Kopin Corp (KOPN) 2007 Q3 法說會逐字稿

Good day everyone and welcome to Kopin Corporation's Third Quarter 2007 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You may access an archived version of the call on Kopin's website at www.kopin.com.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.

Richard Sneider.

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

Sneider.

Please go ahead, sir.

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

Before we begin I want to remind you that during today's call taking place on Tuesday, November 27th, 2007 we will be making forward looking-statements as defined in the Private Litigation Securities 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, market conditions, the Company's ability to ramp up production in its manufacturing facilities, potential that our revenue guidance and product forecasts will turn out to be wrong, the potential consequences and impact to our business from any findings related to our on going internal stock option review and the likely delay in filing our financial reports and other factors discussed in our most recent form 10-Q and annual report on 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 its financial statements for the fiscal years 1995 to 2005 and related interim periods and tax consequences of the restatements.

These restatements relate to preliminary findings of an independent special investigations committee's review of Kopin's historical stock options grants, which were described in a press release and a form 8-K filed on Securities and Exchange Commission on May 9th, 2007.

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

As we announced early this month, the Company was delayed in filling its form 10-Q for the period ending September 29, 2007.

The Company filed a form 12-B-25 notification of late filing on November 7, 2007.

The Board of Directors of the NASDAQ stock market has granted Kopin until Monday December 17, 2007 to file an all overdue periodic report and necessary restatements with U.S.

Securities and Exchange Commission and NASDAQ to regain compliance with the final requirements.

We are working diligently to meet this filing deadline and we will not be answering questions about this issue on today's call.

We will continue to update you as information becomes available.

I wish to reiterate that the financial information that we are presenting does not include the impact of any adjustments, which may result from our ops review and therefore should be considered preliminary.

Turning to our preliminary financial results, today's total revenue for the third quarter of 2007 was a record quarterly result of approximately $29.2 million, an increase of 87% compared with total revenues of $15.6 million in the third quarter of 2006, and 34% higher than $21.8 million reported in the second quarter of 2007.

III-V revenue in the third quarter of 2007 was approximately $11.1 million compared with $10 million in the third quarter of 2006 and flat with $11.1 million in the second quarter of 2007.

CyberDisplay revenue for the third quarter of 2007 was $18.1 million.

This compares with $5.6 million in the year-ago period and an increase of nearly 70% from $10.7 million in the second quarter of 2007.

Kopin's third quarter CyberDisplay revenues reflect sequential increases in all three product segments.

Consumer product sales were driven by strong demand from digital-still camera and video eyewear customers.

Military sales continue to strengthen and accounted for approximately 15% of total revenue in the third quarter of 2007 compared with 7% in the third quarter of 2006.

On a year-to-date basis military sales comprised approximately 16% of total revenues.

With the release of the TWS switch contract that John will talk shortly about, our outlook for this business remains positive for 2008.

Our preliminary net loss for the third quarter of 2007 was approximately $772,000 and $7.9 million for three and nine months ended September 30th, 2007 respectively.

Professional fees incurred for the option review for the three and nine months ended September 30th were $430,000 and $1.9 million respectively.

Kopin has not reported its net income or loss or corresponding fair share amounts for any quarters after the second quarter of 2006.

Moving to the balance sheet, Kopin had cash and marketable securities of $94.1 million as of September 29th, 2007 compared with $105.4 million at December 30th, 2006.

Through September 30th, 2007 we had incurred $5.7 million in capital expenditures associated with the capacity expansion of both our III-V and CyberDisplay operations and with a number of new product developments.

The equipment acquisition for these expansions are almost complete and we expect to begin realizing the fruits of these efforts in 2004.

Other cash uses included $3.1 million to fund increases in inventories and accounts receivable to support higher sales levels and cash front use to fund operations.

Accounts receivable were $14.5 million at September 29th, 2007 compared with $11.2 million at December 30th, 2006.

Inventories at September 29th, 2007 were $17.8 million versus $11.8 million at December 30th, 2006.

We continue to have no long-term debts.

Turning to our guidance, as stated in today's Press Release, we are reaffirming our 2007 revenue forecast.

Based on the current business environment and the outlook for our two businesses, we continue to expect full-year 2000 revenue to be in the upper end of the range of $90 million to $95 million.

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

Thank you, Rich.

It is late in the evening in China where I am right now.

Welcome everybody and thank you for joining us today.

Let me start by saying that I am very pleased with our record setting third quarter performance.

Our III-V business was its usual steady contributor to the top line, something that we sometimes take it for granted.

Our CyberDisplay sales really drove the product.

Let me provide some additional color to the quarter.

For our III-V products our third quarter sales were essentially the same as the second quarter, which is lower than normal season patterns.

When looking back we believe this is consistent what the industry has been seeing during the quarter.

However, as pointed by our customers at their recent investment conferences is a strong sense of consumer demand building up for cell phones and similar devices for advanced media applications, which should increase investments in the WiMAX infrastructure rolling out in the next few years.

This trend favors our III-V products and explains in part our capacity expansion.

More sophisticated applications, bridge phones (inaudible) means more HBT per phone and this should fuel future growth.

Now let us turn to our display business.

During the third quarter, the increased CyberDisplay product sales results from sequential increases in all our three product segments, the digital camera, military and video eyewear products.

For the third quarter, digital still camera, military and video eyewear sales were approximately 40%, 25% and 15% respectively of our Display sales.

We continued penetration in the bridge digital camera market from partnership with leading OEM customers such as Olympus, Fujifilm and Eastman Kodak.

To give you some idea we are winning the market share, in 2006 our market share of the bridge camera electronic view finder market was only about 5%.

One year later, today, we believe our 40% bridge cameras sold world wide are equipped with electronic view finders produced by Kopin making Kopin's compact modules the EVF of choice amount of the worlds leading high zoom digital camera markets makers.

We are the only company in the world capable of making a high density, high resolution (inaudible) display on a single crystal silicon IC.

Just by using foundries in Taiwan and Korea our technology is very scalable and during previous peak periods we have obtained production levels of about approximately 600,000 displays per month making us by far the largest LCD manufacturer in the United States.

The combination of this relationship to OEMs and accelerating volume produced provides the opportunity to make these product segments profitable and this will be our focus in year 2008.

Turning to our military display business, we have an outstanding relationship with U.S.

army.

The first program to deploy our display technology for military purpose was the TWS, which is thermal weapons site program for thermal weapons.

Today we continue to successfully to develop recognized products, which (inaudible) assessing performance that is under extreme temperature and battlefield conditions.

We have been shipping to the TWS program and follow-up program, the TWS-2 program.

So as of the third quarter we have steady shipments of display modules to our TWS-2 customers and the demand for this product continues to be strong.

While the TWS-2 program is focused on production hardware and delivery we have been working with our customer on the third phase of military procurements, the TWS bridge program.

Our TWS customers BAE, CRS and Raytheon have all been selected to participate in this new bridge program, which is expected to deliver up to 150,000 thermal weapons sites for U.S.

Army.

This next generation of sites will feature technology improvements aimed at lower power and improved performance in the smaller size.

The TW-2 bridge program represents the strong endorsement of Kopin technology with the U.S.

military.

So clearly we see this as an extremely positive opportunity for Kopin over an extended period.

As you may know, Kopin and U.S.

military partners started in the early 1990's the programs that were developed in micro-display that boast better than HD resolution in a screen or in a display size about the size of a dime.

Imagine shrinking the footprint of your new plasma TV down by 10,000 times and you have a good idea of the scale I am talking about.

In essence, we are creating a powerful digital eyeball capable of doing work beyond the capabilities of the human eyeball.

There are a large number of military programs, which are now in development, that need a display with this extreme performance.

Until the fully developed digital eye can be realized, which we think is in a few-- in a couple of years, where we have been working with military to continue to provide a superior display, which can be deployed today.

One of the programs working toward this goal is the enhanced night vision goggle or ENVG program.

This program combines night vision and thermal weapon sites and thermal technology to enable the soldier to see beyond the human eye's limitations of only the visible spectrum.

He can now see in multiple spectrums in total darkness.

Another reason we're excited about our military display program is now their special ramp for U.S.

Armies and has night vision goggle programs.

The potential ramp activities are underway on this program and deliveries are expected to start in the first quarter of 2008.

Overall our military product sales have been very strong and profitable and we believe this will continue to be a significant market segment for us in the coming years.

Turning to our video eyewear business, during this third quarter we experienced strong growth and we saw several new prototype products, which we hope to see introduced during either this holiday season or for the Olympics next year in China.

We believe 2008 will continue to be a building block year as more mobile content infrastructure is deployed and product performance continues to improve.

Now let me provide you with an update on the progress we made on our capacity expansion during the quarter.

We have three capacity expansions going on at this time.

First, as we announced in 2006, we are increasing our III-V capacity by over 50% from 2005 levels.

This capacity expansion is being accomplished by qualifying OMCVD reactors in our Taiwan joint venture and through the addition of three of the most advanced OMCVD reactors in the world.

These new reactors will allow Kopin to move from the market-- with the market as the industry shifts from 4 inch to 6 inch wafers to provide the highest quality 6 inch HBT wafers available today and now, as we previously announced, these reactors have been qualified and we have started initial shipments.

Second, in display we are in the progress of qualifying new 8 inch production lines.

We anticipate this line qualification phase will be completed by the end of this year.

We believe this new line will provide or offer smaller yet higher resolution displays with better performance, better yield, lower cost and high capacity.

Our final capacity expansion is actually the creation of a new clean room for the sole purpose of manufacturing high level assemblies or we call it HLAs.

HLAs are sold to our military customers and depending on the customers and end products it will combine our displays, their lights with some combination of electronics and optics in one of our housings.

Because the complexity of integrating these elements into a display subsystem and the sensitivity of this display subsystem to environmental issues during the assembly process, such as the particles and humidities, our customers are increasingly recognizing the value in clean room manufacturing, manufacturing skills that Kopin brings to the table.

I should point out that many of these skills are from the lessons we learned from working with our digital still camera customers.

Let's turn to our outlook.

Based on the current business environment and current market conditions for our business, we are reconfirming our forecast for 2007 revenues.

We continue to expect total revenue to be the upper end of our guidance range of said $90 million to $95 million.

More importantly, while the significant investment we're making in both capacity expansion and technology improvements have fed the margins in the short term, we expect 2008 to be a very significant tick up point for Kopin as we begin to ship the fruits of our investments in both sales and margin expansions.

On the CyberDisplay front we expect to continue to accelerate the pace of activities in consumer applications for digital still cameras, mobile video eyewear and also expand our market position with our military customers.

In III-V we expect continued strength in demand for multi-function cell phones and advanced wireless handsets equipped with i-transistors and in particular, we anticipate increased momentum in WiFi applications.

With that, we are ready to take your questions.

(Operator Instructions) Your first question comes from Mike Burton of ThinkEquity Partners.

On your guidance you mentioned for Q4 that you would be on the high end of the range.

Can you give us an indication III-V versus CyberDisplay?

You know I think that we would normally expect some seasonality, of course, in the III-V business but should we also see CyberDisplay come down a little bit in Q4 or how does that play out and maybe the different components within displays?

Thanks.

Richard, do you want to answer that?

Yes I think, Mike, we would expect to see seasonality actually in the CyberDisplays come down.

We've obviously shipped heavy for folks that were trying to make the Christmas season.

This year we don't expect to see so much seasonality in the III-V business.

Okay so-- and that would be primarily on the consumer products side then and we'd expect military still to be somewhat flattish?

Yes.

Okay and then you talked a lot about-- in the Press Release and some of your comments about some WiMAX and how that's going to drive your III-V business going forward.

I was wondering if you could help elaborate a little bit on that, if there are some customers that you're seeing or some of the-- or point to some of the traction that you guys have been making in that market.

This is John C.

I may have made a remark of that.

We are now, as I say, we actually-- the industry wide actually has a little slow down in the second and third quarter, which is unusual but now we see a lot of strong forecasts from our customers in the coming quarters.

Many of them, of course, come from cell phones but we also see a lot of activity on WiFi and WiMAX.

As you well know, WiMAX power M chips are quite large and there too very good news for people who provide wafers.

Okay and then on the WiFi side is that primarily being driven by some of your cell phone customers or are there some other customers that are driving WiFi in the near term?

A little bit of both.

Okay fair enough.

(Operator Instructions) Mike Burton, ThinkEquity Partners.

I was wondering, John, if you could talk a little bit?

There was some discussion from RF Micro Devices and Skyworks regarding MEM's applications in cell phones going forward.

I was wondering how you expect that dynamic to play out.

Is that a 2009 phenomenon or how do you see that developing and does that cause any change to your expectations for what you're going to need for capacity given the change in PAs, the number of PAs from you know about 5 PAs for a 3G device down to one?

Yes I expect this development will not be as fast as it seems.

Right now everybody is still adding up more and more capacity for making PAs in their line, as you well know.

Both of those companies that you mentioned, they are increasing their capacity to make PAs with a (inaudible) so that only can explain the situation.

Scott Bundy of Smith Barney.

Hey, John, I appreciate your excitement for revenue growth but at the end of the day it's all about profits.

Can you expand at all about how we can get operating margins of this Company ex interest income to be profitable?

Yes that's a very good question as we mentioned that 2008, 2009 now we are focused on margin expansions.

The most important thing for display especially is you've got to be real.

You've got to make enough displays and occupy some space and with us you obviously satisfy that.

The product mix is also very important.

As you well know, we have three different product lines, one for making product applications, digital still camera and video eyewear and therefore military.

The military, as you well know, has very good margins.

And video eyewear actually has pretty adequate margins.

The lowest margin is really the digital still camera, at least the digital still camera the bridge camera.

If you quote the [SLR] the margins are actually quite high.

So once we do the mix right now of course the digital still camera revenue percentage that we announced in the third quarter is 40% digital still camera.

Right now about 25% is military and 15% for video eyewear but we see a much faster growth rate right now in military and video eyewear and they will catch up and the margin mix will be different.

I hope that answers your question, Scott.

John, one of the issues in the past has been we've gotten out of businesses that have not been profitable.

If we're not making money with the digital still camera, why are we moving in that direction?

The digital still camera has two segments, one bridge camera and with SLR, which is an even bigger segment and that will be a very profitable business for us and that's why we're moving there.

That concludes the question and answer session.

I'll now turn the conference back to Dr.

Fan for closing remarks.

Thank you everybody for joining us this morning or this evening over here.

We look forward to reporting to you on our progress on the next conference call.

Thank you.

That concludes today's conference call.

Thank you.

You may now disconnect.