Kopin Corp (KOPN) 2006 Q3 法說會逐字稿

Good day and welcome to Kopin Corporation's Third Quarter 2006 Preliminary 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You may access an archived version of the call on Kopin's website at www.kopin.com.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 today from the Company are Chairman and Chief Executive Officer, Dr. John C.C.

Fan and Chief Financial Officer, Mr. Rich Sneider.

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

Please go ahead, sir.

Good day, everyone.

And thank you for joining us today on our third quarter preliminary financial results conference call.

We typically do not do a morning call, however, I am in California to present the AeA Classic Financial Conference this afternoon and so to comply with Regulation FD we are having the call at this time.

Before I begin I want to remind you that during today's call taking place on Tuesday, November 7, 2006, we will be making forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995 including statements related to financial guidance and business expectations.

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 productions in its manufacturing facilities and potential cost [inaudible] and impacts to our business from any findings relating to our ongoing internal option investigation and the likely delay in our filing of our quarterly report on Form 10-Q for the quarter ended September 30, 2006, and other factors discussed in our most recent Annual Report on From 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.

As indicated, our results are preliminary pending the completion of an independent review being conducted by a special committee appointed by Kopin's Board of Directors.

As a result of this review, Kopin does not expect to file its quarterly report on Form 10-Q by the November 10th filing deadline.

Due to the ongoing nature of our internal investigation, we are unable to answer any questions that you may have related to the internal review at this time.

All financial results reported today are presented before any adjustments that may be required as a result of potential changes in the accounting estimates associated with the ongoing stock option review.

The results should be considered preliminary until Kopin files its Form 10-Q for the third quarter ended September 30, 2006.

Turning to our preliminary financial results, total revenue for the third quarter of 2006 was approximately $15.6 million.

This compares with total revenue of $25.4 million in the third quarter of 2005 and $18.9 million in the second quarter of 2006.

III-V revenue in the third quarter of 2006 was $10 million, essentially flat with the $10.8 million in the third quarter of 2005 and down from the $12.1 million in the second quarter of 2006.

A sequential decrease in III-V revenue is primarily attributable to inventory adjustments by our customers.

CyberDisplay revenue for the third quarter of 2006 was $5.6 million compared with $14.6 million in the year ago period and $6.8 million in the second quarter of 2006.

As you may know, we previously announced that our third quarter shipments to a military customer were interrupted because of a design improvement made by a third party supplier to a thermal weapon site program resulting in additional testing by our customer.

The test is now complete and we have resumed shipments.

Military sales were approximately 7% of total revenue in the third quarter of 2006 compared with 17% in Q2 of 2006 and 13% in the third quarter of 2005.

Moving to our balance sheet, as of September 30, 2006 Kopin had cash and marketable securities of $108.7 million compared with $111 million as of July 1, 2006 and we have no long-term debt.

Accounts Receivable were $12.6 million at September 30, 2006 compared with $15.2 million at July 1, 2006 and $13 million at December 30, 2005.

Turning to our guidance, we expect total revenue for the fourth quarter of 2006 to be in the range of $17.5 to $19 million.

We anticipate our HBT business to remain at its current level and our display business to continue to make progress in our transition to higher margin consumer applications and the ramp of our thermal weapon sites programs from military targets.

With that, I will now turn the call over to John for a business review.

Thank you, Rich.

Welcome everyone and thank you for joining us today.

Let me begin by updating you on our military display programs.

As Rich mentioned, we are pleased to report that additional required tests that affected shipment to our military customer in Q3 has been completed and shipment of these modules have resumed.

Although no one is happy when issues like that arise, no one can argue that our troops have to get the finest gear possible.

We are again on track to have sales to military customers be a part of our strong foundation.

Elsewhere on the military front, we continue to make progress with our other major military display projects - enhanced night vision goggles - for the U.S. Army.

The ENVG program combines night vision technology which offers a clear, sharp picture for amplified residual light with infrared technology that sense temperature differences and make warmer objects appear brighter.

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

In fact, we are also committing preliminary efforts on digital night vision goggle which is anticipated to be the successor to the enhanced goggle.

Although the digital program is still some years away, it demonstrates the long product cycle on military programs and the long-term value of these design wins for our shareholders.

We also are working on other military programs.

I am restricted so as to what I can discuss other than we expect military programs to be a profitable, growing part of our display business.

Now let's move to our commercial display business.

We've been focusing on penetrating digital still camera (DSC) market and we are expecting our momentum in this area to grow as we're streaming our relationship with our new and existing top-tier camera manufacturers.

We expect to start shipping to those customers at the end of fourth quarter for DSC models which are scheduled for introduction in the market in the first half of 2007.

Kopin displays are getting a lot of attraction in the military and consumer markets as we continue to improve our technology and manufacturing processes.

Critical drive strategy is implementation of a new 8-inch line which is scheduled to be on-line in the middle of 2007.

This advanced 8-inch line will provide our display with higher performance, greater capacity, better yields and higher resolutions and will be parallel to our existing 6-inch line.

Now let's switch to video eyewear.

The video eyewear market continues to build momentum as smaller, lighter, slicker and less expensive models are being developed.

Just last week, we announced that the Wild Planet Toys have introduced a remote control toy car equipped with an infrared camera that connects to a monocular eyewear to be worn by the user.

This announcement demonstrates the future of video eyewear are many forms for many different applications.

What's really encouraging for us is that we're seeing a greater level activity from larger, more prominent OEM's in the consumer electronics industry.

To date, small entrepreneurial companies have been introducing eyewear and larger companies are looking at different concepts; what we call Tier II type of companies are now developing product launches scheduled for 2007.

And Tier I folks are starting to settle on their own designs.

Our CyberDisplay, our display of choice for almost all of this large and small eyewear manufacturer.

I understand some people believe I get too enthused about eyewear.

I make no apologies as this has been our dream for some time.

No one can dispute the size of mobile video the way that it's building up.

Today's consumer can get mobile video content on their cell phones or on their mobile storage devices.

The question the investors have to ask is, "What is the best viewing option?"

Carrying a 6 to 7-inch bioscreen?

Or use a 1-inch diagonal cell phone screen?

Or use a mobile eyewear which provides a large virtual TV image?

Now let me turn your attention to our III-V business.

Consumer demand for our new generation of cell phones continues to fuel the HBT market.

Our customers are giving us every reason to believe there are growing demands for more feature-rich phones that require increasing HBT content and performance.

In response, we are aggressively increasing our manufacturing capacity and increasing our market presence in anticipation for increasing demand for HBT.

We are excited to announce that KTC, our OEM HBT manufacturing facility in Taiwan, is now qualified for production of certain products.

The ramp-up of KTC in addition with three large HBT production machines in content in Massachusetts will allow us to increase our capacity by 50% in the next 12 months.

Just as important as capacity, this new machine will produce more and better HBT wafers per run thus enabling better efficiency and longer toward gross margin expansion.

As I announced last quarter, we have started shipping our patented GAIN-HBT wafer to our Tier I customer.

Our GAIN-HBT technology improves power amplified performance by reducing operating voltage, increasing eye performance and offering greater temperature stability.

Currently, we estimated over 10 million cell phones are already in the market with our advanced GAIN transistors.

Looking forward, we believe our GAIN-HBT's will continue to play a crucial role enhancing the performance of PA's using new generation of cell phones.

As we have stated earlier in this year, this year is our year of transition.

We will introduce new, higher margin products, we will expand our manufacturing capacity and we will broaden the reach of our technology.

We are delighted about the progress of this transition.

Kopin is now positioned for growth.

In our III-V business, we are very excited about the opportunity of our HBT products, growing demand for multi-function, multi-standard cell phones and wireless networks create power efficiency requirements that are best served by Kopin's advanced transistors.

We have now two of our three new advanced systems already being delivered and installed.

Equally important, we are live with our quick customers who have [inaudible-highly accented language] relationship with Tier I handset OEM's.

In our display business, we are working to ensure our exit -- we will exit 2006 with a consistent and sound military sales space to grow our part; and that our 8-inch line is operational mid-next year; and that our display technology and capacity is ready for the anticipated spread that mobile video [inaudible-highly accented language].

By meeting our focus objective, we can expect to generate profitable revenue growth and with strong margins in this coming year.

The market trends are in our favor and we are very excited about our prospects.

With that, we are ready to take any questions.

Operator?

Thank you. [OPERATOR INSTRUCTIONS] We'll take our first question with Mike Burton with ThinkEquity.

Hey, guys.

I was wondering if you could give us gross margins and operating expenses ex-stock-comp this quarter?

Mike, we really can't do that because of the stock option review.

To the extent there's any adjustments necessary, it would affect all those line items.

Okay.

And perhaps maybe you could provide us with the CapEx and maybe the change in working capital?

Sure.

CapEx - excuse me - for the year is approximately $4 million to date and the stock buyback is approximately $6 million year-to-date.

So those are the two big swings in cash from the end of the year.

Okay.

And were inventories up in the quarter or down in the quarter?

Again, potentially those inventories are affected by the comp because it might result in some capitalization.

Okay.

Then in CyberDisplay, obviously military was 7% this quarter, but can you perhaps go through by some of the product lines or perhaps which product lines were greater than 10% of revenues in the quarter?

As we indicated, we basically have military and commercial in HBT; so we said military was 7% of sales and you know from the numbers provided what the HBT sales were so you can back in.

I think the relief also indicates that we had roughly a couple million dollars of contract revenue.

So from that you can pretty much derive all the different segments.

Okay.

Great.

And then can you also perhaps provide your outlook for 2007 for HBT given the 50% capacity increase?

We historically only give guidance one quarter in advance and so we're not really prepared to talk about 2007 at this time.

As John indicated in his prepared remarks, the comments we are getting from our customers regarding HBT is that it should be a very good year both from a cell phone growth because the replacement cycle has become so large now and also because of content.

And also because the requirements - this is John Fan speaking - for more advanced transistors which is the mentor for us.

So as we stated before we are increasing our capacity right now in cell phones.

Okay.

Thanks, guys.

We'll go next to Jason Tsai with Montgomery and Company.

Hi, guys.

A couple of questions here.

On the stock option investigation, what do you expect the timing for resolution for this would be?

Jason, we have -- actually it's completely out of our control and I had really no input as to how long it will take.

Okay.

Okay.

And then on -- John you had also talked a little bit about you believed that there are about 10 million cell phones out there in the world with GAIN-HBT, what do you expect GAIN to be for kind of 2007 as far as percentage of your III-V business?

Jason, that's a very good question.

As you well know, those numbers are not known to us until they happen.

We know that we're shipping pretty robustly on the GAIN transistors right now.

Okay.

So -- okay.

Do you expect it to be kind of like a double-digit percentage at least or is it still going to be a single-digit type of contributor to -- as a percentage of revenue?

That, again, I cannot say because also we're seeing, as Rich was saying, our customers are projecting a very, very strong year next year.

So the other transistor also be -- going to grow there fast; so the percentage might be harder to estimate because it's --

Okay.

-- a strong year.

Fair enough.

Yes.

And then you also talked about an 8-inch display manufacturing line that you're setting up.

And are we going to encounter some qualification issues with this new product, with this new manufacturing line as a result through your military business or do you expect to see that fairly -- do you expect to see much impact from that?

I don't think it will be an impact because - this is John Fan speaking - the 6-inch line is still running.

The 8-inch line is parallel to the 6-inch line so the transition will be seamless.

So once we are ready and once customers are ready it will move to the 8-inch line.

And also the newer, newer displays will be qualified on 8-inch line so never have to be impacted by a 6-inch line.

So this is the strategy that we will work out with our customers and it's basically the same thing with HBT.

We have all the existing systems going but then we'll put an additional system.

So I think it will be seamless.

Okay.

And then last question here for you, Rich, I think you tried to touch upon this a little earlier but on your display side we can back out what commercial was versus military, do you have a split for us for digital still camera versus kind of other consumer display?

Digital still camera really won't start shipping until this quarter.

Okay.

So there was very little in Q3.

Yes.

I think in our prepared text we say that digital still camera will start shipping at the end of this quarter, the fourth quarter, and we're actually very excited about the number [inaudible-highly accented language] we have.

But I thought you already had legacy product go into Kodak in the past so that product has come to [inaudible]?

The new model.

Yes.

Yes.

Okay.

Thanks a lot, guys.

Thank you.

[OPERATOR INSTRUCTIONS] We'll go next to Karen King with Pacific Edge Investment.

Hi.

I'm sorry I was a little late for the call but I wondered if you just disclosed either the cash flow for the quarter or what the cash ending balance at the end of the quarter was?

Sure.

We started the year at roughly $120 million in cash.

We ended the quarter at roughly $109 and CapEx was around $3.5 to $4 million and stock buyback was around $6 million.

So those are the real big changes from the end of the year to date.

And what are your future CapEx spending plans for the rest of the year?

We expect over the next 12 months to be somewhere in the neighborhood of $5 to $6 million.

Okay.

Thank you.

We'll take a follow-up question from Mike Burton with ThinkEquity.

Hey thanks, guys.

Following up actually on the HBT, what are your lead times for HBT?

From what standpoint -- the way it works now is we get a 90-day forecast usually with about 30 days it locks in.

As you may recall with our largest customer, Skyworks, we have a consignment program and so we're basically replenishing a consignment inventory at their location.

Okay.

And are you getting an indication from some of the customers that you had seen the inventory correction with that if they started to come back, and if it is Skyworks, have you started to ship into the hub again?

We never really stopped.

It's just the level of shipments into the various programs.

And even the best laid plans of mice and men, we have consignment balances but sometimes you just don't have the right parts depending on which models are selling or not selling.

So even though we do have this forecast and the consignment, sometimes it doesn't all work out the way everyone thinks it's going to work out.

So we are shipping back into them but I think that also the people are very concerned about inventory levels and so everyone is keeping a close eye on it.

Nobody wants a repeat of what's happened in previous years where there was big Christmas build-ups.

So I think people are keeping a very close eye on it this quarter.

Okay.

And so you've begun to replace a lot of the parts that you were short on, but have you started to see - I mean, obviously we're looking into Q1 now with some of the order patterns you're seeing from these customers, have you seen a real pick-up in the orders there or has it followed more of a normal seasonality?

It's followed a normal seasonality.

Typically what happens now is, quite frankly, that we dip in the month of November through Thanksgiving as folks sort out what they think is going to be left over after Christmas based upon sales patterns which are being established right now.

And then in December we'll actually start manufacturing and shipping for Q1.

So there's a dip in November which typically leads to seasonality.

And seasonality is almost every year we have that.

Yes.

Great.

Except for last year, right?

No.

There was seasonality last year.

That is true.

Yes.

Last year there was some too.

The overall business, yes.

Okay.

Thanks a lot, guys.

[OPERATOR INSTRUCTIONS] We'll go next to Edwin [Line] with Line Investment Management.

Guys, you've made very few comments about progress with your eyewear in your first remarks or even in the questions.

Could you comment a little bit more about that area and what specifically are you doing in S. Korea, for example, with eyewear?

Okay, the question was - by Ed - was about eyewear.

I did make some remarks on the eyewear.

I think that in some way people think that I'm always very enthused about eyewear.

What I can say is that we're seeing really increasing momentum with eyewear.

There is more eyewear coming out right now.

As you may know, in Sharper Image now if you go there, there are two different models on two different companies that they are now selling the eyewear; both of them, of course, use our display.

So just -- and then, of course, we top out the Wild Planet Toys which I don't know whether you have gone online to look at it; the toys are very, very interesting.

It not only allows you to see as if you are driving the remote control car but also allow you to see in the dark.

So it's a very interesting company called Spy Toy Car.

Indication is that they are selling pretty well or very well there.

In addition to that, I would say we have now about a dozen companies in Asia now [inaudible-highly accented language] eyewear using our display just including the one in Korea.

The Korea - if you go online gets the [inaudible-highly accented language] in Korean.

They're talking about selling -- and, in fact, I think that that particular eyewear is exhibiting in some stores as well as E-Mark Stores in Korea.

So -- and then, of course, there are many companies in Taiwan, in China and Hong Kong are building eyewear and I think they are -- they introduce eyewear -- some eyewear is also beginning to appear soon in Japan.

So there's a lot of activities.

As you well know, the mobile wireless world is always first in Asia and they will come to this country so we feel very good about it.

We also feel we are seeing a lot more bigger companies getting involved so now the company's -- last -- this year I see a more year like a year of Tier III companies; next year working with Tier I, Tier II which are companies like a 2000 to 10,000 people employee-type company, and then 2008 we'll -- hopefully Tier I companies will come in with their products.

So all in all the trend is definitely in our direction.

As everyone knows the content are here so the mobile content is getting very active.

We also noticed the people want higher resolution displays.

They really want to have the image of a HDTV but you carry an HDTV with you on the go and our image line will provide at the price and the yield and the capacity for them.

So I would say we continuously have their high hope.

John?

Hello?

Yes.

I'm here.

Are you on track for that target you gave - potential target - for sales in '06?

I think you did about $150 or the world did $150,000.

Yes.

So in '05 you estimated -- are you on track?

And are you getting the same more or less percentage of around 80%?

Yes.

The question is, "Are we on track?"

My answer is we believe so we [inaudible-highly accented language] think about the toy car.

Okay.

And we obviously maintained a percentage.

Yes.

The toy car is going to change everything.

Okay.

Thanks.

Thanks, very much.

[OPERATOR INSTRUCTIONS] And 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 morning.

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

Thank you.

That concludes today's conference call.

Thank you.

You may now disconnect.