Kopin Corp (KOPN) 2012 Q1 法說會逐字稿

Good morning and welcome to Kopin Corporation first-quarter 2012 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You may access an archived version of the call on Kopin's website at www.Kopin.com.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 morning.

John will begin today's call with a review of the first 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, May 10, 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 in the forward-looking statements.

Potential risks include, but are not limited to, the demand for our display and III-V products; development of Golden-i; operating results of our foreign subsidiaries, Forth Dimension Display and Kopin Taiwan Corporation; market conditions; and other factors discussed in our most recent annual report on Form 10-Q and other documents filed with the Securities and Exchange Commission.

The Company undertakes no obligation to update forward-looking statements made during today's call.

With that I will turn the call over to John.

Thank you, Rich.

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

Let me first turn to our first-quarter results and full-year revenue guidance, which remains on track.

Revenue for the quarter was $25.2 million, with Display contributing approximately $11 million and the balance came from III-V.

With respect to Display, we have described the near-term challenges on our last fourth-quarter call.

We continued to supply the Army's Thermal Weapon Sites program but looming Pentagon budget cuts adversely affected our military display revenue.

We expect military display sales to decrease by about $20 million this year.

In anticipation of the budget cuts, we have moved proactively to [cut] expenses by consolidating our US display manufacturing activities to a single facility in Westborough, Massachusetts.

This enables us to also combine our two domestic III-V manufacturing operations into a single facility.

Richard will discuss this consolidation in more detail later on.

Now let me turn to our III-V business which generates about $14 million in first-quarter revenue, partly because of seasonality.

We are optimistic about the prospects of our III-V business in 2012 and beyond.

Worldwide smartphone demand remains strong.

As we have discussed, the complexity of these devices requires a greater number of sophisticated [power amplifier] which also drives Kopin's content higher and higher.

We are partnering with the world's leading integrated circuit manufacturers and we expect our partners to be well represented in the new smartphone models which will be launched in the coming quarters.

One of the hallmark of an innovative company is the ability to anticipate market changes and develop products that meet those dynamic needs.

Our III-V business is a great example of how Kopin has remained ahead of the technology curve.

In the mid-1990s our gallium arsenide transistor wafers set a new standard for performance in the emerging wireless handset market.

As wireless handset emerged evolving with additional (inaudible) and multiple bands our III-V technology advanced.

We invest in increasingly more sophisticated equipment, enabling us to develop multi-layered structures which combine HBT and HEMT materials on larger diameter wafers.

In addition, we have developed and installed our proprietary (inaudible) monitoring system that has now helped increase yield, enhance quality, and reduce cost.

In recent weeks, Kopin has raised the III-V technology bar even higher, achieving record results in tests of our new gallium nitride-based high electron mobility transistors.

A paper on these results were published in Applied Physics Letters of the American Institute of Physics, which is the field's leading peer-reviewed publication.

The paper described performance characteristics achieved with gallium nitride HEMT material [groomed] using our proprietary process.

Why are these results significant?

The reason is advanced gallium nitride materials are considered key to improving not only the next generation of power amplifiers, they also are expected to play a critical role in enhancing energy efficiency across a range of applications, including power switching, automobile, and clean energy.

Our development of these new structures is still in its early stages with additional studies and testing being conducted.

Consequently, we anticipate the publication of additional scientific papers and articles on this topic in the coming quarters.

Before moving away from III-V, I want to mention the purchase and supply agreement with our largest integrated circuit customer.

As you may know, our current agreement expires at the end of July and we fully expect to have an extension completed soon.

Skyworks has been a very good customer and partner for many, many years.

Our relationship has proved extremely successful for both companies.

We continue to provide Skyworks and all our partners with the highest quality of III-V wafers.

Complementing our strong III-V business we are very excited about a [product] like Golden-i, our revolutionary new hands-free voice and speech controlled computer headset.

With this seamless integration of hardware and software we are confident that Golden-i will set new standards for anytime, anywhere computing from the convenience of a comfortable, lightweight device controlled by voice.

The first version of Golden-i is now being developed by Motorola Solutions for industrial applications.

It is scheduled to be launched later on this year and the feedback on beta customers could not be more positive.

The industrial version of Golden-i represents a revolutionary offering for applications such as for remote energy [pumps], security, first responder emergencies, medical, construction, public safety, and others.

Our future development plan for Golden-i includes a version for professional and consumer markets, including video and gaming.

You may recall that at Consumer Electronic Show last January Verizon and Ericsson showcased Golden-i at their booth, so we are working on multiple fronts as it relates to our Golden-i program.

Turning to our guidance, as I mentioned at the beginning of my remarks, we are on track to achieve the full year revenue guidance of $110 million to $120 million for 2012.

In addition, our balance sheet remains very strong, enabling us the financial flexibility to execute on our strategy.

While our recent consolidations have meant a reduction in operating expenses and personnel, we have not taken those steps at the expense of innovation.

Rather, as our gallium nitride and Golden-i programs demonstrate, we continue to develop new products, new technology that are fundamentally changing the landscape of computing and communications.

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

Thank you, John.

Even with the top line, as John mentioned, total revenues for the first quarter were $25.2 million compared with $34.9 million in Q1 of 2011.

III-V revenues were $14.3 million for the first quarter of 2012 versus $17.6 million in the first quarter 2011, while display revenues decreased $10.9 million from $17.3 million a year earlier.

Looking at the display revenue in more detail, military applications represented $7.6 million of revenue compared with $11.1 million for the same period last year.

Consumer display sales were $2.8 million in Q1 of this year as compared to $4.4 million for the same period in 2011.

R&D revenues [decreased to $0.5] million from $1.8 million last year.

Gross margin for the first quarter was 29.4% of product revenues compared with 33.3% for the first quarter of last year.

The decrease reflects lower revenues in the 2012 period for the military display products.

R&D expenses declined from $6.4 million in Q1 of 2011 to $5.1 million and SG&A expenses increased from $4.4 million to $5.1 million.

The increase in SG&A is primarily related to non-cash stock compensation charges of [$500,000] and approximately $150,000 of severance costs from the reduction in force associated with the plant consolidation John mentioned.

For the full year we expect the reduction in force to reduce compensation expenses by about $1.5 million.

For the full 2012 we are targeting R&D expenses to be in the range of 15% to 20% of revenue with SG&A expenses to be in the range of 10% to 15% of revenue.

On the bottom line the first-quarter 2012 net loss is [$2.1 million] (technical difficulty) or $0.03 per fully diluted -- per share compared with net income of $2.1 million, or $0.03 per share, for Q1 2011, reflecting the impact of lower revenues over higher fixed costs.

Results for the 2012 period included a gain of approximately $860,000 on the sale of securities owned by the Company.

Cash and equivalents and marketable securities totaled $102 million at March 31, 2012, compared to $105.4 million at year-end.

We continue to have no long-term debt.

Capital expenditures were $1.8 million in the quarter.

Depreciation and amortization was $2.5 million for Q1 of 2012.

We repurchased $1.3 million of our stock.

Stock compensation expense included in the P&L was $1.1 million for the first quarter and was allocated as follows -- $869,000 to SG&A, $130,000 [to cost of] product revenues, and $85,000 to R&D.

Accounts receivable outstanding at March 31, 2012, were 54 days compared with 44 days at the end of the first quarter 2011.

As John mentioned, we are on track to achieve our 2012 revenue guidance of $110 million to $112 million.

And with that we are ready to take questions.

Operator?

(Operator Instructions) Matt Robison, Wunderlich Securities.

This is Blake Harper for Matt.

Do you guys have any new qualifications for any potential new customers in the III-V segment that you could possibly talk about?

Your question is about the III-V new qualifications; this is John Fan.

As you well know, we have now a lot of activities in Taiwan so we have a couple of new qualifications in Taiwan, yes.

Okay.

Then could you maybe also update -- you had talked about Motorola with your Golden-i.

But could you talk about it engaged with the Android or other smartphone ecosystems and kind of how your IP would fit into that?

You are talking about the Golden-i, whether Golden-i would be connectible to Android?

Yes.

Okay, that is a very good question.

Golden-i for Motorola is connected to Windows only because all the industrial computers are Windows based.

However, we did mention for our consumer model -- the consumer model is now planning to connect to both Windows, Android, and Apple.

So all three?

All three, yes.

Okay, thanks.

Then just a couple of housekeeping items.

Do you have the cash flow from operations number for the quarter?

It was a use of $700,000 approximately.

And then also, on the other income, do you have a breakout there of what is the interest income and what some other non-operating income was?

It was essentially -- the large numbers, the $860,000 gain on securities, there was roughly $160,000 loss on foreign exchange, and the rest of it is interest income.

Okay, thanks.

Then just one last question.

On the military display could you just update there about some of those contracts there for the enhanced night vision goggles and really how you see the contracts coming?

Is there going to be like a consolidation of suppliers or how do you think those contracts will end up being played out?

We would have expected contracts awarded by now, but it doesn't appear it has been finalized.

None of our customers have made announcements and so, therefore, it really wouldn't be appropriate for us to discuss it until they announced it.

So at this point it's really just kind of status quo.

We are waiting for our customer announcements and then we will follow-up with our announcements.

Okay, thanks for taking my questions.

Blaine Carroll, Avian Securities.

Thank you.

Hi, John.

Hi, Rich.

A couple of questions if I can.

John, can you talk about the -- or Rich -- can you talk about the linearity in the III-V business as we step from the first quarter to the second quarter and then the second half of the year?

Some of your customers in that business have talked about lumpiness related to the shipment of the iPhone, and just wondering what you are seeing on the III-V business there.

Well, I think that one of the issues you are going to see is last year Q1 was extremely strong, which is why the comparison year over year doesn't look too good this year.

But the reality of -- what we think happened last year, a lot of folks were buying for the 4S and they built-up inventory in anticipation of it.

And then we spent the rest of the year kind of working off that inventory.

So that is why a couple of times on our quarterly conference calls we discussed kind of the abnormal seasonal trend that we had seen last year.

And so you are not seeing that this year.

I think this year it looks like it's a little bit more normal, which typically means that the third and the fourth quarters are the big quarters for us.

The third and the fourth quarter, okay.

Then, Richard, sort of a similar question on the display.

Actually military did better than I thought and consumer was a little bit weaker than I thought.

Did you expect that to sort of change as we moved through the year?

Well, at this point I think the way the military is going to fold out -- we are at the tail end of the old [TWS] programs and so we are not anticipating, quite frankly, a lot of revenue in Q2 from those.

And then we are expecting the awards of the new programs, hopefully we are in those awards, and so therefore those revenues rebound in the second half of the year.

The consumer that is a really tough market to predict.

You get a design win in a camera, but then how does the camera do against other cameras so on and so forth.

So that revenue is just always very difficult to predict quarter to quarter to quarter.

Okay.

And then, John, how often do you negotiate the supply agreement with Skyworks, and is there any risk that this doesn't get settled?

And what is the pricing?

Is there any pricing that is going to play into this as well?

I think we have negotiated regularly -- it varies between every three years or every two years or every 18 months, and that has gone on for 16 years.

We have a very good relationship with each other so we don't anticipate any real big problem.

In fact, we are expecting everything will be fine.

With respect to pricing, there is always pricing issues.

If something comes up (inaudible) some pricing decrease, but I think the pricing pressure, as we have stated in earlier quarters, although there is certainly pricing decreases [long term] because we reached a target level now.

John, when you look at your wafers that you are shipping and you are getting excited about the GaN what is the -- is there a breakdown between like a straight gas -- the number straight gas wafers that you ship versus bi-fed and then eventually the GaN?

Is there a way of looking at what the split is there?

Currently, it's, of course, overwhelmingly a high percentage is, again, arsenide.

The bi-HEMT or bi-fed definitely they are coming very strong, and I am assuming in a year or two anything (inaudible) would be more than HBT.

With respect to GaN, it's still early.

We are seeing an inflection point right now; people are looking for a domestic supplier of GaN, a merchant supplier of GaN for their particular applications both in power amp for base stations as well as GaN material power converters and power switching.

It's actually a big thing.

GaN for power switching and power converter can save as much as maybe 10% of electrical energy in this country, so a lot of people working on it.

Silicon guys are working on it, gallium arsenide guys are working on it, and we have been working on it for the last four years with different customers and partners.

So now there is results are coming out and I think we are getting excited about it.

Okay.

And last one; Rich, do you want to talk about gross margin?

Myles Standish is closed down now right?

That is correct.

All of that occurred late February/early March, so there really wasn't a whole lot of benefit in the quarter, and so you will start to see some of that going forward.

Where do you think margins can get to in the second quarter?

We are going to fight, honestly, to keep margins kind of flat where they are because of the declining military.

Unfortunately, some of the benefits on the III-V will be offset by lower sales of the military, the higher margin products.

So we are just, honestly, just trying to stay where we are for now and then we expect expansion in the second half of the year.

Great.

Thank you, good luck.

Thank you.

(Operator Instructions) Tim Shelton, Needham & Co.

This is Tim Shelton on behalf of Raji Gill.

Just had a few follow-up questions on some of the previous questions I wanted to ask.

So I was hoping you could give a little visibility into the military segment and when you might see a little more visibility into this space and how we should think about long-term growth rates going forward?

As far as long-term growth rates, honestly we are not factoring in significant growth in the military business over the next couple of years.

What you are going to see this year, these new programs they are going to order -- TNVG, 17 micron, these are all new programs.

The volumes will start to pick up; there will be a little bit more volume 2013.

But as the budgets as we understand them sit today, next significant deployment is really starting 2014, so for us we are not budgeting over the next couple years significant growth in the military.

We really believe that it's between the III-V, some hopefully growth from gallium nitride, and really Golden-i is really the driver that we are looking for to take us to the next level.

Okay, great.

Then going along with that; Golden-i I know you mentioned you have that introduction later in the year.

When exactly would you try to see some returns on your investment for Golden-i?

We have said all along we expect the revenues to be de minimus this year, but we would expect to see good revenues starting next year.

All right, great.

Then, finally, in terms of your III-V business, I know just looking at Skyworks' results seems like their revenue was up year over year for this quarter.

And I know you had alluded a little bit to the unusual seasonality last year for the first quarter, but should we see this drop off in the III-V revenue for you as some sort of timing issues or potentially a share loss?

Or is it really just due to some of that seasonality?

Sky is into so many products you really have to dissect their revenues.

I don't think it's a complete comparison just to say well they are up so therefore Kopin's revenue should trail along the same pattern.

So I am not sure that you can do that, honestly.

We just think that we are back to the seasonal pattern that we experienced historically, which is three, four of the big quarters in the first half.

And last year was kind of the outlier so that is what we are expecting.

All right, great.

Thanks so much.

[Patrick Wu], Battle Road Research.

Hi, guys.

Just a question regarding the military, do you foresee military to have a little bit of an uptick closer to Q3 as it usually does, or do you see that pretty much flat for the year (inaudible)?

That all depends on when the government announces the new 17 micron programs and how much of those programs we win.

Right now we are expecting an increase in the second half of the year, but it's dependant on our notification of those wins.

Secondly, more like a fun question, if you will, Google recently announced their Project Glass and we know that Google tends to have a lot of test projects and things like that.

I just wanted to get your impression on that and how that could (inaudible) with or against you guys?

I think you are referring to the all famous Google Glass.

Yes, yes, yes.

My personal feeling is I think it is a very good video.

I do believe that the function and the application is correct.

We have been talking about these type glass for at least maybe five, six years now.

And with respect to their program as you well know, you probably can appreciate, we cannot comment on that because obviously we cannot talk about individual programs.

Do you think -- I mean, as I said, I think Google has a lot of test projects and things like that they sometimes don't even pick up.

Do you think it's something that they are very interested in continuing or it's more like another project that they bring into the masses and then push to the side?

We certainly cannot talk about that.

But I don't think the product; if there is a product that is coming out this year.

But again, go back to my own personal feeling is such glasses, such [colored] glasses is very useful.

Thanks for that color.

There are no further questions at this time.

I would like to hand the floor back over to Dr.

Fan for closing comments.

Thank you for joining us this morning.

On Wednesday, May 30, Rich and I will be presenting at Cowen Group 40th Annual Technology Media and Telecom Conference in New York.

We will hope to see some of you there.

This concludes today's conference.

Thank you.

This concludes today's teleconference.

You may disconnect your lines at this time.

Thank you for your participation.