Kopin Corp (KOPN) 2007 Q4 法說會逐字稿

Greetings, ladies and gentlemen.

Good day and welcome to Kopin Corporation's fourth quarter and full year 2007 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You may access an archived version of the call on Kopin's website at www.kopin.com.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 are the -- with us today from the Company are Chairman and Chief Executive Officer, Dr.

John C.C.

Fan, and Chief Financial Officer, Mr.

Richard Sneider.

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

Sneider.

Please go ahead, sir.

Thank you, operator.

Good afternoon, everyone, and thank you for joining us.

I'll begin today's call by taking you through our Q4 and full year financial results, and providing our revenue outlook for 2008.

John will then discuss the operational highlights from our CyberDisplay and III-V businesses, and will review our business strategy.

Then, we'll be happy to take your questions.

Before we begin, let me remind everyone that, during today's call, taking place on Thursday, March 27th, 2008, we will be making forward looking-statements as defined in the Private Securities Reform Act of 1995.

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 product, market conditions, foreign currency exchange rate, the availability of raw materials and other factors described in our most recent annual report on form 10-K, most recent quarterly report on form 10-Q, and other documents on file with the Securities and Exchange Commission.

The Company undertakes no obligation to update these forward-looking statements made during today's call.

Turning to our financial results, total revenue for the fourth quarter of 2007 increased 62% year-over-year to $28.9 million, driven by sales increases of nearly $8 million in our CyberDisplay product line, and $3 million in our III-V business.

For the full year, revenues increased approximately 38% to a record $98.1 million, exceeding our guidance of $90 million to $95 million that we provided on our Q3 preliminary results conference call.

On a segment basis, Kopin U.S.

and Kowon, our South Korean subsidiary, accounted for $92.6 million and $5.5 million of 2007 revenues, respectively, as compared to $65.1 million and $6 million for 2006.

In terms of our product lines, in Q4 '07 CyberDisplay revenue was $16.7 million, up approximately 88% year-over-year, while III-V revenue increased approximately 36% to $12.2 million.

For the year, CyberDisplay revenue increased 100% to $54.6 million, while III-V remained essentially fat -- flat at $43.6 million.

Looking at CyberDisplay by product type, our sales of display products for consumer electronic applications increased more than $20 million to $29.3 million for the full-year 2007.

Sales from military applications increased $4.5 million to $15.8 million.

And sales for eyewear applications improved $3 million to $6.3 million.

Our 10% customers for the year were Skyworks Solutions at approximately 26%, and Sanyo Electric Company at 16%.

Please note that we also sell to Advanced Wireless Semiconductor Company, or AWSC, which is a fab used by Skyworks.

If we assumed everything we have sold to AWSC went to Skyworks, our sales to Skyworks would have been 31% of total revenue.

I also mentioned Sanyo Electric.

Sanyo performs assembly for Fuji, Olympus and Kodak.

So our technical sale is to Sanyo, but our display is ending up in cameras branded by these other companies.

The gross margin for Q4 '07 was approximately 20% down as compared to 25.2% in the fourth quarter of 2006.

The full-year gross margin was approximately 16.5%, down from 25.2% in 2006.

The decrease in gross margin primarily resulted from normal declines in ASPs for certain products, and a significant sales mix resulting from the -- the significant change in sales mix resulting from the rapid increase of our share of digital still camera viewfinder market.

And this is something that John will address later on in the call.

Research and development expenses were $3.3 million or 11.4% of revenue in the fourth quarter.

This compares with $2.1 million or approximately 12% of revenue in Q4 2006.

For the year R&D expense was 11.9% of total revenue compared with 14.4% for 2006.

The decrease in R&D expense as a percentage of revenue reflects leveraging an increase in R&D expense over a higher R&D revenue amount.

We expect R&D expenses to be approximately 8% to 12% of revenue in 2008.

The percent decline again reflects basically a flat expense over a higher revenue estimate.

Selling, general and administrative expenses in Q4 of 2007 were $4.3 million or 14.9% of revenue, compared with $7.6 million or 42.3% of revenue in the fourth quarter of 2006.

For the year, SG&A expenses were approximately $18 million or 18.3% of revenue versus $19.3 million or 27.2% of revenue for the full year of 2006.

SG&A for 2007 and 2006 included $1.8 million and $3.7 million, respectively, in professional fees and expenses associated with the independent review of Kopin stock option granting practices.

The entire $3.7 million in 2006 was recorded in the fourth quarter.

We would expect SG&A to be in the range of 12% to 15% of revenues for 2008, excluding any additional costs incurred in the outstanding litigation associated with the derivative losses.

Net income for the fourth quarter of 2007 was approximately $285,000, or breakeven per diluted share based on 67.5 million weighted average diluted common shares outstanding.

This compared with a net loss of $2.9 million, or $0.04 per share, based on 67.4 million weighted average common shares outstanding in Q4 of 2006.

For the 12 months ended December 29, 2007, the net loss was $6.6 million or $0.10 per share based on 67.5 million weighted average shares outstanding.

This compares with a net loss of $2.1 million or $0.03 per share based on 68.1 million weighted average shares outstanding for the full 2006.

Noting again that the results of 2007 and 2006 include 1.8 and 3.7 million, respectively, in expenses associated with the independent review of our stock options.

2006 also included a $1.2 million gain from the sale of 200,000 shares of [Micrel] stock.

Looking at the bottom line operating segment, in 2007 Kopin U.S.

reported a net loss of $7.8 million, while Kowon reported a net income of $1.2 million.

Cash and marketable securities as of December 29th, 2007, totaled $93.3 million compared with $105.4 million at the end of 2006.

The decrease in cash resulted primarily from an increase in investment in working capital of $5.2 million to support anticipated growth, and capital expenditures of $7.6 million.

We have no long-term debt outstanding.

Accounts receivable increased to $15.2 million as of December 29th, 2007 from $12 million at December 30th, 2006.

Inventory at year-end was $16.7 million versus $11.8 million at December 30th, 2006.

The primary reason for the increase in working capital reflects the growth in the business in 2007 and the anticipated growth in 2008.

Although accounts receivable increased, DSOs, or days sales outstanding, actually decreased to approximately 38 days at the end of 2007 compared with 59 days for the comparable period in 2006.

Depreciation and amortization was approximately $3.5 million for 2007 compared with $2.6 million for 2006.

For 2008 we expect CapEx to be between $5 million and $9 million.

Turning to our guidance, taking into consideration the current business environment and economic conditions in our market, we expect the full 2008 year revenues to be in the range of $105 million to $115 million.

And with that, I will turn the call over to John.

Thank you, Rich.

Good afternoon, everyone, and thank you for joining us for our Q4 conference call.

By now, I'm sure everyone's aware that earlier this month we concluded our stock option review.

This was a very lengthy process, not only for the Company but, more importantly, for our shareholders.

And I wanted to thank you for your patience, confidence and support for the last 16 months.

Suffice to say that we are pleased to have this issue behind us.

We are happy -- and we are happy to move forward.

Since this is our first conference call in 2008, we will spend a little bit more time to describe our business and our strategy.

Let me begin our operation review with a brief discussion of our three-year investment plan that was started in 2006.

During the last two years we have taken steps to advance our technology leadership and further different Kopin in the marketplace.

We have accomplished this by significantly expanding our III-V manufacturing capability and capacity with the installation of three of the world's most advanced OMCVD reactors.

The uniformity and consistency of the 6-inch III-V wafers we are producing with this machine is outstanding.

In addition, we have increased our display capability and capacity with the installation of a new 8-inch CyberDisplay line that already has enabled us to achieve a major technological breakthrough - our new strength SVGA display.

I have -- I will have more to say on this in a moment.

And next month we will complete the construction of a new 2,800 square foot clean room with -- equipped with some very specialized instruments in Taunton for the high-level assembly of military related display products that Rich mentioned earlier.

In 2008 we'll continue our aggressive process and product development.

Our three-year capital investment program is now substantially complete.

As I have said -- as we say in this afternoon's news release, we're confident that this initiative will help us to drive margin enhancement, increase our capacity, our capability, our quality, and further diversify our customer base and position the Company for our long-term growth.

Now, let me turn to our business segments.

Beginning with CyberDisplay, which grew 100% in 2006 -- or 2007 -- to record revenues.

We saw strong growth (inaudible) across all our customer segments--in consumer electronics, in military, and as well as the video eyewear.

I would first to discuss our thermal weapons site to U.S.

Army.

For those of you who may not be familiar with this program, TWS II, it is a family of advanced thermal weapon sights that improve combat effectiveness under virtually any battlefield conditions, including dust, sand, fog or smoke.

It is important to remember that Kopin is the only qualified government supplier of display for TWS II.

The program, which is led by CRS technology and BAE systems, involves the production of up to 70,000 units.

As a reminder, Kopin is also the winner of TWS I, which had a production run of about 30,000 units.

Kopin is also the display provider for the next generation of this program called TWS-Bridge.

TWS-Bridge is a five-year contract to produce about 150,000 advanced light, medium and heavy weapon -- (inaudible) weapon sights.

Production of TWS-Bridge is scheduled to start late this year.

The TWS-Bridge will feature Kopin's newest military display, the CyberDisplay 640-MLVR, which we introduced late last November.

This high-tech display is specifically designed to operate at temperatures as low as -40 degrees centigrade, with nearly instant (inaudible) capability without a need of external heater.

By dramatically reducing display power consumption we believe this new display will also be applicable for a broad range of military applications.

Our CyberDisplay is also a key component in the enhanced night vision goggle, or ENVG, which is being developed for the Army by IGG Industries.

The helmet model ENVG is the first system to combine image intensifier with infrared technology.

Early production of the ENVG is already underway with full production expected to begin in the second half this year.

TWS II and ENVG highlight our strategy for military display business.

Kopin has a special singular focus.

It is the soldiers.

Both TWS II and ENVG are part of what is known by the Army's program executive officer soldier, PEO Soldier.

The goal of this PEO Soldier program is to develop the best equipment for our men and women in combat, and deploy the equipment into the field as quickly as possible.

PEO soldier stands for the -- stands as a vanguard on the Army's new focus on technology innovation and we are pleased to play a significant role in this transformation.

A moment ago I mentioned about our new 2,800 square foot clean room that will open in this April at Taunton for high-level assembly of military eyepieces.

These (inaudible) eyepieces combine the electronics, display and optics in a complete solution that provides our military customer with requisite (inaudible) in turnkey units.

Now, let's turn to a discussion of our commercial display segment.

Display revenue for digital still camera applications increased almost nine times in 2007 from 2006, served by a growing share of digital still camera viewfinder market.

During the year leading OEMs, including Olympus, Fuji Films and Kodak, selected the Kopin CyberDisplay EVF 230K electronic viewfinders for their new high-zoom models.

Allow me to describe the situation a bit of our digital still camera business.

In 2006 we moved away from our camcorder business and, late in 2006, we introduced two viewfinder models, one fixed focus and the other variable focus.

We were pleasantly surprised by the rapid adoption and huge demand of our new models.

The rapid ramp of productions in the first half of 2007 has strained our production systems, decreased our operation efficiency, but we successfully satisfy our customers' demands.

In 2007 we have adjusted our product mixed and ship a wafer on the lower margin fixed-focus viewfinder model to a higher margin variable-focus model.

In fact, we have effectively stopped taken orders on our fixed-focus model.

Regardless, we continue to experience healthy business in digital still camera in this year.

And our relationship with key digital camera manufacturers will be invaluable for us as we develop higher margin models for new advanced cameras.

We are optimistic of our ability to pursue new markets, as well as to expand our margins.

A principle reason is our successful breakthrough of our new shrink SVGA display, which we revealed earlier this year.

As the LCD industry's smallest color SVGA display, the new display has a 45% smaller area and consumes 30% less power than a commercially available SVGA display.

The pixels in the shrink display are now 1,000 times smaller than those used in the current LCD TVs.

And this will permit mobile devices to display high-resolution display images with unsurpassed color and clarity.

The development of the shrink SVGA was made possible only because of the investment we made to establish the new 8-inch line.

We demonstrated a new display during January's Consumer Electronics Show in Las Vegas and the response for the market is very possible -- very positive, indeed.

We'd like to emphasize the new 8-inch slide, and it was not only to achieve higher capacity, but also improved yield and performance.

Now, let's turn our discussion to the growing opportunity for our displays in the video eyewear market.

Eyewear featuring Kopin display already is available through a variety of outlets, from retail stores, in catalogs, to airport kiosks and iPod vending machines.

Customer and retailer feedback to products manufactured by companies such as [MyView] and VizEx have been very positive.

In response to accelerating popularity of mobile video devices, a number of overseas companies are also integrating Kopin display into a range of new eyewear designs which combines function and style.

The new (inaudible) opportunity will be dependent on a number of factors, not the least of which is the overall economy.

However, we still anticipate further growth of video eyewear market segment this year.

Now I would like to move from display to our III-V business.

III-V combined -- the III-V business (inaudible) has been -- is consistent contribution to our top line in 2007 reflecting the strong relationship with our tier one integrator customers.

As I mentioned, over the last couple years we worked diligently to expand our HBT manufacturing capacity and capability with recent installation of three LMCVD reactors at our Taunton facilities.

These new systems really enhance our capability to process 6-inch (inaudible) wafers used in both (inaudible) amplifiers, as well as a number of emerging wireless and obviously electronic applications.

Among these emerging areas we're beginning development of advanced III-V high electron mobility transistors, HEMT, structure for the new generation of military, public mobile radios, and base station products, as well as (inaudible) for energy applications.

We believe our (solar cell) systems do produce the (inaudible) and uniformities required for (inaudible) structures as well as for soldiers.

It is interesting to know that solar cells, our first product we introduced commercially following of our inception in the 1980s.

As a result, we have substantial intellectual property and the manufacturing know-how around this technology.

The HEMT solar initiative represents long-term opportunity for Kopin.

But I believe they are technologies that we're uniquely qualified to address.

In summary, during the past two years Kopin has made strategic capital investments in our III-V and CyberDisplay business that increase our capability, our capacity, and have positioned Kopin for continued growth.

This year, 2008, we will continue and complete our three-year plan through our aggressive process and product development initiatives while still maintaining our strong financial position.

We are widening our lead in the marketplace.

As Rich stated earlier, considering the current economic and business environment, we expect 2008 revenue to be in the range of $105 million to $115 million.

Now, we are happy to take questions.

Operator?

Thank you.

(Operator Instructions.) Our first question comes from the line of Mike Burton with ThinkEquity Partners.

Please proceed with your questions.

Hey, guys.

Just wanted to go through the guidance for 2008 a little bit more.

If you could talk a little bit about what the components are regarding III-V versus display.

And then, maybe within the display segment, are we expecting a big lift out of military?

And then if you could follow up with that and talk a little bit about where the target model is going forward into 2008 for gross margins as these different products ramp.

Thanks.

Rich, you want to answer that?

Sure, Mike.

So, we would expect that HBT or III-V is relatively flat.

We're expediting normal price declines anywhere from 5% to 10% and potential increases in volumes about the same, so they'll probably offset.

So, the growth is primarily being driven by the CyberDisplay business.

And the bulk of that growth is being generated by the military at this point in time.

So, that's how we see it sorting out.

I think I gave you kind of the target model in some respects.

Other than gross margins.

For the year we were in the 16% range and we're trying to get into the mid-20s in 2008.

Otherwise, as I said, SG&A is somewhere in the 8% to 12% range and R&D will be somewhere in the 10% to 15% range of sales.

Okay.

And then just to follow up a little bit more there.

So, it sounds like, the majority of it being military growth, John did talk about some effect from the economy on the eyewear segment.

But how should we also expect the camera portion to grow?

Is that -- is it going to be up or is that more flattish as well?

I will make a comment there.

We expect the digital camera segment will actually decrease somewhat because we no longer are aiming at the fixed-focus model.

But it's still going to be pretty healthy.

And eyewear business will continue to grow.

That amount is (inaudible) unknown because that depends on the economy, but we expect it to grow.

Okay, great.

That's it for me.

Thanks.

Thank you.

Our next question comes from the line of Dan DeClue with ASB Advisors.

Please proceed with your question.

Thank you.

And congratulations on getting the option issue resolved.

I'm sure it's a relief to all.

Thank you, Dan.

It was a big relief, yes.

John, there was some news today about a possible joint venture in the WiMAX area reported in the Wall Street Journal.

It's not clear if it's going to happen or not, but that there have been fits and starts around the rollout of a national WiMAX and with some implications for all types of mobile use.

Could you speak a little bit about what impact that might have on Kopin in terms of the use of power amplifiers?

Yes.

The question from Dan is how the WiMAX is going to affect the III-V business, of Kopin's business.

Rich answered is that when ASP (inaudible) increase, it really does not include the WiMAX growth.

WiMAX has been pushed to the right every year.

WiMAX -- almost WiMAX now using HBT as a PA.

So, if WiMAX grow then I would say that the demand for our HBT wafer will greatly increase.

So, we have capacity for it.

We have the three large systems are installed.

So, that's not included in our estimate.

So if this thing -- I saw the release, also.

But I think it would take awhile for it to really materialize.

It probably would impact us next year more than this year.

Could I ask you to maybe expand a little bit, John?

Does it -- how does it relate for instance to a phone that has an additional band in it?

Is it around -- is the additional demand for a phone that's enabled with WiMAX, as well as the traditional couple of types of bands, roughly the same as getting another band, or is there something particular about WiMAX that makes it more intensive in terms of its demand for amplification?

Yes.

I think WiMAX, a lot of them will be more in the base station area.

By the way, Dan, your discussion about WiMAX -- WiFi phones is also very important.

There's a lot of discussion in the last two days about a lot more phones that have WiFi in there.

That will also increase the demand for HBT.

So, although the HBT right now we do expect to be static, kind of stable, there are some elements that can change the whole equation.

As you well know, in high-tech sometimes a new cooler application comes in and (inaudible).

So, I still think in a year or two the demand for the HBT will be much higher than people expect.

Thank you.

Thank you.

At this time there are no further questions.

Gentlemen, do you have any closing comments?

No, I think -- thank you for joining us this afternoon.

We are looking forward to see you updated on our progress next time.

Bye-bye.

Thank you.