Kopin Corp (KOPN) 2009 Q3 法說會逐字稿

Good day and welcome to Kopin Corporation's third quarter 2009 financial results conference call.

Today's call is being recorded for Internet replay.

(Operator Instructions).

You may access an archived version of the call on Kopin's web site at www.Kopin.com.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

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

Sneider.

Please go ahead, sir.

Thank you and good morning everyone, and thank you for joining us.

I'm calling from San Diego, site of this year's AEA Conference, where I am presenting this morning and John is back in his office in Taunton.

I'll begin today's call by taking you through our Q3 2009 financial results.

John will 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 Monday, November 2, 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 for our CyberDisplay and III-V products, market conditions, foreign currency exchange rates, the availability of raw materials and other factors discussed in our most recent annual report on Form 10-Q and our most recent quarterly report on Form 10-K 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 revenues for the third quarter of 2009 were $32 million, up 4% from the comparable period in 2008 and 13% higher on a sequential basis.

Year-to-date total revenues were $81.7 million as compared to $85.7 million in 2008.

Display revenues declined approximately 4% or $1.2 million to $17.7 million from the same period in 2008 and remained basically flat on a sequential basis.

Year-to-date display revenues are $50.2 million as compared to $49.6 million in 2008.

Revenues from the sale of military display products was $13.2 million for the quarter.

This is an increase of approximately $2.7 million from the same period in 2008, and roughly the same as Q2 of 2009.

Year-to-date sales of military products were $38.2 million as compared to $24.5 million in 2008, a 56% increase.

In keeping with our previously announced strategy and reflecting global economy, sales of our display products for consumer electronic applications were $2.9 million in Q3, down from $4.8 million for the same period in 2008.

Year-to-date sales were $7.2 million as compared to $14.8 million in 2008.

III-V products accounted for $14.3 million in the quarter as compared to $11.8 million, an increase of 21% from the third quarter of 2008 and 38% increase sequentially.

We believe the improvement is primarily a result of the adoption of smartphones which require more of our HBT transistors.

The incremental revenue from the KTC acquisition which I will discuss shortly, was approximately $500,000.

Year to date, III-V revenue is $31.5 million as compared to $36.1 million for 2008.

The decrease is primarily attributable to the severe drop in Q1 of this year.

Gross margin for the third quarter was $32.6 million(Sic-see press release) of net product revenues compared with 26% in Q2 of this year.

The sequential improvement reflects the higher utilization of our III-V operations.

On a year-to-date basis, the slight decline in gross margin is attributable to III-V products being a greater percentage of the overall sales mix.

Our military products have higher gross margins than our III-V products which is why our year-to-date gross margin percentages have increased to 29.3 as compared to 27.4 for 2008.

R&D expenses were $3.6 million or approximately 11% of third-quarter revenues.

This compares with R&D revenues of $4.1 million or approximately 13% of revenues for the third quarter of 2008.

Selling, general and administrative expenses in Q3 of 2009 were $3.5 million or approximately 11% of revenue compared with $4 million or approximately 13% of revenue in the third quarter of 2008.

Included in our year-to-date expenses for 2009 and 2008 was $1.5 million and $1.7 million of stock-based compensation expense.

Turning to the bottom line, net income for the third quarter was $8.5 million or $0.13 per diluted share based on 67 million weighted average common shares outstanding.

This compares with net income of approximately $1.5 million or $0.02 per diluted share for the third quarter of 2008 based on 68.5 million weighted average shares outstanding.

During the three months ended September 26, 2009, the Company increased its ownership position percentage of Kopin Taiwan Corporation, or KTC, from approximately 34% to 87% and accordingly we are now consolidating KTC.

Under the new accounting rules, accounting for business combinations has changed and I believe an attempt to explain all of the details will cause more confusion than clarity.

So I would suggest you review both our both our press release and our Form 10-Q which will be filed later this week for specific details.

However, in short, there are approximately 3.7 million gains in the quarter that resulted as a result of the business combination.

Our third quarter and year-to-date results also include $2.1 million and $6.2 million of gains, respectively, from the sale of patents we're no longer using.

In addition, our 2009 third quarter year-to-date results also include a $926,000 impairment on marketable equity securities and $757,000 of losses on foreign currency exchange.

Financial results for the third quarter of last year include $1.2 million of gains related to foreign currency fluctuations, an impairment charge of approximately $0.5 million on corporate debt securities and a loss of approximately $2 million associated with the sale of [Kennit], a company in which Kopin owned an equity investment.

Cash and marketable securities at September 26, 2009 increased to $107 million from $100 million at the end of 2008.

Cash generated from operating activities was approximately $13 million.

Year-to-date capital expenditures were approximately $2.2 million.

Keep in mind that KTC has provided us with additional capacity we otherwise would've had to create ourselves.

We continue to have no long-term debt.

We expect capital expenditures for the next 12 months to be in the range of $6 million to $10 million.

Accounts receivable at September 26, 2009 increased to $22.9 million from $19.6 million at December 27, due to the increase in sales.

Depreciation and amortization was $4.5 million for the first nine months of 2009 compared with $4 million for the same period of 2008.

Turning to our guidance, while the fourth quarter historically has been our seasonally weak quarter, however, based on continued momentum of our military program and III-V product sales, we expect to achieve the high end of our revenue guidance of $110 million for the full year 2009.

Our forecast is based on discussions with customers and assumptions about the prolonged duration of the economic recession and do not reflect non-canceled purchase orders.

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

Thank you, Rich.

Good morning everyone and thank you for joining us for today's conference call.

We are very pleased with our net income of $8.5 million or $0.13 per share on revenue of $32 million.

Even excluding the impact of KTC transaction, we have a very strong quarter in this challenging economic times.

In Q3, we benefit from two primary drivers.

Our execution in delivering leading-edge display products to our various military programs and our strong HPT market share position as smartphone increase as a percentage of overall wireless handset sales.

Let me start with military first.

As Rich mentioned, military display revenue was up 26% for the third quarter of 2008.

Year to date through September, military display revenues are 56% from the same period in 2008.

At present, our military display business centers around the US Army's multi-year Thermal Weapons Sight, or TWS program.

We're currently shipping to -- there's a first phase of TWS programs called TWS Bridge.

To give you a sense of the potential upside for TWS program, TWS Bridge was and initially expanded to total about 150,000 units.

Our estimates indicate that total addressable market is much more significant, perhaps exceeding 1 million US soldiers.

With the increasing focus of making sure the soldiers are equipped with the best technology possible, we believe that TWS programs are just the start of Kopin's opportunity in this market.

From temperature stability to [sharp assumptions] to the absence of foreign particles in the weapons site, our military display modules have met the test for withstanding the extremes of battlefield conditions.

The technology we use to produce these display modules is innovative and world-class and we have proven the ability time and time again to manufacture in volume and in consistency.

It is not just our manufacturing technologies which differentiate Kopin, also our test capabilities.

As we noted in this morning's news release, we are in the process of completing the installation of advanced facilities and equipment that simulate the harsh conditions that our IPs in the high-level assembly will undergo in combat environments.

As our customers migrate more and more to system integrators, our ability to offer these services improved their confidence in the final system solutions make Kopin a much more vital supplier.

For military display systems, let's turn to screen five.

One of the other headlines in quarter three was the strong performance of our products for the wireless handset market.

Revenue for III-V products was up about $3.9 million or 37% higher sequentially and $2.4 million, or 21% over the third quarter of last year.

The continued momentum of III-V is encouraging as signs of market trends.

Smart phones and other advanced 3G devices are now everywhere.

To accommodate the power and performance requirements of these new devices, it will require often times four, five, or sometimes even six power amplifiers per handset.

This is a very good news for us.

The more power amplifier that goes in a particular device, the more III-V contents that we sell.

In addition, the performance requirements of these advanced power amplifiers are much higher.

This require more complex HPG structures and characteristics.

Within the communication food chain, Kopin is in an enviable position.

Engineers in the research labs around the world has put various semiconductor structures through their paces and test to identify which materials and structures will most effectively handle the power and performance demands of those advanced wireless handsets.

The clear winner in our view and in the view of many experts in the mobile world is gallium arsenide, or GaAs.

It turns out that gallium arsenide-based semiconductor structures are ideal for ensuring [similar] quality, battery life, talk time, power efficiency, and other functions that enable power amplifiers to achieve peak performance in the advance 3G/4G devices that combine video, voice, and data.

With gallium arsenide and other III-V related structures positioned at the forefront of the mobile world, we believe Kopin is posed to grow in the years ahead.

As I have noted many times, [we're the] leading emerging supplier for gallium arsenide-based HBTs to the wireless industry.

Because of our technology and our track record success, our customers are the world's top power amplifier manufacturers (inaudible).

Much of our success [encompassing] our strategy was outlined over last several years in the investment we made to support our strategic initiatives.

In our display product lines, while we are world renowned in our ability to develop the next-generation devices, we're less recognized but actually equally proficient in our ability to manufacture not just a display, but high-value products like the IP's we deliver to Raytheon.

Now we are augmenting this strength with advanced testing facilities.

In our III-V product line, we have installed new advanced six-inch production lines and expanded our capability and capacity overseas.

We believe the productivity and performance improvements that result from those initiatives reinforce the value of our investments.

We are especially pleased with the rapid performance increase improvements achieved in our new advanced display and III-V lines.

We have validated our strategic focus on higher-margin products and full system integration.

Now let me turn to the new Golden-i platform which is creating a bust in technology user and in industry conferences around the country.

Golden-i represents the merger of mobile video communications and voice-activated hands-free computing entertainment.

We believe that Golden-i has the potential to be a technology game-changer and there are quite a few major companies that agree with us.

Our strategic business partner on Golden-i includes industry leaders such as Microsoft, Motorola, Nuance Communications and Texas Instruments.

The feedback today has been extremely favorable and field testing with potential customers is on schedule to begin early next year.

In summary, I would like to restate a principle that coping Kopin has always appeared to -- when times are tough, to make sure you keep investing.

When the technology bubble burst early this decade, we kept developing the next generation of technology and products, [and success] our military business bear out our strategy.

The current economy is challenging, but we continue to invest; for example, Golden-i, to make sure that we continue to offer new innovative products that the world demands.

We are ready for your questions.

Operator?

(Operator Instructions).

Matt Robison, Wedbush Morgan.

Nice results, a couple of housekeeping to just get them out of the way to start with.

Of the number $5 million, which amounts affect revenue or go against OpEx?

When you say, I'm sorry, which $5 million are you talking about?

Well, the number $5 million that's with the patents in the KTC and so forth.

So, right now, they are all sitting in other income with the exception of about $500,000, which is in SG&A.

Okay.

On the stock-based comp, what was the breakout between COGS, R&D, and SG&A?

Let me get that for you in a second.

And the $500,000 that went against SG&A for the -- is that just a reversal of bad debt?

Yes.

And what else?

That's it.

Okay.

All right.

So, $439,000 was in cost of revenues, $215,000 SG&A -- I'm sorry -- R&D, I'm sorry; and $955,000 in SG&A.

Are these nine-month values?

Yes.

Okay.

And so, and also, the SG&A, the $500,000, is a nine-month as well, right?

That's correct.

For the three months, the bad debt number was $300,000.

Okay.

And then, the $300,000 -- yes, $291,000, yes, right.

What was internal and external R&D expense?

The internal number was about number $2.5 million.

Okay.

And we can back out the rest.

Yes.

It's about $1 million for the external.

And the R&D, was there -- did you have the breakout between display versus III-V for the R&D revenue?

It's almost all display.

The exact display number was about, as I said, it's almost all.

About $1.1 million is the display number.

Did I hear right, that operating cash flow for nine months was $13 million?

Cash flow from operating activities; that's correct.

And the CapEx for nine months was $2.2 million?

That's correct.

Okay.

And depreciation and amortization was number $4.5 million for nine months?

That's correct.

Why was the consumer segment so strong?

That's been fallen off, and it looked -- if it was up sequentially, I guess there's some seasonality in that, but it certainly didn't fall off like we might have thought.

Do you want me to take that one, John, or do you want to take it?

I am, I'm a little bit confused, Matt.

I think that our consumer sector is really not that strong.

On the camera side of course, it still seems to be quite regular, but the eyewear has dropped off a lot.

Okay.

You had -- I think you had a $0.5 million of eyewear and $2.9 million of the consumer.

It's the $2.9 million that I was interested in your thoughts on.

What happened is that, as you well know, we have a strategy of deemphasizing our digital still camera, the lower end of the digital still camera business.

But we (inaudible) a couple of [their] strategic customers and those customers are the ones that actually do better in this downturn because they are very famous brands.

So that's why they did not fall as much as, I guess, people expected.

Okay.

And then, so does that seem like that kind of level is sustainable or at least -- ?

It appears to be sustainable.

I guess we can -- it's obvious that when times are bad, everybody buy very famous brands.

And they stick with us because we are the financially stronger and our displays are much better.

And they are glad that we still kept them.

Yes, sure.

But, is that businesses still significantly lower margin than the corporate average?

The consumer electronics?

Yes.

Yes.

Eyewear actually has a pretty good margin.

Unfortunately, the eyewear has been the weak this year.

But, having said that, we still have expectations the eyewear will do better next year.

And maybe we'll come back to that.

I guess I wanted to touch on before yielding the floor here, talk about qualifications for the third customer of TWS and the enhanced night vision goggles, how that -- those two elements are going.

I will make a brief comment.

We can only talk about qualification to our customer.

We'll leave our customers to mention about their qualified with the government.

But with our third customer, we are qualified by them.

Yes.

And with the [ENVG], we're actually shipping, a volume low rate volume now to our customer.

So that means it's also, again, also qualified by a customer.

And so -- but you didn't, you're not -- are you not shifting low rate volume of the third customer for Thermal Weapons Sights yet?

They're doing better now, yes.

We are shipping pretty --

So we're shipping to all customers?

Yes, all customers now.

Okay.

I will yield the floor and maybe come back to the (multiple speakers) later.

Yes, I think the programs are doing pretty well.

We are quite happy with them.

(Operator Instructions).

[Raj Gill], Needham & Co.

Thank you.

Congrats on the good results (multiple speakers) on the military business.

Could you talk a little bit about some of the revenue trends going into the fourth quarter and into next year, if there's seasonality in that business?

Also, what are the design cycles looking like now in the military business now that you get -- have increase in traction?

I would talk about design cycle leverage, talk about the trends.

The design cycles and military programs as you can guess is very, very long, especially in thermal gun sights, where those products are subject to extreme battleship environments -- vibrations, temperature, had to go from minus 40 degrees centigrade to very high temperature.

And also you cannot, in fact, I think there's one item we actually mentioned today's news conference is the foreign particles.

When you have this vibration, you cannot have particles inside a gun sight that disturbs your gun sight.

And all those things require extreme testing and that's why we are installing facility and test equipment to simulate what's happening in the battlefield.

So it's a very long cycle.

It doesn't mean that it cannot be done, but once it's done, it's a mountain that you climb over and we are glad that we are past them.

Yes.

Kind of the two questions that you asked were actually kind of related.

One of the things that we point to in our III-V products is that the cycle time to make our product and to get it to our customer, it can be anywhere from six to 10 weeks.

And so many, many years ago we developed a process where we could simulate our customers' results so that we could reduce the design-in cycle time.

That's the thing we call quick lot.

And that was really why we were so successful in HBT.

And so up-to-date on our military products, we have -- essentially we have to wait after we make our product shipped to our customer and get the response to their whole manufacturing cycle to get feedback so that we can make improvements.

And as John just indicated and as we said in this quarterly release, we have put in a lot of testing equipment so that we can now speed up that process.

So we don't have to wait per se for them to get all their results back to us.

We can now actually do it in-house.

It improves our design capability yields and so on in a much shorter time frame.

And so the revenues, as we have indicated, we expect to hit the top end of the guidance because right now there are some gating factors as it relates to testing of product and so on.

So that's why we've brought this in-house.

So as we indicated, we expect to hit the top end of the guidance.

The top end of the guidance, say 105 to 110, is that going to be mostly driven, obviously it's a seasonally weak quarter, but is that going to be mostly driven by continued growth in the military business quarter over quarter?

Or, do you expect continued sequential growth in III-V offset by some consumer electronics declines?

Or any -- maybe you can describe some of the puts and takes going into the fourth quarter.

Well, we would expect the display and the military to be strong.

And really, it's the III-V business which traditionally has the more seasonal orientation to it.

I should say, historically, the consumer display business had a large seasonal aspect to it, but obviously we don't have the greatest sales on the consumer-electronics side.

So really, what's going to affect us this quarter will be the seasonality of the III-V business.

But we expect military to remain strong.

Okay, got it.

And on the military business, going out, looking out into 2010 -- this is a question for Dr.

Fan -- what are your thoughts in terms of what -- the magnitude or the size of the military business could shape up next year?

What other -- are you looking at other institutions besides the U.S.

Army?

Are you looking at the Marine Corps, other divisions of the Army?

What are some of your expansion, your growth strategies to grow that business?

What percentage of sales do you think it could be?

And any idea in terms of kind of sizing of the magnitude, the size of that business next year?

This is a very good question.

We ourselves are obviously -- did quite a lot of studies on it.

Right now, we've been currently just focusing on three programs, which of course TWS is the biggest program.

We have [EVG] related EVG programs, and also are expecting starting to get into deployment.

So -- but there are other services, like you said Marines and Homeland Security and of course there are foreign countries.

All of these are being now looked into.

Total [TAM] is actually bigger than one expects.

We've just talked about TWS, which I think currently, even including the TWS Bridges being shipped, totally, you're still only talking about -- a little bit over 250,000 units.

But for the US soldier alone, we think that the TAM over there is about over 1 million.

So there's a four times growth just shipped on that program alone.

So, I think we still have a lot of room to go.

But near-term wise, we are of course, watching what the President would do in the Afghan, whether he's going to increase the troops or not.

Those are probably things that can have instant impact for us.

So, the products that are going into the Army right now, are they being serviced for both of the wars, the Afghan and the Iraq war; or, is it just primarily one of the wars?

We probably cannot comment on that, but certainly is in the battlefields right now.

So if there is a decision not to go send troops to Afghanistan, then what are some of the implications to your military business?

Well, I think the soldiers need to be updated.

And whether they're going to war not, we all know that it's important to fight the night.

I think we have to own the night.

That part is still fine, but that they are -- I'm sure if there are some near-term increase in troops, you will have some near-term incremental improvement for us.

Got it.

Okay.

Any sense of the revenue from Golden-i business?

You talked about sampling with some customers early next year.

Any sense of early visibility, when you'll start getting some generation of revenue from that?

Yes, that's -- see, Golden-i is an entirely new platform, is really in many ways, like we say, the game-changer.

And the important thing is that for us and for our partners now to introduce those, we call it development kits that will be available early next year.

And those development kits will be sent to people at a price.

So we will start getting revenue next year, but I really think the real revenue will come in 2011.

So far, all the response has been very good.

I don't know where you have seen it or not, but once you have seen it and experienced it, you will be a different person.

Right.

Going into the HBT business, you talked about ramping to $0.06.

What percentage of the inventory do you think is going to be six-inch exiting this year, and any thoughts in terms of six-inch ramp into the next several quarters?

As you well know, we are really -- we only really mix samples upon orders and into their consignment which, of course are customer only, so our inventory per se is, other than some consignment use, is not strong.

I do believe, however, six-inch transition will be very rapid.

As we said, as the smartphones are growing very fast, the contents are increasing.

People need to put more power amps in their production line.

So people are going to shift into six inch as rapidly as possible.

We are very fortunate or maybe foresighted that three years ago we would plan on this transition with about the most advanced equipment, learn the technology to get the most complex structure for our customers.

So, [it's entrenched] and I think they will switch very quickly.

We welcome their switch.

Okay.

I will stop there.

I will yield the floor.

Once again, congrats on excellent results.

Thank you very much.

Thank you.

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.

Thank you very much for joining us this morning talk and we look forward to keeping you updated on our progress.

Just a reminder, that Rich will be presenting this morning at the ADA Classic Investor Conference in San Diego.

Richard's presentation will be webcast live on the Kopin website beginning at 11:30 AM Eastern time.

We hope you will tune in.

This concludes our call, and have a very good week.

Thank you.

That concludes our conference call.

Thank you for joining us today.