Kopin Corp (KOPN) 2011 Q2 法說會逐字稿

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You may access an archived version of the call on Kopin's website at www.kopin.com.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

Please go ahead, sir.

Thank you.

Welcome, everyone.

Thank you for joining us this afternoon.

John will begin today's call with a review of our second quarter results.

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, July 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 of 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 afternoon, everyone, and thank you for joining us.

Our second quarter operating results reflect a continuation of our strategy set forth at the beginning of this year.

With balancing short-term financial performance, we are focused for long-term growth.

We have robust growth projections for our III-V products and an opportunity -- a (inaudible) opportunity -- to add a new potentially high-volume military display product to enhance night vision systems by the Army for our current portfolio of Thermal Weapons Sights products.

In addition, we are partnering with Motorola Solutions to develop a potentially game-changing hands-free wireless industrial computer product in Golden-i.

The rapid growth of smartphones, of active participation in enhanced night vision systems and our drive of Golden-i are exciting growth opportunities of Kopin that require significant investments this year.

Despite our aggressive development projects and (inaudible) efforts, through the first half of fiscal year [2001], we have maintained strong operating results.

Overall, our revenues are up 19% and our III-V revenues are up 10% over the same period last year.

Let's talk a little bit about III-V.

Our III-V technology is helping us to drive the record adoption of advanced 3G and 4G technologies across the major smartphone and tablet platforms.

These advanced devices not only require more III-V transistors, but transistor structures that are a lot more complex so as to provide more integration and higher performance.

These advanced transistors are quite challenging to produce, but we have been installing advanced production tools with (inaudible) monitoring systems for these new structures.

Our ability to provide and produce these products in volume is unmatched in the industry.

Turning to our display business.

While the federal budget situation has impacted the timing of military display sales, we expect another year of strong military revenue, as evidenced by our recently-announced $23.2 million in (inaudible) orders for TWS-II Bridge program.

In addition to the TWS-II Bridge program, there is this new exciting high-volume opportunity with the Army's enhanced night vision goggles.

We have been devoting a lot of effort to get qualification systems ready for this program.

If production's efficient, (inaudible) expected sometime in the first half of next year.

Furthermore, we have been actively engaged by military partners on other multiple R&D programs incorporating our display technology for various advanced weapons systems.

The military design pipeline remains very active in terms of a strong demand for equipments that enable our soldiers to gain a technological advantage in the battlefield.

It is important to stress that the military's needs play right into our strengths.

We repeatedly demonstrate our ability to produce display systems that are very rugged in the really harsh operating conditions.

Now let me shift the discussion to Golden-i, our innovative and constructive computer headset for hands-free mobile computing and communications.

Together with our business partner, Motorola Solutions, we continue to make excellent progress in bringing our Golden-i to market in the first half of 2012.

The initial response to field testing on Golden-i by selected customers has been extremely positive.

Golden-i was also demonstrated this month at the Microsoft-hosted Imagine Cup 2011 in New York and the World Future in 2011 in Vancouver.

Looking ahead, with revenues for the first 6 months of 2011 at $66 million and the third and the fourth quarters traditionally our strongest, we are on course to achieve our full-year revenue guidance of $130 million to $140 million.

Robust smartphone demand should continue to fuel our growth in III-V, as well as TWS-II Bridge and a number of military and commercial programs are expected to [generate] momentum for our display unit.

Finally, I want to make a comment.

Market trends point to strong growth in all our product lines.

We are in an enviable financial position to enable us to aggressively capture these opportunities.

Several years ago, we anticipated this ever-accelerating demand for higher performance in mobile devices and thereby have put together a three-year strategic plan in place to capture this demand.

This three-year plan is now entering its final year.

We are on schedule with the plan and we believe that development in the marketplace is also in sync with our plan.

Together, today -- whether it is for consumers or soldiers or medical practitioners or for industrial users -- the (inaudible) for enhanced mobility is (inaudible).

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

Thank you, John.

Total revenues for the second quarter were $31.4 million, up 4% year over year from $30.2 million in 2010.

III-V revenues were $16 million, compared with $15.9 million in the second quarter of 2010.

We believe that our results for the quarter reflect the fact that, although we sell to all the major [P8] suppliers, our market share is different with each one.

So our quarterly results will reflect the various wins among our customers.

However, we continue to benefit from the long-term global trends in smartphones.

Display revenues increased $1.1 million to $15.4 million $14.3 million a year ago.

Display revenue from military applications accounted for $9.2 million of the second quarter revenue, a decrease of 9% over $10.1 million in the same period of last year.

Offsetting the slight decline in military revenues were increases in consumer display sales and R&D revenue.

The increase in consumer display sales was driven by Forth Dimension Displays which (inaudible) approximately $1.6 million in revenues during the quarter.

Gross margin was 35%, up from 25% in the second quarter of last year.

The comparison is a little misleading as Q2 last year was our lowest gross margin quarter.

However, sequentially, we are up a couple percentage points from expense control and production efficiencies.

Consistent with our guidance, R&D increased as a percentage of revenue base to approximately 23% in the second quarter of 2011 from approximately 16%, reflecting increased investments to develop III-V products for smartphones, the qualification of additional III-V production capacity, expenses incurred for the development of night vision products for the enhanced night vision program, and costs associated with the development of Golden-i.

However, we expect full-year R&D expenses to be in the range of 15% to 20% of revenue for 2011.

SG&A expenses totaled 15% of revenue, up from 14% in the second quarter of 2010.

The 2011 increase is attributable to roughly $800,000 of SG&A incurred by Forth Dimension Displays.

We expect SG&A expenses to be in the range of 12% to 15% of revenues for the balance of 2011.

Other income expense for Q2 2011 included gains from the sale of investments of $359,000, which was offset by a foreign exchange loss of $347,000.

Q2 2010 included gains from the sale of equity investments of $1.9 million and foreign exchange gains of $720,000.

Turning to the bottom line, net income for the second quarter was $0.8 million, or $0.01 per diluted share, based on 65.8 million weighted average shares outstanding.

This compares with second quarter 2010 net income of $1.9 million, or $0.03 per diluted share, on 67.4 million weighted average shares outstanding.

We started the year with $111 million in cash and marketable securities and, during the six months ended June 25, 2011, we've generated $3.5 million cash from operating activities.

We spent $10 million used to acquire Forth Dimension Displays, $3.9 million for CapEx and $1.9 million for our stock repurchase plan.

So this gets us to the $99 million of cash and marketable securities at June 25, 2011.

We continue to have no long-term debt.

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 expansion of III-V production capacity.

Depreciation and amortization was $3.8 million for the first 6 months of 2011.

Accounts receivable days outstanding at June 25, 2011 were 58 days as compared to 48 days at the end of the first quarter of the year.

Turning to our guidance, as John mentioned, we may (inaudible) our full-year 2011 revenue guidance of between $130 million and $140 million.

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

Thank you.

(OPERATOR INSTRUCTIONS.) Our first question comes from the line of Matt Robison with Wunderlich Securities.

Please proceed with your question.

Hi, gentlemen.

Can you comment on what you think the range of growth will be for III-V this year?

We've never given specific guidance to any particular product line.

We have said over the next few years we expect the average growth rate to be around 25% -- not that any particular was going to grow over 25%, but over the -- but that's the anticipated range over the next few years.

Yes.

The reason you never gave guidance -- that's why I asked you to kind of give a range (inaudible), because you had some kind of unusual patterns this year with the demand flipping from the fourth quarter of last year to the first quarter for kind of a catch-up and then the unusual -- sort of seasonally unusual sequential decline as a result this quarter, and I'm just trying to get a flavor for how you -- do you think the seasonality for the back half will be more normal so we could maybe see -- or what should we expect?

Well, Matt, this is John Fan.

I think -- I'm going to comment on some of the overall trends.

We're seeing that the phones are moving more towards performance-driven end instead of a cost-driven, at least in the high-end phone (inaudible) there.

And there's a lot of transition going on.

We're seeing an interesting (inaudible) right now.

So although now we are providing this to everybody, we're seeing a lot of [shipments] going on right now.

So overall-wise -- and Rich is totally correct -- we anticipate the smartphone will drive us growth around 25% per year per year (inaudible) the next few years.

It looks like -- except for the Forth Dimension piece, it looks like the commercial side of display was down a bit relative to last year.

What do you -- how are you thinking about the way that market's developing?

Actually, we're seeing -- beginning to see increase right now improvement.

In fact, there's some -- as we mentioned, there's some commercial programs that are doing pretty well.

Is that separate from -- do I think of that as being the traditional consumer electronics or is it more in the i-ware category?

More into a new products area.

So what we do is -- as we said before, we are (inaudible) down our conventional products for EVF or camera, but we're providing new products at much higher margins, and these are coming to the market right now and we're very encouraged by the response on the market that will greatly improve our margins.

And these are -- so they're not -- is i-ware the wrong way to think of it, or is it something --

Well, we don't call it i-ware.

We call everything (inaudible).

Everything's (inaudible) right now.

So this (inaudible) products.

Okay.

Now you mentioned -- I think you mentioned something about some further goggle R&D opportunity early next year.

Is that what you said?

Yes.

They're the night vision goggle.

Yes.

See, what happened is our military product's going through some (inaudible) last three or four years and we [basically] dominate this area.

The next thing we always want to do is to use our display for night vision, which is not (inaudible).

It is more surveillance and other stuff.

And (inaudible) higher volume -- about 1 million night vision goggles out in the market by the soldiers.

What they do is -- this kind of enhanced goggle -- is they combine the night vision and (inaudible) image together, and that requires our display, and that has a -- potentially has a very high volume.

So we've been working very hard on providing a night vision goggle with thermal imaging use into it.

Right.

And you had pretty substantial amount of funded R&D for that in the first quarter, I recall.

Yes.

It is -- this has opened up this year and we've been -- and everything had to be done by the end of the year for decision next year.

Okay.

So -- and then you had a pretty good year-over-year growth in that revenue category for the June quarter.

Do you expect that to persist or do we wait for another couple quarters until early next year before we see another tranche of funded R&D for that?

I think that we'll have -- continue to have strong funded R&D through this quarter -- that being the third quarter -- and then really the heavy lifting for us is over and then it goes to our customers who are going to go through qualification and then it'll get picked in the end of first, beginning of the second quarter of next year.

So you think -- so will -- last year in the back half, the funded R&D kind of went down by half versus -- or more than half from (inaudible).

It won't go down half, but the third quarter will probably maintain as it did in the second, and then it will come down in the fourth.

Okay.

But more importantly -- I think we said in the script -- we are seeing a lot of activities going for the mobile soldiers and we are the one that everybody comes to right now.

So we are aggressively active right now.

And it looks like --

Many other programs.

Yes.

And it looks like your operating cash flow went from about $1 million in the first quarter to $2.5 million this quarter.

And you think -- what do you think the -- what should we expect the trend to be there, Rich?

From a cash flow generation standpoint, the second half will be stronger than the first, but -- and the third quarter will be pretty close probably to the -- a little bit more than the second.

Okay.

Thanks.

I'll let somebody else ask a question.

Thank you.

Thank you.

(OPERATOR INSTRUCTIONS.) Our next question comes from the line of Eric Ramsley with Walrus Partners.

Please proceed with your question.

Hi, guys.

I was wondering if you could explain the disparity between last year's and this year's net loss attributable to non-controlling interest.

The net loss to the -- so we have a Korean subsidiary, which is where that is derived from, and so that reflects what that subsidiary does.

So we own roughly 80% of that subsidiary, so that non-controlling piece is the 20%.

So that's what they -- the 20% folks -- that's what they get.

And so that's just a reflection of the operating results in the subsidiary.

Okay.

Thanks a lot.

Okay.

Thank you.

(OPERATOR INSTRUCTIONS.) There are no further questions at this time.

I'd like to turn the conference back to Dr.

Fan for any closing comments.

Well, thank you very much for joining us this afternoon.

I look forward to updating you on our further progress.

This concludes today's call.

Thank you.

Ladies and gentlemen, this concludes today's teleconference.

You may disconnect your lines at this time.

Thank you for your participation.