Kopin Corp (KOPN) 2007 Q2 法說會逐字稿

Good day, and welcome to the Kopin Corporation's preliminary second quarter 2007 financial results conference call.

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

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

John C.C.

Fan, calling from Tokyo, Japan, and Chief Financial Officer, Richard Sneider.

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

Sneider.

Please go ahead, sir.

Thank you.

Good day, everyone, and thank you for joining us today for our preliminary second quarter 2007 financial results conference call.

Before we begin, I want to remind you that, during today's call, taking place on Tuesday, August 7, 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 and business expectations and anticipated growth.

We may also make statements about our customers' products.

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, demand for our customers' products, the market conditions, the Company's ability to ramp up production in its manufacturing facilities, the potential that our revenue guidance and product forecasts will turn out to be wrong, potential consequences and impact to our business from any findings related to our ongoing internal stock option review, and the likely delay in our filing our financial reports, and other factors discussed in our most recent Form 10-Q and 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.

Please note that today's results are preliminary, pending the planned restatement of certain of our financial statements for the fiscal years 1995 through 2006 and related interim periods.

These restatements relate to the preliminary findings this month of an independent special investigation committee's review of Kopin's historical stock option grants, which were described in a press release and a Form 8-K filed with the Securities and Exchange Commission on May 9, 2007.

As noted in the Form 8-K, financial statements and related disclosures for the period 1995 through 2006 should not be relied upon.

As we announced last week, the NASDAQ Listing and Hearing Review Council has given the Company until Tuesday, September 25, 2007 to file delinquent periodic reports and the necessary restatements with the United States Securities and Exchange Commission and NASDAQ.

If the Company does not file these reports and any necessary restatements by the close of business on September 25, 2007, the Council said that it could suspend Kopin securities from the listing on NASDAQ's global markets at the opening of business on Thursday, September 27, 2007 if a further stay of the delisting is not granted.

We are working diligently to meet the filing deadline.

And, while we will not be answering questions about the issue in today's call, we will continue to update you as information becomes available.

Turning to our preliminary financial results, total revenue for the second quarter of 2007 was approximately $21.8 million compared with total revenue of $18.9 million in the second quarter of 2006.

III-V revenue in the second quarter of 2007 was $11.1 million compared with $12.1 million in the second quarter of 2006 and $9.1 million for the first quarter of 2007.

CyberDisplay revenue for the second quarter of 2007 was $10.7 million compared with $6.8 million in the year-ago period and $9 million for the first quarter of 2007.

The 56% increase in CyberDisplay revenue was driven by strong business from digital still camera OEMs, including Fuji, Kodak, and Olympus.

Military displays contributed approximately 10% of total revenues in the second quarter, as one of our partners in the Thermal Weapons Sight II program implemented several product modifications.

These modifications have been completed, and we are in the process of resuming shipments.

On a year to date basis, military sales have been 16% of our total revenues as compared to 14% for the first six months of 2006.

Our outlook for this business continues to be very positive, with several programs expected to begin ramping in 2008.

From an expense standpoint, our operating margins have been affected by a sales mix which had lower HBT revenues as a percentage of total sales, an increase in sales of displays to the digital still camera segment, inefficiencies from significantly increasing our headcount, and the substantial investments in our capacity infrastructure.

SG&A has also been affected by higher than normal professional expenses resulting from our stock option review.

Moving to the balance sheet, Kopin has cash and marketable securities of $99.6 million as of June 30, 2007 compared with $105 million at December 30, 2006.

We continue to have no long term debt.

Accounts receivable were $11.8 million at June 30, 2007 compared with $11.1 million at March 31, 2007.

Turning to our guidance, as stated in today's press release, we are increasing our 2007 revenue forecasts.

Based on the current business environment and the outlook for our two businesses, we now expect full-year revenue to be in the range of $90 to $95 million.

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

Thank you, Rich.

Welcome, everyone, and thanks for joining us today.

I'm on business in Japan, and I'm calling from Tokyo, which is still very early in the morning.

I hope everyone can hear me clearly.

Turning to our results, we are satisfied with our Q2 revenue of $21.8 million, with III-V and CyberDisplay contributing about evenly.

As Richard stated, we expect strong revenue growth in the second half of this year.

Before we get into the reasons for the strong revenue growth, let me address the progress of our investments in capacity and performance enhancements in both our III-V and Display operations.

We are on track with installation qualification of three of the world's most advanced and largest HBT production systems in our new-- in our Taunton facility.

By the end of this year, we expect our capacity should be approximately 50% higher than our 2005 capacity level.

In addition, these very advanced systems should enhance our operation efficiencies and improve the uniformity and process control of our 6-inch wafer products.

In our Display operations, our new 8-inch production line also should be operational by the end of the year.

Nearly all the required equipment has been delivered and installed.

This new line, in parallel to our existing 6-inch line, should provide us with up to twice of our current capacity.

And these new systems should further enhance the performance of our displays and operational efficiencies.

In summary, we're very excited about our progress of our major investment initiatives, which commenced in 2006.

The expansion in production capacity will provide us with the opportunity to further extend our HBT and Display market leadership and continue our growth in 2008.

As Rich mentioned, significant investment in capacity and personnel are expensive and affect efficiencies but are a very necessary part of our growth.

Now let me address some details of our business which is reflecting that growth.

The III-V business has a 20% sequential growth, and then we expect continued growth in Q3 and Q4.

The increase in business results from strong demands for 3G phones and other advanced handsets and WiFi system customers.

We also expect this trend to continue in 2008.

Turning to our Display business, on the military front, sales slowed in the second quarter as a result of product modification by one of our partners in the Thermal Weapons Sight II program.

We understand the modification has been completed, and we are in the process of resuming shipments.

Our focused strategy for penetrating the civil weapons sights and night mission goggle remains on track, and we're well positioned in the military deployment programs.

We expect increasing shipments of display to our military customers in the second half of 2008, and we also expect-- in the second half of 2007-- I'm sorry.

And we also expect 2008 to be a very strong year for our military segment.

Moving to our commercial business in Display, during the second quarter, we strengthened our penetration in digital still camera by capturing a design win with another tier-one customer.

In June we announced that Fujifilm Corporation has chosen Kopin CyberDisplay 230K electronic viewfinder for its new 5-pix digital camera.

Last month we were selected by Eastman Kodak for its new EasyShare digital camera.

Thus far in 2007, three tier-one camera manufacturers have incorporated our display into their new-generation SLR-type cameras that feature [6X] high zoom lens.

Our innovative CyberDisplays have paved the way for commercial and military products that combine high resolution and low power.

Here, I would like to stress again that to meet our customers' designs for increased performance and capacity at our Westboro facility, we are well on our way to install a new 8-inch wafer manufacturing line that will allow us to use advanced design rules at our foundry partners.

This new line should significantly increase manufacturing efficiency, lowering the unit cost and creating a win/win situation for Kopin and its customers.

In our video eyewear business, we are also observing stronger growth and more volume purchases for an increasing number of companies which have started designing video eyewear.

We continue to be very optimistic by the future of the eyewear.

Based on our current business environment and the outlook for our CyberDisplay and III-V business, we are increasing our forecast for 2007 revenues, which, now, we expect to be in the range of $90 to $95 million.

In III-V, we anticipate continued strengthening demand for advanced wireless handsets equipped with our transistors.

On CyberDisplay, we continue to expect to [begin growth in the] military segments and to accelerate the pace of activities in consumer applications for digital still cameras as well as video eyewear.

In summary, the demand of our products are strong, and our capacity increases are on track.

Kopin is poised for growth.

With that, we are ready to take your questions, operator.

Thank you.

(OPERATOR INSTRUCTIONS).

And we'll take our first question from Jason Tsai.

Just a few questions here.

Can you talk about the reason for the decline in cash?

Was that--?

Was that just CapEx expenditures there, Rich?

It's a combination of CapEx use in operations and supporting working capital - higher inventory levels with the increased sales volume.

Okay.

And you made the comment about higher operating expenses and lower operating margin.

Is there a chance that you guys went into the red here on the operating basis?

Unfortunately, we really can't get into that whole detail.

Okay.

Fair enough.

And, then, your higher guidance.

Is that from across the board for both III-V as well as the CyberDisplay, or is that more from one segment or another?

That's from both.

Okay.

And, then, let's see here.

Your 10% customers this quarter-- SkyWorks, I suspect, is one of them still.

Yes.

We only disclose that on an annual basis, but it really hasn't changed significantly.

Okay.

Fair enough.

And then, lastly here, military dropped to 10% of revenues this quarter.

Where do you think military is going to shake out at the end of the year, based upon your guidance-- current guidance, or your updated guidance?

Do you think you can get that to 20%-plus, or do you think it will be in the teens still?

It will be in the teens.

it will be in the teens?

Yes.

Okay.

Great.

And, then, that's about it for me.

Thanks a lot, guys.

I think that the reason is that we're seeing growth in almost all the segments right now.

(OPERATOR INSTRUCTIONS).

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

A quick follow-up question to one of Jason's.

On the HBT side, are you really seeing the demand going forward that's increasing your guidance?

Is it related to one specific customer, or are you seeing some growth outside of that customer?

And then, perhaps, you could talk at your largest customer - if there's any new programs perhaps that are really causing you to be encouraged and increasing your guidance going forward.

Thanks.

Mike, this is an interesting question.

I think-- Probably suffice it for us to say that we're seeing growth in several of our major customers in III-V.

Okay.

On the military side, if you could perhaps help us a little bit there.

Are we beginning to see any more activity outside of TWS, or it primarily TWS at this point?

For this year, I think it's still primarily TWS, but we are seeing activities now for night vision goggle, which will contribute very strongly for us in 2008.

Okay.

And should we think about [EMDG]--?

Is that really more second half of this year, or how should we think about that in 2008?

In 2008, I think it's going to be continued growing throughout the year in 2008.

Of course, it will start ramping and then continue growing.

I think the plan is for it to start ramping in Q1.

Yes.

Rich is referring to the goggle, yes.

Right.

And, then, for the-- I missed just the beginning of the call.

But, if-- I didn't know if Rich mentioned it.

Are you providing a timeframe for when we will begin to see or when you will have the full numbers reported outside of the press release regarding the NASDAQ timeframe?

Well, as we mentioned, NASDAQ has sent us a letter, requesting that we be compliant with all our delinquent filings by September 25.

There are opportunities to potentially get that extended.

But, right now, that's the deadline that we're working towards.

And suffice it to say we're working very diligently on this matter.

Yes.

Okay.

Thanks.

(OPERATOR INSTRUCTIONS).

We'll go next to Orin Hirschman with AIGH Investments.

Congratulations on the progress on the sales side.

Could you talk more about additional camera customers and the alternatives within the camera market where you're strong and where you may not be so strong; for example, high end versus low end?

Yes.

I think that the question is about our camera customers.

Those models we won are what they call a bridge camera.

They're the mid-section cameras between the low end, cheaper, inexpensive digital cameras, the very tiny ones, to SLR camera, which, of course, one day you change your lens into very big ones.

Now, in Japan, they call it bridge camera.

About 5 million units are being sold this year, and we have now three of the big providers of the bridge camera.

I think we will get around-- a little bit over 40% market share.

To give you some idea of the size of that win, last year in this bridge camera, our market share was about 5%.

And this category is growing.

It's growing pretty fast.

It's one of the areas that's growing very fast in digital camera.

In addition, the whole digital camera in Japan, business is very good.

Almost all the manufacturers are making money, and they are very optimistic.

Many new models.

Many new activities.

I enjoy my stay here.

A follow-up in terms of the mention of eyeglass wear and (inaudible).

With respect to eyeglass, we did make a mention-- an announcement that the eyewear business continued growing.

In fact, I think-- In the near future, I think people will be excited about the progress.

The whole mobile video need is really growing, and it's never so clear [of the continuation].

This whole area is really an area where I think a lot of record growth will also occur.

If you're in Japan or you're in China, they have now terrestrial digital TV now that you can receive.

And you can be on the go, and you can see those digital TV (inaudible).

And many people-- Many companies, big and small, are planning on to put product in, especially related to eyewear, like our displays are very well situated.

People are talking about all the higher, higher resolution.

So our increasing capacity, as well as performance enhancements, are really done in sync with all these new things that's coming up.

Thank you.

We'll take our next question from [Dan DeClue] at ASB Advisors.

Congratulations on some real nice progress over the quarter, John and Rich.

I wondered if you could speak a little bit to some of the changes that are going on in the cellular handset market.

I notice fairly frequently new offerings that seem to involve greater and greater complexity in the handsets.

There's been some discussion about phones-- I think there's a phone from Samsung that uses WiFi or WiMAX that you could possibly use as a docking station in your home so that, potentially, you could move away from even the sort of land line that people are using.

My understanding is that, with complexity, comes demand for more power amplifiers or possibly for more III-V.

But I don't have a real clear sense as to what the magnitude of the change is.

This question, actually, is very interesting, because we, ourselves, are right now watching the whole trend as the phones are getting more and more complex.

First, one thing I did notice when I was here yesterday talking to one company is that the phones are becoming more and more user-friendly.

User interface has become very important.

I think Apple's iPhone is one big example of where software becomes a more dominant role and it allows it to go to different functions easily.

Another thing that's very interesting is that people want to have more like a worldwide phone.

There are so many different standards.

If you do that, then you need more amplifiers in one of the designs.

And, since design is getting more complex, the value of this device gets increased.

So people are not reluctant anymore to put in more power amplifiers because the unit cost is higher.

So I think that's one trend.

Another thing is that WiFi is definitely needed in cell phones to allow you to go to the Web.

Again, as you well know, WiFi power amps offer HBT, but it's a separate one from the cellular system.

So phones are going to get more and more WiFi.

And people really want to go to WiMAX, which is more advanced than the WiFi system.

Then the HBT's requirement is even more, because the WiMAX chip is etched much larger than WiFi chips.

So it is more area.

Again, that explains why we feel that HBT growth will continue.

Thank you very much.

(OPERATOR INSTRUCTIONS).

At this time, there are no further questions in the queue.

I will now turn the conference back over to Dr.

Fan for any closing or additional remarks.

Thank you very much, everyone, for joining me this morning.

We look forward to report to you again soon on our progress.

Thank you.

And that concludes today's conference call.

Thank you.

You may now disconnect.