Kopin Corp (KOPN) 2006 Q2 法說會逐字稿

Good day and welcome, everyone, to the Kopin Corporation's second quarter 2006 financial results conference call.

Today's call is being recorded for telephone and Internet replay.

You may access an archived version of the call on Kopin's website at www.kopin.com.

With us from the company is the President and Chief Executive Officer, Dr. John C.C.

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

For opening remarks I would 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 walking you through our Q2 financial results.

John will then review our recent accomplishments, discuss our near-term strategy and our outlook for the third quarter.

Then we'll take your questions.

Before I begin, I want to remind everyone that during today's call, taking place on Tuesday, August 8th, 2006, 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 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 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.

Turning to our financial results, total revenue for the second quarter of 2006 was $18.9 million, in line with our guidance that we provided on our first quarter conference call.

This compares with total revenue of $21 million in the second quarter of 2005 and $18.7 million in the first quarter of 2006.

III-V revenue in the second quarter of 2006 was $12.1 million compared with $9 million in the second quarter of 2005 and $12.8 million in the first quarter of 2006.

I would remind everyone that in the first quarter of 2006 III-V revenues included $850,000 in R&D expense-- excuse me, R&D revenue, from training services performed and completed by Kopin for the KoBrite joint venture.

We continue to see strong demand for our heterojunction bipolar transistors and we are now being integrated into two power amplifier circuits for advanced cellular phones as growth in the wireless handset market increases.

CyberDisplay revenue for the second quarter of 2006 was $6.8 million compared with $5.9 million in the first quarter of 2006 and $12 million in Q2 2005.

Military sales were 17%, 9% and 20% of the second quarter of 2006, first quarter of 2006 and second quarter of 2005 revenues, respectively.

Our gross margin in Q2 2006 was 29% as compared to 24% for Q1 2006.

Gross margin exceeded our guidance of 22% to 27% for Q2.

For the third quarter of 2006 we expect gross margins to be in the range of 27% to 32%.

Research and development expenses were $2.5 million or 13.4% of revenue in the second quarter of 2006.

This compares with 29-- excuse me, $2.9 million or 15.5% of revenue in Q1 2006 and $2.7 million or 13% of revenue in Q2 2005.

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

The expected increase as a percentage is attributable to the qualification of our new 8-inch display line and additional HBT reactors.

Selling, general and administrative expenses in Q2 2006 were $3.9 million or 21% of revenue.

SG&A expenses were $3.6 million or 19% of revenue in Q1 2006 and $3.9 million or 19% of revenue in the year-earlier period.

Net income for the second quarter of 2006 was $1.9 million or $0.03 per diluted share.

This compares with net income of $78,000 or breakeven in the first quarter of 2006 and net income of $1.9 million or $0.03 per share in Q2 2005.

Results for the second quarter of 2006 include a charge of $381,000 or $0.01 per share in stock-option-based compensation expense reflecting Kopin's adoption of Statement of Financial Accounting Standard number 123-R, Share-Based Payment, starting January 1st, 2006.

We anticipate the stock option expense under FAS-123R will be approximately $600,000 for the remainder of 2006.

Net income for the second quarter of 2006 benefited from $1.2 million gain on the sale of approximately 200,000 shares of Micrel Semiconductor common stock.

Earnings per diluted share for Q2 2006 were calculated based on approximately 68.6 million shares while the per share figure for Q2 2005 was calculated based on approximately 69.7 million shares.

The first quarter 2006 per share figure was based on 71.2 million shares.

Under our stock buyback program, we repurchased 480,000 shares of our common stock in the second quarter of '06.

Since inception we have repurchased approximately 11.8 million of the 15 million authorized at the outset of the buyback program.

As of July 1st, 2006, Kopin had cash or marketable securities of $111.8 million compared with $112.9 million as of June 25th, 2005.

In the first two quarters of 2006 we used approximately $100,000 of cash from operating activities.

In addition, we spent $3.9 million on CapEx and $4.7 million on our stock buyback program.

Our balance sheet has no long-term debt.

Accounts receivable increased to $15.2 million from $8.6 million at June 25th, 2005, primarily as a result of increases in display military product sales.

Inventory at July 1st, 2006, was $8 million versus $9 million at June 2000-- June 25, 2005.

The primary reason for the change in inventory was lower raw material balances.

DSOs were running approximately 73 days for the quarter compared to 71 days in Q1.

Depreciation and amortization was approximately $800,000 per quarter compared with $900,000 per quarter last year.

Turning to our guidance, total revenue for Q3 is expected to be in the range of $19 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 making additional continued progress in our transition to high-margin consumer applications and in the ramp of our thermal weapon sight program for our 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.

Our financial performance this quarter highlights Kopin's HBT transistor's dominance in the wireless industry as demand for our HBT wafers was a key driver for our Q2 revenue.

As we have discussed on our last few calls, the wireless handset market is undergoing a renaissance.

Consumer demand has surged with the rollout of new generation advanced cell phones capable of voice, video and high-speed data transmission.

These advanced handsets require more power amplifiers, which in turn increases the number of our HBT contents per cell phone.

Indeed, in the second quarter, our sales-- III-V revenues increased 34% from the previous year, driven by demand for our integrated circuit power [amps].

With the global handset market projected to produce about 95-- 950 million units in year 2006 and with the projected growth in high fi and WiMAX-- WiFi and WiMAX, where the PA is also based in HBT, there is a surge in demand for our HBT transistor wafers.

We have initiated a major capacity expansion at the beginning of the year to keep pace with the sharp increase in demand for our HBT wafers.

We do understand there have been some comments about slowdown in sales and shipments, however we continue to see strong demand for our wafers.

In April Kopin announced a multiyear purchase and supply agreement with AIXTRON for its highest capacity and most advanced MOCVD system to meet the demand and offer additional capacity for HBT wafers used in PAs.

The first machine is now installed in our facility and we will install two more of these advanced systems in the next six months.

In addition to increased capacity at our facility, we also are in the process of qualifying KTC, our OEM HBT manufacturer in Taiwan, with our new customers-- with our customers.

We expect initial production at KTC and from our new equipment to begin by year end.

Our goal is to increase capacity 50% in the next 12 months.

As we announced last quarter, we are beginning to ship for production our patented new generation GAIN-HBT wafers for production.

GAIN improves power amplifier performance by decreasing and reducing operating voltage, increased RF performance and offers greater temperature stability.

Since Kopin's customers can simply substitute GAIN-HBT wafers in place of our standard HBT wafers in circuit-- in their circuit manufacturing lines, we expect it will be used to manufacture tens of millions of PAs in the next 12 months.

Let's turn to HBT-- CyberDisplay.

In Q2 we continued to ship our advanced micro displays, an integral component in the next generation of light, medium and heavy thermal weapons sights developed by our partners under a multi-year production contract with the U.S. Army.

We are encouraged by the progress our partners have made so far.

Since Kopin is the sole provider of displays [inaudible] for these programs, as our partners move around the process, we expect to see continued growth within the coming quarter.

Our other major military program is a multiyear production contract to supply display components for the U.S.

Army's enhanced night vision goggle system.

These ENVG program combines night vision technology, which offers a clear, sharp picture for amplified residual ambient light with infrared technology, which senses temperature and makes warmer objects appear brighter.

We continue to work closely with our partner, ITT, to move this program through qualification testing.

Before moving to our commercial displays I want to talk about the July launch of our application design center in Hong Kong.

The opening ceremony for this facility was a great success with over 100 attendees.

Kopin Hong Kong, Ltd., a Kopin subsidiary, is strategically located in the Hong Kong Science and Technology Park.

Our location choice is a reflection of the significant advances being made in technology in Hong Kong and China.

The park provides a cluster of technology partners for us to work with and to develop our next generation display products.

For example, in the same park we have access to companies providing three critical components which complement our CyberDisplay products, the driver ICs, the [bed] lights and the imaging enlarging optics.

Being close to these companies will strengthen our relationship and drastically speed up our application development work.

Incidentally, our HBT partner, Skyworks Systems, has also an office in the same park.

Moving along to our commercial CyberDisplay business, over the past 12 months we have seen more and more mobile content, video content, available through portable media players such as DVD and the iPods.

The next wave of video content will come from advanced cell phone services, mobile TV broadcasting and WiFi and WiMAX wireless Internet access.

The idea of being able to information any time, anywhere, which started with cell phones, will not completed until mobile video viewing is available.

In fact, mobile TV applications have already started in Japan, in Korea, in China and many parts of Europe and mobile operators are eager to launch mobile TV services in the U.S. and the rest of Europe.

The number of companies developing video eyewear for these applications has more than doubled and many newcomers are based in Asia.

Establishing our application design center in Hong Kong is a critical step for Kopin so that we are closer to our customers and component suppliers when developing the next generation technologies for this fast-growing market.

Kopin's continued goal is to establish strong partnerships to build mutual success.

The tipping point for mobile video is about to occur.

We are focused on getting ready for that moment.

We continue to invest in technology and work diligently on our strategy of developing video eyewear.

Video eyewear is a brand new category which presents its own set of opportunities and challenges.

We continue to see very strong interest in this category from a very large, diverse range of companies, including content service providers who are aggressively exploiting the potential of mobile video on their-- for their own businesses now and in the future.

For example, Microsoft recently announced it's working on music and entertainment products which are expected to compete with Apple's iPod and iTunes music service.

Microsoft's working on series of hardware and software products called Zune with the first product expected to be available later on this year.

Recently at the Microsoft imaging contest, Microsoft's CEO Bill Gates was spotted testing Icuiti's DV920 video eyewear, which was using our display.

We believe the implementation of Microsoft's Zune products, which is supposed to have WiFi inside, to wirelessly transmit and receive mobile video content, will have a very positive effect on mobile video market, including the desire for video eyewear.

With this type of new products, we will have realized our long-standing vision that we will have HBT inside and our CyberDisplays outside.

Overall, this video eyewear market continues to gradually increase momentum as smaller, lighter, more fashionable and less expensive models are being developed.

Based on current market demand we believe Kopin's display could be integrated into as many 150,000 eyewear units in year 2006, with the overall market probably up to about 200,000 units.

We also continue to work on penetrating digital still camera market and we're gaining design wins.

We expect our momentum in this area to build-- to build up in the third and fourth quarters this year.

Turning to our R&D program, we continue to-- continue to develop and install our 8-inch production line for our CyberDisplays, which will provide higher performance, higher yield and higher resolution displays for both military and commercial markets.

Our plan is to have the 8-inch line-- production line running by the end of Q1 next year.

The 8-inch line will be parallel to our existing 6-inch line.

Before I discuss our outlook for the second half of this year, I would like to take a minute to talk about this year's Society for Information Display, SID, conference, which was held in this June where Kopin showcased some of our customers' video eyewear products, powered by our digital iVision technology.

The highlights of our exhibit include 3 widescreen new 16 by 9 versions of our CyberDisplay products and our BDM-922K video subsystems with VGA display.

We surveyed the many customers or visitors who came to our booth.

They were able to test various eyewear products with Kopin displays inside.

Feedbacks are very positive and a majority of the participants in the survey viewed most of the eyewear as comfortable designs with attractive features.

Aside from collecting the survey data, the conference also offered an opportunity to introduce video eyewear technology to many who never knew it existed.

For those who were already familiar with video eyewear, the show helped to spotlight the new designs and new features.

So I think the overall message that we took away from this year's SID conference is that video eyewear will shine soon as the mobile video content software and hardware converge together.

In summary, our focus is to continue to expand our-- to expand our leading technology innovations in capacity, in product performance and in market share for both HBT and micro displays.

We continue to see a strong demand for our HBT products in the new generation of advanced phones and we're working towards our goal of increasing capacity by 50%.

In CyberDisplay, we continue to ship our advanced displays, an integral component in the new generation of light, medium and heavy thermal weapons sights developed by our partners for the U.S. military.

In the meantime, we're installing a brand new 8-inch line for our new higher performance, higher resolution displays either for our targeted military and commercial markets.

We continue to focus and invest on various elements of our growth strategy by consistently aiming to higher margin, higher growth applications.

As we add capacity and capability, we will continue to maintain our strong financial foundation.

We are excited about our future.

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

Operator?

Thank you. [OPERATOR INSTRUCTIONS] Okay, we'll go first to Jason Tsai with Montgomery & Company.

Please go ahead.

Hi, guys.

A few-- a couple questions here.

First, Rich, you ran through the numbers on the military pretty quickly.

Can you give us-- can you give me those numbers one more time, just what was military as a percentage of revenue this quarter?

Yes.

For the second quarter that we just completed, it was 17%.

For the first quarter of 2006, it was 9%, and for the same period, second quarter of 2005, it was 20%.

Okay.

Got you.

And then so the display revenue growth we saw quarter-over-quarter in the June quarter was primarily attributed to the military coming back or any other businesses?

It was really on the strength of the military programs ramping up.

Okay.

And then you-- have you guys gotten any sort of better idea as to when that whole ramp is coming?

Is that still expected to be kind of late third quarter, early fourth quarter?

It will be in the second half.

I mean, as our guidance indicates, we're basically up a little bit this quarter, Q3, so you're still seeing military sales ramp.

There'll still be some-- camcorder sales will probably decline a little bit, so net/net you're up slightly.

But then it should continue to ramp through the fourth quarter.

Okay.

And then, John, on the display products for the consumer market, we've talked about this quite a bit over the year last few years, but the numbers that you're talking about, what level of confidence do you have in these expectations and just kind of give us a little more sense on that?

Yes, I think we're seeing a lot of new products actually coming into the market this quarter and for this coming quarter.

And we still have very strong hopes that those numbers will be achieved.

Obviously, it's a new category.

Everybody is still expecting-- forecasting it.

So we'll see what happens.

But the contents are definitely coming, though.

The new contents are here and new models are coming here, quite a few models from China, Asia, are very attractive right now.

The new models are coming into market.

Okay.

And are you seeing any sort of adoption by some major players, major consumer electronics players yet, or is it mostly still kind of on the smaller fringe players from China?

We are seeing some-- it's not-- I think we will see some strong companies beginning to have them in their stores.

Okay.

Okay, great.

Thanks a lot.

Thank you.

Thank you.

We'll go ahead and take our next question from Pierre Maccagno with Needham & Company.

Please go ahead.

Hi, Rich and John.

Regarding the HBT, is that going to be mostly 6-inch or 4-inch, as well?

For us, mostly, of course, as you well know, Skyworks is our biggest customer and they are focused on 4-inch.

So 4-inch definitely will be a higher ratio.

Okay.

And do you see that migrating any time soon to 6 or--?

I think that's-- I think that's a question probably to ask Sky, but we believe that 6-inch will certainly continue to grow, but 4-inch will still be strong for the next couple of years.

Okay.

And our-- all our capacity expansion and has been for the last few years have all been machines that are compatible both on 4 or 6-inch and so we can go either way.

Yes, that's a very good comment from Rich, is that all our new machines, as we stated before, is very large machines, capable of doing 4-inch-- multiple 4-inch and multiple 6-inch.

Okay.

And then-- could you explain the R&D?

The R&D was actually down, but you were saying-- you were saying that you're guiding for 15% to 20% going forward, correct?

I mean any reason why the R&D went down this quarter?

Yes.

Well, the R&D is a reflection of a number of activities and the reason why it's going up in the second half is that we have started installing 8-inch equipment for the display.

We're moving from a 6-inch wafer to an 8-inch and so we're going to start qualifying and tweaking that line and then, of course, we have reactors that will be being delivered in this quarter, in the second half of the year, and so there will be development expenses to get those up and running and so on and so forth.

So that's why although it's been running around 13%, it'll probably get closer to its normalized 15% to 20% in the future.

Okay.

And finally, Cyber, was it mostly military or just-- what percentage of Cyber was military, more or less?

Well, for the military it was somewhere around $3, $3.5 million and display revenues were $6-- $6.8 million.

Okay, great.

Thanks.

Yep.

Thank you.

We'll go next to Mike Burton with ThinkEquity Partners.

Hi, guys.

I was hoping-- could you break out your guidance by segment on displays versus HBT heading into Q3?

We don't provide that guidance.

Okay.

I could comment that our HBTs remain very strong.

Okay.

What percentage was Skyworks in the quarter, including AWSC?

They continue to be in the 70% to 80% of HBT sales.

Okay, great, and were there any other 10% customers in the quarter?

No.

Okay.

Then also, switching over a little bit to eyewear, given the unit numbers we're looking for this year, how many eyewear units have already shipped in the first half at this point, both for Kopin and for the industry?

That's a very interesting question.

I think it's around 50,000 to 70,000.

That's my guess right now, but I think, as you know, the whole thing is really second half oriented right now.

Okay and you guys are still the leading provider, so--

Yes.

--about 80% to 90%?

Anywhere between 80% to 100%-- 90%.

[inaudible] share, okay.

Yes.

Great.

And then lastly, can you just break out the-- your non-cash stock comp by the expense line?

The-- so in the quarter we had $381,000 related to stock option expensing. $280,000 of that, roughly, was in SG&A and to be honest with you, off the top of my head, I'm not sure what the breakout is between R&D and cost of sales, probably 50/50.

It can't be too far off.

Okay, great.

Thanks.

Thank you. [OPERATOR INSTRUCTIONS] And we'll go ahead and take our next question from [Pradesh Munji].

Please go ahead.

Hey, hi.

My question's been answered.

Thank you.

Okay.

It appears we have no further questions at this time.

For any additional or closing remarks, I'd like to turn the program over to Dr. John C.C.

Fan for any closing remarks.

Well, thank you, everyone, for joining us this afternoon.

We look forward to reporting our progress to you on our third quarter conference call.

Thank you.

This concludes today's conference.

You may disconnect your line at any time.