Kopin Corp (KOPN) 2011 Q1 法說會逐字稿

Good day, and welcome to Kopin Corporation's first quarter 2011 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You may access an archived version of the call on Kopin's website at www.kopin.com.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.

Thank you.

Welcome, everyone.

Thank you for joining us this morning.

Now we'll begin today's call with a review of the first quarter.

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

I would like to remind everyone that during today's call, taking place on Thursday, April 28, 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 those forward-looking statements.

Potential risks include, but are not limited to, demand for our cyber display and III-V products, development of Golden-i, 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'll turn the call over to John.

Thank you, Rich.

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

2011 opened with record results for Kopin.

We posted a first quarter revenue of $35 million, the highest quoted revenue in the Company's history, and 37% above the first quarter a year ago.

Both our III-V and display product lines delivered strong revenue growth over the first quarter of 2010.

Now let's turn first to III-V.

The world's appetite for smartphones continues to fill the demand for our HBT products.

As a reminder, we supply our products to virtually all of the major power amplifier suppliers.

So regardless of which smartphone OEMs battle for the market share, our technology promises to be a key part of the smartphone growth.

Advanced 3G and 4G devices must be able to switch seamlessly among various frequencies and perform within multiple interface standards.

Our vertical structure transistors technology is ideal for the demanding requirement.

As the architecture of advanced phones becomes more complex, our III-V products become even more valuable to the companies who integrate our technology into their power amplifiers.

A number of investors have asked us how big the smartphone market would become, or can become.

Well, according to a recent New York Times article, International Data Corporation projects more than 450 million smartphones to be shipped in 2011, up substantially from about 300 million phones of smartphones shipped last year.

That growth shows no signs of slowing down any time soon.

As a leading merchant supplier to this growing market, we think, and we believe, we are in a very excellent position to benefit as smartphones continue to grow.

To accommodate this anticipated growth of the smartphone, we have been actively enhancing our III-V production capabilities as well as expanding capacity.

We began our expansion plan in 2009 with the acquisition of KTC in Taiwan, and installing new machines both in Taunton here and in Taiwan.

I'm happy to report we are on track to achieve our target goal of doubling our capacity by the end of this year.

Now let me turn to the -- our display business.

Q1 was a very solid quarter for our military display revenue which increased by almost $5 million to $11.1 million.

Historically, our military display revenue varies from quarter to quarter.

In addition, of course, our growth could be affected by the current federal budgeting process.

However, we do expect our military display business to continue to be very strong, a strong contributor to our display revenue in 2011.

We are thee supplier of display and subsystems for the US Army's Thermal Weapon Sights program.

And we are active in new programs such as the military Enhanced Night Vision Goggle program.

In addition, we have been developing products which should be useful for a new generation of military programs.

For example, one of our new products is our Ruby Module, a new plug-and-play digital interface display module.

We just announced and introduced this Ruby Module at the Defense, Security and Sensing Symposium in Florida this week.

Available in both military and commercial versions, Ruby is a very high-performance display module suitable for a very wide range of product applications.

It is designed to simplify system integrations for a high variety of -- a broad variety of noncustom applications, including video eyewear helmet module display systems and military weapons sights.

Now let me turn to our exciting Golden-i program.

We continue to make excellent progress with our business partner Motorola Solutions in developing our hands-free cloud-computing headset to the production phase.

Golden-I Version 3.5 received certification from the US Federal Communications Commission, achieving a key milestone in the development of this new technology.

In April -- in early April, we have announced the availability to select customers of Golden-i development kits.

The feedback from those customers will be useful in advancing the ruggedized product schedule for 2012.

Although it's only been a few weeks since the announcement, we are delighted to see very strong initial demand.

Now let me update you on the Forth Dimension Displays, our Scotland based subsidiary which we acquired early this year.

The integration of FDD has been very smooth.

The FDD team is now working on a number of exciting product initiatives focused on FDD's high-speed ferroelectric LCOS architecture and excellent color imaging systems, their specialized, very high-performance cinematography training, simulation, 3-D and medical imaging applications.

We are very excited about the project -- prospects.

In summary, both financially and operationally, Kopin is positioned for a very solid year in 2011.

Let me go through some of the highlights.

The worldwide growth of the smartphone market has created unprecedented demand for our III-V technology.

We expect this business to continue to perform well in the quarters ahead.

Second, together with Motorola Solutions, we are making great progress on Golden-i.

We expect this to be an exciting year for software application development and product testing as we move towards true commercialization in 2012.

Third point, although we have increased our R&D spending and have been embarking in very aggressive capacity expansion in III-V, our balance sheet remains very strong with a robust cash position and no debt.

Based on our current business environment and conversations with our customers, we are affirming our full year 2011 guidance for total revenue of $130 million to $140 million.

Now let me turn the call to Rich for his financial review.

Thank you, John.

Total revenues for the first quarter were $34.9 million, up 37% from the same period for 2010.

Keep in mind that military display revenues were down in last year's first quarter due to the timing of a procurement cycle.

III-V revenue for the 2011 first quarter was up 21%, to $17.6 million versus $15.4 million in Q1 of 2010, reflecting a continued strong demand for smartphones and other advanced mobile devices.

On our Q4 call, we mentioned a supply chain issue unrelated to us that did affect Kopin.

That issue was resolved.

And although we can't quantify it, we do believe that resolution had a positive impact on the first quarter revenue.

Display product revenue increased 59% to $17.3 million from $10.9 million in the first quarter of 2010, largely as a result of high military display sales this year.

In addition, FDD had approximately $1 million in revenues during the quarter.

Display revenue for military applications increased to approximately $11.1 million, or 64% of display revenues in the first quarter of 2011, from $6.3 million in Q1 of 2010.

We expect military display revenues in Q2 will be lower than Q1 and then pick up again in Q3.

Consumer products accounted for about 25% of R -- and R&D accounted for 10% of display revenue.

Gross margin was 33.3% in the first quarter of 2011 compared with 26.5% in the first quarter of 2010.

This reflected an increase of sales in military displays and our ability to leverage III-V fixed costs over greater volume.

R&D expense accounted for 18.3% of revenue in the first quarter of 2011, compared with 16.9% of revenue in Q1 of 2010.

Excluding the of FDD, R&D expenses would have been 17.6%.

Higher R&D reflects increased investments to develop III-V products for use in 3G and 4G smartphones and R&D expenses associated with Golden-i.

SG&A expenses were 12.7% of revenue in the first quarter, 14.3% of revenues for the comparable period in 2010.

In absolute dollars, SG&A was up about $800,000.

Q1 2010 had a credit of approximately $400,000 from insurance proceeds.

And in Q1 2011, we had approximately $200,000 in transaction costs for FDD.

Consistent with our previous guidance, we continue to expect R&D expenses to be in the range of 15% to 20% of revenue and SG&A expenses to be in the range of 10% to 15% of revenue for 2011.

Turning to the bottom line, net income for the first quarter was $2.1 million, or $0.03 per diluted share, based on 65.6 million weighted average shares outstanding.

This compares with net income of approximately $1 million, or $0.02 per diluted share, for the first quarter of 2010, based on 67.3 million weighted average shares outstanding.

I would also note the first quarter of 2010 results of operations included a gain of $686,000 from the sale of Micrel stock.

Stock compensation expense totaled $559,000 for the first quarter and was allocated as follows; $123,000 to cost of product revenue, $114,000 to research and development and $322,000 to SG&A.

Cash and marketable securities at March 26, 2011, was $99 million compared with $111 million at year end.

Cash from operating activities was approximately $1 million.

Offsetting that was a decline of $10 million spent to acquire FDD and $597,000 for our stock repurchase plan.

We continue to have no long-term debt.

Accounts receivable days outstanding at March 26, 2011, decreased to 48 days from 58 days at March 27, 2010.

Capital expenditures were $1.2 million in the first quarter.

We continue to expect capital expenditures to be in the range of $5 million to $8 million over the course of 2011, primarily to finish the increase in III-V production capacity.

Turning to our guidance, as John mentioned, we expect full year 2011 revenues to be between $130 million and $140 million.

And with that, we're ready to take your questions.

Operator?

Thank you.

We will now be conducting a question-and-answer session.

(Operator Instructions) One moment, please, while we poll for questions.

Our first question is from Raj Gil with Needham & Company.

Please proceed with your question.

Yes, thank you.

And congrats on good results.

Question on the III-V business if I can.

It seems like the first two power amplifier companies that have come out with reports, TriQuint and RFMD, have cited seasonal weakness in the March quarter and then below-seasonal growth for June.

Some of that has to do with specific customer order pushout.

Some of it has to do with share loss.

Your biggest PA customer, Skyworks is going to report tonight and then Anadigics following.

But there seems to be concern, at least broadly in the handset market.

Maybe if you could describe a little bit about that in more detail.

Are you seeing that impact your business at all?

You had good sequential growth, about 16% in III-V in Q1, maybe discuss that on a growing-forward basis.

Yes.

I made a quick comment.

I guess I often anticipate some people may ask how is that -- the disaster and the earthquakes in Japan impact the whole food chain to us.

Of course, it's a huge tragedy.

We have not seen any real material adverse effects, and partly because the nature of our business and nature of our product and because also we supply to all the key customers, a broad range of key customers.

Go back specifically to III-V, our product is aimed for smartphones.

And I think that when, as you look at -- of course, our customers ship it more to the smartphones.

Some of them ship it to regular phones.

So the smartphone is growing very rapidly, and that sector, I think, is continuing to grow.

And we actually are focused on the right product.

And what's --

I hope I answered your question.

We do not see any adverse effects.

Okay.

That's good.

On the gross margin, it seems like it's picking back up again because of the military.

How should we look at the gross margin profile going forward as military starts to ramp?

We would expect it to be in the mid 30s, 30%, 35% for the full year.

30% to 35%?

Okay.

If you look at the OpEx, OpEx increased pretty significantly in Q1 over Q4, on a non-GAAP basis around $10.4 million.

And it's been increasing, increasing.

Should -- is that the run rate we should be looking for, $10 million to $11 million a quarter?

As we've indicated, the model is that R&D will be 15% to 20% of rev, and SG&A will be 10% to 15%.

So this is an indicative quarter, but we manage it to the rev.

So it'll oscillate from quarter to quarter, but that's how it should shake out for the whole year.

Yes, I think I want to make a comment to that.

I think this is a very interesting situation where we notice a very exciting opportunity opening for us both in III-V as well as Golden-i, which this is the year we will focus on getting commercial for next year.

So we don't intend to slow down, but I think Rich is right.

We manage very correctly between revenue and operations.

Oh, very good.

And then on the seasonality for June and September in the III-V, can you maybe just kind of update again us on how you look at that and also the military side?

Our historical pattern is the third quarter is the strongest quarter followed by the second, the fourth and the first.

That's always been the seasonal pattern.

For III-V?

Yes.

And then military, do you expect that just to -- okay.

You talked about military.

Thanks a lot.

Appreciate it.

Thank you.

Our next question is from the line of Matt Robison with Wunderlich Securities.

Please proceed with your question.

Thanks.

And congratulations on the results here.

Thank you, Matt.

Real quick, let's follow up on the seasonality question because you had what I think of as kind of a little bit of a catch-up quarter on the III-V, so does that kind of flop -- do you think that's going to flip the seasonality around a little bit?

Yes.

It should have some impact.

We really can't quantify how much that catch-up was.

But we do think that might have some impact.

And it's interesting, this whole dynamic in the cell phone business.

You had Nokia losing share but also commenting on their call that because of what happened in Japan, the channel is over-ordered, and the channel inventory in the cell phone business actually grew.

Now, of course, that might be their channel inventory.

It might not reflect others.

You've got obviously completely different dynamics going on with Apple, et cetera.

So kind of -- and then we had some reports, the licensing company SIBA had pretty huge royalties coming out of China for some of the local -- associated with local manufacturers.

Are you seeing maybe a shift towards some of the contract manufacturers in the compound semi-conductor space that might be serving the locals over there, that may be reflected in your business more than some of the other companies that were mentioned by the earlier caller?

Yes.

I think, Matt, your question actually is a $50,000 because we did hear about some of the comments, and we went -- of course, as a company, we go up and down the food chain trying to find out how is that going to affect us.

As we stand today, we have not seen any material adverse effects, which we partly attribute that to the smartphone is where we're focused on.

But right now, we just haven't seen it.

Yes.

And the Nokia story kind of goes well beyond smartphones.

But do you see any shift in the -- getting with some new players in the III-V business or --

Maybe I should point out we do see a shift of our product demand.

The product demand for smartphones keeps on increasing, which, of course, is balanced by the other ones.

Yes.

All right.

So I think that kind of reflects what's going on in the market right now.

I was intrigued by your mention of enhanced night vision goggles.

That program was one that got a fair amount of attention back in 2009 and then kind of seemed to go dormant with some spec issues and redesign if I remember right.

Is that program back in play now?

Yes.

The Enhanced Night Vision program has never gone away.

We, of course, were the winner of the first production.

We were the sole winner.

In fact, ITT was the sole winner.

But they have a second phase coming out, and it's already out -- it's already advertised openly so we can talk about it.

And now we are working very hard to go for the second phase, and which I think it will be probably announced by the middle of -- by beginning of next year.

And how --

That's (inaudible).

How have the (inaudible) changed for that?

So that's why there's a lot of R&D activities going on.

Yes.

And funded R&D it looks like, or is that not related?

It's funded R&D.

But funded R&D you also have [austerity] things we had to do which was not fund of costs.

Yes.

What's -- the military business end, the funded R&D both looked pretty good this -- in the March quarter.

Is this a situation where your military customers are -- they were aggressive to get some business while they could and so that you think they've cleared demand for a few months here?

Yes.

I think that's a very good observation.

It is true.

Also, there are some programs which we've seen -- although nobody can predict.

But I think for the soldiers, like whether it's thermal gun sights or night vision for the soldiers, I believe those programs still will be supported by the military.

And therefore, our customers see it the same way.

So there's another shift.

See, just like in the phones, the phones are shifting to smartphones.

And the military programs are switching to move more to soldiers.

We are situated in the right position right now.

Rich, CapEx, if I heard it right, was down quite a bit.

Was that -- are you waiting on some gear?

Or how should -- should we expect a catch-up?

You gave some numbers that addressed the catch-up.

Could you just kind of go back over that and give us the flavor of the dynamics?

Sure.

As we said last year, the CapEx should all be installed by the June quarter.

And so the way the payment structure works is that the last payment on the reactors occurs after we accept them.

So last year we paid a lot of the upfront.

The reactors have been shipped.

They're being installed.

Many have already been installed.

They're in qualification.

And then -- so in the June quarter, assuming all goes according to plan, we'll be making the final payments on those.

Okay.

So that's -- we'll see kind of a catch-up there too.

Okay.

That's all I've got for now.

Thanks.

Thank you.

(Operator Instructions) Our next question comes from the line of Betsy Van Hees with Wedbush Securities.

Please proceed with your question.

Thank you, and good morning.

And congratulations on the quarter.

Thank you, Betsy.

I was wondering if we could go back through the R&D expense.

Your long-term model is 15% to 20%.

And if we look at it on a GAAP basis, it looks like R&D was 18.3% of overall revenue for the quarter.

So is it fair to say that R&D, given the significant investments you're going to make, is going to be more towards the higher end of that range?

Yes.

Okay.

Thanks.

And then the next question, I was wondering if you could help us with the tax rate for the rest of the year.

How should we be looking at that?

The effective tax rate looks to be about 6% for the year.

Okay.

Thank you very much.

Then I just want to kind of go back to the questions that have been asked, one that Matt asked about the military business and then also about the III-V business.

You said you had the catch-up in III-V and then military is going to be down over the quarter.

So is it fair to say that we could see -- and then also, Rich, you talked about the cadence of how your quarters look, with Q3 being the best.

Is it fair to say that we could potentially see a dip in Q2 on both the revenue and gross margin standpoint and then a snapback in Q3?

Yes.

Or how should we be looking at that?

It's possible.

That would follow normal historical trends.

Okay.

Okay.

And then I guess that's it for my questions.

And once again, congratulations on the quarter.

Thank you.

Thank you.

At this time, we have reached the end of our Q&A session.

I would now like to turn the conference back over to Dr.

Fan for any closing or additional remarks.

I thank everybody for joining us this morning.

As a reminder, we will be hosting a 2011 annual meeting of shareholders tomorrow at 9:00 a.m.

in Boston.

We hope to see every one of you over there.

And also, we will be also presenting at several investor conferences in the coming months.

Please check our website for details.

And this will conclude today's call.

Thank you.

And that concludes our conference call.

Thank you for joining us today.