Kopin Corp (KOPN) 2009 Q2 法說會逐字稿

Good day and welcome to Kopin Corporation's Second Quarter 2009 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You may access an archived version of the call on Kopin's website at www.kopin.com.

There will be an opportunity for questions after the prepared remarks.

(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 now like to turn the call over to Mr.

Sneider.

Please go ahead, sir.

Thank you and good afternoon, everyone.

I'll begin today's call by taking you through our Q2 2009 financial results.

John will then discuss our business highlights and our strategy after which we will take your questions.

Before we begin, let me remind everyone that during today's call taking place on Tuesday, August 4th of 2009, we will be making forward-looking statements as defined in the Private Securities Litigation 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 of our CyberDisplay and III-V products, market conditions, foreign currency exchange rates, funding for US Military programs and other factors discussed in our most recent annual report on Form 10-K and our most recent and our most recent quarterly report on Form 10-Q and other documents filed with the Securities and Exchange Commission.

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

Starting with our financial highlights, total revenue for the second quarter of 2009 were $28.2 million, up 9% from the comparable period in 2008, and 31% higher on a sequential basis.

By product line CyberDisplay revenues rose approximately 31% year-over-year and 22% sequentially to $17.9 million.

Sales of our display products for military applications drove the growth in our display business.

Revenue from military products increased to $13.7 million, up 104% from Q2 of 2008 and 21% from the first quarter of this year.

For the six months ended June 27th, 2009 sales of our display products for military applications was approximately $25 million as compared to $14 million for the first six months of 2008, a 79% increase.

Reflecting our previously announced strategy of de-emphasizing low and mid-range digital still cameras in favor of higher value applications, display sales from consumer electronic applications were $2.1 million in Q2, down roughly 45% from the same period in 2008 and 5% sequentially.

For the six months ended June 27, 2009 sales of our display products for the consumer electronic applications was down 57% to $4.3 million.

The effects of the macroeconomic climate on the consumer electronic market continued to affect the sales of our video eyewear products.

Revenue for eyewear applications was $0.3 million for the second quarter as compared to $1.6 million a year earlier and $0.4 million for the first quarter of this year.

For the six months ended June 27th, 2009 sales of our display products for eyewear applications was $0.7 million as compared to $3.2 million for the first six months of 2008.

III-V product revenues rebounded from the first quarter, improving by 51% to $10.4 million.

Although III-V revenues were off about 15% from Q2 of 2008.

The sequential increase in revenue is an encouraging sign that reflects momentum in certain segments of the wireless market, namely Smart Phones and other multi media mobile devices.

III-V revenues were $17.2 million for the first six months ended June 27, 2009 as compared to $24.3 million for the same period in 2008.

Our strategy on focusing on higher value applications continues to result in improved manufacturing efficiencies.

Gross margins for the second quarter were 26% of net product revenues compared with 23% of the second quarter of 2008 and 29% in the first quarter of this year.

The year-over-year increase is attributable to sales mix, specifically the increases in military sales.

The sequential decline is attributable to higher material costs in the second quarter resulting from the re-design of certain military products.

On a six month to six month comparison gross margins are up about 300 basis points as a result of the increase in sales and displays for military products.

On the expense side research and development expenses were $3.8 million, or 13% of second quarter revenues compared to $3.8 million or approximately 15% of revenues for the second quarter of 2008.

Selling, general and administrative expenses in Q2 of 2009 were $2.6 million, or approximately 9% of revenue compared with $5.1 million or approximately 20% of revenue in the second quarter of 2008.

Bad debt expense was $1.5 million lower in Q2 2009 as compared to Q2 2008.

The reduction in the allowance for bad debt is due to a reduction in receivables from KTC.

When KTC experienced liquidity problems in 2008 we established a reserve for their net receivable to us.

Subsequently, the net receivable has been reduced.

In addition, professional fees were $0.4 million lower in Q2 2009 compared with Q2 2008.

Turning to the bottom line, net income for the second quarter was $3.7 million, or $0.05 per diluted share based on 67.5 million weighted average shares outstanding.

This compares with a net loss of $1.7 million, or $0.02 per diluted share, for the second quarter of 2008 based on $67.7 million weighted average shares outstanding.

Year-to-date income is $5.6 million as compared to a loss of $0.7 million in 2008.

EPS on a fully diluted basis was $0.08 per share for the first six months of 2009 as compared to a loss of $0.01 per share for 2008.

Financial results for the three months ended June 27th, 2009 include a $0.7 million loss related to foreign currency fluctuation and a $1.5 million gain from the sale of certain patents that we no longer use.

Comparable 2008 quarter results include an impairment charge of $0.7 million related to our equity investment in a non-marketable security and a gain of $0.4 million from foreign currency fluctuations.

Year-to-date we have received $4.1 million from the sale of patents we no longer use.

Cash and marketable securities at June 27th, 2009 increased to $105.8 million from $100 million at the end of 2008.

The $5.8 million increase is the net of $12.2 million of cash generated from operating activity less $0.5 million of capital expenditures and $5.3 million from the repurchase of our stock.

We continue to have no long-term debt and we continue to expect capital expenditures for 2009 to be in the range of $4 million to $8 million.

Accounts receivables decreased to $15.9 million at June 27, 2009 from $19.6 million at December 27th, 2008.

Inventory was $12.8 million at December 27, 2009 as compared to $13.3 million at the end of the year.

Depreciation and amortization for the first six months of 2009 was $3 million compared to $2.7 million for the same period in 2008.

To bring you up to date on our $15 million stock buyback plan, during the second quarter we purchased 1.5 million shares of our common stock for approximately $4.4 million.

Year-to-date we have repurchased approximately 2 million shares for $5.7 million.

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

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

We also announced an increase in our ownership of KTC, which John will discuss shortly.

We anticipate consolidating KTC in our future reporting.

We are maintaining the guidance that we previously provided in our first quarter of 2009 news release and conference.

That is we expect military display revenues to continue to grow in fiscal 2009, while sales of our commercial display products will decline as a result of our previously announced strategy.

We expect 2009 revenues to be in the range of $90 million to $110 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.

Let me begin by saying I am pleased with the strong performance we delivered in the second quarter, particularly in what has been a challenging global business environment.

In addition to being up 9% year-over-year, Q2 revenue increased 31% sequentially.

This growth was driven by military display products as well as the III-V product line.

The combination of these results enabled us to deliver a net income of $3.7 million in Q2, our fourth consecutive quarter of profitability.

This is a very good achievement in view of the deep global recessions during this time period.

I have just returned from a trip to Asia where the talk is of a V shaped recovery occurring in Taiwan and China.

We shall see -- we shall have to wait and see whether it is true but it is good to hear some encouraging economic news for a change.

While overseas I met with a number of current and prospective customers and with several of our manufacturing clients.

Along the way I had the unique opportunity to preview a number of remarkable new mobile devices that are now in development, as well as learn about several breakthrough products for the consumer industrial products area that we will be hearing more in the quarters ahead.

One thing many of these new products have in common is Kopin technology.

In 1990 -- in the 1980's we pioneered the ability to manipulate compounds at the atomic level to produce unique semiconductor based products that are small, fast, strong and power efficient.

Nearly 25 years later Kopin continues to lead the market with innovative technologies we are transforming the way information is shared in today's high speed mobile world.

Yet while the end users see the finished product, be that cell phone, a Smart Phone, a thermal weapon site, a video eyewear for it often goes unnoticed is a skill required to engineer what powers those products.

For example, our uniquely designed HBT transistors enabled customers to design integrated circuits that have excellent sensitivity, improved linearity, greater output power by maintaining bandwidth, efficiency and noise characteristics.

In CyberDisplay our technical advances enable us to reduce power consumption of normally power hungry high resolution XGA and XVGA LCDs to less than 30 milliwatts at full video rates.

This is actually a very important innovation since our displays are targeted for mobile applications of which power consumption is a critical differentiation.

Our achievements at that rate result in continued commitments to enhance our manufacturing know how and supply technical expertise.

The fruits of these efforts are seeing our products and the growth of our patent portfolio.

This strength differentiates Kopin.

We have been successfully executing our strategy to drive values for our customers.

Now let me briefly discuss performance of our product line beginning with CyberDisplays.

As Rich noted, display revenue increased approximately 31% on the second quarter of 2008 reflecting our continued ramping up of our products in the US Army multi year thermal weapon site programs.

At $13.7 million revenue from display applications increased more than 100% from the same period in 2008.

Virtual revenue now accounts for approximately 77% of total display revenue for the quarter compared with 49% for the second quarter of 2008.

We expect our military display products to [garner] further momentum as the thermal weapons site program continues its ramp and our products are integrated into other weapons systems under development.

The performance of our military display program is a direct result of aggressive strategic investments we are making to enhance the performance, efficiency and manufacturing capacity of our CyberDisplay product line.

As we note in our Release, our gross margins improved 300 basis points or 23% a year earlier.

We believe these not only reinforce the value of our investment we have made, but also validate our strategy to focus on higher value applications.

Kopin's proven ability as the display supplier for mission critical weapon systems has helped us to build new relationships in industry leading technology partners.

A prime example is our investment in the new Golden-i concept, a revolutionary multimedia asset with the potential to transform portable computing for military, industrial and high end consumer products.

Weighing only three ounces, Golden-i features a virtual 15-inch SVGA resolution display image and natural speech recognition interface.

It is the world's first wireless voice command controlled hands free micro display system as initially targeted for industrial market.

We are excited to have been working closely with our strategic business partners including Microsoft, Motorola, Nuance Communications and Texas Instruments as we begin Golden-i's field testing.

Thus far the feedback from our Golden-i concept product has been outstanding.

The product concept was debuted in Las Vegas in FIATECH Conference in last April and since been demonstrated at two Microsoft technology conferences in May and July.

Microsoft now plans to demonstrate Golden-i demonstration units in several more new conferences coming up.

These include the ARM Process Partner conference later on this month, the Embedded System Conference in Boston and the Tech Ed Conference in Berlin as well as the Professional Developer Conference in Los Angeles.

We are very excited about our progress so far has been made and we look forward to a long and rewarding relationship with those outstanding companies.

On the eyewear front, our revenue are off significantly from a year ago but, given the current economic slowdown, it is not unexpected.

Since our customers, current customers, tend to be small start-up companies, many are still feeling the effect of a chilly credit climate.

They continue to work to improve their working capital issues.

However, my recent trip to Asia suggests a revival of eyewear business is likely to happen soon.

Turning to III-V, we are very pleased with the 50% plus percent sequential increase in product revenue in Q2, perhaps signaling that the recession is beginning to ease.

We expect that demand will continue to improve in the second half of this year.

Businesses are strengthening as strong -- as new headsets ramping production.

Smart phones and other wireless departments or devices are growing in popularity and our integrated circuit panel is gaining market share.

Clearly the wireless industry in migration 3G is benefiting our customers.

A 3G handset can require as many as four power amps per phone compared to one or two power amps in the conventional 2G phones.

Hence, Smart phone demand is benefiting all of us.

Wireless connectivity is a vital part of communication landscape and our III-V technology is integral to the success of this rapidly growing market.

To support our III-V program as we move forward, we have entered into agreement to increase our investment in our Taiwan based wafer engineering manufacturing partner, KTC.

As we announced in our news release, we're investing additional $6.3 million in KTC, which should increase our ownership in the company to approximately 87%.

We believe that by spending our investment will enable us to more efficiently and cost effectively meet the global supply/demands of our integrated circuit partners.

As manufacturing moves from 4 inch to the 6 inch gallium arsenide wafers.

More importantly, by spreading our presence in Asia, we're capitalizing on the demand for Taiwan based high fast growing foundry services, a demand fueled by expanding telecom as well wireless markets.

Before we open the call to Q and A, let me -- allow me to stress a couple of closing comments.

First, our military display of III-V product lines are performing well and we expect them to continue to contribute meaningfully to our results in 2009.

Second, our operational execution and financial strength put Kopin on solid footing for the future.

On the operational front our CyberDisplay in III-V business share a common theme.

We solve complex problems for customers with proprietary, highly engineered solutions.

Our products enable customers to achieve unsurpassed time to market and cost advantages.

Third, the combination of technical expertise and manufacturing skill enable us to achieve and maintain industry leadership in our core market.

And finally, we are committed to maintain our strong financial position, even as we continue to advance aggressively in developing new technologies introducing new products.

We believe our $106 million in cash and marketable securities and no long-term debt reflect a fiscal discipline that should be important to our shareholders, especially in today's uncertain environment.

With that, we are ready for questions, operator.

(Operator Instructions).

Our first question is from Brian Alger with Strata Capital Management.

Nice quarter.

Rich, just a couple of clarifying points, you mentioned the bad debt expense that wasn't present in the quarter.

How shall we think about SG&A going forward?

Is that going to come back up into the low fours or now that issue with the customer is resolved, should it stay down here?

No essentially there was about a $500,000 credit in SG&A expense so that would normally bring it up to a level of about 3.1, which is probably the more apples to apples number and then again, that was even a little low for the quarter but -- so somewhere around III-V is really kind of the way you should be thinking about it.

Okay so we got a little bit of a one-time benefit this quarter just as it turned out on the SG&A line then.

That's correct.

Okay great.

And then, in looking at the III-V business obviously a fantastic rebound sequentially, and looking at your primary customers there, you know, certainly their revenues didn't jump quite that much, although they had nice quarters.

Do you think the inventory restocking at the customers is complete at this point or do you think there's further restocking to be had in the third quarter?

Well, yes this is John Fan speaking.

I think that as the business is coming along we are also adding new customers so we believe that the growth will continue.

Okay so I'll ask the question a different way then, John.

How much of the growth this past quarter came from new customer revenues versus existing customers, in III-V?

I probably should not break it down but we do have new customers coming up.

Okay fair enough.

And then just one final one, the consolidation of the new business, what shall we think of that in terms of net effect on the operating profit line?

Is that going to be accretive or dilutive to the net operating profit line?

For the -- for 2009 it will be little bit plus or minus $250,000.

Okay so de minimis either way?

It's de minimis either way for 2009.

Okay great.

Thanks, guys.

(Operator Instructions).

[Jeffrey Britt] with Janney Montgomery Scott.

One question, ITT reported their night vision goggle division was down 2% for the quarter and I know you guys have been shipping to them.

They did say they had a two-year backlog and they're at full capacity.

Were you flat with them this quarter?

That was the first question.

Actually we are still in the qualification process with ITT so we're still at low volumes with ITT during this year.

So, you know, we're not -- it's just not a sizable piece of our military business at this point so their results really are not reflected in ours.

Okay and the second question on the Golden-i how do you plan to market that to Smart phone vendors?

Would that be like through Motorola or and would they have an exclusive or could you sell to say like the Apple Store or on consignment?

Do you have any thoughts there yet?

Yes this is John Fan speaking.

It's a very good question.

Right now the Golden-i has been demonstrated in various conferences.

The response is very good.

In fact, the business is mostly working out by all our business partners.

It most likely will not be marketed by us directly.

It will be powered by us but marketed by our partners and you will be industrialists go first so it's not going to, for instance, a Smart phone first.

It will be industrial application first and military followed by consumers.

(Operator Instructions).

Rajvindra Gill, Needham & Company.

Thank you for taking my call and congrats on the good quarter.

I just wanted to talk a little bit about the competitive landscape, what you're seeing across your product lines, if you could give us a sense in terms of some of the win/loss metrics that would be very helpful.

You're talking about both product lines?

Yes.

I will make a few comments but Rich probably can also make it.

On the III-V product lines, as you well know, we have about a third of the market share in the world so order from us about a third of our phones are made with our III-V product.

We aim on the high end side, the Smart phone side, and there are other guys, especially from Taiwan for instance, that they are continuously coming out with product but we have all the Tier One customers and also the high end ones.

So, like everything else, we're watching them very closely and our activities with KTC reflects that.

We want to be able to have a very strong base in Asia but that's one.

I hope I answered your question.

But, as you well know, the Smart phone tells -- requires more and more advanced [EPI] products as the transistors and I think it lends to us our strengths so we are very optimistic about there.

On the display side, the military side, on the thermal gun sites and you know there are three customers we have and they are the three ones that qualify to ship to the government, Raytheon, BAE and DRS.

Clearly we provide to them solely and there, again, other guys try to get in there but in military products design cycle is so long so we continue to improve our products and try to be sure that our position there will remain the same.

On the consumer side, on the camera actually in some way camera they have some competition there.

The competition is not really that many.

There is only right now reduced onto one they have from Asia but we took a strategic focus moving away from that because the market -- we felt the market margins is still too low.

If you want to get in there we probably can get a very high percentage but we don't want to.

On the eyewear the margin is good unfortunately the current suppliers of eyewear are too small and they have cash flow working capital issues but, as I said in my conference call, we see a lot of activity is now in Asia with some new products coming out.

We believe the eyewear will rebound.

Our market share there is probably over 95% so I think we're very, very good shape there.

So, all in all, our market share are good.

Our core markets are good.

The recession may be bad for everybody but it affects us less than our competitors.

We have a lot of cash.

Customers love us because they know we're here to stay.

We have all the technology so we are educating our market share so the competitive -- competition is always there but I think we are in a pretty good slope right now.

Okay great thank you and if you could perhaps discuss the gross margin trajectory and you improved the margins pretty significantly sequentially.

How do you look at gross margins, especially with going forward compared to the product mix of other companies?

Rich, you want to make a comment down there?

Well, the ultimate goal is still to get into the mid thirties and our military products provide margins that are in the mid to high 40s.

HBT is a low product -- profit margin, gross profit margin but, as we've said repeatedly, there's not a whole lot between gross and net so it's still a very good business at the bottom line.

The eyewear, small amounts at this point, but that is projected to have mid 30 gross margins, so it always depends on the sales mix ultimately.

We expect military to continue to grow.

Assuming the military grows at a faster rate than the HBT, then our weighted average gross margin will improve during the rest of the year.

To the extent HBT has a stronger rebound than maybe some people expect, then maybe gross margins won't grow as quickly.

So I mean going into the down a little deeper, digging a little deeper, if you look at the kind of the CyberDisplay product business, what product mix do you expect that as a percentage of sales going forward and what's the revenue ramp, given the fact that you have TWS production is coming on line in '09, how do you see that business progressing throughout the year and going into 2010?

Well, we always just give gross product revenue guidance or total revenue guidance or total revenue guidance of $90 million to $110 million.

We never really get into the individual component but I mean we can tell you historically that display revenues has run about 60% to 65% of the total revenue.

Okay and if you could give me or at least just size up the opportunity for the Golden-i?

I mean, how are you looking at that in terms of the total addressable market?

What type of perhaps a market share or gross margin metrics on that particular business?

Yes I will make a comment there.

I think we should not anticipate a lot of top line revenue from Golden-i even next year.

Right now it's being field testing.

The exciting thing is our partners whether it be at Microsoft or Motorola or Nuance, they consider this a total -- it's a very disruptive product and it has many applications.

In fact our issue is really to work with our partner to focus on near term applications.

I mean our feeling right now the near term is the industrial application and even that our partners identify very huge opportunities and now, of course, the military is a hands free -- is basically hands free cell phone/internet computer device that allows you to do, including all the cloud computing, and that's why Microsoft, especially Microsoft, is showing this in many of their conferences.

They say this is the what exactly that hands free computing should be, so however we are taking a very modest attitude in the sense of revenue for next year, although we think potentially it can very large and that's why all those top tier guys are very much involved with us and have been involved for quite a while.

Okay great and the last question for me in terms of usages of cash, I know you've mentioned you bought a decent amount of shares this quarter.

Should we expect that to continue going forward as the primary usage of cash or is there other strategic alternatives you're looking at?

Right now there are -- you know, we're always inundated with strategic alternatives, as you say, from various folks but right now stock buyback is probably the primary use of cash other than CapEx.

The next question is a follow-up from Brian Alger with Strata Capital Management.

Just a couple quick things -- John, you mentioned the Golden-i isn't expected to generate significant revenues even through next year.

What's it going to cost us in terms of R&D?

In the several millions.

Many of the R&D is actually share work with our partners and we're providing several things.

We are preferring that the units were designed.

We have some over riding software and it's worth the display but a lot of parts are Nuance providing the voice, the operation system is Microsoft CE and many of the industrial designs, other stuff, of course, plus people like Motorola is helping us and TI provides the processors so it is a share activities by many big players so various (inaudible) and it's only --

It is somewhat difficult to answer the question, Brian, because we are field testing it so, you know, we think we're close but the results from the field test will tell us whether we are or whether we have to do another reiteration or two reiterations.

yes and it's not clear exactly which part needs to be worked on so, therefore, which part has to be shared.

Well, how shall we think about it?

Is this something where Kopin is from time to time allocating a couple of R&D engineers to it or are there people dedicated full time to it or how does it work?

A, it will be a group that has been working here dedicated for last few years so it's already embedded in there, so it's nothing extra.

It's already embedded in the system, for several last two years in that group there.

Okay and just shifting gears completely, the consolidation of the subsidiary, you guys took care of that post quarter close, correct?

That's correct.

The closing occurred in July.

Okay so what's our current cash balance, Rich?

As of July?

Yes at post consolidation.

Well, we don't disclose that.

We've never disclosed a post number.

In some respects it's kind of odd though if you think about it because you're essentially transferring the cash from one entity to another and then you're going to consolidate that entity and so the cash pretty much stays on the balance sheet.

So net, net we don't see much change in terms of Kopin cash per share?

That's correct.

Okay.

I just wanted to make sure I was thinking about it appropriately.

Yes.

Okay, guys, thanks.

At this time we have reached the end of the Q and A session.

I will now turn the conference back over to Dr.

Fan for any closing or additional remarks.

Yes thank you very much for joining us this afternoon and we'll look forward to keeping you informed and updated on our progress.

Have a good week.

Thank you.

And that concludes our conference call.

Thank you for joining us today.