comments and remarks.

OK.

Thank you for joining us on our conference call.

We look forward to speak to you next time.

Thank you.

Thank you.

That does conclude today's teleconference.

Thank you all for your participation.

At this time you may disconnect.