Kopin Corp (KOPN) 0 Q0 法說會逐字稿

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

Today's call is being recorded and webcasted.

With us today are chief executive officer Dr. John C.C.

Fan, and chief financial officer Richard Sneider.

At this time, I would like to turn the conference over to Mr. Sneider.

Please go ahead, sir.

Good day, everyone, and thank you for joining us today on our preliminary fourth quarter and full year financial results conference call.

You may access an archived version of the call on Kopin's website, at www.kopin.com.

Before we begin, I want to remind you that during today's call, taking place on Tuesday, March 6, 2007, we will be making forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995, including statements related to financial guidance, business expectations, and anticipated growth.

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, the potential consequences and impacts of our business and any findings related to our ongoing internal option investigation, and then the likely delay in our filing of our annual report on Form 10-K for the year ended December 30, 2006, 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.

This company undertakes no obligation to update the forward-looking statements made during today's call.

As we have 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 Form 10-K for the year ended December 30, 2006 by the filing deadline.

Due to the ongoing nature of the 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 and accounting estimates associated with the ongoing stock option review.

The results should be considered preliminary until Kopin files its Form 10-K for the year ended December 30, 2006.

Turning to our preliminary financial results.

Total revenue for the fourth quarter of 2006 was approximately $17.9 million, compared with our previous guidance of $17.5 million to $19 million.

Total revenue was $24.9 million in the fourth quarter of 2005, and $15.6 million in the third quarter of 2006.

For the year ended December 30, 2006, total revenues were $71.1 million, compared with $90.3 million for 2005.

We had two 10% customers--Skyworks Solutions, and a Taiwanese OEM that performs services for Skyworks.

Therefore, in the aggregate, sales to Skyworks accounted for approximately 49% of total revenues.

III V revenues, in the fourth quarter of 2006, was $9 million, compared with $13.5 million in the fourth quarter of 2005, and $10 million in the third quarter of 2006.

Total III V revenue for 2006 increased to $43.9 million from $42.7 million for 2005.

The marketplace experienced an inventory correction in December, which carried over to the first quarter, but we are currently shipping at about the same rate as before the correction.

You may also recall, in 2005, we transferred our LED assets into the KoBrite joint venture.

Excluding the LED product sales and contract revenue from the joint venture, our III V revenues would have been $43.1 million for 2006, as compared to $41.4 million for 2005.

CyberDisplay revenue, for the fourth quarter of 2006, was $8.9 million, compared with $11.4 million in the year-ago period, and 57% higher than the $5.6 million in display revenue in the third quarter of 2006.

For 2006, display revenues were $27.2 million, as compared to $47.6 million for 2005.

In summary, we discussed in earlier 2006 our intention to exit the low margin camcorder business, but we expected a portion of the lost revenue to be made up by military product sales.

However, the qualification time for our customers' products is longer than we anticipated, and it impacted our 2006 results.

As we have recently announced, we are increasing production volume of our display systems' hardware, for the Army thermal weapons sight II program.

John will provide more color on this program.

Military was a significant contributor to the top line, accounting for approximately 16% of total revenue for the full year compared to 11% in 2005.

For the fourth quarter, military revenue comprised 28% of total revenue, versus 3% for the same period in 2005.

Moving to our balance sheet.

As of December 30, 2006, Kopin had cash and marketable securities of approximately $105.4 million, compared to $119.8 million as of the year-end 2005.

We continue to have no long-term debt.

Accounts receivable were $11.4 million at December 30, 2006, compared to $12.6 million at September 30, 2006, and $13 million at December 31, 2005.

Turning to our guidance.

Based on current market conditions, and the seasonal and other fluctuations in our business, together with a trend with other publicly traded companies, beginning in 2007, we will not be providing quarterly guidance, but instead, we will provide guidance on a yearly basis.

We believe this is a more accurate way to measure our company.

For 2007, we expect total revenues to be in the range of $80 million to $90 million, with the growth rate accelerating in the second half of the year.

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

Thank you, Rich.

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

After this morning's call, I will be leaving for California for a presentation tomorrow morning at 9:00 am California time in the fourth annual Montgomery Telelogic Conference in Santa Monica, followed by a series of meetings with our investors and customers.

Let me begin by reminding everyone that we had planned for 2006 to be a year of transition for Kopin.

At the beginning of 2006, we announced that we are exiting our low-end camcorder display business, and would be moving to higher margin applications in digital still camera, in video eyewear, and military systems.

For these high-end systems, high end performance displays are needed.

And in 2006, we have focused on enhancing our display performance and capacity, and we're delighted by our progress.

Our new 8" line is proceeding on schedule, and is planned for initial production by the middle of this year.

Meanwhile, we're incorporating our new advanced processes for better performance displays and improvement of margin yields.

Despite our lower display revenue in 2006, due to reasons that Rich has covered, we are actually happy to be adding enhanced infrastructures and experienced new personnel, including the hiring of a new VP of worldwide display operations, for our anticipated growth.

Similarly, in our III V business, we also have been focusing on our investments in various areas, including improved infrastructure, new product developments, and new personnel.

We've added experienced people in sales, engineering, and quality control in the III V area.

Also within display, we have installed new, advanced reactors, which will provide multi-tasking capability and provide customers with better performance products.

Therefore, in 2006, we started with ambitious plans, transition Kopin into a stronger company, hopes for substantial and sustainable growth, with advanced products, better performance, better technology, and increased capacity.

We are delighted with our progress in those fronts, and we should expect to reap these rewards for those investments in 2007 and beyond.

Now, allow me to go to each product line.

Turning to our display products, on the military front, as Rich had mentioned, we are pleased to report that we have increased production and shipment [inaudible] of our ruggedized display system for the U.S.

Army TWS-II production program, which was announced this January.

Kopin has been providing microdisplay hardware for systems manufactured by BAE Systems, and BRS Electronics as part of the TWS-II program.

And Kopin's production volume has run to more than 1,000 systems per month for each supplier.

The TWS-II program provides for the production of up to 60,000 light, medium and heavy thermal weapon sights over a four-year period.

Each TWS-II system utilizes Kopin CyberDisplay 640M active matrix liquid crystal display.

Now let me briefly update on our other military display programs.

The important one coming up is the enhanced night vision goggle, which we call ENVG program, for the U.S. Army.

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

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

The urgent need for TWS hardware has resulted in an accelerated production ramp, and Kopin has demonstrated the bridge to ramp quickly, to meet these demanding needs.

ENVG production is expected to begin ramping in the second half of this year, after the formal product qualification.

We also continue to supply a number of emerging programs in the area of multi-spectral night vision with our full-color SXGA display and driver [inaudible].

We're proud to be in a position to supply our troops abroad, and committed to providing the highest quality product for the U.S. military.

Let's move on to our commercial display business.

During the fourth quarter, we were successful in penetrating the digital still camera market, as we continued to strengthen our relationship with new and existing customers.

As we mentioned last quarter, there are several top tier customers that we've been in discussion with, to provide our new electronic viewfinder, EVF.

This EVF offers clearer image quality, and allows easier integration to various makes of digital cameras.

As a result of our effort, we're confident that several top tier digital still camera customers will choose Kopin, enable product into the market in the first half of this year.

In summary, Kopin displays are gaining a lot of traction in the consumer and military market segments, as we continue to improve our technology and manufacturing processes.

Now let me turn to video eyewear.

The growing demand for video eyewear is evident by the greater levels of activities we're seeing for large, larger, more prominent OEMs in the consumer electronics and toys industries.

These companies are designing our fiber display products into a wide range of devices.

As we discussed last quarter, during this past Christmas holiday season, Wild Planet Toys introduced a remote control video car equipped with infrared camera that is connected to a monocular eyewear device.

This toy, called Spy Video toy, received a Toy of the Year award from the toy industry associations.

The car was rated one of the top toys for the holidays in a number of major publications.

In addition, this toy surpassed all expectations in terms of the number of online orders.

We believe the Wild Planet Spy Video car has created a whole new segment within the toy industry.

It has set a new standard for children's toys.

We're beginning to see a strong interest in our display for eyewear for other large toy companies around the world.

In 2006, we estimate that our displays will integrate into about 140,000 mobile video eyewear units, consistent with our industry wide expectation of the year of 150,000 units.

The growing interest in video eyewear were clearly evident by this year's consumer electronics show in January, which featured a number of video eyewear products, enabled by Kopin's digital eye vision technology.

Of those products, Icuiti's eyewear for iPod, and MicroOptical's myvu, received prestigious CES innovation award in the portable electronics, audio/video category.

Mobile video is the center of the consumer electronics universe, and our display technology is driving a significant amount of activities in this assisting--exciting new summit.

We continue to believe Kopin will--owns about 90% of the market share in this application.

Looking forward, we believe we are in perfect position to receive further orders from current and new customers in this market.

We now expect as many as 200,000 to 300,000 new eyewear units could be shipped in 2006--in 2007, using our display.

Now, let's turn your attention to three-part business.

We continue to see strong consumer demand with the rollout of third generation advanced cell phones, capable of voice, video and high-speed data transmissions.

As we enter 2007, we observe a shift by customers to newer generation HBT structures for advanced wireless handsets.

These advanced handsets require more power amplifiers, which in turned increased the number of--amount of HBT [inaudible] can perform for users.

With anticipated adoption of WiFi WiMax technology in cell phones, cell phones may require more than three power amplifiers per phone.

This increased from one or two power amplifiers per phone in less advanced phones.

We continue to increase our available manufacturing capacity at our OEM manufacturing plant in Taiwan, and in our Massachusetts factory in Taunton, in preparation for the increased HBT orders later on this year.

We are tracking increased capacity for 50%, by the middle of this year, with a qualification of our Taiwan OEM and addition in Taunton facility of our new, three most advanced OMCVD systems.

We're excited about opportunities in our III V business, expect year to year growth in the business in 2007, as we continue to build our leadership position in the III V market.

We're continuing to align ourselves with big customers, who have deep relationships with top tier handset OEMs.

In our display business, we expect growth, to continue to be procured by military and consumer electronics, specifically in digital still camera market.

We're equally excited by the prospect of mobile video eyewear applications in the coming year.

In summary, 2006 was a transition for Kopin, and we're delighted by our progress.

We now believe that we are posed for substantial growth in 2007 and beyond.

As Rich has stated, based on our current business environment, we expect top line growth of between $80 million to $90 million in the full year of 2007, with a growth rate accelerating in the second half of this year.

With that, we are ready to take questions.

Operator?

Thank you.

If you'd like to ask a question, please press *1 on your touchtone telephone keypad.

If you would like to withdraw your question, please press *2.

And we'll pause for a moment to assemble our roster.

And we'll take our first question from Mike Burton from ThinkEquity Partners.

Please go ahead, sir.

Hi, guys.

Thanks for taking my call, and thanks for providing the full year guidance.

As we look at that, clearly you guys are seeing some momentum on the display side, and in particular, the military business.

Can you break down for us your guidance, as you're looking at HBT versus displays?

And then, within displays, the different end markets within the display business?

The--it should be roughly 50/50, in the revenue range, between HBT--I should say, III V products and the display.

And then, I guess the only other important point we'd probably make is that the military should exceed 20% of total revenues.

Okay.

And for HBT--on the HBT side, I know you're not giving quarterly guidance, but is it safe to say that we've worked through all the inventory now, or have we seen some lingering issues here in the March quarter?

There was some lingering through January, but as I indicated, it's back to pre-slowdown stages, kind of what we were running in October and early November, so we hope we're through it.

Okay.

And then--sorry I missed it at the beginning, but what was Skyworks as a percentage of revenues, and AWSC?

In the aggregate, roughly 49%.

Of total revenues?

Revenues for the year, yes.

Okay.

And then, with the military business ramped where it is, should we continue to see more gross margin improvement within that line, or--you know, how much do margins go up as that business ramps, and especially as the ENVG come on in the second half.

Is that another incremental margin lift in the second half of this year?

I'm sorry, Mike--just the second part of your question?

For the ENVG?

Oh, I'm sorry, I didn't hear--okay.

Yeah.

Historically, the gross margins on the military approached 50%, and so to the extent that increases, there should be a commensurate increase in margins.

Okay.

And then lastly, I think John mentioned that digital still camera was going to be one of the standout businesses in '07.

Where do we expect that to be, as a percentage?

Well, we kind of just lumped that in with the rest of the consumer electronics--we don't really break that number out, per se.

Okay, thanks.

Yep.

Once again, if you have any questions, please press *1 - *1 for questions.

If you are using a speakerphone, please make sure your mute function is turned off, to allow your signal to reach our equipment.

Once again, if you have any questions, please press *1.

And we'll take our next question, from Jason Tsai, from Montgomery & Co. Please go ahead, sir.

Hi, guys.

Just a couple of quick questions, here.

You touched upon the Skyworks rebounding, or the III V business rebounding.

Are you getting any traction with GAIN HBT yet, or is that still relatively early?

Has that been a significant portion of revenue yet?

Jason, this is John Fan speaking.

We are actually shipping, for productions, both GAIN and also [inaudible] right now.

Okay.

So both of them are going through--I think last quarter we mentioned that GAIN's in, last year, over 10 million phones are using GAIN.

Okay, then you're not really--you're not prepared to break that out as a percentage.

No, our customer would not be very happy with that.

okay, no worries.

And then, you also made an announcement this morning about using GAIN HBTs for more infrastructure 3G solutions--when do we--when should we expect to see that come on line and be a percentage of revenue?

I think that it would be still small, but the important thing is, as you well know, GAIN [inaudible] PM is going to a base station, PAs are still very much in the designing phase for--by customers.

But the potential market can be very big.

They tried replacing the silicone LD [inaudible].

So we expect that we will slowly ramp.

Okay.

And then, you said the military, you expect to be about 20% of revenues, is that right, for 2007?

That's correct.

Okay, and then with the--most of that obviously is off of thermal weapons program, and enhanced night vision, is that going to be a contributor to revenue in 2007, or is it still too early?

If everything goes according to plan, it will be a contributor probably in the fourth quarter.

Okay.

Okay, great--thanks for taking my questions, and I'll see you guys tomorrow.

Yeah, see you, Jason, tomorrow.

Thanks.

Once again, it's *1 for questions.

We'll take our next question from Brian Alger from Strata Capital Management.

Please go ahead.

Good morning, guys.

Good morning, Brian.

Quick question.

Just kind of inferring here, with the 50/50 split on your guidance at 80 to 90, and backing out the 20% associated with military--that tells us that you're expecting a pretty good ramp in the consumer market, kind of coming back to some earlier questions.

Within consumers, where do you see the drivers for that growth?

Are we seeing a rebound at all in the old camcorder business, it this digital still, is it toys, is it mobile eyewear, is it all of the above?

Where is it coming from?

Well, I--this is John Fan.

It certainly is all of the above, but I think we're going to see a rebound in digital still cameras and continued growth in video eyewear.

Okay.

And the implications here, for a 50/50 split on an 80 to 90, tells us that the year on year III V business is just marginally up.

If we're going to see a second half improvement, should we be then inferring that we're going to see further declines in the first half of '07?

Well, I think--again, we're running into a lot of quarterly guidance, but I think that we did indicate that III V was slow coming out of the chute in January.

So that obviously will impact Q1.

Okay.

And in terms of absorption of overhead, the III V equipment is separate from the display equipment, correct?

That's correct.

All right.

Great--thanks, guys.

Yep.

And we'll take a follow up question from Mike Burton from ThinkEquity partners.

Please go ahead.

Hey, thanks, guys.

I know with--you can give limited visibility into the gross margins side, but I'm hoping you could talk maybe a little bit about where the gross margins have come in.

Is there anything we should be concerned about?

Obviously, you know, with the revenues up, I would expect that we probably saw sequential improvement there.

Should we see further declines in the March quarter?

If you could talk to it a little bit?

Thanks.

Unfortunately, Mike, I really can't, because--in the event that there is any impact from this option investigation, any additional expense would hit the cost of goods sold, and potentially all the line items in the P&L.

So I really can't tell you what the gross margins are.

I honestly just can't tell you, until the investigation is done.

Okay--yeah, no--obviously, not in detail, but is there--are we seeing--it just, kind of, excluding any of those factors, can we infer anything from the stronger military business, and what that's doing to your mix?

Well, obviously, the plus side is, the military is good, the incremental margin on HBT is--as we add, react to capacity, the basic infrastructure of the company is still here, the clean room is built, the employees, and so on and so forth.

So there is incremental margin being generated from additional HBT sales.

But then you have the consumer electronics business, which historically has price declines.

And so that's always a tough business to get through.

So it all depends on how the mix turns out at the end of the year, and hopefully--when we get our 10-K filed, we can give you a little bit more guidance.

Okay, thanks.

Yep.

And at this time, we have no further questions.

I would like to turn the conference back over to Dr. Fan for any additional closing remarks.

Well, I thank everybody for joining us this morning.

We look forward to report our progress to you on the first quarter 2007 conference call.

Thank you.

Once again, ladies and gentlemen, this will conclude today's conference.

We thank you for your participation.

You may now disconnect.