Kopin Corp (KOPN) 2008 Q3 法說會逐字稿

Good day, and welcome to the Kopin Corporation's third quarter 2008 financial results conference call.

Today's call is being recorded for internet replay.

You may access an archived version of the call on Kopin's website at www.kopin.com.

A question-and-answer session will take place at the end of the formal presentation.

(OPERATOR INSTRUCTIONS) 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 like -- I would now like to turn the call over to Mr.

Sneider.

Please go ahead, sir.

Thank you.

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

I'll begin today's call by taking you through our Q3 2008 financial results.

John will discuss the operational highlights for the quarter and review our business strategy, after which we will take your questions.

Before we begin, let me remind everyone that during today's call taking place on Thursday, October 30, 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 discussed in our most recent annual report on form 10-K, and our 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 third quarter of 2008 increased 5% year-over-year to a record $30.7 million on a quarterly basis.

CyperDisplay revenue was $18.9 million, up approximately 4% year-over-year, while III-V revenue increased approximately 6% to $11.8 million.

On a reportable segment basis, Kowon sales to external customers were approximately $2 million in the third quarter of 2008, and $1.9 million in the third quarter of 2007.

Kopin US revenues were $28.7 million and $27.4 million for the third quarters of 2008 and 2007, respectively.

Sales of our Display products for the military applications increased to $10.5 million in the third quarter of 2008, from $4.4.

million in the same period of 2007.

Sales from consumer electronic applications declined to $4.8 million from $10 million, primarily as a result of our strategy of lowering sales of our Display products for digital still camera applications.

Research and development revenues were $1.4 million in Q3 of 2008, as compared to $1.6 million in Q3 of 2007.

Gross margin for Q3 2008 was approximately 33.8% compared with 18% for the third quarter 2007.

The increase in gross margin primarily resulted from an increase in the sale of Display products for military and eyewear applications.

Research and development expenses were $4.1 million, or approximately 13% of third quarter revenue.

This compares with $3 million, or approximately 10% of Q3 revenue in 2007.

Third quarter R&D expenses were associated with the development of high resolution displays as well as the development of new III-V products.

We model R&D expenses to be in the range of 15% to 20% of revenue.

Selling, general and administrative expenses in Q3 2008 were $4 million, or approximately 13% of revenue, compared with $4.2 million, or roughly 15% of revenue in the third quarter of 2007.

Essentially, they were flat and within the 12% to 15% of sales that we expect.

Kopin reported net income for the third quarter of 2008 of $1.5 million, or $0.02 per diluted share, based on 68.5 million weighted average common shares outstanding.

This compares with a net loss of $0.4 million, or $0.01 per share for the third quarter of 2007, based on 67.5 million weighted average common shares outstanding.

Net income for the third quarter of 2008 included a write-down of our investment in Kenet of $2 million, a write-down of certain corporate debt securities of $0.5 million, and these were partially offset by a translation and transaction gain of $1.2 million.

A little more detail on these items.

As you may know, several years ago we invested in Kenet, a mixed signal IC company.

In October, Kenet was sold for cash.

The sales proceeds we initially received exceeded our $2 million investment -- exceeded our investment by $2 million.

There is also continuing consideration we may receive consisting of amounts held in escrow, and amounts which may be earned if the sale of Kenet products exceeds certain thresholds over the next couple of years.

Our Q3 net income also reflected $0.5 million of impairment charge on corporate debt investments.

Within our $92 million of cash and marketable securities are approximately $18 million of corporate debt securities, which we are currently -- which are currently rated as investor grade.

However, we determined that the fair market value of approximately $11 million of these securities -- other than temporarily impaired, because they had been in an unrealized loss position for 12 months.

As a result, we recorded an impairment charge of $0.5 million to write these investments down to their prior market value.

Finally, as a result of declining value of the Korean won as compared to the US dollar, our Korean subsidiary recorded $1.2 million foreign exchange gains.

By operating segment in the third quarter of 2008, Kopin US reported net income of $0.4 million, compared with a net loss of $1.3 million for the comparable period of 2007.

Kowon reported a net income of $1.1 million in the third quarter of 2008, compared with net income of $900,000 for the same period of 2007.

For the 9 months ended September 27, 2008, total revenues increased 24% to $85.7 million, compared with $69.2 million for the comparable period of 2007.

Net income through the first 9 months of 2008 was $0.8 million, or $0.01 per diluted share, compared with a net loss of $6.8 million, or $0.10 per share for the same period 2007.

Turning to our balance sheet, cash and marketable securities at December 27, 2008 totaled $92 million, compared with $93.3 million at the end of 2007, and we continue to have no long-term debt.

The (inaudible) increased $18.5 million at September 27, 2008, from $14.2 million at year-end.

The change resulted from increased sales to military and eyewear customers.

Capital expenditures were approximately $2.8 million for the first 9 months of 2008, compared with $5.7 million for the same period.

Depreciation and amortization was $4 million for the 9 months of 2008, compared with $2.6 million for the same period of 2007.

Turning to our guidance, based on current business environment and the economic conditions in our end markets, we continue to expect our full year 2008 revenue guidance to be in the range of $105 million to $115 million.

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

Thank you, Rich.

Good afternoon, everyone, and thank you for joining us on today's conference call.

Before I go to details about CyberDisplay and III-V categories, let me begin with an overview of financial performance in Q3.

First, I am very pleased that we were able to generate record revenue and strong profits in the third quarter, particularly in what is very challenging economic environment.

Just as important, we continue to significantly improve our gross margin.

As Rich had mentioned, gross margin increased 1600 basis points year-over-year to 34%.

This improvement reflects the steps we have taken to focus on markets and product applications where our display technology is a key differentiator.

Clearly, this strategy is beginning to yield measureable results.

Let me first turn to CyberDisplay, which grew modestly in the third quarter 2003 -- 2008.

(inaudible) that we're in the process of deemphasizing the low end of consumer electronics segment.

So, year by year, display growth is not truly a meaningful metric to evaluate our results.

We believe the real story continues to be the growth of our military display revenue, which more than doubled to $10.5 million from $4.4 million in the third quarter of 2007.

As we have mentioned on previous calls, the primary driver behind the $6.1 million increase is the US Army Thermal Weapons Site II program.

Kopin is the primary display supplier for TWS II, in partnership with DRS and BAE Systems.

In addition, we are producing a shipping display for a number of weapons systems in development, including the next generation thermal weapon site, TWS Bridge, and the enhanced Night Vision Goggles Program, ENVG.

Let me point out, as part of our military work, our customers ask us to supply higher level assemblies.

To that end, we have built earlier this year a dedicated 3,000 square foot clean room in Taunton where the work is now taking place.

Our proprietary display (inaudible) the display of choice by our customers, and now, this new facility provides additional differentiation for Kopin.

Given the strength of our customer relations, the skill of our military participation, and the depth of our expertise, we expect sales of our military display products to be strong in 2009 and beyond.

Turning to the commercial side of our display business, we continue to achieve measurable progress in video eyewear segment.

Eyewear display sales have been up modestly in third quarter 2008 to $2.4 million.

For the first 9 months of 2008, eyewear display revenue was up nearly 30% to $5.7 million.

We are seeing an accelerated pace of design activities involving increasing number of large companies.

We continue to believe that video eyewear is the ideal technology to accommodate a new and emerging array of mobile devices.

As with our military display applications, our displays also are ideal for eyewear applications.

As anyone over age 35 knows, the typical screen size of those mobile devices is simply not conducive to browsing the internet, watching video feeds, or working on desktop applications.

Video eyewear provides the features and functionality of a full screen computer screen with the privacy and portability required by today's mobile consumers.

Display revenues for camcorder and digital camera declined more than $5 million in Q3, reflecting our strategy to deemphasize the low end of our consumer electronics segment, and focus on higher value and differentiable opportunities.

III-V product revenue meanwhile increased about 6% for the third quarter and 15% for the first 9 months of this year.

As we noted in today's news release, we have seen a continual migration among our wireless circuit partners to our indium gallium phosphide InGaP power amplifiers.

InGaP is an ideal structure for the performance demands for the new wireless handsets and mobile devices.

Kopin first introduced InGaP HBT 10 years ago, so we're extremely knowledgeable about this technology, and are very well-positioned as the market moves towards InGaP.

Let me close by saying that our strategy of focusing on high value of opportunity is yielding top line growth, improved margins and solid profits.

The global economic climate may be unsettled for the moment, but Kopin is very well-positioned, both financially and operationally, for continued success.

With $92 million in cash, and no long-term debt, we have the financial muscle to continue to profitably grow its business.

By investing in new products that add value for our customers, we extend our competitive advantage.

Innovation is an ongoing focus for our display technology.

We continue to aggressively develop new products for military and commercial applications.

In III-V, we always strive to enhance consistent performance, and we're delighted with the improvements achieved by our new advanced III-V reactors.

Ultimately, the key driver for Kopin's success is the continued growth in demand for light, power-efficient mobile technology that effectively delivers voice, video and data.

Kopin has the technology and products for this mobile (inaudible).

With that, we're ready for your questions.

Operator?

Thank you.

Ladies and gentlemen, at this time, we will conducting a question-and-answer session.

(OPERATOR INSTRUCTIONS) One moment, please, while we poll for questions.

Our first question comes from the line of Timothy Jurgens with CBS Financial Corp.

Please proceed with your question.

I was just wondering with the current cash position and the market outlook, if it wouldn't be wise to have some kind of stock buyback program to basically put a floor on the stock, and give it a better momentum on the upside?

Is there any thought to a stock buyback program of, let's say, $5 million, or something that might add some momentum to the stock?

We always are evaluating stock buybacks and stock buyback programs.

Frankly, I think at least management and ultimately the Board decision, but I think management's perception at this point is that no-one really understands what this economy's going to do next year, and cash is kind of king, and, so, we're going to keep in the bank to weather whatever storm comes our way over the next 12 months.

To the extent there's better visibility, then perhaps we might do something.

I understand that the stock looks attractive at these levels --

Well, it seems to be at an historical low, and some small incremental buyback program, which could be augmented as you gain momentum, and yet have substantial resources to weather, you know, the current storm.

Are you concerned about the election in terms of a large segment of your business in terms of military, because evidently one aspect -- one group will gut the military which is standard.

Is that something that may hold you back?

Well, as far as the military goes, we feel confident looking into 2009, because of the way the appropriations work in Congress -- after 2009, you know, all bets are off.

We really don't know what's going to happen, nor does anyone else.

So, it's really the current economic situation, not necessarily the election, which is driving at least our thought process that we want to keep as much cash as possible.

Okay.

(OPERATOR INSTRUCTIONS) Gentleman, there are no further questions in the queue at this time.

I'd like to hand it back over to you for some closing comments.

Well, I thank you very much for joining us for this conference call, and I hope to talk to you guys next time.

Bye-bye.

Ladies and gentlemen, this does conclude today's teleconference.

Thank you for your participation.

You may disconnect your lines at this time.