Kopin Corp (KOPN) 2005 Q2 法說會逐字稿

Good day, everyone, and welcome to the Kopin Corporation second quarter 2005 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 8 p.m.

Eastern time through Tuesday, August 9, by dialing either 888-203-1112 or 719-457-0820 and entering the confirmation code 4200958.

You may also access an archived version of the call on Kopin's website at www.kopin.com.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 the chief financial officer, Mr. Richard A. Sneider.

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

Please go ahead, sir.

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

The format for today's call should be familiar to most of you.

I will begin by taking you through our financial results for the second quarter and six months ended June 25, 2005.

John will then update you on our recent accomplishments and give you our outlook for the third quarter, and then we will take questions.

Before we begin, I want to remind everyone that during today's call, taking place on Wednesday, August 3, 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 facilities and other factors discussed in our most recent annual report on Form 10-K and other documents on file with the Securities and Exchange Commission.

The company undertakes no obligation to update the forward-looking 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 second quarter of 2005 was 21 million in line with the guidance of 20 million to 21 million provided on our Q1 conference call.

CyberDisplay revenue was 12 million compared with 9.5 million in the first quarter of 2005, and 13.2 million in Q2 2004.

The sequential increase resulted from strong military sales and a pickup in orders from our camcorder customers.

III-V revenue in the second quarter of 2005 was 9 million versus 9.4 million in Q1 2005 and 10.4 million in the second quarter of last year.

Cost of goods sold in the second quarter of 2005 represented 64% of product revenues versus 63% in Q1 2005 and 87% one year ago.

The year-over-year improvement gross margins was a direct result of higher-margin CyberDisplay products for military applications and a reduction of our CyberLite LED expenses.

For the third quarter we expect gross margins to be in the range of 30% as a result of a change in sales mix.

Specifically we expect consumer Display segment to account for a greater percentage of our total Display revenue in the third quarter.

Research and development expenses were 2.7 million, or 13% of revenue in the second quarter compared with 3.4 million, or approximately 18% of revenue in Q1 2005 and 3.5 million, or 15% of revenue in Q2 of 2004.

Both Q1 of 2005 and Q2 of 2004 had approximately 1.4 million of R&D associated with our CyberLite LED products.

Going forward, we expect R&D expenses to be approximately in the range of 15% to 18% of total revenue as we continue our aggressive technology and engineering efforts particularly for our new CyberLite application.

We would like to stress that our R&D expenses for CyberDisplay in Q2 was about 20% of Display revenues as we can sell new and interesting new Display products.

Selling, general, and administrative expenses in Q2 2005 were 3.9 million, or 19% of revenues.

SG&A expenses were 3.3 million, or 17% of revenues in Q1 and 2.6 million, or 11% of revenues in the year-to-date earlier period.

During the three months ended June 25, 2005, the company recorded additional 650,000 in our accounts receivable reserves, 200,000 for professional fees, 140,000 for promotional events, and 100,000 for severance costs as compared to the three months ended June 26, 2004.

We expect SG&A expenses to be in the range of 2.5 to 3 million per quarter as we maintain a balanced cost structure.

Kopin's net income for the second quarter of 2005 was 1.9 million, or $0.03 per diluted share.

This compares with a net loss of 2.3, or $0.03 per share in the same period last year and net income of 1.2 million, or $0.02 per share in the first quarter of 2005.

Kopin's second quarter net income performance was achieved by strong sales of higher-margin CyberDisplay products from military application and a transition of our LED business to Asia under the KO-BRITE joint venture.

Earnings per diluted share for Q2 2005 was calculated based upon approximately 69.7 million shares on a fully diluted basis, and while the per-share figures for Q2 2004 was calculated based on approximately 70.1 million shares.

Under our stock buyback program, we repurchased 1.1 million shares of common stock in the second quarter.

Since inception, we have purchased approximately 1.6 million shares for $5.3 million through June 25, 2005.

As of June 25, 2005, Kopin had cash and marketable securities of 112.9 million compared with 111.9 million as of December 25, 2004.

Overall, cash has increased year-to-date due to 4.6 million of cash generated by operating activities and 4.5 million from the transfer of equipment to the KO-BRITE joint venture less the 3 million we invested in the joint venture and 4.7 million used to repurchase our common stock.

We have no longer-term debt.

For the six months ended June 25, 2005, total revenue was 39.9 million compared with 45.9 million for the same period last year.

Revenue from III-V products was 18.4 million for the first six months of 2005, down from 19.9 million for the first six months of 2004.

CyberDisplay revenues were 21.5 million versus 26 million the first half of 2004.

Net income from the most recent six-month period was 3 million, or $0.04 per diluted share compared with a net loss of 5.7 million or $0.08 per share for the first six months of 2004.

Our financial momentum over the past two quarters highlights the operating efficiency of our HBT and CyberDisplay products and emphasize our focus on profitable products and strategic customers.

Accounts receivable decreased to 8.6 million at June 25, 2005, from 9.1 million at December 25, 2004, because of the increase in the reserves.

Inventory at June 25, 2005, was 9 million versus 7.9 million at December 25, 2004.

The primary reason for the increase is additional component parts necessary to support anticipated military product sales and normal buildup to support expected seasonally higher third quarter revenue.

DSOs were running at approximately 38 days for the quarter compared to 51 in Q1.

Depreciation and amortization is approximately 900,000 per quarter compared with 2.3 million a year ago.

The year-to-date capex is approximately $350,000.

In terms of our guidance for Q3, we expect total revenue to be in the range of 23.5 to 24.5 million with more than 20% sequential growth in CyberDisplay revenues.

We will maintain our focus on profitability, continue to develop new microdisplay products for digital cameras, military applications, and video eyewear.

I would also like to mention that we will be presenting at the Adams Harkness Summer Seminar in Boston at 2:30 p.m. tomorrow August 4th.

During the second week of September, John and I will be at the ThinkEquity conference in San Francisco.

We look forward to seeing you at these events.

For those of you who are unable to attend, live and archived webcasts of these presentations will be available on the investment relations section of our website.

Now I'll turn it over to John.

Thank you, Rich.

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

Let me start off by noting that Kopin continues financial momentum in Q2.

We posted our second consecutive quarter of profitability even as we continue to invest aggressively in our new products for new markets, especially in microdisplay area.

Our results show a couple of things.

First, they reflect a high level of efficiency and operational success that we have been able to achieve by transitioning our LED product group to Asia as part of KO-BRITE joint venture.

In addition, our Q2 performance underscores our strength in profitable core products.

HBT continues to be a steady contributor for Kopin while microdisplay products are our company's growth engine.

We are only beginning to tap the potential opportunities for our display products, which we think will be driven by three primary product groups -- mercury systems, digital cameras, and, over a longer term, mobile video eyewear.

In all three applications, the trend favors Kopin.

Our products play directly into the convergence of communications, computing, and entertainment in mobile devices.

For OEMs the small size, the low-voltage capability, and the high-resolution of our full color displays provide the ability to make products that small, fast, slim, and power efficient.

Quite simply, we have the technology, the manufacturing capability, the customers, and IP to stay ahead of the curve in each of the fast-growing markets.

Let me spend a minute on each of the markets beginning with our military Display business.

Microdisplay sells applications including rifle scopes, thermal weapon sights, night-vision goggles representing a growth driver for Kopin.

This application serves to highlight the changes in mercury focus, for mercury by expensive systems such as Stealth airplanes and sophisticated HEC [ph], the technologies designed to enhance the effectiveness of each individual soldier.

[Inaudible] is moving from research phase to appropriation and development.

As we said in June, when House of Representatives approve $3 million in funding to set up manufacturing processes, equipment for production of enhanced microdisplay, Kopin is the key manufacture beneficiary.

In fact, mercury Display sales account for more than 10% of our total revenue in the second quarter.

Given the need for extremely ruggedized [ph] display that can withstand better field conditions, the ESPs and margins on those products is higher on displays for -- than for higher on displays for the consumer market.

The ESP for digital camera display, they range from $10 to $20 -- for example, ESP [inaudible] displays and margins are anywhere from $300 to more than $2,000 each.

The '04 trend is extremely positive.

Military spending for thermal weapon sights and night-vision goggles are set to step over about 160 million this year to more than 328 million in fiscal 2008.

I would like to remind everyone that Kopin is the sole supplier to three of the top manufacturing military thermal weapon sites so we feel very good about direction of this business.

Digital cameras also represents a growth driver for Kopin.

Our shipment of digital cameras are expected to increase by approximately 38 million units to more than 100 million units by 2008.

An increasing percentage of these cameras, particularly in the middle and higher-resolution area market will use electronic viewfinders and EVF.

Just as we have done in the digital camcorder areas, Kopin is perfectly positioned to capture significant share as consumer demands increase.

Our color filter products include the 113K, 180K, 922K, offer manufacturers a range of EVF.

But a key element strategy is to deliver product with increasing level of integration.

For microdisplay [inaudible].

As more recently, in our second quarter, we introduced a low-voltage type of EVF 230K, the world's first completely electronic viewfinder system.

We designed the 230K in collaboration with Q1 OEM with the goal of making it standard for the next-generation high-resolution, high-zoom digital cameras.

We have begun volume production of DVF, and we expect the camera to be in the market within the next 60 days.

In keeping with our policy, the product on the shelf we will provide you with additional details.

Computer digital cameras -- the video eyewear market is still an entirely new category.

This year, for instance, Wester [ph] made only about 50,000 to 100,000 video eyewear units to be sold worldwide.

Next year the number could reach anywhere from 500,000 to 1 million units before really beginning to kick off in 2006, 2007, 2008.

We are basing our industry growth projections currently on a design facility activities and partly on the fast sell to the world leading communications as consumer electronic companies are beginning to enter the mobile video market.

In addition, the rapid advances in video compression, storage technology, store of software, and content are making easier than ever to deliver full color video to mobile devices.

In recent months, we have several design wins to illustrate the high -- the huge potential of mobile video markets.

Several of our customers plan to launch their eyewear product in the coming months.

This coming forth French Telecom wireless unit, Orange, will be introduced a mobile video service that use eyewear powered by Kopin microdisplay.

The service will enable to send cell phones subscribers to watch TV, movies, check e-mails, view photos, as well as browse the Internet using MicroOpticals innovative video eyewear, which comes equipped with two VGA resolution full color CyberDisplay.

It is equivalent to a full-color 12-inch screen from a distance of three feet, and you give consumers a big screen feel in a slick, very slick and stylish pair of eyeglasses.

Another exciting new mobile video product is Tokyo-based Scalar Corporation's Teleglass, the world's smallest video eyewear.

The Teleglass encompass Kopin's 0.24-inch diagonal CyberDisplay 180K, a tiny device that attach by miniature suction cup onto a lens of any pair of eyeglasses.

But connect to a portable DVD player, a digital camera, a mobile phone, the Teleglass, which weighs a mere 5 grams it quickly delivers high-tech video experience in full color.

It will be a great device for riding subways and trains in Japan.

During the second quarter, we introduced a major design win for our new BDM 230K, a complete video module that integrates all the required optics, electronics in a plug-and-play package.

Virtual reality game developer 3001 AD, selected BDM 230K for its Trimersion virtual reality system.

This system brings virtual reality gaming to two of the world's most public game systems -- Microsoft Xbox and Sony Playstation.

A binocular display module blast full color QVGA video with virtual reality image give gamers the spirit of a 35-inch TV screen.

Based on 3001 AD's recent design win, we expect rapid consumer adoption of our module by other companies.

Here I would like to stress that Kopin's business model is that Kopin inside model.

We provide display the modules to our customers, but we do not use the end-user systems.

As for our Q3 guidance, Rich shared with you our forecast of 23.5 to 24.5 million in revenue with CyberDisplay revenue growth of more than 20%.

In summary, Kopin is in a great position as we continue to display our CyberDisplay leadership.

We are, by far, the largest microdisplay manufacturer in the United States.

We have more than 200 patents and patent applications, we make unique, innovative, and differentiable products that truly are changing the way our customers work and play.

We will continue to focus on our profitability by aggressively develop and introduce new products for military, digital media, and mobile video applications.

Design activities continue to be very strong.

We expect to capitalize off significant growth opportunities in the quarters ahead.

We are excited about our bright future.

With that, we are ready to take your questions.

Thank you.

[OPERATOR INSTRUCTIONS] Jason Tsai with Bank Equity Partners.

Just a couple of quick questions -- you guys had very solid margins, gross margins, this quarter.

Part of that was driven off of strong military.

Do you expect that trend to continue over the next couple of quarters?

How should we think about gross margins, going forward?

I think as we said in our prepared remarks, we are looking for around 30.

I think the gross margins are going to come down in Q3 just by the nature of the fact that this is a big quarter for the consumer product folks, you know, the stuff that they've got on the Christmas shelf.

So a much greater percentage of our sales mix will be along those products.

So we expect the gross margins to come down overall in the 30% range.

As far as military, do you expect that to continue to be a 10% customer or do you expect that to come down as well?

Over the course of the year, we don't expect the military to be a 10% customer or to have a 10% customer for the whole year.

We do expect it to be more than 10% of revenues next year.

Okay, and then on the -- John, if you can talk a little bit about some of these designs wins on the consumer eyewear stuff -- the XBox gaming, and things like that look pretty solid.

Are those the majority of things you talked about, are those for release this year or is that going to be tentatively for next year?

That is a good question.

The video eyewear, in many ways, this is the first year.

So we're going to see a lot of it tied to the strong eyewear.

Quite a few companies chose a new product.

Some of them are for watching TV, some of them for games, some of them to attach to cell phones.

So we expect about 50,000 to 100,000 units will be sold worldwide this year.

It is the first year.

So we expect next year will be a lot more.

We just see a lot of activities there.

The most important thing is the contents are there that we actually been demand pull into the market right now.

Okay, great.

And, I'm sorry, Rick, the last question -- what should we think about share count?

How is the share repurchase going to affect that for next quarter?

Well, we're actively in the market, and I guess a good way to look at it would be the rate that we've been declining during the second quarter if you compared Q1 to Q2, would probably be an equal amount in Q3.

Brian Alger with Pacific Growth Equities.

Congratulations, guys, nice quarter.

In looking at the military revs, you said they're 10% of revs.

Was that 10% of the total revs or 10% of CyberDisplay revenues?

Total revs.

Great, and we know that we're ramping up with the thermal sight program on the rifles.

Has there been any progress with some of the other progress like night vision goggles?

As you well know, thermal gunsight is Phase 2 and Phase 2.

The Phase 2 will be a year and DRS, which we announced, so they are now [inaudible] into Phase 2.

IN the thermal gunsight, on the night vision goggles, we have not announced yet, but we are actively working on the night vision goggles, and hopefully we'll have some good news for you soon.

Okay, is that something where a decision is imminent, or is that something further out?

I think in the next 60 days.

Great, and as we look at the revenues, Rich, you talked about Q3 being a big consumer quarter.

Presumably, then, we should see gross margins come back up in the December quarter as consumer slows down while military stays pat?

Well, we only give quarter-to-quarter guidance, so we'll let you know about Q4 and Q3.

All right, and one last question with regards to gross margin -- I'm sorry -- R&D expense.

We talked about through the sale of the assets off to incorporate that there would be a pretty substantial drop in R&D.

Keeping it up around that 15% to 18%, is that a sign that you guys are seeing further opportunities down the road or what's going on there?

Yes, we have a lot of activities in both three areas -- the military applications, as you well know, the night vision goggles, as you just asked; and the digital cameras, when you're choosing all these new products out there as well as some eyewear.

So it goes between 15% and 18%.

Some are display, R&D is higher than that right now.

So that's why we think it's necessary.

Okay.

I guess just one follow-up to that then is -- in your previous Qs and Ks, you've mentioned that there may or may not be a need to increase your capex spend rate.

What's the current plans on capex and how does that look for the projects going into the '06 timeframe?

Well, right now we're still in the -- particularly, with our original guidance at the beginning of the year of 2 million to 4 million for this year, probably more towards the low end right now.

You may have seen a release that we did during the quarter where the House has earmarked about $3 million for microdisplay development, and we're hoping to get a piece of that.

If we did, there would be matching piece potentially on our side.

So that all has to do with some of the 8-inch development issues that we've talked about.

So as we disclosed in our Qs and Ks, excluding the 8-inch development, we're looking from around 2 to 4.

If we did get matching money by the feds or the state government, then that number would go up.

Jed Dorsheimer with Adams Harkness.

Congratulations on a solid quarter.

I'm looking forward to seeing you here tomorrow.

A couple of questions -- everything has been pretty clear.

Rich, just on the R&D expense, as a follow-up to the previous question, do you see that reaching a plateau at some point, or is that 15 to 18 -- is that the longer-term target?

Well, I think as John just stated, we'll spend what we think we need to spend for the opportunities that we have in front of us.

So at this point the best I can give you is the 15 to 18% guidance.

That's what we know today.

Obviously, as things develop, it could go up.

I may have missed this -- are you expecting profitability next quarter?

We don't guide on the bottom line.

And then, John, moving over to the thermal weapon sights, we actually had a couple of military suppliers here at our conference, and I'm curious -- which specific models would be using the thermal weapons -- can you give us an idea?

Is it the M-16, is it the M-4?

Could you talk about the platforms a little bit more?

Yes, ours is all above.

We are in the light weapons, medium weapons, and heavy weapons, and the thermal gunsights are provided primarily by three manufacturers right now -- Raytheon, BAE, and DRS, and we are in all of them.

So we are basing all the gunsights as thermal gunsights for all the systems and 16 all the way to 10.

I guess I have to clarify one thing, because I'm not sure what all the guns are out there.

So I think we have publicly stated that we are on the M-1 and the M-16.

Those I know of -- I'm not sure about what else the government's got out there for guns.

Is there any weighting towards any one of those three or is it equally distributed?

We're not privy to that information.

I want to clarify that.

There is one -- phase 1 and phase 2.

The phase 1 winner was Raytheon, and the phase 2 winners are BAE and DRS.

So that certainly is going through phase 1, phase 2 right now.

George Iwanyc with CIBC World Markets.

Hi, John and Rich.

Congratulations on the quarter.

Could you maybe give an idea, you know, if you're just looking at your Display revenues, how much was for military from the digital cameras as well as the legacy camcorders?

We don't go to that granularity.

We said over 10% of our total revs were military, and those obviously would all just be CyberDisplay products, and that's about the extent of the granularity we can give.

Okay, well, maybe I can take a different approach.

Can you maybe give an idea of how quickly do you think the digital camera opportunity can ramp?

Well, maybe I'll answer that.

As you well know, our development for the digital camera is like we did with the camcorder -- we usually pick our first-tier customer to introduce the product, and the product becomes standard.

What we are doing now is providing that to that customer.

Meanwhile, we are now working with other customers.

So at the rate how they're going to adopt, is very hard the revenue was ramped.

Our goal is to take over many of the applications there.

Okay, thank you, and on the HBT side, could you maybe just give an idea of how that looks and how the pricing looks in that area?

I think, from a pricing standpoint, we've given guidance that pricing would be down 8% to 10%.

We gave that guidance at the beginning of the year, and that has not changed at all.

Okay, so it's holding to what you expected?

Absolutely.

Pierre Maccagno with Needham.

Congratulations on the quarter.

I didn't quite understand your SG&A guidance.

The guidance -- 2.5 to 3 million is what we anticipate per quarter.

Okay, and so that's your long-term --?

Yes, that's the long-term.

Okay, what about taxes?

We have roughly 60 million of net operating losses, so from a federal standpoint, we think we're in good shape.

The state NOL obviously doesn't carry -- the carryback for the fed is obviously 15 years; the state is only five years.

So we don't anticipate any federal or state taxes this year.

There's potentially state taxes next year.

The only caveat is this year there might be several hundred thousand of AMIN [ph] tax, but that would probably be the extent of it.

So next year what percent of [inaudible].

The state rate is 9.5%.

And in terms of greater-than-10% customers, how many?

We don't disclose that.

That's only something we disclose annually, but there really hasn't been any significant changes in our customers.

Herbert Meyer [ph] with Winslow Evans and Crocker.

I guess the only item on the income statement that really hasn't been hashed over except for the previous comment was SG&A.

You made a couple of comments about some extraordinary items that were in there for your accounts receivable and severance, which I guess is what brought it above the previous guidance.

I guess what I would like is maybe some more color on your marketing expenses as you're selecting these first-tier OEMs to work with and just what's involved, are there commissions, what's the sensitivity to revenues, and what sort of increase might be expect as revenues grow in the sales line item?

I think I will leave to Rich to comment on a few things.

I think I actually should comment about marketing.

Our marketing tend to go for Q1 customers.

So hopefully tier-one customer continue to add more zeroes into their invoice.

So I don't expect a huge increase in marketing.

Of course, we are collectively, selectively increasing tentacle support in other people in the system, but I don't see an extraordinary sudden increase.

Rich, do you want to make --?

Yes, I think, as we've stated over the years, we tend to be in a situation with all our products as having a limited customer group, and so we've never had worldwide sales forces.

We use distributors in Asia who work with our sales teams out there, but we've always leveraged very nicely on the marketing aspect.

Yes, back to the distributor, we really don't have too many distributors in Japan, and the commissioner and the distributor fees are very normal, so there's not anything extra on -- and we do have driver sales for all the customers.

So the guidance you gave us last quarter of 12% to 18%, and we back out some of the extraordinary things, that could be a reasonable level, going forward?

Is that the conclusion?

Yes.

[OPERATOR INSTRUCTIONS] Brian Alger.

Just some bookkeeping.

Rich, in the past, we've looked at the NRAs as being almost attributable to the CyberDisplay group.

Should we be counting the 500,000 or so in the 12 million discussion for CyberDisplays or is it split between III-V and CyberDisplay?

I'm sorry, did you say the R&D revenues?

Is that what you're asking?

Yes, the NRAs, yes.

That is CyberDisplay-related only.

Okay, and is that primarily coming from the government?

Yes.

Okay, great, and then as we look out, you said that next year we should definitely see the government as a 10% customer.

Should we be thinking of that significantly greater than 10% or what -- I guess I'm looking for a potential hit to the gross margin line in a positive way.

Should we be expecting that or no?

Yes.

We have very high hopes for the government programs next year.

Okay, and we're characterizing military government contracts as above 50% still?

The gross margin about 50%, yes.

That's right, they're gross for 50%, that's right.

We have no further questions in the queue.

I'll turn the conference back over to Dr. Fan for additional or closing remarks.

Thank you, everybody, for listening, and I hope to talk to you all in the next question.

Thank you.

That does conclude today's conference.

We thank you for your participation.

Have a great day.