Kopin Corp (KOPN) 2012 Q2 法說會逐字稿

Good morning and welcome to Kopin Corporation's Second 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 You may access an archived version of the call on Kopin's website at www.kopin.com.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. Mr. Sneider, please go ahead.

Thank you, operator. Welcome, everyone. Thank you for joining us this morning. John will begin today's call by sharing his perspectives on future opportunities and summarizing our second-quarter results, I will take you through the financials in more detail and then we'll take your questions.

I would like to remind everyone that during today's call taking place on Tuesday, August 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.

Potential risks include, but are not limited to, demand for our display and III-V products; development of Golden-i; operating results from our foreign subsidiaries, Kowon, Forth Dimension Displays and Kopin Taiwan Corporation; 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.

Today I'm going to focus my remarks on opportunities that we are pursuing, particularly with our Golden-i technology, and how we plan to monetize them. Specifically, I want to speak on how we are creating technology to develop platforms that we believe have potential to guide the future of mobile communications. I'm talking, of course, about Golden-i. I want to make sure that when we speak of Golden-i, we're not talking about a device or a piece of hardware the way most of us would commonly refer to a cell phone or a laptop computer. Instead, Golden-i is a software-based, application-driven platform technology that we believe will enable both device makers and software application developers the opportunity to develop and create a new breed of wireless, head-worn, hands-free mobile devices for numerous applications.

Our broad platform encompasses numerous technologies developed by Kopin overlaid on our proprietary operating system. Golden-i creates a new mobile device category -- wearable communication and computing device -- that mobile device makers can create a group of new devices and new products for markets that they will identify with new applications of this platform.

No one can argue about the profound impact smartphones have had on people's lives, especially at work and at home. But even the smartphone is not without inconvenience. For example, the news constantly shows individuals walk into doors or falling into manholes as they try to walk and text on smartphone simultaneously. The Golden-i platform improves the user interface by using voice and gesture controls, as well as speech recognition.

Now many of you may have used speech recognitions in the past, and results today have been mixed, although clearly it is improving. So why is our voice recognition better? First, we have developed the latest state-of-the-art technology. But it is truly simpler than that. Because Golden-i is a headwand device, the microphone locations are well tailored to the user as opposed to smartphones where the distance and locations varies among users. This feature also enables us to optimize our noise cancellation software.

Golden-i speech was initially tailored for industrial applications, and accordingly was more command and control oriented. This requires the users to go through a series of command statements. Our efforts now focus on natural speech to improve the industrial users' experience. We're currently interjecting artificial intelligence into the speech, and we expect to have a natural speech system of Golden-i by the end of this year.

Another area we believe that Golden-i will provide a superior experience is with our microdisplay. Many smartphone providers are still trying to determine the best size for the screen. Is it the current 4-inch or the tablet 10-inch or somewhere in between? Whatever their solution, it will be a compromise of form factor, power and user experience. By contrast, our display technology provides a virtual image equivalent to looking at a laptop computer screen. We're able to develop platforms that use a small form factor and low power and still provide a large image.

The third area where Golden-i platform delivers unique [capabilities] is a use of Bluetooth, WiFi, 3G and 4G technology. Golden-i uses an advanced camera feature to stream video back to other Golden-i users or anyone with access to two-way streaming video. This enables collaborative problem-solving between field service technicians and their headquarter engineers.

So where are we today? The Golden-i platform technology is currently put through its paces by more than 100 prospective industrial users and partners and their software developers. With their feedback, we are identifying the features and market verticals that show the greatest promise. Over the coming months, we'll be working with our partners -- most notably, Motorola Solutions -- to finalize operating systems, improve the current features -- such as providing a more natural speech interface -- and to develop various application software. Application software is key to long-term success of Golden-i. That's why in the second quarter we made strategic investments in two software companies which we believe can accelerate the development of app software and the adoption of Golden-i technology.

Presently, we are focused on the industrial market. According to Forrester Research, 25% of computers used in work settings are tablets and smartphones, not personal computers. What this tells us is that there is a demand for a Golden-i software technology platform. We are actively evaluating possible future products, such as a professional or prosumer version, and we are in the product definition stage.

Our business model focuses on generating revenue and licensing the Golden-i platform technology and selling our innovative imaging display system. We also are looking at selling or licensing software apps and accessories. Our first Golden-i-enabled product for the industrial market is expected to be launched by our partner later this year.

So what is our vision for Golden-i? A complete platform technology that delivers a seamless user experience, highlighted with a robust operating system, natural speech recognition and precise gesture control. Stay tuned for Golden-i development updates and other interesting announcements.

Now let me change to our second-quarter financial results, starting with our III-V business. While III-V was up about $500,000 on a year-to-year basis in the first half, we believe the business will pick up in the second half of this year based on design wins captured by our integrated circuit partners on upcoming new smartphones and other advanced mobile devices.

I also want to mention that Kopin and our biggest customer, Skyworks Solutions, have extended our purchase and supply agreement through December 2013, on essentially the same terms as the previous agreement. Skyworks has been an excellent customer and partner for many years. We are excited about our partnership going forward.

Moving on to display, as we mentioned on previous conference calls, display revenues will be down due to lower military spending as a result of the US withdrawal from Iraq and reduced activities in Afghanistan. The possible sequestration budget cuts have further limited visibility for our military display business. We certainly anticipated a decline due to the decrease in military spending. But as we noted in this morning's news release, the expected drop-off in military revenue is sharper than we initially expected.

While the display product line faces some near-term challenges, we are optimistic about the future. Our III-V business is strong and, with our renewed agreement with Skyworks, should remain so. Golden-i is on course to create a new class of products, and we are working diligently with our industrial partner customer towards the first product launch later this year.

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

Beginning with the top line, total revenues for the second quarter were $22.8 million, down 27 percent year-over-year from $31.4 million in Q2 of 2011.

III-V revenues were $15.8 million for the second quarter of 2012 versus $16.0 million in the second quarter of 2011, while display revenues decreased to $7.0 million from $15.4 million a year earlier.

On the III-V front, we anticipate a stronger second half of the year than the first. In terms of display revenues, military applications represented $3.1 million of revenues compared with $9.2 million for the same period of last year and sales of displays for consumer applications were $3.0 million as compared to $4.5 million in Q2 2011.

Gross margin for the second quarter was 26.9 percent of product revenues, compared with 35.4 percent for the second quarter of last year. The decrease reflects lower revenues in the 2012 period from military display products.

R&D expenses declined from $7.1 million in Q2 of 2011 to $5 million, down in dollars but up slightly as a percentage of revenues from 22% to 23%.

SG&A expenses increased from $4.7 million to $5 million in the second quarter of this year and rose as a percentage of revenues to 22% from 15% in Q2 2011. The increase in SG&A is primarily related to non-cash stock compensation costs.

Operating expenses for the second quarter of 2012 included non-cash intangible asset and goodwill impairment charge of $2.4 million associated with our Forth Dimension Displays Limited subsidiary. The impairment charge is our current estimate and investors should refer to our Form 10-Q for the period ended June 30, 2012, for a complete description of the impairment charge.

For full year 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.

The net loss for the second quarter of 2012 was $5.9 million, or $0.09 per share, compared with net income of $800,000 or $0.01 per diluted share for the second quarter of 2011.

Cash and equivalents and marketable securities totaled $96.3 million at June 30, 2012, compared to $105 million at year-end. We continue to have no long-term debt.

Capital expenditures were $4.1 million in the quarter and $5.8 million year to date.

Depreciation and amortization were $2.6 million for Q2 of 2012 and $5.1 million year to date.

Year to date, we have repurchased 3.5 million of our stock, of which 2.2 million was in the second quarter.

Stock compensation expense was $1.1 million for the second quarter and was allocated as follows $916,000 SG&A; $135,000 the cost of product revenues; and $89,000 to R&D.

Accounts receivable outstanding at June 30 were 59 days, compared with 58 days at the end of second quarter of 2011.

Turning to our full-year 2012 guidance, the renewed purchase and supply agreement with Skyworks, combined with our strong relationship with other customers, positions our III-V business well for the future. While the growth expected in the wireless handset market may not have been as steep as anticipated at the beginning of 2012, the market remains strong.

On the display side, we have been discussing with our shareholders for over a year now -- we expected a decrease in military displays sales. The military market size is decreasing as the wars wind down and there's significant pricing pressure as the Pentagon deals with the budget deficit. Specific to Kopin, the decline in defense spending has prompted one customer, through various options, to reduce costs, which is currently affecting an existing program. As a result of this review, orders we had anticipated in our 2012 guidance will likely not occur this year. Consequently, we are reducing our full-year 2012 revenue guidance to $90 million to $100 million from the previous range of $110 million to $120 million.

And with that, we will take calls. Thank you, operator.

Thank you. (OPERATOR INSTRUCTIONS.) Our first question comes from Matt Robison of Wunderlich Securities. Caller, please proceed with your question.

Hi, Rich. Let's start with a couple housekeeping items. I missed what you said operating cash flow was.

Year to date, cash flow from operations is about $1.1 million.

Okay. Can you give us a little breakdown of the other income?

The -- it's primarily interest income. There's a very small ForEx piece.

So the interest income went up quite a bit then in the last couple quarters.

Well, relatively speaking.

Okay. So I think the ForEx was something like -- it was a loss of $160,000 last quarter or so. It was -- we should take that to be zero and there was no gains on IP or stock sales or anything like that?

Right. There was a small gain on ForEx, but it was a small number.

Okay. How much did you guys spend on the strategic investments that John mentioned?

A couple million dollars.

Care to mention who those were with?

One of them was a company called Ikanos out of the UK and the other one's a private company. The reason why we mentioned Ikanos is that, as a result of our investment and additional investments, you'll actually see them showing up in our Q3 10-Q as a consolidated entity. The other one is just a small private company that we have a small percentage equity interest in.

And can you spell it for us? The Ikanos?

I-K-A-N-O-S.

Okay. I've seen it around. Okay. Now some of the military defense contractors have talked about actually an increase in bookings in advance of sequestration or planning for sequestration. It seems like your products -- your type of products for the military don't fit in that category. Is -- can you talk about whether there's any future at all for your displays and what's -- and also, there's been some -- it looks like some competitive incursion on some of the military products and projects. Can you give us what we should be thinking about as we look further into next year?

At this point, we (inaudible) as a very viable player in the military and we're working on a number of programs. The reality of the situation is that the military budget is getting cut. There are some new entrants -- I shouldn't say new -- but there are some existing folks who are making a bigger play to get into the military space that we currently occupy. And between the -- essentially, more people trying to chop up a smaller pie. We have to look at our resources. And honestly, the next big deployment contracts are not scheduled until 2014, 2015. So we will maintain our existing programs at lower levels. What you'll see next year is more R&D-oriented for the bigger deployment projects that are scheduled for 2014, 2015. And that's the current strategy on the military.

Why was the CapEx up in the quarter?

We've made a number of investments in some III-V equipment.

Okay. Is that -- should we expect this level to continue?

We -- our guidance for the year is $5 million to $8 million.

Okay. Now can you comment -- I think I've seen in some of your press release -- you talk about 200 patents awarded or in process. What percentage of those do we think of to be applicable for portable devices like Golden-i or Project Glass and that sort of thing?

Well, I think your question -- this is John Fan. You're talking about the [IT] filing. I would say right now maybe 70% of new filings are in the Golden-i area and 30% in III-V.

Well, what's new out of the 200?

There's always -- the last year and a half, we've filed a lot of patents.

Right. I know. But in your press release, you talk about this number as a big number of 200. So how should we think about your patent position?

Very strong.

Can you help me understand what -- of the 200, which apply to this wearable-type technology?

I would say in the display and wearable technology, at least over half of them are there -- of the 200.

Okay. I'll let somebody else ask a question. Thanks.

Yes. Matt, just for clarification, we use the number 200 because it's a round number. We actually have in excess of 200, but we don't get down to 3-digit accuracy so we just kind of use the general 200.

Well -- but also, I guess, we don't even know how many of those are actually granted versus filed, right?

Yes. Yes. That's true.

Yes. So it's really a very vague number. And so if you -- if we looked out a year -- in a year's time when -- I think it's a year's time or maybe even a little longer than that -- when Project Glass developers are supposed to get their prototypes, what -- how many patents do you think you'll have granted by then?

Well, I think we have to look at the situation on the Golden-i technology. We've been working on Golden-i about 20 years ago and we (inaudible) into the Golden-i area. So we have patents that go all the way back. So -- and we're filing patents very aggressively the last two years. So we're in good shape.

Alright. Thanks.

Our next question comes from Blaine Carroll of Avian Securities. Caller, please proceed with your question.

Yes. Thanks. Hi, John. Hi, Rich.

Blaine?

Hi.

Rich, you guys actually cut out during John's commentary so I just was wondering if you could talk about -- your gross margins are a little bit better than we were looking for. They still remain depressed. But any commentary around gross margin?

The military, honestly, has been a higher-gross-margin product for us and so, obviously, a decline there impacts the overall weighted average gross margin of the company. We would expect -- if some of the projections for some of the smartphones which are to be released in the coming months -- if those projections are accurate, then we should leverage very nicely in our III-V business and we should see some gross margin expansion there.

Okay. Is there a way of thinking of what the contribution margin is on $1.00 of revenue within the III-V business, Rich?

In what -- contribution in what --

To the gross margin. So an incremental $5 million in revenue -- what does that fall through on the gross margin line?

We actually have that number down to the penny. But I'm reticent to provide that because it impacts our pricing.

Okay. Fair enough. And then John, on the new guidance -- the $20-million reduction on the annual guidance -- what would you say the split of that is coming from -- display and -- versus the III-V business?

I would say almost -- vast majority comes from display area.

Okay. Good. Let me see. With RFMD, they mentioned that they had sold their MBE business, IQE. But one of things they talked about in their release was that they could buy some MOCVD wafers from IQE and get most-favored-nation pricing. Have you seen any change in the relationship there or in the overall pricing environment?

We (inaudible) RFMD question is we have seen no change. In fact, no change at all.

Alright. And then any thoughts or anything you can share with us on what Motorola's marketing strategy is going to be as we go through the end of the year? Any -- sorry. Go ahead.

I think the questions relate to our account (inaudible) Motorola on the industrial version using our Golden-i technology. Our guidance is always that we are on schedule and we expect that the product would be launched this year. And how they go to market -- I think you will relay to them. I'm sure they will do a very good job. Remember, this is the first (inaudible) computer ever in the market. This is the first one -- the first headset. So it's going to be a very interesting time.

Okay. This speech technology that you're talking about -- does that push out the launch of the device at all?

No. See, in the case of a speech search, it's not critical for the initial product, although it would really enhance it. So when the product launch, you will have it in there anyway. We are far along in getting it done.

Okay.

That's a very interesting thing. It actually fares well for industrial applications because the domain search is limited. It's a (inaudible) domain search instead of a generic domain search, so the accuracy is much better and much more useful.

With the current version.

No. With the search -- in a natural speech search on a limited domain, like an industrial domain. It is a much more (inaudible).

It is?

Yes. It is much (inaudible). That's why we think it lends itself to (inaudible) this kind of a search for industrial applications right away.

Okay. And John, one of the things you said was -- you said you have 100 units -- and I know that's not an exact number -- with customers and partners. How many units are in the field right now and how many partners do you have versus how many customers currently trialing the product, if you will? And maybe they're one and in the same.

Yes. So Blaine, what we're saying is that over 100 partners have units. There's more than a couple hundred units in the field.

Okay. Okay. So this, in no way, is an exclusivity with Motorola that you're doing right now. Is there any exclusivity for a period of time?

Blaine, just to clarify. Those prospective customers would be Motorola (inaudible).

Gotcha. I gotcha.

We'll work with them.

Okay. Do you have an exclusivity with Motorola for 6 months, a year, 2 years or something?

They have an exclusivity on the industrial market.

Okay. Alright. Good. I'll pass it on. Good luck, guys.

Thank you.

Our next question comes from Raji Gill of Needham & Company. Caller, please proceed with your question.

Actually, Simran Brar calling on behalf of Raji Gill. Thank you for taking my questions. So our first question is how are you benefiting from the ramp at your major power amplifier customer, Skyworks, as they get prepared for their ramp at Apple?

Well, we're all hoping that the iPhone 5 is as successful as all the prognostications. Under the new agreement, we have the vast majority of the Skyworks business. And so we think -- no one knows for sure, but we think they're well-represented in the phone and, therefore, it should pay good benefits to us if all the speculation is true.

Okay. Thank you. And the second question is when are you going to see a rebound in government spending on the thermal weapons program?

I don't honestly think you're going to see a rebound per se. The program is pretty well-defined -- how many units they want to buy over what timeframe. However, because of the cost-cutting and a whole bunch of other reasons, the actual delivery schedule hasn't been worked out. The contracts haven't been awarded as we would have thought. There's a lot of confusion in the marketplace. So as -- I mentioned that actually, the next -- the number of other programs which are designed for release in '14 and '15 are really kind of the next big deployments, and so we're focusing, honestly, on those more than the thermal weapons (inaudible) program at this time.

Okay. Thank you. And our last question is when should we see a return on investment of Golden-i?

Hopefully it gets launched at the end of this year. (Inaudible) we've always said this year's revenue will be de minimum, and then next year, it'll start to ramp. It'll be like any other new product. We'd love to have it be a vertical take-off, but that's probably not realistic. As John said in his prepared remarks, it will gain steam as we develop more application softwares which expand its use horizon. But --

Okay. Thank you.

(OPERATOR INSTRUCTIONS.) Our next question comes from Patrick Wu with (inaudible) Research. Caller, please proceed with your question.

Hi, guys. Hope you guys are doing well today.

Great.

Going back to the acquisitions you guys were talking about -- the two companies -- one private, one being Ikanos. Can you -- I guess you (inaudible) to talk about it. Can you elaborate on the plans you guys have with those companies moving forward?

Just to clarify. So one, we took a majority-owned position -- that's Ikanos. The other one was not an acquisition; it was a small investment. Alright. John,

Alright.

And John, I don't know if you want to talk about those.

Well, I think that both (inaudible) companies and one actually is involved in our applications as well operating software, and the other company is involved with our natural speech search. So (inaudible) two companies. And (inaudible) and we're very happy with them.

Okay. Okay. I'm just taking a quick look at R&D. Can you guys help me just sort of understand, in terms of R&D expenses, the percentage that goes into Golden-i and then what percentage goes into III-V, generally speaking? For this quarter and maybe also historically, as a range?

The R&D expense for III-V typically runs in the 10%-15% range. And then right now, the majority of the R&D expense is running on the display side towards the Golden-i. We actually don't consider Golden-i part of the display, frankly. It's a separate product line.

Okay. So the display runs at around 85% to 90%.

I'm not sure I understand that.

(Inaudible) say that the Golden-i can be -- (inaudible) display/Golden-i is around 80%-90%. Maybe (inaudible).

Because you guys said the III-V usually occupies around 10% to 15% so --

No, it's 10% to 15% of its sales --

Okay.

Of the III-V sales. And then you can figure out what the rest is.

Okay. Sure. Last question is regarding the customer you guys talked about in the defense that has sort of, I guess, exited the relationship. Is that customer an agency of the DOD or is that actually a company that has a relationship with DOD and thus, having seen the DOD reduce their budget, they, in turn, I guess, canceling that type of relationship?

It's not an agency of the DOD.

Okay. So it's a company that works with the government. Okay. Alright. Well, thanks. That's all I have.

It appears we have no further questions at this time. I would now like to turn the floor back to management for closing comments.

Thank you for joining this morning's talk. As a reminder, next Tuesday afternoon, I will be presenting at the Oppenheimer Technology, Internet & Communications Conference in Boston. I look forward to seeing a number of you here -- there. Well, this will conclude today's call and we look forward to keeping you updated on our progress. Have a good day. Thank you.

This concludes today's teleconference. You may now disconnect your lines at this time and thank you for your participation.