Kopin Corp (KOPN) 2005 Q3 法說會逐字稿

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

Eastern Time today through Monday, November 7, by dialing either (888) 203-1112 or (719) 457-0820 and entering the confirmation code of 1400280.

You may also access an archived version of the call on Kopin’s Website at www.kopin.com.

With us from the company is 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 call over to Mr. Sneider.

Please go ahead, sir.

Good afternoon, everyone.

Thank you for joining us.

I will begin by walking you through our financial results for the three and nine months ended September 24, 2005.

Then, John will share his perspective on the mobile video market, update you on our recent highlights, and give you our outlook for the fourth quarter.

Then, we’ll take your questions.

Before I begin, I want to remind everyone that during today’s call taking place on Tuesday, November 1, 2005, we will be making 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 our most recent annual report on Form 10K 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 request a copy from Sharon Merrill Associates by calling (617) 542-5300.

Turning to our financial results, total revenue for the third quarter of 2005 was approximately $25.4 million, ahead of the guidance of $23.5 to $24.5 million that we provided on our second quarter conference call.

CyberDisplay revenues increased 22% sequentially to $14.6 million from $12 million in the second quarter of 2005 and 11% year over year from $13.2 million in the third quarter of 2004.

As expected, CyberDisplay sales in the quarter were weighted towards the consumer electronics segment.

III-V product revenue in the third quarter of 2005 increased approximately 20% sequentially to $10.8 million from $9 million in the second quarter of 2005 and climbed 11% year over year.

Q3 saw strong HBT volume from our wireless customers.

Cost of goods sold in the third quarter of 2005 represented 65% of product revenue in the third quarter versus 64% in Q2 of 2005 and 78% in the year-ago period.

The sequential change in gross margin reflected a shift in product mix with consumer electronics, which has lower margins than our military displays.

The year-over-year improvement is significantly due to the moving of our LED product line to the KoBrite joint venture.

For the fourth quarter of 2005, we expect cost of goods sold as a percentage of product revenues to be in the range of 67% to 70%.

Research and development expenses were $2.5 million, or about 10% of revenue, in the third quarter.

This compares with $2.7 million, or approximately 13% of revenue, in Q2 2005 and about $3.5 million, or 15% of revenue, in Q3 of 2004.

We plan to continue investing aggressively to maintain our microdisplay technology and engineering advantage, and over the long term, we expect CyberDisplay R&D expense to be in the range of 13% to 18% of sales.

Selling, general and administrative expenses in Q3 2005 were $2.7 million, or 11% of revenues, in line with our guidance of $2.5 to $3 million.

SG&A expenses were $3.9 million, or 19% of revenues, in Q2 2005 and $2.6 million, or 11% of revenues, in the year-earlier period.

Our third quarter SG&A was lower than the second quarter because of a decrease in our reserve for doubtful accounts as a result of improvement aging of our receivables.

We would expect our SG&A to be in the range of $2.7 to $3.3 million in the fourth quarter.

Our third quarter net income benefited from a $600,000 benefit in tax contingencies at last.

This was partially offset by the accrual of approximately $550,000 for anticipated domestic and foreign taxes, for a net tax benefit of approximately $50,000.

Kopin’s net income for the third quarter of 2005 was $5.4 million, or $0.08 per diluted share.

This compares with net income of $1.9 million, or $0.03 per share, in the second quarter of 2005 and a net loss of $1.1 million, or $0.02 per share, in Q3 2004.

In summary, Q3 improvement over Q2 as a result of an increase in contract revenue, more gross margin dollars from increases in sales, lower SG&A expenses, and the tax benefit.

Earnings per diluted share for Q3 2005 was calculated based on 70.5 million shares outstanding, while the per share for Q3 2004 was calculated based on approximately 70 million shares outstanding.

Under our stock buy back program, we repurchased 275,500 shares of our common stock in the third quarter.

Since inception, we have repurchased approximately 7 million of stock versus the 15 million authorized at the outset of the buy back program.

We continue to intend on our stock buy back program.

For the nine months ended September 24, 2005, the total revenue was $65.4 million compared with $68.8 million for the same period last year.

Revenue from III-V products was $29.2 million for the first nine months of 2005, down from $29.6 million for the first nine months of 2004.

The CyberDisplay revenue was $36.2 million versus $39.2 million for the same period last year.

Net income for the most recent nine-month period was $8.4 million, or $0.12 per diluted share, compared with a net loss of $6.8 million, or $0.10 per share for the first nine months of 2004.

Our 2005 performance to date reflects the reduced investment in the LED product line, increased sales of CyberDisplay parts for military applications, and cost reduction strategies.

As of September 24, 2005, Kopin had cash and marketable securities of $111 million compared with $111 million as of December 25, 2004.

For the nine months ended September 24, 2005, we had generated approximately $5.8 million of cash from operating activities, repurchased approximately 6.4 million of our stock, and invested $1.5 million in capital equipment.

Accounts receivable increased to $14.8 million at September 24, 2005 from $9.1 million at December 25, 2004 because of the timing of sales during the quarter.

Inventory at September 2005 was $8.4 million versus $7.9 million at December 25, 2004.

DSOs were running approximately 56 days for the quarter compared with 38 days in Q2.

Depreciation and amortization is approximately $1 million per quarter compared with $2.4 million a year ago.

We expect CapEx to be in the range of $6 to $7 million over the next twelve months.

In terms of guidance for Q4, based on the current market environment and the customary sequential seasonality of our business, we expect total revenues in the range of $23 million to $25 million.

I would also remind you that, as previously disclosed, certain restricted stock awards will vest if the Company has four consecutive quarters of profitability, and there will be an accompanying charge.

With that, I will turn the call over to John.

Thank you, Rich.

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

Let me start by saying that I’m very pleased with our third quarter results.

We exceeded our top line guidance and enjoyed record CyberDisplay revenue and also attained three consecutive quarters of profitability.

Our EPS of $0.08 also marks the highest quality total in Kopin’s history.

I want to spend a moment reviewing our third quarter results and then talk about Kopin’s long-term strategy for achieving long-term, sustainable growth.

Our III-V revenue rose 11% on a year-to-year basis, fueled by increasing HBT order volume for our wireless customers, thanks to our strong relationships with those customers and our success at maintaining our technology and cost advantage.

Our III-V product groups have remained a steady contributor.

Meanwhile, we posted a record $14.6 million CyberDisplay revenue in the third quarter, highlighted by orders to the military and robust sales to digital media customers.

Third quarter is typically a strong quarter for our display products, as consumer electronics customers gear up for the holiday selling season.

It may be a good time to reiterate our strategy.

As we outlined to you about this time last year, our strategy is to transition from low-margin or slow-growth products to higher margin [unintelligible] microdisplay products and to focus on markets with significant growth potential.

The initial element of this strategy, of course, was our decision to move Kopin’s LED manufacturing to Asia as part of KoBrite joint venture.

KoBrite, which will celebrate its grand opening of the manufacturing plant in Dongguan, China next week, achieved two goals.

First, it provides a more competitive cost advantage and structure for which KoBrite can compete in the global LED market.

More importantly for Kopin, it allows us to focus more aggressively in our core business, particularly CyberDisplay, by introducing new products and pursuing high-growth markets.

In CyberDisplays, this market includes digital still camera, advanced military [inaudible] and, most excitingly, the emerging mobile video.

Mobile audio is now, of course, everywhere.

It is our position that mobile video is coming.

A recent Business Week headline proclaimed - “Mobile video is set to take the wireless industry by storm.” The article detailed a study by American Technology Research forecasting the base of mobile video users will grow to more than 20 million by the year 2007 compared with less than 1 million today.

ABI Research is also forecasting more than 250 million people will be watching mobile video service by the year 2010, generating about $27 billion in sales compared to about only $200 million today.

All these forecasts was before Apple reviewed its video iPod.

Apple’s entering the portable video entertainment is a watershed event for the consumer electronics industry.

Steve Jobs says it marks a giant step towards digital distribution of video, which of course made everyone in the industry sit up and take notice.

The video iPod is a strong validation of the mobile video market and of the potential opportunity for video eyewear products such as our Binocular Display Module 230K, which we introduced earlier this year.

The Module is a complete system which includes our microdisplay, LED backlights, drive electronics and optics.

We expect it to play an important part in our video position in the video eyewear market.

The innovation driving the Binocular Display Module is being recognized around the world.

Last month, in the Hong Kong Electronics Fair, Kopin and its display IC circuit partner, Solomon Systech, captured the grand prize and Gold Award for Outstanding Innovation and Technology Products in that whole conference.

The Hong Kong Electronic Industry Association, who sponsored the show, honored Kopin and Solomon for our outstanding new Digital iVision technology.

Digital iVision provides OEMs with complete mobile video solutions and gives consumers high definition images on the go.

Kopin and Solomon used the Electronics Fair-- Actually, it’s Asia’s largest consumer electronics show and the second-largest consumer electronics show in the world, just after the CES show in the United States.

We used that as a backdrop to announce the co-marketing alliances with Solomon for Digital iVision in China.

Under this agreement, Solomon will develop new ICs for our BDM products and sell Kopin’s Digital iVision BDM products in China.

Solomon has very strong customer relationships in China and almost 20% of the global seller for [unintelligible] IC market.

Among the products exhibited in the show were our BDM 230K, the world’s first plug-and-play video subsystem which delivers full-color QVGA quality resolution in an eyewear format, the VGA-resolution BDM Module-922K, the CyberDisplay YVGA, the first microdisplay with the aspect ratio of a high-definition TV in the 16 x 9, and CyberDisplay SXGA, whose 1280 x 1024 spatial resolution actually surpasses that of HDTV color.

Digital iVision is now being designed to solve the problems inherent in today’s mobile video world.

Either the picture is too small to enjoy, or the device is imply too big to move around.

Our long view for Digital iVision is that it will allow people to enjoy movies, sporting events, music videos, browse the Web and check their e-mail from mobile phones or play 3-D video games whenever and wherever you want.

Just like iPod has transformed the audio world for music lovers, we think Digital iVision has potential to revolutionize visual information and entertainment and provide big pictures for people on the go.

We expect mobile video to be a major catalyst for growth for Kopin in the long term.

We already have captured several major design wins for portable video eyewear in diverse products such as virtual reality gaming systems, portable i-Theatre, as well as wireless phones to establish us as a market leader.

Our innovative technology puts us in the prime position to continue to capitalize on opportunity as this market grows.

I understand that not everyone in the United States shares our excitement and enthusiasm, but over in Asia, the momentum is building.

Our reputation as the leader in this market is one reason that Excellent Media Group, EMG in Taiwan, a multi-media company recently chose our BDM for its new eye theater system.

Our full-color QVGA system display allows users to watch the equivalent of a 35-inch TV from a distance of 7 feet.

Weighing a mere 2.4 ounces, the i-Theatre is believed to be the world’s lightest weight mobile video eyewear.

EMG is the latest in a series of OEM design wins for video eyewear products that was announced since last May when we celebrated our entry into the mobile video market with industry event which we call Vision 2005.

The steady [trumpet] will begin starting in Vision 2005 is resonating with some of the consumer electronics industry’s most established companies.

Needless to say, I and our people at Kopin have high expectations that video eyewear will become a hot consumer product soon.

We’re very focused on creating this new product category.

In the first year of video eyewear this year, we expect only about 50,000 eyewear units to be shipped to the world, mostly to Asia and Europe.

However, we expect strong growth next year.

Now, allow me to comment on a new design win with Eastman Kodak Company.

Kodak, the largest maker of digital cameras in the United States, is incorporating our CyberEVF 230K viewfinders into their new EASYSHARE P-Series 8 and 5.1 megapixel cameras.

The CyberEVF is a complete viewfinder solution that has enabled Kodak to speed its design time, substantially lower assembly costs [unintelligible] for the camera.

For OEMs, the benefit of our EVFs are compelling, and this design win is a byproduct of our strategy to increase our penetration in the digital camera market.

We did this very successfully in digital camcorders, capturing a significant share of the viewfinder market in camcorders.

We’re now also working with other digital camera makers, since our EVF is a standardized product design for digital cameras.

Now, let’s move to another key area for Kopin’s strategy and technology.

I want to mention our roll out of microdisplays to the U.S. military.

Kopin, as you may well know, supplies displays for thermal weapon sights manufactured by all three approved suppliers of those products to U.S. troops.

Thermal sights and night vision goggles provide a very defensible advantage for our troops in the field.

Kopin has focused on this internal application for quite some time.

As we mentioned in this afternoon’s news release, together with our partners, we’re making good progress towards the deployment of our next-generation thermal weapon sights as well as on the development of the next-generation night vision equipment.

This development will represent major growth opportunity for Kopin in 2006 and beyond.

The defense appropriation bill approved by the U.S.

House in June provides federal funds for the development of next-generation night vision technology to support U.S. troops in the battlefield.

As we have discussed in earlier calls, we expect active designing activities and early initial production this year with follow-up production in the year 2006.

With regards to our Q4 guidance, Rich shared with you our forecast for our fourth quarter revenues is about $23 to $25 million, reflecting modest year-to-year growth as well as sequential seasonality that’s customary of our fourth quarter.

To sum up, Kopin had a very good quarter - a great quarter - posting record revenues and record EPS.

Our III-V business enjoyed strong sales in the third quarter, driven by HBT order volume for our key wireless customers.

Our CyberDisplays reached an all-time high revenue also in the third quarter.

Looking ahead, we plan to continue executing various elements of our long-term growth strategy.

The key component of that strategy is transition away from our first-generation product applications to integrate display systems that carry stronger margins and higher growth opportunities, particularly for military applications and mobile video.

We have begun the fourth quarter on a high note.

We introduced our digital vision technology and partnering with Solomon on a co-marketing agreement that takes our mobile video products into China, the world’s fastest growing market.

Myself, I’m going to Asia this weekend, first, for the Dongguan grand opening in China as well to visit customers and partners in Japan and China.

With that, we’re ready to take your questions.

Thank you Dr. Fan. [OPERATOR INSTRUCTIONS].

And, we’ll take our first question from Jason Tsai with Bank Equity Partners.

Hi, guys.

Congratulations on a great quarter.

I just wanted a few questions here.

First of all, your military - what was that as a percentage of revenue this quarter?

Was it a significant portion of revenues?

It was over 10%.

Over 10%.

Okay.

Great.

And, then, how’s that transition coming from phase one to phase two?

Is that moving along fairly smoothly, or is there going to be some gaps in there?

It’s moving-- I wouldn’t say smoothly.

It’s very tough to say anything ever moves smoothly.

Right now, I think that there probably will be some gaps in Q4, but we expect, as John said, to go into volume production in 2006.

Nothing has changed in our 2006 projections.

I think, Jason-- I want to make a comment.

We always have said that the transition would be the third and the fourth quarter and the volume production in 2006.

That said, things are still on schedule.

Okay.

Great.

Then, John, can you talk a little bit about the eyewear?

What’s the initial reaction so far from these products?

When do we see them in the market here in the U.S.?

How’s this holiday season shaping up so far?

I think that eyewear, as you well know-- The mobile video contents are really arriving.

And, it’s very interesting; when we were showing the eyewear in Hong Kong, the same day was when Steve Jobs and Apple introduced the video iPod.

We had a special reception for our Digital iVision, and it was a mob scene.

All of the who’s who of many consumer electronic companies in Hong Kong, Taiwan and China were there.

So, we’re seeing a lot of response from that activity.

The key thing for eyewear is, and I think as people will know, you need eyewear that is very comfortable to wear, very lightweight, very high resolution and reasonable cost, and it’s easy to load and display images to people’s eyes.

I think our BDM is really assessed by that.

It allows people to quickly introduce eyewear to the market and for different applications.

So, the application we’re seeing right now initially is for gaming, for entertainment and watching movies, or, now days in Korea, in Japan, as well as in China, they have terrestrial digital TV that’s broadcast to you like a cell phone system, except this time video.

They’re all testing it.

I think next year will be a very interesting year.

We’re seeing a lot of activity now.

Great.

Thank you.

Then, the last question here.

You guys did better than expected this quarter, obviously.

What drove the strength in the quarter?

Was there any one particular business that was better than the others, or was it just strength across the board?

I’ll let Richard answer that.

As I mentioned, we received some benefits from some reduced SG&A and some tax benefits.

But, the top line was really strength across the board.

Okay.

All right.

Great.

Thanks a lot, guys.

And, we’ll take our next question from Brian Alger with Pacific Growth Equities.

Hi, guys.

Good afternoon.

Nice quarter.

I want to come back to the military question.

You mentioned that we expect to have some limited volume shipments this Q4 time frame with volume next year.

Was that just for the thermal sight business, or are we starting to see some of the next-generation night visions move into pilot phase as well?

Yes.

Good question, Brian.

Night vision, as you well know, is one area that we’re really focusing on also.

I think we are-- We’re not that privy to talk about that yet.

As you well know, we have not announced our activities in night vision yet.

So, when we’re talking about military revenues this year, what we’re primarily talking about is the thermal weapon sights for the three contractors we’ve announced?

That’s right.

I think that’s definitely true.

I think that night vision, especially-- We’ve always advised the Street that night vision designing cycles this year and then volume production next year and that we’re on schedule too on that.

Okay.

When we’re talking about in ’06 volume production for night vision, obviously, we’re looking at a much bigger market opportunity here.

When should we anticipate that?

Is that a first-half initial volume ramp, or is that more second half?

We would hope Q2.

Okay.

Would it start from zero and go to full volume, or would there be some early orders there?

There would be some early orders.

Okay.

Great.

And, you talked about your gross margins being in the 30% to 33% in the fourth quarter.

Comparing that to Q3, which if I back up the contract revs was about 33%, Rich, what’s causing the conservatism here?

It depends on where he hit, quite honestly, in the revenue range.

It’s the typical fixed-cost model of the semiconductor.

You hit the high end; you get the very nice leverage.

If you hit the lower end, you don’t.

Okay.

Fair enough.

As we look at the night vision opportunity, clearly the potential has been there for a long time.

A lot of people have gotten excited and grown bored with it over the years.

I’m wondering, John, if you’ve seen anybody talking about developing video out ports on devices, since it seems as though we’ve got to be able to have something to plug into, whether we’re talking cell phones or iPods or what have you?

Oh.

So, you’re talking about video eyewear that has an outlet that can plug right to the eyewear?

Yes.

Like the video iPod right now - does it have a video out plug that one of your devices could plug into?

What about cell phones?

Where are we in the design cycle on those types of devices?

Okay, the answer to that question, we’re seeing a lot of new products coming out will have a video output.

The video iPod that just came out does have in the UBS port a video output.

Yes.

And, your device could connect via the USB?

Yes.

If anyone stops by our presentation at AEA next week, they might see that in action.

Next week, you can see that using our eyewear to plug directly into the video iPod.

It’s a beautiful picture.

It’s really smashing, actually.

Okay.

Last question.

Kodak started to generate some revenues in the September quarter for you.

Nice announcement there.

However, those are two of many SKUs for Kodak.

What’s the potential of expanding your penetration within that key customer?

We’re obviously working with them.

That’s a new line of cameras for them.

It’s called Bridge Camera.

There’s a sort of bridge between SLR and also the low-end camera.

I think that that’s where a lot of digital cameras will go because the real low-end digital camera will go to camera phone.

But, more importantly, not only are we working with Kodak, we’re now beginning to work with many other key customers in digital still customers using our standard EVF.

Again, I think that we are optimistic that the next-year model we should have some win there.

All right.

Well, keep up the good work, guys.

Thank you.

And, we’ll take our next question from Jed Dorsheimer with Adams Harkness.

Hi.

Thanks.

Congratulations, John and Rich, on a great quarter.

A couple of questions.

A lot of them have been asked.

But, Rich, could you give a little bit greater guidance on the R&D.

I know that you gave a long-term of 13% to, what is it, 18% as a percentage of sales.

But, you came in at 9.8% this quarter.

Do you think you’ll hit the 13% next quarter?

How should we look at that ramp?

Yes.

I think we’d be towards the lower end, clearly, for the upcoming quarter.

So, we’d definitely be closer to the 13% than we would be to the 18%.

Great.

And, looking at the contract revenue, is that going to continue, and are there any costs associated with those, other than not being taxed?

Yes; there is cost associated with it.

It will continue.

I would say that this quarter was high.

As we disclosed in our 10Q last quarter, we had already been working on some government contract, which we had not actually been awarded the government contract.

But, we were working on it in anticipation of getting it.

We did get it this quarter, so we retroactively recognized about $350,000 of revenue that’s in that R&D line.

So, that was kind of-- I guess it might fall in the abnormal type of category.

So, we would expect that number to come down next quarter-- this quarter.

I’m sorry;

Q4.

Great.

Pretty strong business in the HBT.

Could you comment on what Skyworks was a percentage of revenue during the quarter?

No.

We only do that once a year, at the end of the year.

Got you.

And, looking at the guidance, I guess to the midpoint, the sequential decline, would that-- Is that decline mostly coming from the HBT with growth in the CyberDisplay, or how should we look at that?

We come up with a whole variety of probability weighted scenarios for revenue when we kind of settle in on a particular range.

So, if we make the wrong-- We probably will be wrong in any one of two or three scenarios, but we think in totality, we come out right.

Got you.

Linearity during the quarter?

Was it-- Could you talk about that?

It was a very linear quarter for both HBT and Display.

And, then, just a tick up on the A/R on the balance sheet.

I know you did mention that you reversed out some reserves.

I’m curious;

I didn’t see the offsetting account to see that increase.

Could you talk about that a little bit?

Well, what happened is-- I mean, if you look at the SG&A, even though the receivable balance was lower last quarter, the aging of the receivables was not as good.

So, last quarter, Q2, we actually had an increase in the allowance for doubtful accounts.

This quarter, even though the receivables actually went up, the overall age of the receivables is much better because we had more linear sales during the quarter, meaning we had more receivables turning at the end of the quarter.

So, the allowance actually went down.

That’s why you’re going to have this big swing in SG&A.

Basically, you didn’t have the charge in Q2, and you didn’t have the credit in Q3, which is what we had.

So, the receivables themselves-- Again, the fact that they’re up is a function of the linearity of the quarter.

Could you walk me through that one more time, because when I look, it went from $6 million to $14.8 million.

The swing in the SG&A doesn’t seem to account for that.

What am I missing here, if it was a fairly linear quarter?

The receivables went up at the end of the quarter because we had strong sales all the way through the end of the quarter, and the sales were not as strong in the third month of Q2.

Got you.

Thank you.

Lastly, to Brian’s previous question on the night vision with the orders starting in Q2.

Did you give a time frame on--?

I know you said volume production for the thermal weapon sights.

I’m assuming that’s the phase two of the thermal weapons in 2006.

I was wondering if you could give us any greater detail on the timing in 2006 of that volume.

Would that also be Q2?

To be honest with you, I got a little confused on your question.

Could you repeat it?

Sure.

Previously, I think Brian was asking about the night vision goggles.

I think you had mentioned Q2 for volume.

I was wondering on the DRS business; is that Q2 for ramp in volume production?

Okay.

Without specifying any particular customer, we would expect to start volume production of the thermal business in Q1.

Got you.

Great.

I’ll pass it on.

Thanks, guys, and congratulations.

Our next question comes from [Ty Kitrum] with CIBC World Markets.

Rich, frankly, I’m extremely confused by the impact of the gross margin and the operating expenses.

So, if you can go one line at a time and explain how you got those numbers, I’d highly appreciate that.

Okay.

I’m not sure what the issue is on gross margin.

Well, why is gross margin then dropping so significantly into the next quarter?

Well, it will be dependent upon where we hit in the range of $23 to $25 million in revenues.

And, of course, there’s sales mix issues and all that other good stuff.

But, still, you’ve provided guidance for gross margin in the range of $30 to $33, which is still a big drop in gross margins.

I’m just trying to understand that.

Right.

Again, it depends on a number of scenarios that we factor in the potential sales mix.

So, those scenarios don’t anticipate gross margin of higher than 33%?

It could be higher.

That’s why I gave the range of 30% to 33%.

We only gave-- It could be higher.

We gave that range, but it could be higher.

Right.

But, that range implies you have a higher confidence in that range?

That’s the range that we’re publicly disclosing.

Right.

Okay.

R&D again.

Could you explain how come it dropped and why you expect that to jump up again?

Well, right now we expect it long term to be in the 13% to 18%.

In the upcoming quarters over the next, say, twelve months, we’ve disclosed previously that we’re going to be investing significantly in the development of an 8-inch line for our displays.

So, we’ll be having a significant amount of activities going on along those lines.

Right.

But, how do you achieve such a big jump in R&D from one quarter to another?

It’s all dependent upon the development activities and how quickly we can get them done.

And, the SG&A, from what I understand, then, should have been really $600,000 higher?

Yes; on a normalized basis.

That’s correct.

And, the taxes, as well, should have been probably $100,000 to $150,000 higher?

Probably about $200,000 higher.

$200,000 higher.

So, between these two, it’s around $800,000 more in expenses that you should have kind of had on a normalized basis.

That’s correct.

Okay.

Now, John, if you can give us a little bit more color on the i-Module.

What is the ASP on that?

What kind of margin do you expect to get on that, and how would those change over time?

Yes.

I think the question was-- I think you’re talking about the BDM 230K, which is the QVGA BDM which we introduced as a product.

The ASP there is very big depending on the volume, around $60 to $70 each.

Our gross margin, again, depends on volume.

We’re aiming at around 30% or higher.

So, one day, if I have mobile TV then on my handset and I buy one of those eye pieces, will that be a north of $100 ASP?

You mean the retail price or wholesale price?

The retail price.

The current retail price people are putting out on the market is aiming around $149.

But, one day-- You called this one day.

The one day, it may go down to $99, but it depends on the volume again, which day you’re talking about.

If you go to the volume of a few million units, then that’s when you can talk about the prices.

Right now, as we said-- We said this year, we’re projecting around 50,000 units.

So, that’s a still very low volume.

Okay.

So, is the retail price of Bluetooth handset today, between the $60 and $70, is that more of a reasonable long-term price for such a retail?

It depends on resolutions.

Right?

I think that QVGA is really the resolution of a regular U.S. TV.

So, our price below-- around $99.

In fact, people told us if the retail price was $99, the next question was you’d be selling like hotcakes.

So, it depends on the volume.

It’s a chicken and egg question.

Now, if you want HDTV quality, that, of course, is not going to be $99.

So, I think it varies with different semblances.

I think Asia seems to be going for the QVGA, but in this country, I see more activities around VGA, which is the quality of a DVD picture.

I think that will be a great thing for next Christmas.

That will be ASP of around $120 for us.

$120 for an HD.

Not for HD; for what we call videa, which is the DVD quality.

Right.

Okay.

And, you mentioned a research firm that expected-- I think it was American Technology Group.

Correct me if I’m wrong-- 20 million users by 2007?

Yes.

American Technology.

Yes.

That is 20 million users-- more than 20 million from that 1 million today.

That, of course, is including mobile video; it’s not just including just normal video eyewear by itself.

The mobile video users.

Okay.

So, that includes DVBH.

Yes.

Portable DVD players.

Clearly it includes some cell phone guys - that mobile video.

Yes.

That’s a reasonable number.

In fact, I think the number probably exceeded that by then.

Very good.

All right.

Congratulations.

Good luck, guys.

[OPERATOR INSTRUCTIONS].

Our next question comes from Herb Meyer with Winslow, Evans and Crocker.

Yes.

Hello.

I’d like to fill in on a couple of things here.

A number of us had expected that because of Skyworks’ announcements and their importance to you that you wouldn’t do quite so well in three ’05; yet 10.8 versus 9.8.

Was it a function of it wasn’t as bad as Skyworks, or are there other applications there that have picked up the slack?

Yes.

This is John Fan speaking.

I think it’s a very good question.

I think Sky’s situation-- Of course, they have to answer-- I think they are ready to announce tomorrow.

I think they’re more specific to their own case.

The whole market on the cell phones is very strong.

Okay.

I think I got that.

Just, if I might, one more.

On the military side, what would be the next milestone or event or public announcement that we should watch for to know that this program’s on track?

Well, I think that there is much anticipation in the market for us to announce who is our night vision goggle partner.

That is something that I think the market is betting us to announce in the near future.

DRS Technologies announced something just recently.

They are a customer of yours; aren’t they?

Yes.

DRS would be a customer of ours.

Yes.

And Raytheon.

Okay.

Thank you.

It appears we have a follow-up question from Jed Dorsheimer with Adams Harkness.

Thanks.

Thanks for taking my follow up.

Rich, the 8-inch line-- One, will that create any requalification needed with your customers, both in military and on the consumer?

When do you think that that will be completed and up and running?

I think the answer to your question is yes.

It will require requalification.

I think the thought process is that perhaps a lot of the legacy products we sell today may not be qualified on it because we will move the displays to a new level.

We don’t really expect the 8-inch to be up and running until ’07.

’07.

Let me clarify this so that we make sure the market is not confused about it.

We’re going to run the 6-inch and 8-inch in [power] for a while.

So, the product that’s running the 6-inch mostly will still continue to be run at 6-inch.

There was no requalification needed.

It’s that we see a lot of activities now on very high resolution display.

For instance, our HDTV display is one inch square.

That new display will be-- They’re not in production yet.

They will be done in 8-inch, so they’ll be qualified once - not requalification.

Got you.

What is your expected cost savings on the implementation of that line?

That’s a very good question.

First of all, when you have HDTV have 1-inch displays on a 6-inch, the use if not very high.

On an 8-inch, we expect a much better increase in yield.

So, for small display, the difference in cost is not as high.

But, for higher resolution display, I think this could be very fundamentally important.

So, we’re seeing these not just for military but also for commercial reasons.

Also, I wanted to mention about 8-inch versus 6-inch; for 8-inch lines now days the cost of foundries has gone down so significant that cost per square inch in the 8-inch is not any higher than the cost per square inch of 6-inch.

The 6-inch line just not too many left now.

Got you.

And, what are the costs on the 6-inch?

I obviously cannot reveal the numbers because we have several foundries.

But, you can look at the 8-inch line, divide it up, and that’s pretty comparable to what we’re paying for 6-inch.

Got you.

I thought I’d give it a shot.

And, we also have a follow-up question from Brian Alger with Pacific Growth Equities.

All right, Rich, I want to come back to the gross margin question.

I’m wondering-- Obviously, on a sequential basis, we’re not going to see as much-- At least from your commentary, we shouldn’t expect to see as much in the way of contract revenues, and that’s going to have some negative impact on gross margins.

Are we going to see a mix shift within the CyberDisplay business away from military, or do you expect a similar mix in Q4 military versus consumer?

I expect a mix shift away from military.

In Q4?

Yes.

Okay.

That’s due to us waiting or the little bit of a pause before we transition away from Raytheon towards DRS and BAE?

Well, it’s for a whole host of reasons.

But, suffice it to say that’s what we expect to happen.

Okay.

And, I know you’re not giving guidance for Q1, but given your commentary that you expect the volume ramp on the next phase for the thermal weapon sights and pilot programs on the night vision to start kicking in, is there a chance that we would not see the normal seasonality in Q1?

We’re not going to give guidance on Q1, Brian.

It was worth a shot.

Thanks.

And, Dr. Fan, at this time, there appear to be no further questions, so I’ll turn the call back over to you for any additional or closing remarks.

Okay.

Thank you very much, everyone, for joining us this afternoon.

We’re looking forward to report our progress to you on our fourth quarter conference call.

Have a good evening, everybody.

Thank you.

And, that concludes today’s conference call.

We’d like to thank you all for your participation.