Kopin Corp (KOPN) 2008 Q4 法說會逐字稿

Good day, and welcome to the Kopin Corporation's fourth quarter 2008 and full-year 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You may access an archived version of the call on Kopin's website at www.kopin.com.

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

John C.C.

Fan, and Chief Financial Officer, Mr.

Richard Sneider.

(OPERATOR INSTRUCTIONS.)

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

Sneider.

Please go ahead, sir.

Thank you and good afternoon, everyone, and thanks for joining us.

I'll begin today's call by taking you through our Q4 2008 financial results.

John will discuss our financial and operational highlights 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, March 5th, 2008 -- 2009, excuse me, 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 qualification of our CyberDisplay and III-V products, market conditions, foreign currency exchange rate, the availability of raw materials and other factors discussed in our most recent annual filing on form 10K, and our most recent quarterly report on form 10Q, 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 2008 increased to $29.1 million.

CyberDisplay revenues grew 9% from Q4 2007 to $18.2 million for Q4 of 2008.

This was driven by significantly higher revenues from our military display products.

III-V revenue decreased approximately 11% to $10.9 million in the fourth quarter of 2008, reflecting the effects of the global economic slowdown on the wireless handset market.

Looking at our CyberDisplay revenue by product category, sales of our Display products for military applications increased approximately 150% to $12.3 million in Q4 of 2008 from $4.9 million in the same period of 2007.

Display sales from consumer electronic applications declined to $3.3 million in Q4 of 2008 from $8.7 million in Q4 of 2007, primarily as a result of our strategy of deemphasizing lower margin consumer electronics, including low and mid-range digital still cameras.

Sales of our Display products for eyewear applications decreased $1.1 million to $0.8 million in Q4 of 2008 from $1.9 million in Q4 of 2007; again, primarily as a result of effects of the global economic downturn on sales in consumer electronics.

Research and development revenues were $1.8 million in Q4 of 2008, compared with $1.3 million in Q4 of 2007, reflecting increasing participation in emerging military programs incorporating our Display technology.

Gross margin for Q4 2008 was 27.8% compared to 20% for the fourth quarter of 2007.

The increase in gross margin primarily resulted from the higher sales of higher margin products.

Research and development expenses were $3.1 million, or approximately 11% of fourth quarter revenue.

This compared with R&D expenses of $3.3 million, or approximately 11% of revenues for the fourth quarter of 2007.

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

Selling, general and administrative expenses in Q4 of 2008 were $3.1 million, or approximately 11% of revenues, compared with $4.4 million, or roughly 15% of revenues in the fourth quarter of 2007.

In comparing Q4 of 2008 and Q4 of 2007, the Q4 2007 SG&A expenses included $400,000 for professional fees associated with the stock option practice investigation and the restatement of our historical financial statements.

In addition, bad debt expense for Q4 2008 was $400,000 lower in Q4 2007.

Our net income for the fourth quarter of 2008 was $1.8 million, or $0.03 per diluted share, based on 68.6 million weighted average common shares outstanding.

This compares with net income of $0.3 million, or essentially breakeven for the fourth quarter of 2007, based on 67.7 million weighted average common shares outstanding.

Net income for the fourth quarter of 2008 included the loss of $1.2 million associated with the impairment of loans to KTC and the write-down of certain corporate debt securities of $0.8 million, which I will discuss shortly.

For the year ended December 27th, 2008, total revenues increased 17% to $114.8 million as compared to total revenues of $98.1 million for 2007.

On a segment basis, Kopin US and Kowon, our South Korean subsidiary, accounted for $109.2 million and $5.6 million of 2008 revenues, respectively, as compared to $92.6 million and $5.5 million for 2007.

R&D revenues for 2008 were up approximately $3.3 million over 2007.

In addition to an increase in new programs, you may recall in the first quarter we noted that the initial shipments of a military program were classified as R&D revenues.

In subsequent quarters, those revenues were classified as product after the units had been qualified.

The 2008 10% customers were Skyworks Solutions at 29%, and DRS Technologies at 19%.

Research and development expenses were $16 million as compared to $11.5 million for 2007.

The increase relates to the previous comment regarding R&D revenue.

The cost of units in the military program are included in R&D expense in the first quarter.

Selling, general and administrative expenses in 2008 were approximately $16 million compared to $18 million for 2007.

The 2007 SG&A expenses included $1.8 million for professional fees associated with the stock option practice investigation and restatement of our historical financial statements.

We had several and frequently occurring items recorded in 2008.

First, we sold our investment in Kenet and we recorded a loss on the sale of approximately $2.7 million.

We own approximately $16 million in corporate debt securities, primarily bank notes.

For 2008 we recorded an impairment loss of approximately $1.3 million on these securities, because we determined they were other than temporarily impaired.

During 2008 we loaned $2 million to KTC, our Taiwanese III-V OEM who we own approximately 4% of.

This loan is collateralized by liens on equipment and buildings.

Due to the current economic situation, we fully reserved against these loans.

For financial reporting purposes, approximately $1.2 million of the $2 million loss is shown as a loan loss reserve, and $800,000 is included in equity losses of affiliates.

Finally, we recorded a $2.3 million translation gain on cash balances maintained at our Korean subsidiary.

The aggregate effect of these items was to reduce net income by $3.7 million.

Net income for 2008 was $2.6 million, or $0.04 per diluted share, compared with a net loss of $6.6 million or $0.10 per basic share for the same period of 2007.

By operating segment in 2008, Kopin US was breakeven, while Kowon reported a net income of $2.6 million.

For the comparable period in 2007, Kopin US reported a loss of $7.8 million, while Kowon reported a net income of $1.2 million.

Turning to our balance sheet.

Cash and marketable securities at December 27, 2008 increased to $100 million from $93.3 million at the end of 2007.

The $6.7 million increase is the net of $11.7 million of cash generated from operating activities and $2.7 million from the sale of our Kenet investment, less the $2 million of loans we made to KTC, $3.3 million of capital expenditures, and a loss of $1.5 million on the exchange rate of our cash holdings at our Korean subsidiary.

We continue to have no long-term debt.

Accounts receivable increased to $19.6 million as of the end of the year 2008 from $15.1 million at December 29th, 2007, primarily due to the rapid increase in military display shipments.

Inventory at year-end was $13.3 million versus $16.7 million at December 29th, 2007.

Depreciation and amortization was $5.2 million for 2008, compared with $3.7 million for 2007.

As previously announced, in December of 2008 our Board of Directors approved a share repurchase program authorizing the Company to purchase up to $15 million of its common stock.

Kopin plans to buy shares in the open market or through private negotiation transactions from time to time, subject to market conditions and other factors and in compliance with the applicable legal requirements.

The plan does not obligation us to acquire any particular amount of stock and can be suspended at any time at the Company's sole discretion.

We fully recognize that, in is difficult in this macroeconomic environment, our strong cash position is key to competitive advantage.

So, we want to assure shareholders that we will implement this repurchase program judiciously.

Turning to our guidance, we expect our military revenue to continue to grow in fiscal 2009, and that sales of our commercial and industrial will decline as a result of the weakness in the global economy.

Currently, the degree of decline in sales of our commercial and industrial products is difficult to forecast and, as a result, we expect to provide full-year guidance later in the year.

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

Thank you, Rich.

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

Before I review our CyberDisplay and III-V business in more depth, let me briefly discuss our financial performance in 2008.

First, we delivered record annual revenue of nearly $115 million fueled by the outstanding performance of our military CyberDisplay products.

As Rich mentioned, our gross margin increased 1100 basis points, reflecting our emphasis on higher value applications suited for our advanced display systems.

Tight expense controls throughout the year yielded strong operating income of $4.9 million, and we maintain a healthy balance sheet, ending 2008 with $100 million in cash and securities, and no debt.

Now, let's turn to our CyberDisplay business.

Our military product continued to be the real growth engine for Kopin.

Military display revenue was up more than 130% for the year and 150% for the fourth quarter, driven by active participation in production programs for thermal weapon sights and enhanced night vision goggles.

These systems are continuing to ramp in 2009.

We believe that enhancing the capability of our soldiers will continue to be an important military objective going forward.

I can't overstate the importance of our status as the supplier of microdisplay systems for those vital military programs.

We achieved this position after vigorous qualification processes that establish our CyberDisplay products to consistently meet the Department of Defense settings, technical specification and performance standards.

As a result, we believe that Thermal Weapon Sight II, Thermal Weapon Sight Bridge, and the Enhanced Night Vision Goggle programs are just the beginning of our opportunity in this growing area.

Our Military Display business benefited from two important events in 2008.

The first was the installation of our 8-inch CyberDisplay manufacturing line, which results in considerable enhancements in both production efficiency and display performance as we go forward.

The second major event was the completion of a new 3,000 square foot clean room dedicated to the assembly of particle-free, high-level vision systems.

This facility is an essential part of our military manufacturing capability.

Based on our success with the military [progression] programs, we continue to advance aggressively our microdisplay technology for the future weapons and the equipment now being designed and developed for our US troops.

For example, we received the first of a planned three-phase $4.2 million US Army contract award to accelerate the manufacturing capability of our CyberDisplay SXGA microdisplay.

This full-color SXGA, which is 1280 x 1024 full-color pixel, the world's highest resolution liquid crystal microdisplay, is now being designed for the Army's next generation night vision systems.

This new 0.97-inch diagonal LCD will provide resolution contrast necessary to capture images with minute details.

It will increase a soldier's situation awareness through its added capabilities, such as displaying color maps, color [symbology] and [sensor-infused] images.

But our research and next generation military display does not end there.

In December we won another three-year -- a $3.1 million contract to develop even higher resolution and higher density display for use in future vision systems, including integrating night and day night vision systems sights, as well as solid state imagining intensifiers.

This program provides the funding for multiple military agencies for Kopin to expand that boundary of microdisplay resolutions and performance by developing an LCD with 2048 by 2048 microchrome pixels resolutions.

And related resolutions interface will be a 2048 by 2048 full-color resolution in a less than 1-inch diagonal form factor.

This will represent an important element of the strategic research and development initiatives we have undertaken for over the last decade.

So, for military and commercial applications, the market trends favor microdisplay with higher resolution and density, lower power consumption and better display performances.

Our initiatives are already resulting in innovations, including low-voltage architecture, integrated heater, smaller pixel geometry and our unique ruggedized LCD processes.

We will reach this 2048 x 2048 color pixel resolution density are over a decade-long quest for vision system that replicates a human eye capability with heat.

We're optimistic that many of our recent technical advances will enable us to achieve this almost impossible dream which has yet to be achieved in the world.

From military products, let me turn to the commercial side of our business, our display business.

Display sales for consumer electronics declined both in the fourth quarter and full-year 2008, primarily reflecting our decision to deemphasize our lower-end digital still cameras and camcorders.

Display for eyewear applications remained essentially flat for whole year 2008, but decreased approximately 58% in the fourth quarter.

This decrease largely reflects the effect of a sharp economic slowdown on consumer electronics sales.

In terms of our III-V business, revenue for our III-V products were up year-over-year, but down for our fourth quarter, again reflecting the effect of the economic environment.

As with our commercial CyberDisplay business, the economic situation makes the near-term outlook of III-V difficult to forecast.

But we are continuing to work very closely with our tier one customers to provide the best III-V products for next generation wireless handsets.

During this economic slowdown we are (inaudible) shift to more advanced handsets, 3G and even 4G handsets, especially in China.

We continue to believe that our unrivaled wafer and manufacturing experience and strong experience and expertise in III-V technology, such as the indium gallium phosphide, represent an important advantage for Kopin as the new handset standards are being installed worldwide.

Wireless handsets are becoming ubiquitous and an indispensible part of our everyday lives.

They are here to stay.

Our III-V technology and products are essential for the upcoming generation of advanced handsets, and also those handsets on the drawing board.

We expect to remain the leading supplier to this market for a long time to come.

Let's close by saying that we are very pleased to have achieved so many of our objectives in 2008.

After a year of record revenue and strong financial performance, we will maintain our strategic focus and advantage, and we are encouraged by the market opportunities ahead for us.

Despite a global economic downturn, our products and technology are dominate in our markets and are positioned well to weather the current slowdown.

We look forward to building on our momentum that we have generated with our military display products and to continue to focus diligently on rapid innovations and new product development.

Our manufacturing expertise, our solid base of tier one customers, our strong balance sheet and outstanding technologies provide us with the ability to capture our new opportunities, to successfully navigate through this challenging environment, and to emerge as an even stronger company.

With that, we're ready for your questions.

Operator?

Thank you.

(OPERATOR INSTRUCTIONS.) Our first question comes from the line of Brian Alger with Strata Capital Management.

Your line is now open.

You may proceed with your question.

Good afternoon, guys.

Hi, Brian.

Well, a number of questions here.

I'll just crank through them.

Can you refresh things for me here, Rich, in terms of where is the cash breakeven point for the III-V business?

From a revenue standpoint?

Yes.

Quarterly or annually.

Historically, it's been somewhere in the neighborhood of around $12 million; $10 million to $12 million.

Okay.

So, to the extent that the business continues to be under pressure with handsets and whatnot being soft, is that something you guys are watching, where you might be cutting back some expenditures in the future?

Or how should we think about that?

Yes.

I mean, I think we're doing what everybody else is probably doing in the industry as far as headcount reductions and so on and so forth.

Okay.

Fair enough.

Over to the military.

Obviously, that's a big highlight right now.

Great run rate in Q4.

You aren't giving guidance on the full year, but can you maybe tell us how things are going here in the first quarter?

Is it on a similar run rate to Q4?

Is it faster?

Based on where the projects are, should we anticipate that it'll maintain that pace or accelerate through the year?

Give us some color.

The military should accelerate throughout the year.

And in the first quarter, is it maintaining the pace of Q4?

From a product revenue standpoint, yes.

I -- from the product revenue standpoint, yes.

I'm not sure honestly about the contract revenue.

I'd have to take a look at that.

But from the actual shipment of units, yes.

Okay.

I think the momentum of the military is continuing right now.

Right.

So, that's obviously accelerating.

And you talked about getting out of the low end of the camera business.

What kind of a baseline worst case, I mean, is (inaudible), how we should be thinking about what consumer electronics could go to, or is there some baseline business there that we should maybe (inaudible) going forward?

Well, I think we have some orders in Q1 for some of the consumer electronics and legacy products that we still have.

And I think some of it might spill over to Q2.

We're seeing pushouts in a lot of that, so I'm not really sure if in fact from the pushout in Q1, it's going to be pushing to Q2, or it's ultimately just going to end up getting cancelled (inaudible) with the whole global economy goes.

So at this point, it's really hard to tell you whether it's going to be a -- for instance, a zero in Q2 or we're actually going to have some sales.

Right now, all we're doing is being told to push stuff out.

And is that stuff -- the business itself is probably running at a loss, but the products themselves still carry some margin when you sell them, right?

Not much.

Okay.

You guys are focused on the cash, obviously.

With the military business ramping up, do you expect to exit the year at a higher cash level than what you come in with?

Yes.

Okay.

I mean, (inaudible).

One question will be what we do with the cash in the stock buyback.

But right now, the game plan is, yes, to exit with more cash.

Alright.

I'll let other people chime in.

Thanks.

Thank you.

Our next question comes from the line of Edwin Lyon with Lyon Investment Management.

Your line is now open.

You may proceed.

Yes.

My question is, with what I understand is around a 24% holding of the Chinese operation with LEDs over there, how is that operation going?

For example, what's the total revenues of that operation and are you profitable, or are they profitable?

No.

The investment that you're referring to is [CoBright] and it is not profitable at this time.

And I think that the LED market has been very tough over the last quarter, just like the rest of the consumer market.

Could you give me some idea of the company revenues?

No, not without -- I don't have it off the top of my head.

We will be filing our form 10K the early part of next week and I'll have -- the revenue will be in there.

Okay.

Thanks so much.

Yes.

Thank you.

(OPERATOR INSTRUCTIONS.) At this time we have reached the end of the Q&A session.

I will now turn the conference back over to Dr.

Fan for any closing or additional remarks.

Well, thank you very much for joining us this afternoon.

We look forward to keeping you updated on our progress.

Have a good evening.

Thank you.

Ladies and gentlemen, this does conclude our conference call.

Thank you for joining us today and have a pleasant evening.