Kopin Corp (KOPN) 2010 Q1 法說會逐字稿

Good day and welcome to Kopin Corporation's First Quarter 2010 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You may access an archived version of the call on Kopin's website at www.kopin.com.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.

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

Sneider.

Please go ahead, sir.

Welcome, everyone, and thank you for joining us this morning.

John will begin today's call by discussing the highlights of the quarter and our outlook for 2010.

I will take you through the financials and then we will be happy to take your questions.

Before we begin, let me remind everyone that during today's call taking place on Tuesday, May 04, 2010 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 and other factors discussed in our most recent annual 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.

John?

Thank you, Rich, and good morning, everybody.

Last week we had the pleasure of celebrating our 25th anniversary event for our shareholders, customers, suppliers and employees.

The event featured demonstration of our exciting technology innovations, such as Golden-i, our latest military display systems and reference design for 3D video eyewear that we believe will set the standard for mobile viewing experience.

Listeners can go to our website home pages and see the NBC video clip of the event.

Over the past quarter century we have succeeded to grow Kopin into one of the largest producers of micro displays for consumers, industrial and military applications, and we're also the global leader of heterojunction bipolar transistors for wireless devices.

At the heart of the Company's success lies the key pertinent protected technology that differentiates our product in the marketplace, drives our customer success and continues to advance broader technology trends, including mobile connectivity.

Innovation has been a constant driver for Kopin.

It is in our DNA.

We are continuing to use our core nanotechnology in developing product for mobile users to improve the way we see, hear and communicate.

I am pleased to report that we begin our year with strong first quarter financial performance.

Sales increased nearly 19% over the first quarter of 2009.

Our strong balance sheet continues to grow even stronger.

We entered the first quarter with $119 million in cash and marketable securities after generating about $3 million in cash for operating activities in quarter one.

And, of course, we continue to have no debt.

We remain on track to achieve our 2010 revenue guidance of $120 million to $130 million for the full year.

In our first quarter our III-V product sales more than doubled year-over-year fueled by global smart phone growth and the increasing need for mobile connectivity.

3G and 4G technology enables faster data rates and streaming video in addition to traditional voice.

Carriers are busy pushing forward with 3G and 4G investments, as consumers and businesses want immediate accessibility to information.

Our III-V transistor technology is central to powering these advanced devices.

They contain up to three times more of our semiconductor content than traditional handsets.

In addition, we are beginning to see the benefit of our past few years' investment in six-inch wafer technology and capacity.

By the end of 2010 we expect that almost all our customers will have completed their transition from four-inch to six-inch production process.

We expect efficiencies gained from this transition to positively impact our future growth margins.

I cannot stress enough that smart phone growth requires not only four to six-inch conversion for capacity and efficiency, also requires much more complex structures resulting in requirements for enhanced capability and technology.

To support our rapid growth in our III-V product line we have recently hired Dr.

Wayne Johnson as Director of New Business and Product Development and Dr.

Patrick Chin as Vice President of Technology in our Taiwan subsidiary, KTC.

Their qualifications and accomplishments are too numerous to detail here.

I would like to invite you to take a look at the news releases that we issued announcing their appointments.

With respect to our, my early comments on emerging technology trends, Golden-i is uniquely positioned to capture the need for instant information availability.

This wireless, hands free, voice activated mobile device with a near eye virtual computer display stands to revolutionize the mobile Internet overcoming the small form factor physical limitations of wireless handsets and allowing easy access to mobile content.

It is our belief that after touch screen the next trend is towards voice and motion commands.

I would like to stress that our HBT technology facilitates the flow of mobile content information over the wireless networks, while our Golden-i allows a user to see and manipulate this information as if they were sitting in front of their personal computer.

During March we show cased this cutting edge technology platform at a CTIA Wireless 2010 Conference in Las Vegas with significant following.

Having recently shipped out our Golden-i software development kits, the feedback from initial field testing is very positive.

The potential end market for Golden-i are very broad and are very diverse including industrial, medical, construction and military.

Golden-i will be one of our key growth drivers in 2011 and beyond.

On the military display front, our first quarter revenue was lower than the same quarter a year ago, which reflects the timing of government procurement cycle for the Army's thermal weapon gunsight program.

Our recent announcement of $27 million follow-up order from one of our thermal gunsight customers reflects the continued strong momentum of our military display technology.

We anticipate additional orders for this product.

We remain confident of 2010 and beyond for this sector.

In April we announced volume production of our first full-color VGA and wide VGA shrink display measuring just 0.35 inch and 0.4 inch diagonal respectively.

These displays are about 40% smaller than our conventional display that we have been producing the last past few years.

Shipment of these new products are already underway for Samsung's new hybrid digital SLR style camera and Vuzix Corporation's Wrap 920 3D video eyewear.

These new displays also employ Kopin's patented inventions designed to achieve low power consumption.

Power efficiency, vivid color in compact size make these displays ideal for many mobile imaging applications.

Early indications show that new Samsung digital SLR cameras are selling very well.

Everyone is very excited about our success.

Even though we just commenced selling our new shrink display that we announced last.

Last week on our 25th anniversary celebration we announced that we have further shrunk the wide VGA display by another 45%.

We have unveiled the world's smallest color WVGA display.

WVGA has 854 and by 480 color pixels, by the way.

It is ultra compact, only 0.32-inch diagonal product is now demonstrated.

Last week we showcased this new ultra small display in reference designs of three 3D video eyewear models in our celebration and the response was very, very positive.

Volume production of this 0.32-inch display is now scheduled to begin in 2011.

This new innovation further distinguished our technology and creates new growth opportunities for our Company.

We now believe this new, we call it double shrink that display, that this will achieve our -- with this new display we now achieve our long-standing goal of having HD resolution display with the size of a human eyeball, a goal that we had set up many years ago.

Such fine [pixel] will be great for almost all conceivable applications for the next few years.

We are now entering our next phase, the rapid application phase.

With our new -- now let me go back.

With our new 3D product line we'll -- similar to our new 3D product line, we are experiencing a very large number of exciting new opportunities in our display product line.

The support is growing demand across a variety of product segments.

We have recently made several strategic hires, including Tim Edwards as our Senior Staff Optical Systems Engineer, Dr.

Chris Parkinson as Senior Golden-i Software Manager and Mark Stovall as General Manager for our Application Design Center in Scotts Valley, California.

Innovation and technology excellence are core to Kopin's competitive differentiation.

We have made great technological advances in the past few years.

We will now concentrate in product development using those advances.

We are very encouraged by the market reception.

With that, let me turn the call to Rich for the financial overview.

Rich?

Thank you, John.

Total revenues for the first quarter were $25.4 million, up 18.5% year-over-year and down about 23% sequentially from $33.0 million in our seasonally stronger fourth quarter.

III-V revenues increased 110% to $14.5 million from $6.9 million in the first quarter of 2009 and down 3% from the $15 million in Q4 last year.

This was a much lower seasonal decline than we normally would have anticipated.

Display revenues for the first quarter totaled $10.9 million, down from $14.6 million recorded in the year-ago period and $18 million during the fourth quarter 2009.

Military revenue was $6.3 million in the first quarter compared to $11.5 million posted in the year-ago period and $13.5 million recorded in the fourth quarter of 2009.

As John discussed, Q1 military revenues were affected by government ordering process.

We received the first order in early April for $27 million of TWS product from one customer and anticipate additional orders during the near term.

Continuing within the display segment, both consumer applications and eyewear combine for $3.2 million of display revenue in the first quarter, a 29% growth over $2.5 million of revenue recorded in Q1 of 2009.

For the quarter gross margins decreased to 26.5% from 29% in Q1 of 2009.

Decline was primarily attributed to lower military sales, partially offset by higher margins in our III-V product line.

Operating expense, as a percentage of sales, declined to 31.2% in the first quarter of 2010 to 35.4% in the year-ago quarter.

R&D expense totaled $4.3 million, or 16.9% of revenue, during the first quarter of 2010, up from 14.7% during the year-ago period.

Last week at our 25th Anniversary event, the results of our R&D spending were partially revealed to include to three new eyewear reference designs.

In addition, our R&D expenditures are for the development of advanced III-V structures required for the new 3G and 4G smart phones, golden-i and military programs.

SG&A expense totaled $3.6 million, or 14.3% of sales in the first quarter, down from $4.5 million, or 20.7% of sales in the year-ago period.

Net income for the first quarter was $1.0 million, or $0.02 per diluted share based on 67.3 million weighted average common shares outstanding.

This compares with net income of approximately $1.9 million, or $0.03 per diluted share, for the first quarter of 2009 based on 68.5 million weighted average shares outstanding.

Kopin's first quarter of 2010 results included gains of $0.7 million and $0.1 million on the sale of investments and patents respectively.

Our first quarter 2009 results included a gain of $2.6 million on the sale of several patents, partially offset by a $0.9 million expense from an impairment write down of certain marketable securities, which were deemed other than temporary.

Accordingly, excluding other income expense items, operating income for Q1, 2010 was essentially breakeven versus a loss of over $700,000 for Q1, 2009.

Operationally we are starting the year in a very strong position.

Stock compensation expense totaled $504,000 for the first quarter and was allocated as follows; $118,000 to cost of product revenues, $72,000 to research and development and $313,000 to SG&A.

Cash and marketable securities at March 27, 2010 increased $4.5 million to $119 million from a $114.5 million at the end of the fourth quarter of 2009.

Cash generated from operating activities was approximately $2.6 million and the proceeds from the sale of investments was approximately $2 million.

We continue to have no long-term debt.

Accounts receivable day sales outstanding at March 27, 2010 decreased to 58 days from 60 days at March 28, 2009.

Year-to-date capital expenditures were about approximately $0.8 million.

We expect capital expenditures for 2010 to be in the range of $6 million to $8 million.

Turning to our guidance, as John mentioned, we expect full-year 2010 revenues to be between $120 million and $130 million.

This forecast was based on many discussions with customers and does not reflect non-cancellable purchase orders.

Finally, for an update on the status of our negotiations with Skyworks to extend our current purchase and supply agreement, which terminates in July 2010, we can tell you that we are in the early stages of negotiations.

I think that our partner of Skyworks since its conception there aren't a lot of issues.

We are trying to assess the market trends over the next several years in order to estimate volumes from which prices flow.

And, with that, we are ready to take your questions.

Operator?

(Operator Instructions).

Our first question today comes from the line of Matt Robison with Wunderlich Securities.

Can you give us a little bit more of the details, Rich, for instance depreciation?

And then on the gains you mentioned, can you talk about whether you sold any IP or what might have been 4X related?

And then perhaps gives us some flavor for the split on the commercial side display between eyewear consumer electronics and whether you saw any revenue recognition for Golden-i?

Okay, depreciation for the quarter was $1.8 million.

We had a net $354,000 foreign exchange loss.

From the sale of IP we recognized $179,000 gain.

I think the numbers -- yes the questions that you asked related to the P&L and then as far as the revenue, if I understood you correctly, so we did $6.3 million of military, a shade under $1 million for eyewear.

Consumer was $2.2 million, R&D about $1.5 million.

Okay so that was -- that piece of the R&D was specifically for the display as opposed to III-V?

No, that's total R&D but the vast majority of it is display.

Okay and so on that, the other income split, did you mention a gain of 0.7 and then the IP related of--

So yes the IP was $179,000 gain and then we sold -- we had an investment in Micrel Semiconductor, which we sold, and there was a 0.7, a $700,000 gain reported on that.

Okay and did you ship for revenue any Golden-i in the quarter?

There were a small number of units shipped for revenue but it was really de minimis.

Okay, I'll come back with further questions, thank you.

Rajvindra Gill, Needham & Company.

Yes thank you and congrats on good results.

Just wanted to dig a little bit deeper on the military timing issue.

The $6.3 million represents a pretty big sequential decline.

Maybe if you could provide a little bit of color in terms of how you're seeing that military business shape up in the second quarter.

Will those orders that were -- came late in the quarter in Q1 flow to the second quarter?

And then the second questions is, you talked about in your press release you're expecting kind of a bigger second half ramp in military.

Maybe you could provide a little more color in terms of where that will be coming from, any details in terms of which customers are driving that growth and, based on the current projections, will the -- do you foresee that the military business will grow year-over-year in 2010?

This John Fan, let me answer your questions, Raj.

I think the military orders is their actually like semiconductors.

Actually this is more difficult to predict quarter-to-quarter.

However, year-to-year predictions is more accurate than semiconductor business because there is a Federal all in budgets.

So believed right now the fact that the first quarter the orders are a little in coming in, everything will be shifted to the second half this year.

So our $27 million order from one of our customers is a good indication of that and we expect additional orders will come in.

So this part is in the first part of the thermal gun sight situation.

The second part of your question is how about other military programs?

We're seeing a very interesting trend going on in military is a lot of big companies are beginning to -- basically outsource the development of their new weapon programs, especially subsystems to companies like us, so you can see we're actually adding a lot more new talents to be able to satisfy their program.

So revenue, you see military revenue on programs actually increasing and many of these programs will result in the production starting end of this year and the beginning of next year.

So we're seeing a very interesting trend that, although the military budget may be more stable, we expect to grow.

We're expecting to grow in the second half this year and beyond.

Okay but the -- you are expecting a pretty big ramp in the second half versus the first half in terms of revenue, right for you to--?

Yes I think well, as I say, we will repeat our guidance to the Street, that $120 million to $130 million, so in order to do that, obviously, the second half will be even a steeper ramp than we anticipated before.

Will that be mostly driven by, in the second half, mostly driven by the military, a bigger ramp in military or just a combination of bigger ramp in military plus ongoing III-V business?

The III-V business is going to be strong all the way, this year, next year, maybe for the next few years.

The military business looks very good right now and with also a new addition in programs and the digital camera of Samsung is a surprise.

Everybody -- it's a brand new design.

It is a very interesting camera.

You can go on the Samsung website and see it and nobody expected it to be so successful but it looks very successful right now.

Okay great and on the III-V business really good results relative to below seasonal patterns typically that you experienced.

When do you think you'll start recognizing, I guess six-inch wafer revenue and are you still kind of holding firm in terms of your gross margin targets of kind of mid 30%?

Rich, you want to answer the question here?

Yes well, we've been recognizing six-inch revenue for quite some time.

I think domestically almost all our customers now are six-inch and we still have a few Asian customers that are going to six-inch and so, as John said in his prepared remarks, we expect by the end of this year we're probably almost all six-inch.

And we're seeing the benefits of that conversion, as we speak, and so the gross margins were strong this quarter because of it and we expect that to continue throughout the year.

Okay that's it for now, appreciate it.

[Jason Shaft], [Heartland Funds].

So, just with a follow up to the previous caller's question on the conversion from the four-inch to the six-inch wafer, so when those conversions are complete how much of a benefit do you think that you'll end up realizing to the gross margins?

I think what we said early is that we can get a 10 percentage point increase in the gross margins.

Okay and what have been your market share trends in the III-V business?

It's a good question.

I think we're always running around 40%, 50%.

I think we'll continue with things around that way, in the world market, but we are all in the top customers, in top customers so, or the top three PA customers supply in the world.

We are very strong in there.

Okay, then last question for you guys, on the cash on the balance sheet, how much of that is in the U.S.

versus overseas?

Approximately $16 million is overseas.

Okay thank you.

Betsy Van Hees, Wedbush Securities.

I had a quick question on your CapEx.

If I have my information correct, your last guidance was CapEx was going to be anywhere from $6 million to $10 million and I believe you said today it was going to be $6 million to $8 million.

So, it looks like you've lowered your range and I was wondering if you could tell us why you're doing that and what's the -- how we can look at CapEx through the back half of the year?

Sure, part of it is that we spent about $1 million of it already and the other part is we firmed up some estimates on some expansion that we have going, both here and our facility at KTC.

So it's just really just a better estimate.

We expect -- we're in negotiations now for additional capacity expansion and so we're in design phase, I guess, best way to put it, and the actual expenditure will probably happen in the second half of the year when the equipment starts arriving.

Thanks, that's very helpful.

Going back to the gross margin, so gross margin took a pretty big hit in this quarter and I was hoping you could give us a little bit more help as we're looking at the model in terms of how we should be taking that benefit that you're going to get from transitioning to the six-inch wafers from four in terms of your gross margin?

So essentially I think that the way business -- if you looked at those last couple years, it's probably been 60-40 display, III-V business.

So, on a weighted average basis, you can look at the III-V's margins to improve about 10%, as I indicated.

So I guess on a weighted average factor you'd hope to see 4% to 5% increase in margins over the course of the year.

Thanks.

That's very helpful.

In terms of the back half of the year, you guys are very confident and can you give us the top three drivers that are giving you the confidence level to reach that, your revenue in the back half of the year, your full year target?

I'm sorry.

I think that it really boils down to two.

One is the federal budgeting procurement cycle.

I mean a lot of the military is actually already budgeted so that's why we feel comfortable.

We know the units are there and the money has been approved.

And then the second is right now all the discussions that we have with our III-V customers indicate that they believe that that, the smart phone market, is going to continue to develop, not just this year but over the next several years, and so we expect we can see continued strong growth in that piece of the business.

Thanks.

I'll jump out of the questions and let other people ask.

Thank you so much.

(Operator Instructions).

Matt Robison, Wunderlich Securities.

Thanks for the follow-up.

So you had I guess it's because of this SLR camera from Samsung you had an increase in the consumer that was very contrary to normal seasonal patterns it appears.

Should we be thinking in that as an inventory build on their part because of the product launch or are you starting to see signs that the product is selling through and that you might be able to sustain that kind of a level?

This is John Fan.

I would say that this camera is actually retailing around $630.

It's actually pretty high end camera from Samsung and yes we are seeing some increase.

I would say that the trend is such that not only will it continue it might even grow some more.

And when you look at that, the military business, the $27 million order of that's about half of the kind of run rate that you had last year.

Is that order all going to be in the second half of this year or is that scheduled into next year?

And can you give us a little bit of flavor on you mentioned business on a kind of an expansive design in activity for the military applications.

A, is it all domestic and B, are you seeing more customers and are we going to -- do you include enhanced night vision goggles in that or is it all thermal weapons sight?

This is John Fan.

Matt, it's a very good question.

I will answer in several ways.

On thermal gun sights, as we know, the number of units approved by the Army for the Army is pretty -- I think it's quite well known so that will give us a very good solid base and I think the only difference is that the numbers shift, the ordering patterns shift a little bit towards the right.

Now they're all coming in, as we say, so I think that they will be really a pretty good -- these are along the line of what we predicted but what happened is that we're seeing more activity now, especially on a ENVG, as you well know, ENVG is being redesigned for additional units next year and that activity is going very, very strong and I think the government is in a very, very focused mode to try to get ENVG into large production next year.

In addition to that, they have a whole bunch of new programs of some of them are we are beginning to see early sign of volume production so our military perspective is very optimistic by the second half and certainly very optimistic for next year, so that's the area for the military.

And on the Golden-i for the same reason we are seeing very, very positive response from all over the sectors, application sectors, for Golden-i and we expect the product will come out in the next year and it is for industrial and military sector so once you get in there it will be very sticky.

The business will be just like what we have in military with good margins and everything so right now we say we are hitting all the cylinders, which we are adding more and more talent from everywhere.

Well, there's a surprise right now.

It looks like everybody wants to join us right now and we're adding new capacity.

Our technology for display with a double shrink we have achieved our goal, the goal for military, the goal for Golden-i.

It's also goal for all the commercial applications so with right now we can focus very, very focused now on application phase now, so we're in good shape right now.

Is that for as ENVG goes out to I guess kind of a new competitive process with the government is and more entrants amongst your customer base, should we expect the R&D line of your income statement to grow this year.

R&D income statement, R&D revenue?

Yes.

R&D yes.

I think R&D revenue will grow as well as R&D expenses will grow yes.

I think both sectors growing in our is the military, of course, you know many of the R&D military is refunded so it's already fully funded but for the consumer applications, of course, it's our internal investment but both sectors will grow.

We see a very interesting opportunity really ahead of us and we are now using some of our cash flow on investment and in facility, in capacity, in capability as well as the human resources.

We are in a growth mode right now.

And still small numbers but eyewear did more than double it looks like from last year's.

Is it just more design ins and more small volume from multiple design ins or is it -- or do you actually see it, a volume ramp, for many of your customers?

I think it's frankly, as we said at the end of last year, we have a number of customers who were experiencing liquidity problems.

They just couldn't fund their inventories so they have been able to actually raise some capital and it allows them actually to procure inventory and so the demand has always been there.

It's really just been a matter of being able to fill it.

Are we talking about the eyewear?

The eyewear.

The eyewear actually is a point I want to make mentioned is that eyewear was slow last year.

We've seen picking up right now, partly is of course some of our customers have a lot more freedom now in the working capital but, more importantly, is the 3D.

The 3D contents are really coming around both in movies and sports and you watch 3D.

The contents are here.

You can either watch buying a big TV, which amounts $3,000, $4,000 or you can buy the eyewear, which is $300 and eyewear actually it gives you a better 3D experience anyway and if you're watching a TV nowadays you still need eyeglasses anyway so we are seeing extreme -- a very, very active (inaudible) activities from over the world actually working with us on 3D eyewear.

We think this is going to be a very interesting (inaudible) for people next year.

Thanks I'll yield the floor.

Rajvindra Gill, Needham & Company.

You talked about the military unit are actually being allocated and the money has been approved, which is a good thing.

Any sense of what the -- how many units are there?

How many, how does that compare to last year?

How is that being spread over the multi-year cycle?

Raj, to be honest with you, we know exactly all those numbers and we're prohibited by the Federal Government from disclosing volumes.

Is it going to be more than last year?

We really -- we're not allowed to say.

They check all our releases and our conference calls and everything.

They don't like this stuff going out.

Yes I think my meaning another way -- this is John Fan -- is I think it was a question that Matt asked, Matt Robison asked, which I forgot to answer, is about the international sales.

Of course, we all know that we have not been working with our international sales last year.

This year we are now more focused on it and we expect at least some part of our sales this year will be for international.

Right okay thank you.

And then you mentioned 3D.

Are you actually selling the 3D glasses to the TV OEMs?

Can you maybe describe how that business model works and do you see competition from graphic processor companies like NVIDIA, who are also selling kind of 3D eyewear as well?

That's a very, Raj, good question.

Our business model is similar to the Golden-i.

Our Golden-i, as you well know, we have many (inaudible) partners as well as the marketing partner in Motorola.

Our goal is not to sell this type product under our brand.

We usually have a very good marketing partner more, in some ways more like Qualcomm model.

We license it.

We sell some critical components and our goal is trying to get margins north of 50%.

In the 3D eyewear our business model is going to be around the same line.

We'll do reference design and we will, again, sell our optical modules.

We'll license our reference design and we'll use our customer selling their brand.

So the question is are we working with branded companies as well as smaller companies.

The answer is yes we're doing both.

And those customers are then selling to the OEMs, the TV OEMs or how does that end process work?

I think depending on which customer, some customers obviously they are so well branded and they have their own stores so they will be selling themselves.

So that probably ends up most of the model and there are some customers, of course, will sell to Best Buy and things like that but we are not going to be under our brand.

We will be inside there.

Right okay good and just coming and looking at the near term, the next quarter, these orders that came in late, the follow-on order for the eye piece, is that going to ramp in the second quarter and should we be expecting sequential growth in military as a result?

Quarter-to-quarter?

Yes.

The answer is yes.

Okay thank you.

Thank you.

Ladies and gentlemen, 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.

Well, I thank everybody for joining us this morning.

We look forward to keeping you updated on our progress.

This concludes today's call.

Thank you.

Once again, ladies and gentlemen, that concludes our conference call.

Thank you for joining us today.