Kopin Corp (KOPN) 2011 Q3 法說會逐字稿

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You may access an archived version of the call on Kopin's website at www.Kopin.com.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

Rich Sneider.

Thank you, Mr.

Sneider, you may begin.

Thank you.

Welcome, everyone.

Thank you for joining us this morning.

John will begin today's call with a review of the third quarter, I will take you through the financials, and then we will be happy to take your questions.

I would like to remind everyone that during today's call taking place on Thursday, October 27, 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 CyberDisplay and III-V products, development of Golden-i 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 today.

Our financial results through the first nine months of the year highlight our focus on investing in longer-term opportunities that have the ability to generate profitable growth for Kopin in the years ahead.

But first, let me spend a moment discussing our third-quarter results and sharing our business outlook.

Revenue for the third quarter was $29.6 million, down slightly on both on a quarter-to-quarter and a sequential basis.

On the bottom line we earned about $800,000 or 1% per year compared with $1.4 million or $0.02 per share in quarter three last year.

Our third-quarter III-V revenue was sequentially down from second quarter, which is not the norm.

The unusual trend may be the result of cell phones and tablets are being offered more continuously throughout the year as opposed to primarily before US holiday season.

Our fourth quarter has started out strong with a marketing increase in qualification and production activities of BiHEMT among our integrated circuit customers.

We believe BiHEMTs are designed to achieve the performance in small footprints required by smartphones.

We have been planning for this disruptive change.

We have both the world's most advanced equipment to produce BiHEMT products in volume and the world's first patent pending in situ monitoring system to control the growth of such complex structures.

Our in situ monitoring measures every layer as it's being grown, contributing to a higher quality and yield.

As a reminder, BiHEMT is a vertical transistor structure comprising of HBT transistor grown on top of a pHEMT structure.

BiHEMT represents a real advantage through the RF circuit designer because the PA and switch content can now be monolithically integrated and optimized.

Therefore, BiHEMT can lead to a smaller module, reduced packaging complexity, while enhancing circuit performance.

We have anticipated this change and have been aggressively installing advanced reactors and monitoring systems for such structures.

Based on the level of activities and the forecast growth for the smartphone market, we feel very good about the prospects of our III-V business as we go forward.

With regard to our Golden-i program, which is partnership with Motorola Solutions, we continue to invest towards the commercialization of our Golden-i hands-free computing headset for workers in the manufacturing, engineering, public safety, and construction industries, just to name a few.

We believe that Golden-i will represent a paradigm shift in the way people use computers.

It is a hands-free, voice gesture control in one cloud computing experience.

The near eye display, the near ear speaker, and voice recognition capabilities give users the power to perform any computer task everywhere or anywhere they have Internet availability.

Golden-i field testing is continuing.

In the third quarter we have installed a camera system Golden-i and the response has been great.

We believe the majority of Golden-i users will want a camera system.

Motorola Solutions and Kopin remain on track to bring Golden-i to market in the first half of 2012.

Turning to our military display products, our quarterly revenues are functional government procurement cycles.

For the year we are essentially flat with 2010 which was as expectation.

Looking forward to our 2012, our night vision product went through the first round of testing and the feedback was very good.

Our customer is now supplying governments with the next round of qualification units.

These will be tested through the first quarter of 2012 after which it is anticipated the government will award production group contracts.

Therefore, assuming a defense budget squeeze, we have been holding on quite well because of our security imaging products for our soldiers.

In summary, our performance through first nine months 2011 has been quite strong.

Our revenues are 10% ahead of the same period in 2010.

We have generated $10.6 million cash for operating activities allow us to maintain a strong balance with $103 million in cash and no debt.

Our financial performance is especially strong when consider our aggressive spending on R&D and new product development.

Year-to-date our R&D spending has spent up to $6 million year over year.

This spending has been driven by the demand of BiHEMT products, the need to create night vision goggles for qualification testing in 2011, and Golden-i product.

We do expect our R&D spending will begin to trend down soon as these three product developments are all almost completed.

I would like to point out these three products are game-changing in their respective markets; will represent quick growth potential for us in 2012 and beyond.

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

Thank you, John.

Total revenues for the third quarter were $29.6 million, down 6% year over year from $31.6 million in 2010.

III-V revenues were $15.5 million compared to $16.6 million in the third quarter of 2010.

Display revenues decreased $0.9 million to $14.1 million, $15 million a year earlier.

Display revenue for military applications accounted for $7.3 million of third-quarter revenue, a decrease of 30% from $10.4 million in the same period last year.

Offsetting the decline in military revenues were increases in consumer display sales which rose 35% to $5.8 million and R&D revenues which were up $700,000 [to] $1 million.

Forth Dimension Displays, which we acquired in January, accounted for approximately $1.5 million in revenues during the quarter.

Gross margin for the third quarter was 33.2% of product revenue or $9.5 million compared with 32.3% or $10.1 million in the third quarter of last year.

R&D expense increased on a percentage of revenue basis to approximately 22% in the third quarter of 2011 from approximately 15% for Q3 2010.

The increase reflects investments developed to our BiHEMT products for smartphones, qualification of additional III-V capacity, development of night vision products for the Enhanced Night Vision program and costs associated with Golden-i.

We expect full-year R&D expenses to be approximately 20% of revenues for 2011.

SG&A expenses totaled 15% of revenues, up from 12% in the third quarter of 2010.

The increase in 2011 is attributable to $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 and expense in Q3 2011 included a gain from foreign currency fluctuations of $1 million.

Q3 2010 included foreign exchange losses of $0.6 million.

Turning to the bottom line, net income for the third quarter was $0.8 million, or $0.01 per diluted share, based on 65.4 million weighted average shares outstanding.

This compares with third quarter 2010 net income of $1.3 million or $0.02 per diluted share based on 67.8 million weighted average common shares outstanding.

At September 24 we had cash and marketable securities of $103.3 million.

We started the year with cash from marketable securities of $111 million and in 2011 we have generated $10.6 million of cash from operating activities, spent $10.1 million to acquire Forth Dimension Displays, $5.2 million for CapEx, and $3.1 million for our stock repurchase plan.

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 $6 million for the nine months of 2011 and approximately $2.2 million for the third quarter.

Non-cash compensation expense was $706,000 for the third quarter of 2011.

As a result of an equity incentive compensation award in the third quarter, we anticipate fourth-quarter non-cash compensation expense will increase by approximately $500,000.

Accounts receivable days outstanding at September 24, 2011, were 51 days as compared to 58 days at the end of second quarter this year.

Turning to our guidance, based on the current trends in our business we expect our 2011 revenues to be in the range of $128 million to $132 million.

And with that we are ready to take your questions.

(Operator Instructions) Raj Gill.

Thank you.

Just wanted to get a better understanding of what is going on in III-V.

Dr.

Fan, you mentioned that the III-V revenues were affected by kind of the shift in wireless handset sales from a pattern that is more continuous versus kind of a holiday season build.

Maybe if you could elaborate a little bit on that.

That would seem kind of counterintuitive; there is a holiday season build that happens, there are more phones that come out.

Why would III-V be down in the third quarter when typically historically it has been up?

Is there anything going on beyond that?

Is there any market share dynamics going on?

Maybe if you could elaborate that in more detail, that would be helpful.

Yes, let me make a comment on that.

It is obviously the third quarter is off and on.

Normally we do have a strong third quarter, but we have seen these mixed signals.

Third quarter certainly was weaker but the fourth quarter is very strong.

So there are many explanations.

One of the explanations is in fact when nowadays people are introducing phones all through the year, new models, and they are no longer scheduled towards the Christmas season.

Also, phones are being sold all around the world and holidays around the world are phased differently.

For instance, the Lunar New Year, which is a big thing in Asia, comes after Christmas.

So several of those things happening.

And then, of course, there are some problems where the handset sales have been slow, slower now, but we have obviously seen mixed signals.

Our third quarter was weak; at our fourth quarter is very strong.

Yes, I am just trying to -- that is interesting because Q4 is typically down from Q3 and the power amplifier customers probably want to see how the Christmas season goes before they scale back on their orders or pair down on their inventory, so the Christmas build is good.

Then Q1 of next year won't be as bad.

If it's bad then they will carry excess inventory into Q1.

So I am just wondering how I should be thinking about III-V in terms of seasonality.

Not just for the near-term quarters but for Q1, Q2, and Q3, Q4 going forward, is there any read-through in terms of how I should look at seasonality in that business?

Yes, I think this actually has been an issue that we are looking at.

You look forward it's strong and you look next year it's strong so.

Also, I think it explains some of the things happening; maybe we are gaining market share because of the disruptive change going on from ordinary HBT go to BiHEMT.

And we are obviously leading the pack right now.

Any share gains that you can update us on III-V, say, at RF&D or other potential customers?

Well, it's a bigger question.

We supply our supply to all our customers, so we are obviously sensitive to really detail which customer is stronger.

However, it is very clear that some of the new phone models our products are getting pretty good penetration.

Thank you.

(Operator Instructions) Matt Robison, Wunderlich Securities.

Thanks for taking my call.

This is actually Sam Brownell sitting in for Matt Robison today.

First question I have, could you talk a little bit about why the military business is down sequentially and what you foresee for the fourth quarter?

Yes.

Again, as we have stated over the last few years, it really -- quarterly guidance on the military is extremely difficult.

It doesn't follow any logical pattern.

It's really based upon their procurement cycle and Congress and a whole bunch of things.

So we anticipated, as John said in his remarks, that we thought that we would -- 2011 would be essentially flat from 2010; we are on track.

And that inferred that fourth quarter will be up over Q3.

Okay.

All right, great.

Thank you.

Then I noticed that you guys had talked about kind of first round of testing and the feedback was good with the night vision goggles.

I was wondering if you could give us a little bit more of the milestones for next year in terms of the selection process.

As I understand it -- so what happened was during the summer time the first round of testing was completed.

Our units passed very favorably.

Now, I believe just this week our customer started shipping to the military for the next round of testing.

That testing will continue through February.

Assuming that you make it through that gate then the government, as I understand it, will ask the folks that did make it through the gate to bid.

And then it actually becomes -- so once you pass the technical milestone then in February you have to put a price tag associated with your unit.

And that will happen in the March timeframe.

Then we understand that from the other government award contracts.

We are purely speculating.

If it follows the thermal weapons site model, the government will select one or two, maybe three, vendors and not each vendor will get the same order quantity.

That will be dependent upon their pricing.

And then that will continue as the program progresses.

Okay, great.

And then for the non-military participants in the third quarter, what are the primary drivers of that?

I think that we mentioned that we are producing new product for the consumer EVF for the viewfinder for the cameras.

And those EVFs are much higher resolution, higher price.

That product was just introduced and we are catching a lot of design wins.

So we expect fourth quarter will continue to ramp.

Okay.

All right, great.

The last question I have here is back to the III-V revenue.

Talking about the fourth quarter, just really quickly just to refresh me, do you expect a recovery and is that rebound with current customers or is it going to be driven by new customers?

On the III-V?

Yes.

We are basically supplying III-V to almost all the customers on all significant [PA] supplies in the world.

So it's just a shifting between different customers that we have, the share.

So we obviously (multiple speakers) all of them anyway, yes.

Okay.

Do you expect meaningful volume from new customers anytime soon in the fourth quarter or the beginning of next year?

I probably cannot make comment to that.

Okay.

All right, all right, no problem.

Thank you very much, guys.

Thank you.

Walter Ramsley, Walrus Partners.

Thank you.

Congratulations.

Just a couple of things.

The Golden-i deal, did you collect any revenue from Motorola in the third quarter?

There were some unit sales.

But, again, these are going out to folks that are developing software applications to it or trying to understand how they can use it in their organization.

These are not the units that will actually be introduced to the general public next year.

Right, okay.

Can you provide an update as to how many of those end users are testing the product at this point?

There is a couple hundred units out there, so it's very hard to describe how many customers.

But we have extremely active activities going on.

It varies all the way from military to Homeland Security to industrials to factories.

It turns out -- I think it has become very clear this is a really, pretty game-changing.

This is really the first time a computer that is really going to be driven by voice and gesture, so that the era of punching keys or touchscreens are changing to voice.

Yes, it looks like a great opportunity.

With the commercial launch next year do you have any idea how quickly the adoption rate will ramp up?

I mean, we are obviously internally between us and Motorola has a pretty modest initial ramp because I think they are basing on their experience for industrial computer being introduced.

But this is so disruptive, so there is nothing like that in the world right now, so we are guessing where it is.

Our model [to use smallest] ramp.

And just switching gears, the BiHEMT products, I am not really that familiar with what is going on there.

Can you take a minute and explain?

Is that pricing is the same as the existing product, and what share of your business does BiHEMT account for now and whether the whole industry is going to switch over to that?

Or what that product is all about?

This again is a new thing.

BiHEMT basically, in the early days, now current days actually, in an RF situation you have -- you have a HEMT which is really basically a switch, [transfers a] switch and then we are HBT, which is the power transistor.

Normally people make them in separate places, and they are grown separately and fabricated in separate fabs.

But what is happening is that, as all technology does, they try to combine both the switch and HBT in one shot.

The combinations done by (inaudible) will grow on top of each other.

So what happen, the switch and the HEMT, HBT normally you have only a few layers.

Now the whole structure now is [all the weight about] 30 atomic layers.

So guys like us that grow 30 atomic layers at each lab better not have no mistake in thickness, in developing, in everything that is needed.

So it's extremely hard to control, and that is why it took us about three years to develop technology and equipment to do so.

However, such devices are out there and to view around phones.

And I would not want to mention which phones do have it, but chances are you probably can guess; all the new advanced phones on the market have them.

So it's really changing; it's not just one company doing that.

I think about two years from now I won't be surprised 60%, 70% of all the advanced phones will be using it.

Okay.

Just one last thing, in the past the Company has kind of ballparked the smartphone industry, growing maybe 25% to 30% in units and 20% to 25% in revenues to Kopin.

Is that still, more or less, the way looks?

Yes, that projection was spaced out; in three or four years we expect to grow around 20%, 25% a year.

We still stand by that.

We think that BiHEMT will allow us to do that.

Okay, thanks very much.

Appreciate the chance to talk to you.

Thank you.

Nate Shapiro, SF Investments.

Hi, John.

Had a question on Golden-i.

Hi, Nate.

How are you?

I haven't talked to you for a while.

How are you?

Well, I am always on the calls and I love seeing the progress that the Company makes.

With Golden-i, because it is a disruptive product and so new in the industry, what kind of changes are you likely to encounter as different customers have different preferences and different demands for its use?

Yes, this is, Nate, a very good question.

You know we have -- Golden-i has gone through two models.

Last year was Golden-i 3.0, this year is Golden-i 3.5.

Next year Golden-i 4.0, which is Motorola, come out which will be the ruggedized industrial version.

We put all these models out and test marketing, people tested.

Last year the 3.0 has no camera and it became very clear everybody wants to have a camera.

3.5 now has a camera and it caused another range activities.

So now what we are seeing is that this year especially we found that software becomes very, very important -- the application software, the ease-of-use, the way to interconnect all the devices, the cameras, the phones, the cloud computing.

So we have lot of activities on software right now in preparation for the 4.0 coming out in the next year.

It's very clear that -- and I think you will see more indications from industry -- this becomes a rage, everybody now looking at it.

I think it's very clear the next sets of computer will be voice anyway and hands-free is perfect for voice.

So we seem to be in sync, but actually we have been working on Golden-i for about 3.5 years.

We saw that coming and we are right now situated pretty well.

Great, that is terrific.

Look forward to its introduction.

Thank you.

There are no more questions at this time.

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

Fan for any closing or additional remarks.

Thank you for joining us this morning.

We are excited about our progress and we look forward to updating our further progress.

This concludes today's call.

Thank you.