Kopin Corp (KOPN) 2006 Q1 法說會逐字稿

Good afternoon, and welcome to Kopin Corporation First Quarter 2006 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You may access an archived version of the call on Kopin’s website at www.kopin.com.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 welcoming you to our Q1 financial results.

John will then review our recent accomplishments, discuss our strategy, and provide an outlook for Q2 of 2006, and then we’ll take your questions.

Before I begin, I want to remind everyone that, during today's call taking place on Tuesday, May 9, 2006, we will make forward-looking statements as defined in the Private Litigation 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, 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 odd 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.

Turning to our financial results, total revenue for the first quarter of 2006 was 18.7 million, which is at the high end of the guidance of $17 to $19 million provided in our fourth quarter news release and conference call.

Total revenue was $18.9 million in the first quarter of 2005 and $24.9 million in the fourth quarter of 2005.

III-V revenue in the first quarter of 2006 was $12.8 million compared with $13.5 million in the fourth quarter of 2005 and $9.4 million in the first quarter of 2005.

Included in III-V revenue is $850,000 from the KoBrite joint venture, which was the final payment for services rendered under the initial joint venture agreement.

As expected, CyberDisplay revenue decreased in the first quarter, generating revenue of $5.9 million compared with $11.4 million in the fourth quarter of 2005 and $9.5 million in Q1 2005.

As we discussed previously, in our displays business we are focused on shifting away from low-end camcorder viewfinder market to applications characterized by higher margins and stronger growth potential, including military systems and video eyewear.

Our growth margin in Q1 2006 was 24%.

Declining gross margins resulted from the lower display volumes and decreases in average sales prices.

For the second quarter of 2006, we expect gross margins to be in the range of 22% to 27%.

Research and development expenses were $2.9 million, or 16% of revenue in the first quarter of ’06.

This compares with $3.4 million, or approximately 14% of revenue in Q4 2005 and $3.4 million, or 18% of revenue in Q1 2005.

Going forward, we would expect R&D expenses will be approximately 15% to 20% of revenue.

SG&A expenses in Q1 2006 were $3.6 million, or 19 % of revenue.

SG&A expenses were $3.8 million, or 15.2% of revenue in Q4, and $3.3 million, or 17.5% of revenue in the year-earlier period.

We expect SG&A to remain in the $3.5 to $3.8 million quarterly range.

Net income for the first quarter of 2006 was $78,000, or break-even.

This compares with net income of $3.7 million, or $0.05 per share in the fourth quarter of 2005, and net income of $1.2 million, or $0.02 in Q1 2005.

Results for the first quarter of 2006 included an incremental charge of $435,000, or $0.01 per share in stock-based compensation expense, reflecting Kopin’s adoption of Statement of Financial Accounting Standard Number 123(R), share-based payments, starting January 1, 2006.

We would expect the incremental FAS123(R) charge to be approximately $1.5 million for all of fiscal year 2006.

Also included in the first quarter results is approximately $300,000 of translation loss from our Korean subsidiary, Kowon, which holds U.S. dollars to pay certain expenses.

Earnings per diluted share Q1 2006 were calculated based on approximately 69.4 million shares, while a diluted figure per share for Q1 2005 was calculated based on approximately 70.2 million shares.

As of April 1, 2006, Kopin had cash and marketable securities of 117.5 million compared with 119.8 million as of December 31, 2005.

During the quarter we generated $2.8 million of cash from operating activities, spent $2.5 million on CapEx and, under our stock buyback program, we repurchased 480,000 shares of our common stock for $2.5 million.

Since inception, we have repurchased approximately 9.7 million of the 15 million authorized at the outset of the stock buyback program.

Our balance sheet contains no long-term debt.

Accounts receivable were essentially flat for the fourth quarter at $13.3 million.

Inventory at April 1 was $8.4 million versus $9.3 million at March 26, 2005.

DSOs were running approximately 71 days for the quarter compared to 55 days in Q4, which reflects higher sales towards the end of the quarter.

Depreciation and amortization is approximately $868,000 for the quarter compared with $945,000 for the same period a year ago.

Turning to our guidance, total revenue for Q2 is expected to be in the range of $18.5 million to $20.5 million.

We expect our HBT business to continue to be strong in the current quarter.

In our display business, we anticipate seeing continued progress in our transition to higher margin consumer applications and the ramp-up of our thermal weapon site programs for military partners.

And with that, I will turn the call over to John.

Thank you, Rich.

Welcome, everyone, and thank you for joining us today.

I’m coming to you from Dongguan City in Guangdong Province of China right now, where the local time is only 5:00 a.m.

Wednesday.

I’m visiting Dongguan to attend a board meeting of our LED joint venture, KoBrite, which were convened [in the] last few hours.

I will have more to say in a moment about this, but KoBrite is doing very, very well, and I’m very excited about opportunities here.

Rich already has gone through our Q1 financial results, so I would like to talk to you about our market strategy and how Kopin’s two key components, HBT and Display, are doing.

They are capitalizing on the trends that are shaping our industry.

At the heart of this trend is the cell phone, which is becoming increasingly more powerful and more sophisticated.

Today, the cell phone represents the convergence of communication, entertainment and computing, [the heart] of voice, data and video.

Our strategy has always been to enhance the performance of the phone inside and out by leveraging our HBT technology, the power of the ever-demanding electronics in the handset.

And by leveraging our display technology, we provide users with dynamic full-color video experience.

Let’s first talk about HBT, where we have the dominant capacity performance and brand in the industry.

We are partnered with the world’s tier one power amplifier circuit manufacturers, such as Skyworks, which are using our proprietary HBT structure to enhance the performance of the [IPA].

As amplifying our positioning in the market, earlier this year we have announced the extension of our agreement to provide Skyworks with 100 percent of its production [process of] wafer requirement through to July 2008.

Wireless handset volume is growing at about 15% per year, driven by demand for advanced cell phones in established markets, and rapid adoption of cell phones in developing markets.

Multiple power amplifiers are now required to handle the advanced features and function of those phones, further increasing the need for HBT wafers and putting Kopin in a very strong position to capitalize on this demand [growth].

To keep pace with this growth, we have begun to implement our strategy to increase our HBT capacity by more than 50% over the next 24 months.

We’re doing this by installing new equipment at Kopin, by further improving the operational efficiency, and by qualifying KTC, our qualified HBT original OEM in Taiwan, for production.

KTC has started qualification process with our customers, and we expect production to begin by year-end.

With regard to improving operational efficiency, last month Kopin announced that it has partnered with AIXTRON in a multi-year purchase and supply agreement for AIXTRON’s highest capacity and most advanced [MOCVD] system to meet the performance demand and offer additional capacity for HBT wafers using the handsets and the Wi-Fi and the [wireless] and power amplifiers.

We also have begun to ship a production of our patented GAIN-HBT wafers, our new generation HBT structure.

The performance of our GAIN wafer is superior to those of the current InGaP wafers.

We expect our new technology to play a crucial role in enhancing the performance of each PA used in new generation of cell phone.

Before moving on to [inaudible] display, I would like to briefly update you on the progress of our KoBrite joint venture in China.

As we mentioned in our fourth quarter call, KoBrite’s Dongguan, China facility celebrated its grand opening last November.

Since November, KoBrite has been making excellent progress towards becoming a fully functional facility.

I’m pleased to report that the migration of our LED business in Asia is now completed.

The factory is running very well.

Production already started [inaudible] to accommodate the growing demand for LEDs for applications such as cell phones, [inaudible] and others.

Now turning to our display business.

You may recall from our Q4 call that we said we expect 2006 to be a year of significant growth for our military display business.

I’m pleased to announce that, in Q1, we begin volume display shipments for the new generation of thermal weapon sites for our partners under a multi-year program.

Remember that Kopin is the sole provider of display modules for this program.

Elsewhere on the military front, we continue to make progress in a multi-year program for the Army’s Enhanced Night Vision Goggle system.

We called it ENVD.

The ENVD systems allow for improved mobility and situation awareness by providing each soldier with a combined image of an image intensifier and a thermal imager both.

We continue to work closely with our partners to move this program through qualification into testing.

Last month Kopin announced a new display system for military industrial applications based on our Active Matrix LCD display, AMLCD.

These patented displays are specifically designed to operate temperature as low as minus 40 degrees Celsius with nearly [inaudible], and they ship without the need of an external heater, significantly reducing display power consumption.

The newer [instant-on] features necessary for military application and is a breakthrough in the LCD industry.

Packet product application for thermal weapon sights and handheld thermal images for military.

Kopin anticipates making this technology available in its full lines of military display by the middle of 2007.

This instant-on display system is just one example of many new technologies we’re developing now to support the transition to higher margin, higher growth opportunities that Rich and I discussed in our Q4 call.

We continue to make technology investments to meet these high-performance requirements for these end-user markets, and we continue to be encouraged by the response of our customers to Kopin’s displays for video eyewear.

Just last week, for instance, we announced that Sharper Image, a large U.S. retail-based company, will begin marketing Icuiti’s DV920 VGA video eyewear powered by Kopin’s full-color VGA display, which has a resolution of 640 x 480 full color resolution.

The Sharper Image decision to take our video eyewear makes it one step closer to large-scale consumer adoption, and we expect more announcements like this as the holiday season approaches.

By our count, about 50,000 eyewear systems were sold industry-wide in 2005, with Kopin commanding approximately 80% of the market share.

This year we believe sales could increase to as many as 200,000 to 300,000 units.

Again, we expect Kopin displays to be integrated in a large percentage of these products.

Not a precise number, may move somewhat one way or the other.

The main point here is that the market is growing exponentially, and Kopin technology is gaining traction and driving demand by enabling eyewear that’s smaller, lighter, sleeker and less expensive for consumers.

We are also seeing a strong interest [and activity in] video eyewear from a very large diverse range of companies, including content service providers, and they are aggressively exploring the potential of mobile video on their own business, now and in the future.

In conclusion, the market trends are in our favor.

The worldwide movement to mobile continues to be strong, resulting in increasing demand for our HBT and display for cell phone, video eyewear and mobile military applications.

We have dominant market share, excellent focused products, very, very strong financial position, and very strong intellectual property position with more than 200 patents and patents pending for this growing market.

We are very excited about our prospects.

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

Operator?

[OPERATOR INSTRUCTIONS.] Brian Alger of Pacific Growth Equities.

Obviously, things are going through a bit of transition here as we move away from the camcorder market.

The HBT business, you guys for two conference calls now in a row have described it as being significantly stronger than what it has been over, say, the past three years.

I’m wondering if we might be able to go into what kind of utilization rates we are seeing.

Obviously, if you’re adding capacity, the implication is that you’re using more of your fab.

Where are we with that, and what does that imply for not only gross margins but maybe operating margins on that HBT business?

I can briefly make comment.

Again, I think Rich can emphasize the most, but this is John Fan speaking.

I think our utilization [set] is around 80%, and we’re increasing our operations efficiency to increase that percentage.

And as you well know, once you reach this level, it is appropriate to add more facilities.

So, we have ordered the machines and we are installing and [coping in] with that some of those machines will be providing production by the second half of the year.

Rich, you want to make more comment on that?

HBT follows the historical semiconductor model.

It’s a high fixed cost structure, and so, as you leverage volume over it, most of it falls to the bottom line.

It’s always had a very high contribution margin per sale dollar, in excess of 50%.

So, the leverage is good.

It’s a very good leverage model for us.

So, Rich, we haven’t really been running anywhere near these utilization rates for the past several years.

If we’re adding capacity and we’re running at this utilization, what does that imply in terms of a contribution margin?

Well, a couple things.

Keeping in mind as you look at HBT, the first is, as you know, it’s in two facilities, 200 John Hancock and 695, and it now has to absorb the cost of both those facilities, whereas LEDs take a big chunk of the costs associated with the 200 John Hancock.

So, it’s been able to absorb those costs and remain profitable.

I also want to make sure everyone understands that, in Q4, we had 13.5 million in revenue versus 12.8 this quarter.

Keep in mind that Q4 was a 14-week period so, when you’re doing your modeling, last year was a 53-week year.

So, when you put that in altogether, actually HBT was slightly up this quarter.

So, from a contribution standpoint, after you get past the raw wafer and the source material, the deprecation on the reactors is not significant.

You can calculate.

Reactors probably all in is $2 million spread over five years, so it’s not a big depreciation number.

So, again, it’s a very good leverage model.

I’m not going to get you to give me the number, am I, John?

No.

All right.

Suffice it to say it’s increasing as we ramp up the utilization and the volume?

Yes.

Okay.

You said you’re starting the military, and the military is going to get better.

What kind of volumes are we contemplating here for DRS and BAE, and are both of them in volume production, or is it only one?

We are somewhat limited as to what we can talk about as far as volumes go.

You really need to talk to our customers when discussing where their programs stand.

But, we are shipping to our customers, and we expect it to continue to ramp over the remaining part of the year.

Jed Dorsheimer of Canaccord Adams.

First, Rich, just curious.

I guess the 850,000, is that split across both the product and the R&D revs, and should we look at that as sort of a 50-50 split?

No.

We record that as R&D revenues.

As R&D?

All right, thank you.

And then, will CyberDisplay revenues be up sequentially in Q2?

Did you mention that during the call?

We anticipate them to be up sequentially, yes.

I got on the call late, so I apologize if you already mentioned this.

But, previously you had mentioned that, year-over-year, you expected ’06 revenues to be up from ’05.

Do you still feel that that is the case at this point?

Yes.

[OPERATOR INSTRUCTIONS.] Pierre Maccagno of Needham & Company.

Could you comment on the pricing of HBT?

Are you going to expect that to kind of level off, or what are the trends?

We would expect HBTs to decline somewhere over the next 12 months in the 10% range, which has been the normal ASP decline for the last few years.

Okay, and can you comment on the supply of raw wafers?

Is there a tightness of supply there?

We have not had any issues to date.

Depending on whose forecast you look out, it could become an issue towards the end of the year.

But, right now, we’re not seeing anything.

We have a number of vendors qualified, and they, from time to time, will rattle a saber, saying that maybe there’s a shortness.

But, as soon as we threaten to place an order with somebody else, they seem to be able to come up with the wafers.

So, we haven’t had any issues to date, and I really don’t anticipate anything, at least for the next few quarters.

The key is really I think any worry about supplies, really we use the small suppliers.

We are really a big gorilla here.

And [inaudible]?

No, because we are such a big user of substrate, people obviously ship us [inaudible], so we don’t see the [inaudible] yet, no.

Okay.

And you expected to grow this 50% within the next two years, and are you expecting to see new customers, or do you expect to just grow mainly with Skyworks?

Well, I think that the way we should probably -- is the cell phone right now this year probably will grow 15% but, because the power amps, there are more power amps per phone now, in fact there are some phones that have as many as four or five power amps per phone, and some of the power amps in Wi-Fi [inaudible], actually they’re [a lot].

So, we believe, and if our customers telling us, and we also check it all out, that the number of HBT wafers may be double their rate as much as 30% a year.

So, I think that there’s just a growth by the industry alone, [I would bet] that we need about over 50% of the capacity for the next 24 months, and we’re installing it right now.

So, we’ll be able to [inaudible] our customers.

In addition there obviously, we are working with some new customers which [inaudible] very good opportunity for us.

And going to CyberDisplay, this quarter did you have any sales to camcorders, or are you just ramping that business down?

Are you ramping that business down completely?

We advised in Q4 we continue to support our customers.

It’s just that we’re moving out of the low-end, high-volume market.

So, we’re still in the camcorder business.

The CapEx I didn’t quite hear.

How much was that?

$2.5 million.

Mike Burton of ThinkEquity.

For your military business, did you talk a little bit about some of the progress you’re making there and when that will be 10% of your total revenues?

Yes.

Again, we’re limited as to what we can talk about as far as volumes.

All we can say is that we expect it to continue to increase over remainder of the year and sequentially increase each quarter.

And whether it be a 10% customer at the end of the year will really depend a lot on eyewear and digital still cameras in some of the second half stuff right now.

As it relates to the military, you’re expecting sequential increases for each quarter this year, right, just for the military I’m talking specifically?

We expect Q2 to be up, and so that’s about as far as we’ll go with guidance.

But, the original programs that we’re under should continue to ramp through the rest of the year.

I guess our official guidance would be that we’d expect it to be up in Q2.

And military was down sequentially in March, is that correct?

Yes.

And then, as we’re looking at digital still camera as well, are you starting to see that pick up a little bit more?

Are you expecting a sequential increase as well in that market?

The digital still camera is, of course as you know, our announced customer is Kodak, and we certainly expect the continuous new models working with them right now.

In addition, we have additional companies working with us closely on new design wins.

So, on digital still camera, which we didn’t comment now today, actually we expect that that would be one of our growth areas.

For the ITT enhanced night vision goggle contract -- and I know you can only give a little bit of information there -- but is that more of a Q3 or Q4 time frame for the ramp there, or is it maybe 2007?

How should I think about that?

What we said was that we expected to hopefully be qualified by the end of this quarter, and that would be a second half of the year event.

Herbert Meyer of Winslow, Evans & Crocker.

My question I guess is for Rich on the comments you made about the leverage in HBT, the gross margin guidance of 22% to 27%, and my sense that, as the military ramps up, that it’s a higher ASP, better margin business.

I guess the question, when might we expect the gross margin to return to the 35% level?

Well, we really historically have not given guidance beyond the next quarter, and so I guess I would refrain from doing that.

Okay, then let me attack it in a different way.

We’ve got the military business.

You said volume shipments began in the first quarter, and that’s reputedly very profitable, so that should be a good increment.

You talked about the leverage in HBT as you add more capacity.

That should certainly be a positive.

And so, what am I missing?

Nothing.

I guess the specific question is in what quarter or what time frame do we hit 35% gross margin and, for me to answer that, I have to start giving guidance that goes beyond the second quarter.

And so, like I said, we won’t hit that number in the second quarter, and we’re not prepared to go beyond that for guidance.

One comment, Herb, is that gross margin of course would continue to increase, to improve, once our revenue on this space begins to recover, because it is a fixed number of costs, fixed cost going on the display.

Okay, but the revenues seem to be out there, but we’ll pursue this later.

It seems to me there’s considerable upside leverage, and not too far out.

I’m just trying to pinpoint.

But, I understand you constraint.

Andrew Root of OTA Asset Management.

In the last conference call, you indicated, Dr. Fan, that I think you thought 2006 would be a growth year in terms of revenue overall for Kopin.

Do you still feel that way?

Yes.

I think Rich just answered that, yes.

As we’ve gotten a little bit further into the year, do you feel like you have more visibility on that, about the same as you had last quarter?

Can you just give a little bit of color?

Well, I think last quarter we talked about that.

We are switching from the camcorder to higher margin, higher growth areas.

The growth area of course is the military and video eyewear, and the military, Rich already mentioned about our starting volume shipments again for thermal images in the first quarter of this year.

And video eyewear is in some ways [inaudible], and so it’s really coming out and is a [hockey stick] for the holiday season.

And in our [text] today, we mentioned that as many as 200 video eyewear will likely be sold this year, and everything still shows that [inaudible] momentum stop there.

So, this just will be the big assignment for [everybody].

And then, I guess just for modeling purposes, to go at the prior question in a slightly different way, we can obviously model our own assumptions for HBT and how that grows through the year, just looking at cell phones.

But, for the incremental revenue that comes in the display business, what kind of contribution margin would you expect on that for each incremental dollar of revenue that we’re modeling in displays?

If you look at it from a military standpoint, gross margins approach 50%.

If you look at it from a low-end camcorder, the margins are somewhere in the 15 to 20%.

Digital still cameras are better.

They’re in the 20, 25, and the eyewear is projected to be in the 35 to 40% range.

And so, it really comes down to a mix issue for us and how well video eyewear takes off in the second half of the year.

HBT incremental revenues, did they come at what type of gross margin?

Again, it has very high contribution margin, approaching 50%.

Brian Alger of Pacific Growth Equity.

Rich, we’re trying to get to the number, and I’m just going to come at it one more time with the gross margins.

You said we’re approaching a 50% incremental impact from the HBT additional revenues.

Off of what base level?

Is that off of our existing revenues level, or is that beyond where we are in Q2?

Help us understand where we’re basing from to kind of factor in additional revs.

Well, the incremental revenue above break-even point, and for HBT we are above break-even so, in looking at sales going forward, when we bring in the new capacity, that’s the type of contribution margin you should be seeing.

Okay, and that has virtually no additional OpEx structure to it, so that 50% gross actually is an Op margin contribution also?

Yes.

You’re talking three or four operators you might hire that are in the 15 to $20 an hour range, but you’re leveraging off the existing engineering staff and quality control systems, which is the big bucks.

And in terms of the visibility aspect, we saw the inventory at Skyworks kind of pop up a little bit in the March quarter.

What is your concern, and maybe this is a better question for John since he’s over in Asia, what is your concerns with regards to the demand that you’re being told about today actually coming to fruition?

How much visibility do you have?

How much confidence do you have?

And is it reasonable to expect the kind of numbers that your customers are telling you?

Well, Brian’s comment is that are those projections realistic.

We’ve been examining this situation for these six months because, as we know, four, five years ago we have a [telecom] situation.

I think this time’s a little different.

There are two things that are going on.

The developed countries are going to more advanced phones, and developing countries like India and other countries are really adopting a lot of phones right now.

Yes, I think different scenario.

We have scenario that shows that the 50% that we are installing right now is [not enough].

So, I think the scenario we are plotting right now is what we [phase] at every scenario just from what our customers, we can see that.

And if a new customer comes in, additional systems come in.

So, in our announcement with AIXTRON, we actually mentioned the relationship is more than a few machines.

It’s a very significant supply and purchase agreement, and with options [inaudible], yes.

Jed Dorsheimer of Canaccord Adams.

I think my follow has been asked, but just maybe for clarification just on the margin one more time.

So, in spite of the military ramping, which has a higher gross margin, those military products actually carry lower operating margins because the unit volumes are going down, and we shouldn’t see the actual benefit from the HBT until the units increase from the video eyewear market?

Is that the right way to look at it?

I’m not sure I understand when you say the military units are going down.

No, I’m sorry.

While revenues are going up, military units are going up, but it’s not enough to offset the decline in the camcorder.

So, the actual operating margin on the incremental revenues in the CyberDisplay are actually going down.

Is that the right way to look at that?

I think that gets to what John said, is that, when the display revenues recover, then you see the fruits of the HBT.

Right.

I thought that was the case.

I just wanted to ask.

Thanks.

That concludes the question and answer session.

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

Well, I thank everyone for joining us this afternoon, or this morning, and we look forward to reporting our progress to you on our second quarter conference call in a few months.

Thank you very much.

Good night.

That concludes today’s conference call.

Thank you.

You may now disconnect.