Kopin Corp (KOPN) 2010 Q4 法說會逐字稿

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You may access an archived version of the call on Kopin's website at www.Kopin.com.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

Thank you.

Welcome everyone.

Thank you for joining us this morning.

John will begin today's call with a review of the fourth quarter and 2010 as well as our 2011 guidance.

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

I would like also to remind everyone that during today's call taking place on Thursday, March 3, 2011 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 that could cause actual results to differ materially from these forward-looking statements.

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 the forward-looking statements made during today's call.

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

Thank you Rich.

Good morning everyone and thank you for joining us this morning.

Let me begin with a few overall comments about 2010.

Our III-V product revenues grew substantially, up 34% in 2010 to $62.2 million.

This was of course no easy task, as we continue our significant capacity expansion, continue our investment in new technology and integrated our KTC acquisition while at the same time meeting growing customer demand.

On the CyberDisplay front, we had a very solid year after slow spots in the first quarter.

We recovered nicely in the latter part of 2010.

Also, we made significant progress during the year in the development of Golden-i, our exciting hands-free cloud computing technology.

In Q4 we are we announced a partnership with Motorola Solutions to jointly [productize and recognize] industrial grade Golden-i for the first half of 2012.

Let me provide a little more detail behind the impressive growth of our III-V revenue.

Today's advanced 3G and emerging 4G devices are far more complex than previous generations, requiring the ability to switch between multiple high cellular frequencies and accommodate a range of air interface standards.

Smartphones account for about 20% of all mobile device shipments in 2010 and are estimated to account for more than 50% of global unit shipments by the year 2014.

This rapid adoption of advanced mobile devices has had a profound impact on the producers of power amplifiers and HBTs.

The HBT products require today are not the HBTs of the three or four years ago.

Advanced smartphones are going to use complex HBT products such as a Bi-HEMT, which is really a combination of the traditional HBT with HEMT switching technology.

These structures are much more complicated to manufacture and require even more vigorous quality control.

For this rapidly developing trend, one needs to have the technology, the capacity and quality control to meet the market demand.

To provide these advanced products, we have been making significant investments in new production systems and enhanced text capabilities and adding additional technical personnel both in the US and in our KTC Taiwan subsidiary.

By the end of 2011 we will have doubled our capacity from the beginning of 2009, giving us the latest production equipment and capabilities.

Our investments are not simply additional equipment.

In 2010, we have completed our multiyear development of a proprietary, world's first in situ real-time monitoring technique to enhance our process control during this complex HBT (inaudible) production.

This revolutionary technique is now being installed in our new advanced protection systems.

The challenges derived from manufacturing and testing production volume of such complicated products are daunting.

But due to our strategic investments, Kopin is well positioned to reap the payoff of this better [continued] growth of the wireless world while maintaining our excellent service to our long-standing partners.

The results of our investment can be seen in our strong 2010 III-V revenue growth and the feedback from our customers.

For example, in January, we will receive a fourth consecutive supplier award from our long-standing, longtime partner and biggest III-V customer, Skyworks Solutions.

This award is a prized acknowledgment of our commitment to manufacturing excellence, technical skill and customer support.

Now let's look at display product lines.

Military display sales started in 2010 slowly, but finished strongly in the fourth quarter.

As you well know, Kopin has been sole supplier of displays and subsystems to Raytheon, [BRS] and BAE, who are the three suppliers of thermal weapons sights, TWS systems to the U.S.

Army.

TWS remains a key US military program and we are expected to continue as a strong revenue contributor to us in 2011.

Of course, everyone understands that every aspect of the federal government budget is being reviewed.

So, we do anticipate there can be some impact in 2011 and beyond.

Display revenue for the customer market growth for the fourth quarter and for the full year 2010 as a result of increasing sales to camera eyewear makers.

Several OEMs are now working very aggressively on new camera models, incorporating our recently developed groundbreaking display shrink technology which enables us to shrink our display by as much as a factor of four.

We have now moved this patented technology into production.

The gross margin of these new displays are expected to be significantly higher.

The increase in 3-D activities is also having a positive impact on Kopin as we receive many inquiries about using our binocular display modules, BDMs, for 3-D applications.

By virtue of the fact that BDM had two displays, the user sees a beautiful and comfortable full-color 3-D image.

We expect 3-D activities to explode because there is better growth in 3-D gaming and 3-D wireless devices.

Now let me update you on Golden-i initiative.

In Q4 we formally announced our Golden-i business relationship and partnership with Motorola Solutions.

Golden-i is a wearable voice-activated cloud computing device.

Under this agreement, Motorola and Kopin are jointly developing an industrial grade Golden-i version which will be sold by Motorola, the world's leader in ruggedized handheld scanning devices and body-worn computers.

[We have] (inaudible) -- our experience working with Motorola to be similar to cycles of learning we have gone through with our other tier 1 partners on various products over the last 10 years.

When we were developing our display for consumer applications, our partners provide great insight into the performance, cost effectiveness, and environmental requirements our display would need to be for the consumer world.

This insight enables us to produce and sell tens of millions of displays over the last 10 years.

Then we began to offer product a few years ago to the military.

And again, our defense industry partners share with us their experiences which enabled us to offer extremely ruggedized advanced thermal weapons eyepieces products, which is used in real battlefield conditions.

In both of these business situations, we partner with industry leaders, which reduced our time to market and led to very successful product launches.

Kopin is following a similar technology with Motorola [enlarging] the Golden-i product and I'm happy to say the program is on schedule.

One further comment about this program.

We have further improved our business model.

We will provide Motorola not only the critical optical engines and the operating software for the Golden-i, but we will also receive royalties for every Golden-i system sold.

Now let me spend a moment to discuss Forth Dimension Displays, a Scottish company that was just acquired in January.

Forth Dimension Displays, we call it our 4DD, produced ferroelectric reflective micro-displays as compared to our translucent displays.

4DD's ultrahigh resolution and world-leading color imaging display systems are used in a variety of very high-end applications, including high-performance cinematography, training and simulations, 3-D metrology and medical imaging.

Such high-end imaging systems have a similar [disc model] as that of the thermal weapons sight.

That is [lower volumes] but higher margins than traditional consumer applications.

[These acquisitions] bring a strong management team, production capability and leading proprietary technology that's already gained traction with customers.

I returned from [Scarlet] two days ago and had a very good meeting with them.

Like Kopin, [SETA] has a can-do and innovative culture.

The company is also making great progress in the development of next generation of these reflective display technologies.

This acquisition fits well with our strategy.

That is, to offer customers diverse imaging options as we bring more high-value and system products to market, such as Golden-i.

Now I would like to amplify a bit on our IP strategy.

Though we have been rotating out some patents that we no longer use or will use, we have been aggressively filing new patents on our III-V and display technologies and products, and of course on Golden-i hardware and software system technologies.

In 2010 alone, we have filed 15 new patent applications.

Allow me to remind you our strategic focus and objectives.

Despite the global recession in the past few years, Kopin has maintained growth and profitability throughout these challenging times.

Furthermore, this achievement has been accomplished in conjunction with significant increase in R&D and new products, spending on large capacity expansion and acquisition and integration of our KTC subsidiary and now FDD.

All the while we are maintaining our solid balance sheet.

We are very well-positioned now for the future.

For 2011, we will continue our topline growth with revenues in the range of $130 million and $140 million.

Now I turn the call to Rich for his financial review.

Thank you John.

Total revenues for the fourth quarter were $33.1 million, essentially flat year-over-year for both III-V and display product lines.

III-V revenues were $15.1 million and the display revenues came in at $18 million for the fourth quarter 2010.

The total increase [as a] percent sequentially over the third quarter revenues [of] $31.6 million.

Our III-V revenues were a little bit lighter than we had anticipated in the fourth quarter due to an issue with a customer that was entirely unrelated to us.

This issue has been since resolved and we continue to expect our III-V business to grow at an annualized rate of at least 20% to 25% over the next several years.

For the full year, revenues increased 5% to $120.4 million in 2010 versus $114.7 million in 2009.

I would note that product revenues were up approximately 8% but R&D revenues declined due to reduced government funding by $2.8 million.

III-V revenues increased 34% to $62.2 million, while the display revenues decreased 15% to approximately $58.1 million.

In 2010 military product sales represented 69% of total display revenue.

Consumer products accounted for 26% and R&D accounted for 5% of display revenues.

For 2009 military product sales represented 76%, consumer products accounted for 16% and R&D accounted for 8% of display revenues.

For the year our 10% customers were Skyworks Solutions at 25%, Raytheon Company at 18%, and Advanced Wireless Semiconductor at 12%.

Overall gross margin was 34.6% in the fourth quarter 2010 compared with 30.8% in Q4 of 2009.

For the full year, gross margins were 29.9% as compared to 29.7% in 2009.

The decrease in gross margins for the fourth quarter of 2010 reflects the higher margin products, specifically military products.

We expect our 2011 gross margin to increase based on higher III-V volumes.

R&D expense accounted for 17.6% of revenues in the fourth quarter of 2010 compared with 11% in the fourth quarter of 2009.

For the full year, R&D expenses represented 16.4% of revenue, up from the 12.3% in 2009.

The increase in R&D expense reflects increases in cost to develop III-V products for use in 3G and smartphones and R&D associated with Golden-i.

SG&A expenses were 9.3% of revenues in Q4 of 2010, down from 11% in the fourth quarter of 2009.

SG&A expenses accounted for 12.3% of revenues for the full year periods of 2010 and 2009.

Q4 and full-year 2010 SG&A revenues include a credit for receipt of insurance proceeds of $1.4 million and $1.8 million respectively.

In 2011 we expect R&D revenues to be between 15% and 20% of revenue, and SG&A to be in the range of 10% to 15% of revenue.

Turning to the bottom line, net income for the fourth quarter was $4.7 million or $0.07 per diluted share based on 65 million weighted average shares outstanding.

This compares with net income of $5.3 million or $0.08 per diluted share for the fourth quarter of 2009 based on 67 million weighted average common shares outstanding.

For the full-year 2010 our net income was $8.9 million or $0.13 per diluted share compared with net income of $19.4 million or $0.29 per diluted share for 2009.

Full-year 2010 results include the receipt of $0.8 million -- $800,000 -- from the sale of patents and $2.6 million from the sale of investments.

Also included in 2010 was approximately $1.8 million from insurance proceeds related to a repayment of costs from the lawsuit against us that was dismissed in 2010.

Our fiscal year 2009 results included gains of $6.3 million from the sale of patents that we went we were no longer using, $1.2 million from the repayment of previously written off receivables from KTC, $0.6 million representing the write-up of Kopin's investment in KTC to its fair market value immediately prior to the purchase of the additional shares by the Company in 2009.

Partially offset by a $0.9 million expense from an impairment write-down of certain marketable securities which were deemed other than temporarily impaired.

Cash and marketable securities at year-end 2010 totaled $111 million compared with $114.5 million at the end of 2009.

We generated $15.1 million in cash from operating activities in 2010 and we also sold investments that generated $4.2 million of cash.

Offsetting were uses of cash including $17.2 million for capital expenditures, $6.7 million for the repurchase of stock.

Depreciation and amortization was $6.6 million for 2010.

We expect between $5 million to $8 million of capital expenditures over the next 12 months, primarily to finish the increase in III-V production capacity.

Stock compensation expense for the full year was $2.6 million in 2010 and $1.9 million in 2009.

2010 stock compensation was allocated $591,000 to cost of sales, $428,000 to R&D, and $1.6 million to SG&A.

Accounts receivable days outstanding at December 25, 2010 was 47 days compared to the 57 days at the end of Q3 and 48 days at the end of 2009.

Turning to Forth Dimension Displays, which we acquired in January 2011, total consideration was approximately $11 million in cash plus an earnout of all the outstanding equity.

The earnout is based on the achievement of revenue milestones reached within essentially one year of the acquisition.

FDD revenues were approximately $6 million in 2010.

We expect the FDD acquisition to be accretive to our results of operations in 2011.

Beginning with the first quarter of 2011 we will consolidate the financial results of Forth Dimension Displays as part of our financials.

Turning to our guidance, as John mentioned previously we currently expect full-year [2011] revenues to be in the range of $130 million to $140 million.

Please also keep in mind that 2011 will be a 53-week year for Kopin.

With that, we are ready to take your questions.

Operator?

(Operator Instructions).

Matt Robison, Wunderlich.

Can you give some flavor on the eyewear portion of the consumer CyberDisplay business?

I've also got a few follow-ups besides that.

It was approximately $4 million for the year.

How was the linearity in the III-V business?

Was that in terms of monthly shipments?

Well, it was linear for the quarter essentially.

Okay, so it wasn't like it the problem occurred late in the quarter and has since been resolved, but it was throughout the quarter type of thing?

I believe it first reared its ugly head in November.

Okay, okay.

And now it's been resolved?

(multiple speakers)

The issue is over now.

So, you said it was all resolved.

So you're back to sort of a more normalized run rate?

Yes.

Did you have an especially strong comparison?

I recall you had a pretty strong comparison in the fourth quarter of 2009 too, right?

What are you referring to, Matt?

Well, you guys have a flat year-over-year comparison.

I understand the issue that -- well, I don't understand the issue fully.

But you had the issue with a customer that's unrelated to you guys in 4Q 2010 and I just wondered if there is a comparison issue that also contributed to that year-over-year flatness.

(multiple speakers) Let's take it off line.

Yes, I'm still not sure I understand your question.

That's okay.

What was -- how big do you expect Forth Dimension to be in 2011?

It'll have some growth, but honestly we don't expect its bottom-line to have a meaningful impact in 2011.

Okay.

Bottom line is not meaningful, but topline -- maybe should we just assume basically flat and see how things unfold?

Yes.

And in terms of gross margin, how does it compare to the corporate average?

It's higher.

More like the military business?

Yes.

And if you could help us just from a housekeeping standpoint, how much was spent on stock repurchases in the fourth quarter?

I know you gave the full-year number.

Stock repurchases?

I don't have that.

Let me go pull that and why don't you circle back and ask a question.

Okay.

And John, you mentioned the kids in the press release Golden-i kits going out in the June quarter it sounds like.

And then you are hoping that you'll get a design cycle for products in the market.

And -- but should we think of it as a six or nine months?

Or is it more of a -- or is it a longer cycle than that do you think?

Okay.

The question you have is when is the Golden-i development coming out, and after that, how many months before the final product comes out?

Well, the development kit, as we said it before, it should be coming out very soon.

We have advised the Street before and they're on schedule, so it should be coming out very soon.

Those development kits are just before the final product.

This one has everything done without being recognized for industrial applications and some of the fine adjustments that Motorola is putting in.

After that, the ruggedized version is now scheduled for the first half of 2012.

So, I assume that it is on schedule.

It will be much more ruggedized than the development kit.

The development kit is really for people to put all the application [routines] in, because this kind of product requires a lot of application routines.

So currently, there is actually a significant waiting list already at Motorola for that developer kit.

So, I think it should be coming out very soon.

So when you say -- help us understand the process here.

Motorola sounds like one customer, but waiting for kits -- is this kind of a situation where Motorola is working with their channel to develop specialized applications for this?

Why wouldn't --?

This price going this way -- it's a good question, is that the application for the wearable hands-free computer now seems to be very wide range.

Go all the way through from utilities to security and federal government.

And what they did and what they are doing with us at Motorola, too, is to identify of all the people who have requested those machines or equivalents, and once the development kits are available they will be sold to those people.

Previously it was actually given -- it was not sold.

It was actually delivered to some of the early partners.

Now, this one will be sold through Motorola's list and people will develop different applications on those units.

And, there are a lot of people waiting for it right now.

And so Motorola -- will Motorola provide a professional services function to help these companies come to market?

Or will that be largely the role of Kopin?

It's a combination of both.

And also there are some third-party also going to provide services.

There are a whole bunch -- it depends whether it's hardware or software.

So, hardware and software are going to be provided differently.

But Motorola is obviously very much involved with the whole process for the industrial applications.

Rich, when we look at the expenses for 2011, it sounds like we can kind of interpolate expenses for Forth Dimension based on sort of breakeven performance I guess and using [the] kind of margins you [were] talking about.

Should we put that mostly all in R&D?

And then how should we look at the amount of increase in the expenses associated with the Golden-i market development and other market development initiatives you have?

Well, we don't break out R&D expenses by individual project.

I'm not asking you to do that.

I'm just trying to give you a flavor for how the impact will be in terms of increase.

Well, the total R&D expense will be -- as I mentioned -- in the range of 15% to 20% of revenue.

That is all inclusive of everything.

That includes everything.

FDD and Golden-i and everything.

And then, how should we look at the SG&A?

10% to 15% of revenue.

So, big, very large ranges; and what would be the factors that would cause those amounts to swing in those percentage ranges?

Well, from an R&D standpoint you'd always like to think that everything goes according to plan.

But, you run into technical issues you didn't expect, so sometimes it goes up and sometimes you save a little bit and you get down.

And, the SG&A -- that number is -- it can be affected by a few things, mostly marketing types of expenses.

And that will be dependent on a variety of new product initiatives as to where they are during the course of the year.

Okay.

That's it for me.

Matt, just to finish, to get back to your last question, fourth-quarter stock repurchases were 350,000 approximately for $1.3 million.

350,000 shares for $1.3 million?

Yes.

Thank you.

Rajvindra Gill, Needham & Co.

Thanks.

Can you talk a little bit about the gross margin profile for 2011?

It's been kind of volatile in 2010.

What type of margin range are we thinking about?

Well, long-term we've always said that around $150 million in revenues we expect to do between 35% and 45% gross margins.

And so as we continue to get closer to those numbers, the $150 million, the gross margins will increase appropriately.

And so you're looking to the 30% for 2011.

Is that 30% gross margin?

So a 30% gross margin?

In the 30's.

In the 30's for 2011.

There is going to be very little earnings growth 2011 as in 2010, despite revenue increasing by about 10% to 12% year-over-year.

It doesn't seem like there's going to be any earnings growth at all on an EPS level.

Is that accurate or not?

Well, we don't provide earnings guidance.

Well, I'm just saying there is some -- I guess we are waiting for the payoff of the investment in Golden-i to start to come in, because that's been a quite a big investment.

And, that's driving up your overall expenses.

And the point I'm trying to make is that the other businesses are growing, but you are not going to have -- relatively no earnings growth in 2011.

2010 there was -- earnings were down.

Now, there were some issues with, as you said, these one-time gains.

So, any metrics that you can provide the investors in terms of what the return on investment will be for Golden-i and what are your thoughts in terms of how much revenue it could generate longer-term or any color there would be helpful.

Sure, and we have discussed in 2010, the market studies that we have done and Motorola has done has indicated this thing is in the tens of billions of dollars types of market -- the TAM -- total available market.

I mean, Motorola is not going to get involved with us to go through all of this to sell a product that's going to have $5 million in revenues obviously.

And, they are a multibillion dollar corporation and they are only going to get involved in products that have meaningful impact to their topline.

And so, we obviously have an agreement with Motorola.

It's signed.

It's hard for the investors, I understand, that they will trust us.

But I think at this point, all we can look at is our history which says that in 2000, we went off and started doing this with the JVCs and the Panasonics of the world and we were successful.

In 2005 we went off with the Raytheons and the BAEs of the world and we were successful.

And now, once again, as John articulated in his prepared remarks, we believe we've hooked up with the biggest gorilla in the industry for this type of technology.

And clearly, you can't develop a product of this type of magnitude for $1 million.

So, we understand that it does weigh on our earnings.

But, clearly management believes it's for the long-term benefit of the Company.

(Operator Instructions).

Betsy Van Hees, Wedbush Securities.

On to gross margin range that you just provided of 30%, it's pretty broad.

Can you kind of help us with how we look at 2011?

Is it going to start in the low 30s, go to the mid?

If you could give us any color around that, that would be very helpful.

Thanks.

As we said, 35% to 40% at $150 million revenue is our target operating model.

So, in the range that we've given you, $130 million to $140 million, at that point I think 35% would probably be a max range that you could come up with for our gross margins.

It's going to be somewhere in that 30% to 35% type of range.

Thanks, that was very helpful.

Then I was looking at the revenue cadence throughout the year.

How should we be looking at typical seasonality for each quarter throughout the year?

Thanks.

I think by definition it is seasonal.

So I think historically, Q3 is our best followed by Q2, Q4, and then Q1.

Okay, thanks.

That was very helpful.

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.

I thank you everybody for joining us this morning and we look forward to keeping you updated on our progress.

This concludes today's call.

Thank you.

Thank you.

And that concludes our conference call.

Thank you for joining us.