Kopin Corp (KOPN) 2005 Q4 法說會逐字稿

Welcome to Kopin Corporation's fourth quarter 2005 financial results conference call.

Today's call is being recorded and Webcast.

You may access an archived version of the call on Kopin's Website at www.Kopin.com.

With us today from the Company are Chairman and Chief Executive Officer, Dr. John C.C.

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

For opening remarks I would now like to turn the call over to Mr. Sneider.

Please go ahead sir.

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

I will begin this afternoon's call by welding through our Q4 and year-end financial results;

John will review our recent accomplishments, discuss our strategy and provide an outlook for Q1 of 2006; then we will take your questions.

Before we again, I want to remind everyone that during today's call, taking place on Thursday, March 2, 2006, we will make forward-looking statements as defined in the Private Securities 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, foreign currency exchange rates, the availability of raw materials, 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 these forward-looking statements made during today's call.

As we announced in this afternoon's news release, we achieved record results for the fourth quarter and full year.

Our Q4 revenue grew 35% year-over-year to 24.9 million, slightly exceeding the guidance of 23.5 to 24.5 million we provided on our Q3 conference call.

For 2005, revenue increased 3.5% to 90.3 million from 87.3 million for the same period in 2004.

Looking at our Q4 results by product group, CyberDisplay revenue was 11.4 million in Q4 '05, up about 16% year-over-year and down about 22% sequentially from 14.6 million in Q3, reflecting customary end-of-year seasonality and our strategy to exit unprofitable product segments.

As expected, our CyberDisplay sales mix in Q4 was weighted more towards the consumer electronics segment.

For the year, CyberDisplay revenue was 47.6 million, compared with 49.1 million in 2004.

III-V revenue increased approximately 58% in Q4, to 13.5 million from 8.6 million in Q4 2004, and 25% from 10.8 million in Q3 2005.

Very strong sales were driven by demand from our power amplifier customers for HBTs used in advanced cellphones and wireless networking products.

III-V revenue for the full 12 months of 2005 was 42.7 million, an increase of 12% compared with 38.3 million in 2004.

Excluding the 2004 CyberLite LED revenues, III-V revenues increased approximately 15%.

For the year ended December 31, 2005, our 10% customers were Skyworks at approximately 32%, Samsung at approximately 14%, and JVC at approximately 10%.

Favorable product mix and efficiencies from the strong sales volumes in Q4 resulted in gross margins of 36%, slightly higher than our guidance of 30 to 33%.

This compares with gross margins of 35% in the third quarter and 11% in the fourth quarter of 2004.

The year-over-year improvement reflects cost efficiencies we have achieved since transitioning our LED product group to Asia as part of the KoBrite Corporation joint venture.

For the 12 months ended December 31, 2005, our gross margin was 36%, up from 15% for 2004.

For the first quarter of 2006, we expect our gross margins to be in the range of 25 to 30%.

Research and development expenses were 3.4 million, or 13.8% of revenue in the fourth quarter.

This compares with 2.5 million, or approximately 9.8% of revenue in Q3 2005, and 3.3 million, or 17% of revenue in Q4 of 2004.

For the year, R&D expenses came in at 13.3% of revenue, compared with 16.3% for 2004.

For 2006, our R&D activities will focus on new display systems for the military segment, Binocular Display Modules, or BDM, development for eyewear, and the installation of an 8 inch line for our displays in order to continue to enhance our display technology by adding new products with higher resolution and increasing levels of integration.

Specifically, we anticipate that R&D expense will be approximately 15 to 20% of revenue through 2006.

Selling, general and administrative expenses in Q4 2005 were 3.8 million, or 15.2% of revenue, slightly higher than our guidance of 2.7 to 3.3 million.

Included in the SG&A in the fourth quarter is a charge of approximately 585,000 of expense from the accelerated vesting of restricted stock, and 332,000 from equipment which we sold to the KoBrite joint venture but which was damaged during shipment.

SG&A expenses were 2.7 million, or 11% of revenue in Q3 2005, and 2 million, or 11% of revenue in the year earlier period.

SG&A for the year was 13.7 million, or 15.1% of revenue, compared with 11.7% of revenue for 2004.

Net income for the fourth quarter of 2005 was 3.7 million, or $0.05 per diluted share.

This compares with net income of 5.4 million, or $0.08 per share in the third quarter of 2005, and a net loss of 7 million, or $0.10 per share in Q4 2004.

For the year ended December 31, 2005, we adopted Interpretation Number 47, Accounting for Conditional Asset Retirement Obligations.

This resulted in a cumulative effective accounting change of 443,000, and represents the present value cost to restore our facilities upon the termination of our leases.

Earnings per diluted share for Q4 2005 and 2004 were calculated based on approximately 70 million shares outstanding.

For the 12 months ended December 31, 2005, GAAP net income was a record 11.7 million, or $0.17 per share, compared to a loss of 13.8 million, or $0.20 per share for 2004.

Our 2005 performance reflects the continued operating efficiencies of both CyberLite, CyberDisplay, and HBT businesses.

Under our stock buyback program, we repurchased 55,000 shares of our common stock in the fourth quarter of '05.

Since inception, we have repurchased approximately 7 million of the 15 million authorized at the outset of the buyback program, and we are continuing to buy back stock.

As of December 31, 2005, Kopin had cash and marketable securities of 119.8 million, compared with 111.9 million as of December 25, 2004.

Our balance sheet has no long-term debt.

Accounts receivable increased 13 million as of December 31, 2005, from 9.1 million at December 25, 2004.

Inventories at December 31 were 9.3 million, versus 7.9 million at December 25, 2004.

The primary reason for the inventory increase is due to finished goods (indiscernible) programs with various HBT customers.

DSOs were running approximately 55 days for the quarter, compared to 56 in Q3.

Depreciation and amortization was approximately 3.9 million, compared with 9.5 million a year ago.

Full year 2005 CapEx was approximately 3.1 million.

We expect CapEx for 2006 to be between 8 and 12 million for both HBT and display expansion.

Turning to our guidance, total revenue for Q1 2006 is expected to be in the range of 17 to 19 million.

This forecast reflects customary seasonal trends in our end markets, and our strategic move away from the low-end of the camcorder viewfinder segment, which in recent quarters has experienced a sharp decline in ASPs.

The effect on display revenue in Q1 will be tempered somewhat by our III-V business, which should produce strong and steady growth throughout the year.

Finally, we would expect the impact of the adoption of FAS 123R, stock option expensing, to be in the range of 1.5 to 2 million in 2006.

We are still reviewing our assumptions.

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

Thank you, Rich.

Welcome, everyone, to our quarter four conference call.

Quite simply, 2005 was a year of record profitability for Kopin.

We generated net income of 11.7 million, or $0.17 per diluted share, the best performance in our history.

We also had an outstanding year on the top line, producing 90.3 million in revenue, second only to the year 2000.

We will also exceed our revenue guidance for the fourth quarter, coming in at 24.9 million.

Let me give you some color on our quarter four results, [then we'll talk about] growth strategy for the next few quarters.

In our III-V business, we saw strong demand for our Tier 1 power amplifier customers, especially from Skyworks, where we are supplying 100% of HBT production wafer requirements.

More on that in a moment.

A couple of important trends are driving HBT orders.

The first is a demand -- increasing demand for advanced cellphones capable of voice, video, and high-speed data transmission.

We are also benefiting from the surging popularity of cellphones equipped to handle both GSM and wide CDMA.

[Increased] functionality is driving an increase in RF content performance.

As the world's leading merchant supplier of HBT, Kopin is benefiting from that trend.

PAs offer a very high-powered density, so they must possess excellent thermal characteristics.

Our HBTs are ideal to handle the power efficiency requirements of these more advanced wireless applications.

Our III-V business is off to a good start in year 2006.

Most recently, we announced a new generation GAIN-HBT product, which already initiated volume production.

Our patented GAIN-HBT transistors enhance PA performance by reducing operating voltage, increasing radio frequency performance and offering greater temperature stability.

Cellphones are no longer just a two-way radio device.

Now, cellphones include many other technological features, including GPS tracking, storage datafiles, snapping photos, downloading music, and now even watching TV and video.

The cellphone has become a complete mobile communication hub.

As new demands continue to be placed on the phone, higher HBT content will be required to engage all these features included in those new models.

Kopin has been the world's top merchant supplier of HBT for a decade now, and there's one simple reason we continue to lead the market -- we provide best-of-breed technology solutions and value to our customers.

There is no better evidence [of that] than the recent expansion of our HBT production supply agreement with Skyworks, which we announced last month.

This agreement provides for support of a wide range of HBT technology, including multiple HBT products, Skyworks advanced BiFET technology, and Kopin's GAIN-HBT platform.

The agreement also facilitates the Company's continuing implementation ofproduction development plans to supply growing worldwide demand for cellphone power amplifiers.

Clearly, Skyworks (indiscernible) leading handset OEMs, including Motorola, Samsung, LG and Sony, provides a growing number of exciting opportunities for our advanced HBT products.

This business continued to perform solidly.

We expect the HBT momentum we saw in 2005 to continue steadily and profitably in 2006 and beyond, as [handsets] continue to add new features and functionality.

Now, before I move on to CyberDisplay, I want to briefly update you on the progress of our KoBrite joint venture.

KoBrite's Dongguan, China facility celebrated its grand opening last November.

The plant, which is located about an hour outside Hong Kong, houses a fab that provides KoBrite with the cost structure and technology very competitive in the global LED market.

The transition of our LED business to Asia has been very successful.

I am pleased to report that the migration of our business to Asia is essentially completed.

Operations in the KoBrite facility are underway, and full production is scheduled to begin later on this year.

Now let's move on to the trends in the display business.

CyberDisplay revenue, as we pointed out in our Q3 call, generally experienced end-of-the-year seasonality, since the bulk of OEM orders tend to occur in the middle of the year for the coming holiday season.

Though the CyberDisplay revenue was down sequentially in Q4, year-to-year growth was driven in part by shipments of our CyberDisplay EVF 230K to Kodak for their P-Series digital camera.

This relationship truly illustrates the success of our full-color EVF system in a high-volume customer application.

We expect to announce additional digital still camera production design wins with Kodak and other OEM partners in 2006.

In terms of the highlights, the design activity we announced in Q4 underscores our focus on emerging opportunities in both the mobile video eyewear and military markets.

One example is our alliance with IC design leader Solomon Systech, which is marketing our Binocular Display Module, which we call BDM, in China for plug-and-play video eyewear applications.

This relationship gives us an entrance into one of the world's most important markets with a partner of which we are strong respect.

[As part of our alliance] with Solomon, the Hong Kong Electronic Asia show in October 2005 -- by the way, the Asia show is the second-largest consumer electronics show in the world -- will review a new line of products called Digital iVision for mobile video applications.

Digital iVision is a technology platform that includes our CyberDisplay WVGA display, the first high resolution microdisplay with a 16 by 9 aspect ratio.

The power efficient -- the power [energy] efficient WVGA display delivers brilliant high-resolution color to a screen that is barely a half-inch in diameter.

At the Electronic Asia show, we also demonstrate the CyberDisplay SXGA, which is a [1280 by 1024] full-color one-inch diagonal -- the size of a postage stamp -- (whose HDTV-plus resolution is targeted towards the emerging high-end military systems as well as the virtual reality personal theater and 3-D HD gaming.

This is the highest resolution display -- LCD display in the world.

Many emerging video eyewear companies, such as Icuiti, MicroOptical and Oriscape all exhibit their products in the show.

The mobile video market has come a long way in the 11 months since we held our inaugural Vision 2005 conference in April 2005 in Westborough, Massachusetts.

We brought together key opinion leaders to discuss the emerging opportunity in the video eyewear.

In hindsight, our event seems to have been a catalyst for the market.

During the past year, a host of global companies have entered mobile video market, rolling out services software and devices.

As the Financial Times reported in an article last month, This year is seen as something of a breakthrough for mobile content.

Of course, Apple was the most celebrated company to join this fray, introducing a video version of its popular iPod.

No longer is the iPod simply a single-function device.

Now it is a portable entertainment information center, a terminal to store and view photos, watch TV shows and music videos, as well as enjoy full-length films.

And just as earbuds have become everywhere in trains, planes and automobiles for legions of iPod music fans, we believe the eyewear will become just as prevalent in the increasing number of -- for the increasing number of mobile video units.

Indeed, video eyewear is already beginning to pop out in areas, including Japan and South Korea, where terrestrial, satellite and digital TV broadcasts are becoming available via cellphones.

The growing demand for video eyewear was evident at this year's MacWorld, where MicroOptical introduced its myvu view personal media viewer to an eager audience.

Equipped with Kopin's QVGA microdisplay, myvu combines great video and audio in a single pair of slick eyewear.

When hooked up to a portable video device, such as Apple's iPod, myvu allows users to view a screen many times the original screen size as displayed in the portable video device.

MicroOptical and Kopin also teamed up on another exciting new product being introduced in Europe right now.

French Telecom's wireless unit, Orange, introduced -- launched a mobile video service that allows cellphone subscribers to watch TV and movies, check e-mail, view photos and browse the Internet on their cellphone.

Using MicroOptical's video eyewear, powered by our device, this innovative design enables big-screen capability in a slick and stylish pair of eyeglasses.

When connected to a cellphone, this eyewear enables viewers to see a large-screen video or pictures that are more than a 12-inch screen as seen from three feet away.

Kopin's display also featured the eyewear developed for iPod by Icuiti, as well as portable home theater products from companies including Welton and Oriscape.

In terms of [size] video eyewear market, we estimate about 50,000 units were sold in year 2005, and that Kopin's market share was north of 80%.

This year we expect that sales could top 300,000 units, with Kopin's market share growing even higher this year.

We expect our displays to capture the lion's share of this growing market.

We [expect year] 2006 will also be a year of significant growth for our military display market.

Last year we were delighted to be awarded three multiyear contracts to produce advanced micro displays for the U.S. Army.

Kopin is partnering with DRS and BAE Systems for a five-year program to produce a new generation of light, medium and heavy thermal weapon gun sights.

As many of you know, Kopin has experience in this program through our earlier participation with Raytheon in developing the first generation thermal weapon gun sights.

We are encouraged with the progress of our [pilot], where we’ve made significant progress towards product qualifications.

We now expect to ramp up production for both DRS and BAE by the end of quarter one.

We also announced a multiyear production contract with ITT Night Vision to supply display subsystems for the U.S.

Army's Enhanced Night Vision Goggle systems, which we call ENVG.

The ENVG is a new generation night vision goggle that provides our soldiers with thermal imaging capability in addition to night vision capability, a major improvement over the conventional night vision goggles.

As a reference, there is close to 1 million units of conventional night vision goggles in the field.

Kopin will provide complete optical module with display, optics and backlights for each of these new advanced goggles.

We expect to ramp up production on this module by the end of Q2 this year.

It is important to stress that both ITT, DRS and BAE have won multiyear production contracts with the government, and we're the sole provider of displays [and modules] for these programs.

From the time we began the Company in 1984, one of Kopin's enduring strengths has been the ability to develop new technologies and new products that anticipate the fast-growing technology curve.

As a reminder, Kopin has excellent innovative technology and products with over 200 patents and patents pending.

Both our micro display and HBT products exemplify that pattern.

They are as Harvard Professor Clayton Christensen discussed during our Vision 2005 conference last April.

In his keynote speech, he talked about how to introduce disruptive technology into the market.

Our strategy has been a classic example of his teaching.

That is to first capture share in the [low-end] market, and the drive margin enhancements through increasing levels of product integration.

Over the last two decades, we have gained enough traction in the market [that we can afford] to concentrate on this enhanced opportunities to allow us to grow profitably.

In our display business, as Richard noted, we have decided to transition away from the low-end camcorder viewfinder market for that very reason.

The camcorder market has not -- itself has not grown in the past three years, and displays for the applications, the ASPs for the conventional camcorders have declined sharply in the recent months.

Our response has not -- has been not to abandon the market, but simply to move high-end models by using our new display technology to penetrate the new generation of camcorders, such as those now using 16 by 9 aspect ratio viewfinders.

Equally important, our new technology, including Digital iVisions, BDMs and other enhancements, is geared towards military DSC, digital still camera and video eyewear markets.

These products require Kopin's new higher-margin products that feature higher resolution and greater levels of integration.

Our R&D program continues to be extremely active as the transition to new products nears completion.

In all our new display products, whether for military or commercial, higher performance displays are needed.

We are actively developing an 8-inch production line.

We expect our 8-inch line will provide high-performance display -- higher performance display, especially for larger, higher resolution displays for new military and commercial applications, and also potentially provide lower cost.

With solid transition in year 2005, and I'm happy to say the 8-inch process is now developed.

And we started installing an entire 8-inch line to be completed by the end of this year.

So, to sum up, Kopin is coming off the most profitable year and fourth quarter in its history, and is poised for a strong 2006.

In our III-V business, we're very excited about opportunities for our HBT products.

Growing demand for multifunction, multistandard cellphones and wireless networks create powerful requirements that are best served by our Kopin transistors.

Equally important, we have now developed and started production for the next generation of HBT transistors, substructure.

We continue to align with great Tier 1 customers who have deep relationships with top tier handset OEMs.

In our display business we are focused on generating profitable revenue growth and strong margins, and successfully transitioned the low-end camcorder business to higher growth, higher-margin business by winning top tier customers' programs.

Each of our key end user markets -- military systems, digital cameras, video eyewear -- is expected to begin ramping in the second quarter, with growth accelerating in the second half of this year and beyond.

While seasonality and our transition from camcorder business will cause total revenue to be down in Q1, for the full year we expect growth -- good growth on our display business.

As a result, in 2006 we are forecasting overall revenue to grow over that of 2005. though that growth rate we cannot say right now, since we do not know how much video eyewear will grow.

In addition, by the end of 2006, we should have a pilot 8-inch display manufacturing line, which will further enhance our display performance, capability and capacity, and will strengthen our -- and extend our lead as a top [U.S.] micro display manufacturer.

The market trends and requirements for HBT and displays are all in our favor, and we have planned for this new demand.

We are very excited about our prospects.

With that, we are ready to take your questions.

(OPERATOR INSTRUCTIONS).

Brian Alger, Pacific Growth Equities.

A couple of quick questions.

First, you guys gave us some guidance with regards to gross margins and R&D, but I didn't catch any commentary with regards to SG&A.

Should we just back out the 580,000 that was kind of onetime?

For the year we should be in the 10 to 15% range.

It's probably going to be closer to the 17, 18% in Q1 because of the lower sales.

But for the year we would expect to average out at about the 10 to 15% range.

So, by my math that looks like we're looking at a slight loss for the first quarter, then?

It's possible.

And can you guys give us a sense for -- I know you don't want to get down into the minutiae, but how much of the CyberDisplay revenues in the fourth quarter were attributable to camcorders?

And of that, how much would you say would be in the high-end versus the low-end that you're walking away from?

We have not historically given that type of level of detail, although I would say that the majority of sales in the fourth quarter were still camcorders.

Let me ask it a different way.

In the camcorder market, which is mid-teens globally, and flat and declining, how much of that market do you think you're walking away from by not targeting the unprofitable business, and how much are you still targeting with the high-end?

Let me answer the question.

I think that we are still working with all our camcorder customers, Samsung and JVC.

We're moving to the high-end products with them.

And some of them are beginning design wins right now.

Okay.

But how many of the low-end products are you not in that you were in before?

As Rich talked about, we do not break out those details.

Can you give us some rough estimate?

Are we walking away from 80% of the available TAM?

Available TAM.

Within the camcorder market, obviously, it's going to have high, medium and low-end markets.

You're walking away from a good hunk of it; presumably that's where the volume is.

I'm just trying to understand how much of the market are you still targeting.

I think the market is shrinking so rapidly, the ASP just in the last year for displays for viewfinders, camcorder viewfinders, dropped more than 30%.

So the total available market shrank a lot.

Okay.

And you talked about -- just moving forward, you talked about the military projects ramping.

The TWS II project with BAE and DRS.

You said by the end of Q1.

Do we expect any revenues from that in Q1?

Yes.

Do we expect the government to rise back up to be a 10% customer in Q1?

Q1 or Q2?

I think he's saying Q1.

That is possible.

It is possible.

And John, you gave us an expectation for growth in fiscal year '06 --

I just wanted to point out, for those TWS program which is ramping up, it is very difficult to really estimate whether it is March or February or April.

We're [just coming in on the cusp] right now, so it's not that important whether it's 10% or not [first] quarter. (multiple speakers) It is a multiyear program.

And certainly, we see growing opportunities in the military throughout the year, and we should see that, obviously, compounded with the new projects coming from ITT.

Clearly, at the beginning of the year we have a relatively low gross margin, below the gross margin level that we had the previous year.

Do you expect gross margins to be down on the full year?

Revenues are expected to grow somewhat, but what about gross margins?

I think as John said, the whole year will really depend on eyewear.

If eyewear is not successful this year, then yes, the answer would be that gross margins year-over-year would be down.

So I take it the eyewear products actually have nice gross margins?

Yes.

Yes.

George Iwanyc, CIBC World Markets.

Could you give maybe a little bit more color on how you think the military will progress throughout 2006?

With the ramp at the end of the first quarter for the thermal weapon sights, and second quarter for the night vision, how do you think those could progress the rest of the year?

Unfortunately, we really can't answer that because it's not -- I can tell you two things.

One, the U.S. military wants the devices as quickly as possible, and that Kopin stands ready to supply our piece of the pie, or our component to the overall piece.

But beyond that, it really depends on how our customers and some of their other suppliers do over the next few quarters.

So we know there's very strong demand on the military part.

Everybody wants to seem to get qualified and as quick as possible.

But we really can't tell right now how it's going to go.

Maybe I'll add a little comment on that, on this military.

There are three major programs, production programs right now in the market.

And we, of course, are [closely] tied to all three.

The first thing is that on the thermal gun sight was switched from first generation to second generation; the first generation was Raytheon; the second generation that we are in with DRS and also BAE.

They're being qualified right now.

All of the budgets are already approved.

The volume pricesare approved.

So, wherever they switch on, they have to provide the same number of units this year and beyond.

So I think it's just a matter of you shift to the right and [that the curve has to] be steeper.

So we are suggesting in our talk that the volume production will start in the end of first quarter this year for this two [count].

The ITT, the night vision goggles, the advanced goggles -- just want to give you some color to that.

There are 1 million goggles in the world.

Okay?

And those goggles are night vision.

They really are light intensifiers.

You cannot see thermal images at night.

So with these new goggles you can see both.

The government is buying for that right now.

They are fully funded.

So, right now, the minute it was qualified, and maybe even before that, the production has to start.

That's why I say, volume production will start the second quarter this year.

And it's a multiyear program, so to give you some color end of the first quarter, the thermal gun sights, end of second quarter, volume start for the advanced goggles.

We think that market is very huge, because it's already goggles already is about 1 million units.

I hope I answered your question, George.

You did.

It's a multiyear program.

It's going to ramp up, and we are the sole supplier for all three programs.

With the kind of 1 million target that you showed for the night vision, can you give a unit number that you think is possible for the thermal weapon sights (multiple speakers)

It's a very interesting question.

That's why we don't -- we are constantly looking at what is the actual military market business.

You know that our [multiple] module for the goggle is everywhere, ranging from a few hundred dollars to close to $1000 each.

So whether the government will change the goggles or retrofitting all the goggles to allow for thermal imaging is yet to be decided.

But you can assume a substantial number of the goggles will become combined goggles.

So the potential is very big.

But also, I think you were asking how big is the thermal as compared to the night vision.

Is that correct?

And I think what we've always been told was that the night vision is four x the thermal.

Four x the thermal for the number of units?

Yes.

Remember the thermal right now we are using as a gun sight, not the goggles.

The goggle is (indiscernible) differently now.

You gave an idea of the 100 to 1000 ASP variability, depending on applications.

Can you give same type of numbers for what you expect right now in the digital cameras and the camcorder and eyewear markets?

Yes.

In the eyewear market, it varies depending on whether people buy just the components or buy the BDM.

And we have advised the Street that BDM can go anywhere from $50 to $100 each.

And in if you buy components, then it depends on whether you're buying a display for low-resolution or high-resolution; it can vary from $10 to $30 each.

And for the digital camera market?

The digital camera market is the one we provide to for instance, Kodak is the integrated what we call electronic viewfinder modules, and it's in the teens each.

One final question.

When you look at possibly having growth in excess of 2005's growth, if you could kind, of give me an idea which parts of the business do you think would contribute the most to that growth outlook?

That's a very good question.

We expect all the market we targeted, whether it's HBT, whether it's digital camera, whether it's military, or whether it's eyewear, they all will grow this year over last year.

So, that's one thing.

The second is we expect the military market will be very strong, and could very well be the major component for our display this year.

Mike Burton, ThinkEquity Partners.

Can you talk a little bit about how you get to your guidance range for gross margins in the March quarter?

It's simply lower volume over a fixed cost structure is really what’s driving it.

Is there a product mix also there, or is it just simply volumes?

It's simply volumes.

And also, the military market hasn't really started until the end of the quarter.

But after that compared to the fourth quarter last year, it's a volume issue.

As we talked about in the fourth quarter conference call, we expect the military market it seems because of transition from Raytheon to BAE and DRS will not start until the end of this quarter, that the revenue contribution display in military for both fourth quarter and this quarter will be small.

And I think we will continue to stick by that.

And then along with that, are you actually expecting military to continue a decline in Q1, then?

Or is -- it looks like you're expecting HBT to be flattish in March, and I'm just trying to -- is the entire 7 million or so decline then pretty much all coming from the camcorder business?

I would say it's coming from the display business, because there's seasonality to all the products.

Even digital still cameras are down seasonally in Q1.

And HBT actually is down seasonally in Q1 also.

That is seasonal every year is like that.

(OPERATOR INSTRUCTIONS).

Brian Alger, Pacific Growth Equities.

It just seems to dawn on me that here we are sitting in March already, March 2nd, and we're not sure as to whether or not the revenues for the military will come in by the end of this quarter.

How much lead time do you typically get from the government, and how fast can you turn on production to generate revenues?

When you say government, you really mean our customers who are government contractors.

Yes.

I'm sorry.

The military.

Again, keeping in mind that these units go from -- range anywhere from price from $800 ASP to 1500 to $2000.

And so the volumes you're talking about have a significant impact are a 1000 a week.

To get the same types of revenues, you had to sell hundreds of thousands of camcorder displays.

So, if March is a big month, it can have a significant impact at those types of ASPs.

I understand that.

But I guess I'm sensing that since -- a bit of uncertainty right now from your commentary, which would tell me that you don't have an order in hand to start production right now.

And my question is --

No, no, Brian.

I don't agree with that.

We have orders, but we are putting all the parts together.

We already advised that our revenue will be 17 to 19 million.

I think that's a pretty clear range.

Okay.

And the delta there would be on how much military comes in?

(multiple speakers) ship to them.

Yes.

So we should be thinking -- from what we're hearing, we should differently be thinking that we will see some of this TWS II program shipping in volume this quarter, and obviously more in the second quarter.

We'll be shipping, start shipping in volume at the end of this quarter.

So whether it is March 15 or March 18, as Rich is saying, when you're starting on this kind of a product, a couple of weeks makes all the difference, because those are high-value products.

That's exactly my point, and I'm just trying to understand how fast you can turn on the production from when BAE and DRS get their full [qual].

How fast can you turn it on?

Because an extra week of production with the ASPs that we're talking about --

Again, keep in mind, we're used to doing 300,000 displays a month.

So, for the government to come in and say -- a customer say I need you to deliver 1000 or another 2000, that is not a huge effort for us to do.

Granted, there is -- these are a little bit more complex than the basic display, but we're more than facilitized and staffed to handle that.

Shifting gears real quick.

John, you're describing a very rapid and positive growth in the video eyewear business, and there's a number of indicators that would say that could occur.

However, do you expect that market to grow linearly through the year, or is that going to be a back-end loaded hockey stick, kind of tied to the holiday buying season?

Very good question.

I think it's going to be a hockey stick.

I think that this is a product that -- let me backtrack a little bit.

I think that the amount of activities since video iPod was introduced by Apple, video eyewear is astonishing.

But as you can guess, it will take it some time for those products to be designed, ready for mass production.

So, everybody now is aiming for this market.

So, it's going to be a hockey stick, and as we now advised the Street that we believe 300,000 units will be sold this year.

Let's hope it comes on.

We've been waiting for personal eyewear for about a decade.

That's right.

Over a decade.

There are many -- but you know how consumer products are.

It keeps on going -- if the price, performance and content come together, and when it comes together, it often time comes as a hockey stick.

And we've been working on video eyewear with our partners for over 10 years.

We are always a true believer, and therefore we have a very dominant market share.

This morning Skyworks announced some new products for their product line, referring to some InGaP developments that they've made.

Presumably this is utilizing wafers from Kopin.

Do these wafers on InGaP have a higher ASP than the typical wafers that you've been selling over the past year for Skyworks?

Let me answer that, since I was one of the persons to finish that agreement with them.

Yes, the answer is the one they announced is called BiFET, which we talked about in my script.

And it does have high ASP, yes.

Can you maybe talk any amount of detail to us in terms of what we should be modeling for maybe a difference between the traditional gallium arsenide and what we're dealing with here?

It will not make any near-term impact, because it just is going to ramp up slowly, certainly slowly compare with the other products.

So we think there will be very little impact.

The same thing with GAIN.

Even though tens of millions of phones will be using GAIN-HBT, but in the view of we are going to be in about maybe 3 or 400 million phones is a very small number.

And GAIN also has high ASP.

How much do you think wafers can grow in 2006 versus '05, in aggregate?

You want to say something, Rich?

I think it will grow.

In fact, Rich already mentioned that CapEx will increase.

We are increasing our capacity right now.

To be honest, Brian, John and I both heard very robust numbers.

And you start saying it's 2000 deja vu, and we all know where that went.

So, I guess we're a little conservative.

It is a very interesting thing.

Brian, I understand your questions, both in display and HBT.

We started out two years ago to transition the Company.

We're moving out of the LED business, of which we have a lot of good technology, but we believe that we cannot be competitive in the overall market.

So moving to Asia, I think we did very well there.

In addition to that, we look at the HBT, so we introduced GAIN and work with Sky on the BiFET of which they're going to production this year.

Meanwhile, the cell phones and the wireless network business continues to increase, and I think many phones now have multiple PAs per phone.

So all of a sudden, usually have 1 or 1.1 or 1.3 PAs per phone; now you going to 2.2 or 2.3 PAs per phone, or maybe it goes three PAs per phone.

So, some of these things are happening as we speak.

And so we are now installing capacity.

Go back to display, I think that camcorder -- camcorder business has not grown for three years.

And that's why as you well know Sony and Sanyo were using their polysilicon display, although they cannot makeas small as we do they can make the same low-resolution display.

And they have no place to go.

They cannot go to higher resolution.

They can't go to eyewear.

They certainly can't go into military.

They can't even go to digital camera very well.

So, they all fall into camcorders.

It's so crowded.

We're getting out of there.

And we want to get out of there, and we told the Street we're going to get out of it.

And we made the decision to get out, and we've got other new customers, new products.

So, there is a transition.

I think the qualification for the military, we all wish they were a little bit faster, but they have very stringent requirements.

So we have won all the contracts as a multiyear.

So, it's not so important whether it comes out in February or March this year.

But they are coming up, and we are expected to go to volume production very soon.

It sounds like the second half of this year is going to be a heck of a lot better than the first half.

Looking forward to it, guys.

Thanks.

[Sherwin Pryor], NorthPoint Capital.

My question is on the camcorder business.

Based upon your plan to exit that business, where do you think you'll end the year (technical difficulty) percentage of sales?

Is it going to be 15%, 20%?

How do you think about that?

Two things.

I didn't hear your question that well.

And again, we want to clarify -- we are not exiting the camcorder business, we're exiting the low-end models in the camcorder business.

So, you can repeat your question a little bit louder.

Here's the question.

You're exiting a portion of that business.

So, just trying to figure out where that number ends up.

So, if it was 34% of your business last quarter, will we end up at 15% of the business.

How do we think about that market?

I think it depends on how much we grow the video eyewear.

Military business we pretty much know.

I think, as I say, the military business will be a major growth component this year the eyewear is going to be around 2 or 300,000 units.

The camcorder production, of course, the ratio be smaller, because all the systems have grown much faster.

But we are not exiting the business.

We are going to high-end models.

I understand that.

Again, I was following up on Brian's question.

Just trying to get an idea, when you say high-end, how big is the market on the high-end for camcorders?

And what is your share of that market?

I think the market -- the camcorders are moving again because everybody [don't like their] camcorder business, because as you well know, digital cameras are moving into digital video.

So, actually in many ways, the camcorder business is going away anyway.

But the key matter for them to survive is moving the camcorder into high-definition camcorders with 16 by 9 viewfinders, as well as 16 by 9 side panels, and to differentiate the old lower-end models, and higher resolutions to boot.

For those models, I think we might be -- we might be in all of those new models.

On the eyewear business, it appeared -- was that flat sequentially from Q3 to Q4?

I think the eyewear will start growing in Q2, and Q3 especially will be either all those design-ins materialize, Q3 will be extremely busy.

We are actually adding engineers and managers, business managers for all this growth businesses right now.

So the hockey stick kind of begins in Q3 that you talked about?

Is that correct?

Hockey stick certainly would be very clear on the Q3, yes.

Well, I also look forward to the second half, guys.

Second half will be very good.

Patrick Kirksey, Trusco Capital Management.

You talk about the normal seasonality between 4Q to 1Q for your first-quarter revenue guidance, but in each of the last four years your revenues actually went up from 4Q to 1Q.

So I'm just curious as to what's different about this year from the seasonality standpoint.

Quite frankly, had the military business kicked in, based upon the forecasts that we had originally given in the middle point of last year, we would have been in the same situation.

We would have expected Q1 to be growing this year.

But the fact of the matter is, the units didn't get qualified.

So, we think quite a long time.

And I think if you went back over [these] last few years, we've had new design wins, but it would be digital still cameras or what have you, it might be CyberLite LEDs a few years ago.

Each one compensated in the first quarter for normal seasonality of the other product lines.

So new product introductions offset that in the past.

And because of the delay in the ramp of the military business we're not getting that this quarter.

That's right.

My next question, just real briefly.

You talked about gross margin comparisons between '05 and '06, that if the video eyewear did not kick in, that potentially gross margins could be down.

So when I'm thinking about kind of the product mix that you had in '05 versus the product mix in '06, well, '05 you had the low-end camcorders; you're exiting that.

And then you're also going to be ramping the new military business, which I presume has much higher gross margins.

So, just if I look at the product mix in '05 versus '06, why is it still dependent upon the video eyewear really kind of kicking in for the gross margins to go up?

That's a very good question, and it was very central to our whole discussion about the strategy about exiting the low-end camcorder.

The fact of the matter is, the business does have a certain amount of fixed cost that you need a certain volume in order to absorb.

And we've been in the low-end digital -- the low-end camcorder business because we're still absorbing that fixed cost.

But the ASP got to such a point where it was now becoming a negative, even on a variable cost basis.

And so if the eyewear picks up in the volumes that we hope, then that fixed cost would be sucked up.

If not, then -- I don't what to say it's a shell game, but in some respects it is, in that those fixed costs now have to get absorbed by the military.

So, the military's gross margin isn't as good because it has to absorb more of the fixed costs, if you understand what I'm saying.

I understand.

Just one last quick comment.

From an investor's standpoint, if you look at your stock price, and kind of the best time to have bought your stock in 2005 would have been earlier in 2005 when your revenue growth in the first quarter was actually pretty significantly down year-over-year.

So, you're kind of calling for the revenue growth to be flat again and then ramp the rest of the year.

The stock price has pulled back.

Let's just hope that it's a similar occurrence, where the best time to buy your stock is when in the quarter where your revenue growth is going to be most depressed ahead of a ramp in revenue growth.

So good luck, gentlemen, in the second half of the year.

Thank you for your comments.

This concludes the question-and-answer session.

I will now turn the conference back over to Dr. Fan for closing remarks.

Thank you for attending our conference call, and I will be looking forward to the next conference call.

Thank you.

This concludes today's conference call.

You may now disconnect.