Kopin Corp (KOPN) 2011 Q4 法說會逐字稿

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You may access an archived version of the call on Kopin's website at www.Kopin.com.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

I will now turn the call over to Richard Sneider.

Please go ahead, sir.

Thank you.

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

John will begin today's call with a review of our fourth quarter and 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 Wednesday, March 7, 2012 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.

Financial risks include, but are not limited to, demand of our CyberDisplay and III-V products, development of Golden-i operating -- and operating results of Forth Dimension Displays, Kopin Taiwan Corporation subsidiaries, 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.

In addition, I would like to remind you that today's discussion will include references to non-GAAP measures.

Kopin believe that such measures give investors an additional method to evaluate historical operating performance and identify trends, additional means of evaluating period-over-period operating performance and a method to facilitate certain comparisons of operating results to peer companies.

A reconciliation of the non-GAAP measures to the most directly comparable GAAP measure is available in today's release which can be found on our website, www.Kopin.com.

And with that I'll turn the call over to John.

Thank you, Rich.

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

We concluded a successful 2011 with solid fourth-quarter growth, offsetting an increasingly challenging environment for the defense industry with excellent performance in our III-V business.

Total revenue for the fourth quarter of 2011 increased 6% to $35.2 million or $33.1 million for the comparable period in 2010.

We remain solidly profitable operationally even though (inaudible) while we still continue to invest heavily in research and development, which actually grew by more than $4 million for the year of 2012 -- or 2011.

At the same time due to strong cash flow for operating activities we concluded the year with more than $105 million in cash on our balance sheet and we continue to have no long-term debt.

Our III-V business finished this year on a very high note as revenue was up year-to-year in the fourth quarter.

The outlook for the business remains excellent and here's the reason -- while others retrenched during the economic downturn of the past several years we actually invested.

We sold many new [advanced] equipment and expanded capacity both here in Taunton and at our manufacturing site in Taiwan.

A new in situ proprietary monitoring system has been installed in all our systems.

This enables any problems in our wafer growth process to be immediately detected and corrected.

Our investments have helped to enhance yield, improve quality and lowering cost.

Worldwide smartphone demand remains a strong indicator for our III-V business.

Right now the demand is very good.

The increased features and functionality of today's mobile devices require [increasing] complexity on the circuits that power them.

The manufacturing investments that we have they has elevate our III-V [capacity] capabilities.

With advanced (inaudible) from HBT wafers to multi-layer complex BiHEMT structures that combined HBT and pHEMT.

BiHEMT delivered the highest performance with smaller footprints required by next-generation smartphones.

My integrated circuit customers, BiHEMT qualification production activities increased significantly in the fourth quarter.

Our intimate knowledge of device and material interrelations that came through our many years of experience proved to be very critical at this juncture.

Moving to our display business, total revenue was roughly flat in the fourth quarter on a year-to-year basis as increased demand in our consumer electronics area was partially offset by increasing revenue for our military applications.

For the full year our display revenue was up roughly about $6.5 million.

The near-term horizon of our military display business is not encouraging.

I'm sure that many of you have read the stories about the Pentagon's plan for military budget cuts including a significant reduction in troop levels.

For Kopin the scaled-back defense budget is (inaudible) to me a sharp decrease of about $20 million in military display revenue in 2012.

How (inaudible) expect to make up that difference over this year?

We continue to supply display systems on thermal weapon sites, TWS program.

In fact, we must emphasize we have not lost any market share in TWS.

The spending decrease in military revenue is related strictly to the smaller defense budget.

Encouragingly we're actively engaged with our display partners in a number of promising R&D projects.

In December we announced the delivery of the world's highest resolution micro-display to Vision Systems, [Inc.], VFI.

The (inaudible) display, which (inaudible) high definition resolution was developed by Kopin under funding provided by VFI and US government.

It's specifically targeted for the next generation night vision system for the US Department of Defense.

To deal with these budget cuts were not unexpected.

We've been planning for this situation for some time.

For example, at the end of this month we anticipate the completion of our planned consolidation project with which we started over a year ago.

All our [dimension] display manufacturing activities are being consolidated into one facility.

This in turn is allowing us to bring all our domestic III-V facility activities under one roof and to effectively close our other US III-V facility this month.

Actions like these result in significant cost savings and ensure Kopin will remain financially strong and flexible so that we can continue to invest in the areas of business which we believe will present new growth engines for the Company.

While this area is Golden-i, which we continue to work very closely with our partner, Motorola Solutions, towards commercialization of product for the industrial market.

Active product testing is ongoing and the feedback is very positive.

Golden-i is a game changing, hands free computing handset with camera and with voice and (inaudible) control.

It is a product which we believe will be our most important growth engine in the coming years driven by demand for military, medical, industrial, public safety and ultimately consumer applications.

Beginning in 2008 our investments in Golden-i and focus on hardware (inaudible) power saving chips, the displays, (inaudible) ergonomic system design and packaging, (inaudible) [offering] and system operating systems and device control software to now recently dedicated application software.

The result is today Golden-i is an integrated system with extensive hardware and software seamlessly working together.

As we have previously announced, Motorola Solutions is our Golden-i marketing partner for industrial applications and we're working with Motorola with a goal of launching the product into industrial markets this year.

This is also very important (inaudible) range of our alliances on Golden-i with development partners including Microsoft, Texas Instruments and (inaudible).

In January at the CES show Verizon and Kopin exhibited the application of Golden-i for public safety which will be -- which we believe will be a killer application.

The response at CES was overwhelming.

We and our partners are putting together an entire ecosystem and we're making breakthrough progress in all those fronts.

As we stated, we believe Golden-i will be an important growth engine in the coming year.

To us many folks who are using laptops, tablets and smart phones are potential [complements] to Golden-i.

The potential market can be very huge.

As we speak more and more companies are getting interested in these new types of mobile devices.

Kopin has pioneered in the hands free mobile devices for many years.

We have filed and are continuing to file many additional patents in this area.

In summary, we anticipate another strong year of global -- growing global demand for smartphones to drive us another (inaudible) year of solid performance in our III-V business in 2012.

In 2012 we will continue to focus on our advanced III-V technologies for ever more powerful smartphones, as well as working aggressively with all our partners for the successful product launch of our Golden-i.

We believe this investment will position us to further capitalize our leadership position in III-V technology as well as our advanced imaging systems for consumer and industrial markets.

We will drive both market share and better gross margins and the longer-term growth of Kopin.

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

Thank you, John.

Total revenues for the fourth quarter were $35.2 million, up 6% year over year from $33.1 million in 2010.

Full-year revenues for 2011 increased to $131.1 million from $120.4 million for the comparable period of 2010.

III-V revenues were $17.4 million for the fourth quarter of 2011 compared to $15.1 million for the fourth quarter 2010.

For fiscal year 2011 III-V revenues rose 6.8% to $66.5 million compared to $62.2 million for fiscal year 2010.

Display revenues decreased $0.3 million to 78 -- excuse me, $17.8 million from $18.1 million a year earlier.

For the full year display product revenue increased 11% to $64.7 million from $58.1 million for fiscal year 2010.

Display revenue for military applications accounted for $38.9 million of revenues as compared to $40 million for the same period last year.

Consumer display sales rose to $20.6 million as compared to $15 million in 2010, the increase was attributable to our FDD acquisition which had $4.5 million of revenue in 2011.

R&D revenues increased to $5.2 million from $3.2 million for last year.

Gross margin for the fourth quarter was 36.1% of product revenues, flat with 36.2% for the fourth quarter of last year.

For 2011 fiscal year, gross margin was 34.6% versus 30.4% for the year earlier period as a result of manufacturing efficiencies in part resulting from higher sales volume.

R&D expense decreased slightly as a percentage of revenues to about 17% in the fourth quarter of 2011 compared to 17.6% of revenues in the fourth quarter 2010.

Full-year R&D expense totaled 19.7% of revenue, up from $16.4 million in 2010.

The increase reflects the expenses facilitated for the development of new III-V products for the smartphone market, the qualification of our KTC capacity, products for the next generation of night vision site and Golden-i project.

We expect full-year 2012 R&D revenues to be in the range of 15% to 20% of revenue.

SG&A expense totaled 15.6% of revenue for the fourth quarter of 2011 compared with 9.3% in the fourth quarter of 2010.

Fourth-quarter 2010 SG&A expenses were low because they included a credit of $1.4 million from the receipt of insurance proceeds.

SG&A expenses accounted for 14.4% of revenues for the full year of 2011 versus 12.3% for 2010.

The increase in SG&A is primarily attributable to, again, the credit in 2010 for the insurance proceeds and the addition in 2011 of FDD SG&A.

We expect SG&A expenses to be in the range of 10% to 15% for 2012.

Turning to the bottom line, the fourth quarter was a loss of $67,000, this compared with a fourth-quarter 2010 net income of $4.7 million.

As noted in our morning's news release, our 2011 results included two non-cash events, a non-cash impairment of goodwill and other intangibles of approximately $5 million and an income tax benefit resulting from the release of a valuation allowance of $4.3 million.

The $5 million impairment charge is related to our subsidiary, FDD as a result of a reassessment of the future operating results.

When we acquired FDD in January 2011 the value of the intangibles was derived based upon forecasted operating results.

Part of FDD's large customers have pushed out its demand, so we have reassessed the value of the intangibles in goodwill.

(inaudible) impairment charge reflects the Company's current estimate of the fair market value of the business.

The value of this is subject to change according to the final results of impairment testing.

The final charges affecting goodwill and intangible assets will be reflected in the Company's annual report on Form 10-K as filed with the Securities and Exchange Commission.

The tax benefit of $4.3 million relates to deferred tax assets at our KTC subsidiary which were fully reserved.

However, based on our current expectations we believe KTC will receive a tax benefit in the future from these assets and we removed the reserve.

The results for Q4 of 2010 included gains of $0.6 million from the sale of patents, the receipt of $1.4 million of insurance proceeds.

Excluding certain of these items and stock compensation expense non-GAAP net income for 2011 fourth quarter was $2.4 million or $0.04 per diluted share compared with $4 million or $0.06 per diluted share for the fourth quarter of 2010.

Net income for fiscal year 2011 was $3.6 million or $0.06 per diluted share compared with $8.9 million or $0.13 per diluted share for fiscal 2010.

Full-year results for 2011 include both goodwill impairment and tax benefits just mentioned.

The results for 2010 include gains of $0.8 million from the sale of patents the Company was no longer using, the receipt of $1.8 million of insurance proceeds and $2.6 million from the sale of investments.

Excluding certain of these items and stock compensation, non-GAAP net income for 2011 was $8.3 million or $0.13 per diluted share compared with $9.7 million or $0.15 per diluted share in 2010.

Kopin generated $18.1 million of cash from operating activities for the year ended December 31, 2011; we spent $5.9 million for capital expenditures and $4.4 million for repurchase of stock.

Cash and equivalents and marketable securities totaled $105.4 million at December 31 compared with $111 million at December 25, 2010.

The Company had no long-term debt as of December 31, 2011.

Depreciation and amortization was $8.7 million for 2011.

Stock compensation was $1.7 million for the fourth quarter and $3.9 million for 2011.

The expense was allocated as follows -- for fiscal 2011, $613,000 was allocated to cost of product revenue; $578,000 to R&D; and $2.7 million to SG&A.

Accounts receivable days outstanding at December 31 were 46 days compared with 51 days at the end of the third quarter of this year.

Turning to our guidance, based on current trends in our business we expect our 2012 revenues to be in the range of $110 million to $120 million and we are currently expecting a return to our historical pattern of Q3 revenues being the highest followed by Q4, Q2 and then Q1.

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

Matt Robison, Wunderlich Securities.

Good morning and congrats on the III-V results.

First of all, can you talk a little bit about the growth range you expect for III-V this year?

Sure.

So obviously we have a host of customers and ultimately it will come down to how they fare in the marketplace because we have various levels of their production.

But at the end of the day we're expecting somewhere in the neighborhood of 10% to 15% growth.

Okay.

And does that include any incremental customers or is that pretty much status quo with what -- the customers that you had for most of 2011?

That includes incremental customers.

Okay.

And you didn't have any meaningful incremental customers in the fourth quarter, did you?

No.

Okay.

What are we -- what are we thinking about in terms of timing for Golden-i aside from just the design kit kind of run rates you have now?

Are you asking for our revenue estimates?

No, not specifically.

More about timing of when you think you'll get an uptick in the Golden-i activity that reflects some sales into live applications by your customers?

I think that the product right now is planned to be launched later on this year.

So we do not expect a large revenue coming from Golden-i, but there will be revenue this year.

So fourth quarter for kind of an uptick in the --?

Yes.

It is the industrial market it will take a little time to ramp up, but the goal is to launch the product later on this year.

And, Rich, what do you expect -- how much did you expect OpEx to be cut?

You can kind of figure those out.

What we said was that R&D will be in the 15% to 20% range and SG&A will be in the 10% to 15% range, so it will be kind of midpoint of those ranges against the new levels of revenue.

And do we expect to see some charges associated with these reductions?

No.

You'll see on our balance sheet there's something called asset retirement obligations, it's roughly $1.2 million.

So we have been accruing for this eventuality over the last couple years.

Okay, so no -- all the facilities consolidation is -- has been accrued for, in other words?

There will be some termination -- [employment] termination benefits, but they're not big dollars.

Okay.

And the military sales, I know there's a big range in ASPs depending on which customer gets what portion of the business.

Does that impact the degree to which you have closures?

I'm not sure what you mean by closures?

Well, if you have -- you have various levels of manufacturing depending on which customer you sell to is my understanding.

That's correct.

Does that affect the timing of the plant -- of your plant consolidation?

Oh, I see.

No.

No, we've been working this out with our customers for the last couple years making sure the facility will be qualified and it would be a seamless transition.

Yes.

In other words, whoever does a customer (inaudible) everything is taken care of in the planning.

So there we did prepare it already.

Okay.

And the consumer, should we expect a decline -- not including the Forth Dimension piece, should we expect the consumer piece to decline this year?

I guess what I'm saying is not including Forth Dimension or Golden-i.

So I guess we're talking about cameras and eyewear, should we expect that to drop this year?

No.

No.

Okay.

That's it for me -- oh wait, just real quick.

I know you mentioned it, but I didn't quite catch it.

What was that cash flow from operations and the CapEx again?

So, cash flow from operating activities was $18.1 million and CapEx was $5.9 million.

And those are full-year numbers, right?

That's right.

You don't have the quarterly -- the fourth quarter first of (multiple speakers)?

No, I don't.

I don't have it in front of me.

Okay, thanks.

(Operator Instructions).

[Thane Carroll], (inaudible) Securities.

A couple of questions I guess.

As sort of a follow-on to the consumer business, if we take out the impact from FDD it looks like the consumer display business, Rich, was probably flat year over year.

Do you expect that to grow in 2012 or remain flat?

And how is that business remaining so resilient?

Well, it actually grew a little bit over last year, we expect it to grow a little bit more this year.

Can you define "a little bit", Rich?

I could, but I'll just leave it at that.

Well, actually maybe -- this is John Fan -- maybe we give a little bit more light to the situation.

As you may remember, last year -- actually year before last we actually decided to exit from the low-margin activities in the consumer electronics area -- arena, mainly for low-end cameras.

Well, what happened is we converted to high-end cameras and the revenue began to grow.

But it so happens now it looks like digital camera is going to the high-end cameras, the low-end cameras are going to the cell phones.

So we're seeing a very interesting transition as we speak.

As the transition completes itself I think it will be an interesting growth area for us certainly later part this year, maybe certainly for next year.

So everything turns against, everything goes to the high-end and our displays are very well suited for those high-end camera.

Okay.

Rich, I think either you or John was mentioning that the consumer electronics show, that the Golden-i was very well displayed there.

But I actually bumped into a gentleman over in Barcelona at the Mobile World Congress that was walking around with a Golden-i headset on and I pulled him aside and talked to him.

There was actually quite a bit of interest, a lot of people were asking questions about the device and so forth.

So there was somewhat of a presence over there and he said there was a lot of interest -- as he was bumping into people and people were seeing him wearing the device.

Yes, we decided not to be very, very high profile over there because we have so much activity going on domestically.

But, yes, we had feedback coming from Europe that the response was very good.

The whole Golden-i situation, this is such a new category it's very hard for people to comprehend.

But the last two years it's a lot of momentum and you're actually seeing a lot of companies in addition to us [not getting involved] with this.

And it could very well be the next best thing after smartphones.

John, is there a new version of it coming out?

Like you said, MSI is going to have this industrial version or Motorola Solutions.

Is there one for the non-industrial market that's coming out that might be a little bit sleeker or thinner or maybe a little less rugged?

Unfortunately I cannot comment (inaudible) there's so much activity going on.

But it is logical to assume there should be several versions, one for professional and one for consumer.

Okay.

And then looking at the III-V business, if you talk to the chip guys, a lot of them that you're selling into, they're sort of looking for that 10% to 15% growth.

So I guess my question for you is, as you're gaining share, and it sounds like there's some new customers that have come on board, as you ship more of the BiHEMT product, which I'm assuming carries a higher ASP, and actually one of the consolidations that's happening on the chip side is moving to these converged devices or hybrid devices which probably impact the chip guys but may not impact you as much.

Can you grow faster than the growth rates that the semi guys are putting out there?

There's market consolidation going on right now, it's a very interesting situation.

Just before the (inaudible) we see actually more PA, power amp suppliers in the world right now, some new entrants.

And I don't know how the whole market will settle down.

But our feeling is that 10% to 15% is where -- as you [reach] our data is out -- our estimate.

So obviously if something turned differently it could be higher, yes.

We still have -- we have installing capacity to be able to grow faster than that, yes.

Okay.

John, what percent of the wafers are BiHEMT?

We think (inaudible) but the BiHEMT percentage is getting higher and higher.

BiHEMT is a new product.

I think everybody is still trying to learn how to design it in.

For us, trying to make sure we can to grow it efficiently and reproduce fully.

But it's no longer a curiosity, it's a real product.

Okay.

And then, Rich, on the gross margin, what is it -- the MS facility that's closing down the little one out front?

The 695 facility, that's right.

Okay.

And can that -- can the consolidation of that facility and the stuff that you've done so far -- can that offset -- I'm assuming there's going to be a hit to gross margins because the military is typically a high margin business, right.

So where should we model the gross margin in 2012?

The low 30%s.

Low 30%s, so it's above 35%?

Yes.

Okay.

Any plans on cash going forward?

The cash has been very good, your cash generation has been good.

Any plans, whether it's in CapEx or something, on the cash front?

At this time we're expecting 2012 to again be another strong cash generating year and CapEx -- we're probably in that $5 million to $8 million range.

And then the rest, we'll look at the stock buyback.

That's been the two primary sources of cash usage for the last couple years other than the FDD acquisition.

Okay.

And then last one, the R&D and SG&A, the guideline that you put out there, that's non-GAAP, right?

That's GAAP.

Those are the GAAP numbers?

What would it be on a non-GAAP?

And should we (multiple speakers) be converting over to non-GAAP?

Are you going to start talking more non-GAAP going forward?

Yes.

One of the drivers is the stock compensation expense, some of the programs that we've initiated are using kind of what they refer to as Monte Carlo models.

And so it's really out of our control, the input.

So right now I think we're modeling something in the neighborhood of $2.5 million for stock comp expense for this year.

That number, as I said, can fluctuate.

So that's a big driver.

And then we'll see as we go by quarter to quarter if there's anything else that pops up that would impact it.

Okay.

And it's just a little bit of the stock compact that hits COGS, most of it's down on the OpEx?

That's right.

Okay, great.

Thanks, guys, good luck.

(Operator Instructions).

[George Blogen], Private Investor.

I've seen a great deal of [Near-i] demonstrations by a lot of companies, but let's talk primarily about Google.

Now would Google's Near-i activity involve Kopin in any way?

This is John Fan.

Obviously we cannot comment on that.

I know what you're talking about, yes, Google -- but as a company there's a lot of activity going on right now on Golden-i like kind of activity going on.

So we're obviously (inaudible) quite a few people.

How about Forth Dimension activities, it looks as though their [lycos] technique could be very popular.

Are they picking up some business?

Yes.

Yes, I think we just announced yesterday that Forth Dimension is going -- exhibiting in a game show.

What happened is our displays are very good, in fact our displays obviously is in Golden-i and (inaudible) ideal for Golden-i.

Forth Dimension Displays, their high resolution displays are very, very good for immersive games.

And so their [announcement] was mentioning the other day, those displays are very good for simulations, virtual reality.

And I think they are -- they're making some inroads for people who are interested in games.

Since you've got a partnership with some -- a larger company, maybe it's not Google but some other one, how soon could that take place?

In the games environment or are you talking about the Golden-i environment?

No, in the Golden-i type.

Well, Golden-i -- of course we have many partners.

I mean we have some development partners and we have some marketing partners.

Motorola Solutions would be the first marketing partner to come out with industrial product.

And this would be the first time ever that such a mobile device came to the market.

So we'll be the first one coming out.

How soon could something come out on the consumer end?

I can't comment on it.

I'd just say stay tuned.

Obviously activity is going on.

All right.

We are -- one thing we all of course know, that the CES we're being partnered with two companies, Verizon and Ericsson.

So their parts -- people went to see us have seen it.

But of course we are working on many other fronts.

What were those companies again?

I didn't quite catch it.

I mean CES we were shown in the Verizon and the Ericsson booth, yes.

Oh, okay.

Thank you.

Thank you.

At this time we've reached the end of our Q&A session.

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

Fan for any closing or additional remarks.

Thank you very much for joining us in the morning.

Next Wednesday Rich will be presenting at the ROTH Capital Partners annual conference at Dana Point, California.

At that conference we'll be demonstrating some of the situational scenarios for our Golden-i early target markets.

We look forward to keeping you updated on our progress and have a good day.

Thank you.

And that concludes our teleconference.

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