Kopin Corp (KOPN) 2012 Q3 法說會逐字稿

Good morning and welcome to Kopin Corporation's Third 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 You may access an archived version of the call on Kopin's website at www.kopin.com.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 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 third quarter, 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 Tuesday, November 6, 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 of our foreign subsidiaries, Forth Dimension Displays, Kopin Taiwan Corporation and Ikanos Consulting Limited; 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.

Just about two weeks ago, on October 22, Kopin celebrated a milestone event several years in the making. I'm referring, of course, to the commercial introduction of the world's first hands-free computer handset, the Motorola HC1. This is based on Golden-i, our game-changing wireless hands-free mobile computing technology platform. This is indeed a very huge event for Kopin, and I will spend much of my time elaborating on Kopin's approach and strategy for this exciting new class of mobile devices.

Motorola Solutions, which two years partnered with Kopin to develop and market a recognized handset computer for industrial arena, launched its first Golden-i-enabled device called HC1. It is the world's first mobile handheld computer. HC1 is the application software-driven device that features voice recognition using natural language, gesture control and head-tracking capabilities. It runs Windows CE, offers Bluetooth and wi-fi connectivities, and initially supports six languages -- English, French, German, Italian, Portuguese and Spanish. Motorola has identified the exciting end-user markets, including aerospace, architecture, automobile, consumer packaging, energy, engineering, high-tech, industrial construction, industrial equipment, life sciences and ship building.

Kopin's Golden-i platform technology completely changed the paradigm for mobile communications. It enables users to seamlessly command and control multiple independent devices and networks, all with hands-free and with natural voice recognition. There's nothing to hold. There's no frustrating keyboard to peck. There's no swiping necessary.

Now, don't get me wrong. On the (inaudible) today's mobile device offerings, tablet computers are great for reading, dashing off a quick e-mail or surfing a web. But if you are an electrical worker dangling from a utility pole 40 feet in the air or you'd [be] a mechanic working on a GE or Rolls Royce engine -- airplane engine -- or you are an EMT on the scene of an accident, you really have to have your hands completely free. You definitely do not want to be (inaudible) typing, texting or swiping. With our Golden-i platform, you don't have to. Our platform is a wireless, hands-free [gateway] that gives you the information on a very large scale. Golden-i platform enables device manufacturers to develop mobile handset computer systems that seamlessly command and control independent devices and networks, all with natural voice recognition. Voice will be the next user interface after the touch.

To provide an optimum viewing experience, Golden-i (inaudible) incorporates microdisplay technology, enabling users to see the equivalent of about a 15-inch laptop screen in a very high-resolution [near-eye] display.

In this morning's earning release, you will find a link to a very good instructional video from Motorola Solutions that explains the HC1 in more detail. I encourage you to take a good look at it.

Now HC1 launch is very significant, not only for Kopin, but also for many of our business partners which have contributed their technology and product expertise to enhance the Golden-i user experience. In addition to Motorola Solutions, we want to acknowledge companies such as Microsoft, Texas Instruments, Nuance, Hillcrest, Aurisound, Ask-Ziggy and Ikanos. These companies -- and there are many others, actually -- have been instrumental in helping us to develop the hardware and software components in the Golden-i platform.

Let me give you an example. For those of you unfamiliar with Ikanos, it is a UK-based software consulting firm that plays a very key role in creating the Golden-i operating system. We began investing in the company early this year. We're so impressed by Ikanos' talent and technology that we acquired a controlling interest in the company in the third quarter. Ikanos will now also provide application development support of customers of Golden-i-enabled products. Ikanos has done an excellent job with us.

While we are always well-positioned with display technology, imaging systems and wireless electronics hardware systems, we have now put together a very strong software team. In addition to our software experts at Kopin, we have now Ikanos and we have Ask-Ziggy, which has a (inaudible) on natural speech interface.

Motorola's HC1 is just the first of what we expect with their new class of cloud computing handsets and visors with Kopin's Golden-i technology platform. The HC1, as I mentioned, is a rugged [eye] device designed for -- primarily for the use in industrial settings. As a reminder, our business arrangement with Motorola Solutions that we have exclusively licensed Motorola for rugged [eye's] industrial applications. Our -- we licensed our Golden-i platform technology, which includes our Golden-i software operating system. We also provide the whole optical display system to the HC1. We are not at liberty to disclose our royalty arrangements, but we're very satisfied with our business model. In some way, it is similar to that of (inaudible).

Beyond this industrial [segment], Kopin's now actively working with additional OEM partners on the development of Golden-i-enabled computer systems for professional, [profession consumers] and other users.

You may recall that early this year we teamed with Verizon Wireless at the 2012 Consumer Electronics Show to demonstrate the remote video expertise capability of Golden-i computing systems using Verizon's 4G network. Please stay tuned for future announcements and alliances that build on this success and complement our objectives. I must say we're very excited about the market's response and reaction to HC1 and other [to-follow] models.

I would like to emphasize that the goal of our Golden-i platform is to generate sustainable and profitable growth by developing complete hardware reference systems and software solutions. For mobile (inaudible) device, it is now paramount to have hardware and software seamlessly integrated together. It covers really a whole range of technology and IPs. We have already built a reservoir of knowledge, know-how and IPs in this area. We believe Kopin has now a leading edge in this new class of software/hardware mobile devices. Our reaching this goal -- it is not overnight process. We have and we will continue to require time, investment and resources. Over the coming quarters, we will continue further to further our lead and to invest in the businesses and technologies that we believe will enable to enhance the commercial opportunities for Golden-i across a whole broad spectrum of applications. Based on conversations with prospective customers and partners, we believe there is a huge market for products built on the Golden-i platform, and we believe we have positioned ourselves well in the development of this new and exciting market. In fact, just yesterday, on November 5, Jupiter Research published a new report on the outlook of wearable computer systems -- wearable technology. They declared 2014 would be the year of wearable technology. They estimate in 2014 the market could be worth as much as up to $1.5 billion.

Before turning the call to Richard, let me briefly discuss our near-term forecast. As noted in this morning's news release, we are on the pace to achieve our full-year 2012 revenue guidance of $90 million to $95 million. Based on the outlook of mobile phones market, we're reasonably optimistic about (inaudible) this in Q4. A number of new models (inaudible) ramping up, the industry has returned to a more seasonal order pattern.

Our balance sheet, which has more than $94 million in cash and cash equivalents, that has no debt provides with the financial resources and flexibility to pursue the strategic growth objective of our Golden-i platform, which will ultimately drive substantial value for our shareholders.

With that, let's -- let me turn the call to Richard to review the detailed financials.

Thank you, John. Beginning with the top line, total revenues for the third quarter were $21.9 million, down 26% year over year from $29.6 million in Q3 of 2011. III-V revenues were $13.7 million in the third quarter of 2012 versus $15.5 million in the third quarter of 2011, reflecting slower growth in mobile phone demand in 2012 period.

Display revenues decreased to $8.2 million from $14.1 million a year earlier. Looking at display revenues in more detail, military applications represented $4.3 million, compared with $7.3 million for the same period of last year, reflecting reduced demand from the US government. Sales and display for consumer applications was $3 million, compared with $5.8 million in Q3 2011, reflecting a decrease in sales of our (inaudible) digital still cameras. [R&D] revenues decreased to $900,000 from $1 million for last year.

Ikanos revenue contributions during the quarter were nominal. I will describe the Ikanos investment accounting in a little bit more detail in a moment.

Gross margin for the third quarter was 24.6% of product revenues, compared with 30.7% for the third quarter of last year. The decrease reflects both lower overall revenues and lower revenues for the higher-margin military display products in 2012 period.

R&D expenses in Q3 of 2012 remained flat at $6.4 million, compared with Q3 of 2011. Included in Q3 2012 R&D expense was approximately $600,000 from Ikanos.

SG&A expenses increased from $4.4 million to $5.5 million in the third quarter of this year. The increase in SG&A is primarily related to an increase in non-cash stock compensation of approximately $800,000, as well as approximately $40,000 related to Ikanos. The increase in non-cash stock compensation primarily relates to awards which are mark-to-marketed. For full-year 2012, we continue to target R&D expense to be approximately 20% of revenue, with SG&A to be in the range of 10% to 15% of revenue.

During the quarter, we invested an additional $2.5 million in Ikanos, as Kopin acquired a majority interest in the company. Prior to our obtaining controlling interest in Ikanos, we were required to determine the fair market value of the company. This resulted in a non-cash write-down of approximately $600,000. Beginning with the third quarter of 2012, our condensed consolidated financial statements include the accounts of Ikanos.

On the bottom line, the third quarter 2012 net loss was $6.7 million, or $0.11 per share, compared with net income of approximately $200,000, or break-even, for the third quarter of 2011, reflecting the impact of lower revenues over higher fixed costs. Results for the 2012 period include $500,000 loss related to foreign currency fluctuations, as well as the previously-mentioned $600,000 loss related to the investment in Ikanos.

Cash and marketable securities totaled $94.5 million at September 29, 2012, compared with $105.4 million at year-end. We continue to have no long-term debt.

Cash flow from operating activities was essentially break-even for the quarter and $1.3 million year to date. Capital expenditures were $2.6 million in the quarter and $8.5 million year to date. Depreciation and amortization was $2.5 million for Q3 of 2012 and $7.6 million year to date.

Year to date, we have repurchased 3.5 million of our stock. We did not repurchase any of our stock during the quarter.

Stock compensation expense was $1.5 million for the third quarter and was allocated as follows-- $1.3 million to SG&A; $125,000 to the cost of product revenues; and $97,000 to R&D.

Accounts receivable days outstanding at September 29, 2012, were 59 days, compared to 51 at the end of third quarter of 2011.

And as John mentioned, we expect our revenue guidance to be in the range of $90 million to $95 million for the full year 2012.

And with that, operator, we're ready to take some calls -- questions.

(OPERATOR INSTRUCTIONS.) One moment while we poll for questions. Our first question comes from Blaine Carroll of Avian Securities. Caller, please proceed with your question.

Thank you. Hi, John. Hi, Rich.

Blaine.

Hi.

Just a very quick housekeeping question. [Why was] the previous target $90 million to $100 million for 2012, Rich?

That's correct. So we're narrowing it, given that we only have one quarter to go.

Okay. And I guess what changed to bring it down towards the lower end?

We just last week received an order for some military revenue, which we had thought was going to come earlier, and we just cannot get the parts in in time to put it out in the fourth quarter. So it's going to fall over to the first quarter.

Okay. That's actually a good sign because the military revenue -- we haven't been expecting much out of it. Is that business changing somehow? It's [just] positive, Rich, as opposed to --

Well, I think everyone's still leery about the fiscal cliff and how that's going to get resolved, but clearly, the order was good news.

Yes. John, one of the things that you mentioned was that the III-V business is returning to normal type of seasonality. It's been a long time since we've had normal seasonality, so can you sort of refresh our memory on what you would consider normal seasonality?

Well, I will say that we're happy that we're seeing some increase now in the growth in the area. So normally, the third quarter and fourth quarter are strong.

Yes.

And this year, it is true. [So far], the fourth quarter's better.

But the third quarter -- the 13.7 -- that's down year over year and down sequentially. So that was -- when I was plugging in the numbers, that was a little disappointing to me.

Yes. Overall, I think that the handset sales haven't been as strong as we thought. We've looked at this from a variety of different ways. Our competitors report numbers and their numbers, frankly, have been down in the third quarter. So it hasn't been a market share issue for us. ASP decline has been just about 7% for the year, which is right -- it's our range that we give -- 5% to 10%. So it's not a pricing issue for us. It doesn't seem to be a market share issue. It's -- I think it's just an overall handset sale issue.

Okay. But do you expect an uptick in the fourth quarter, Rich?

We expect a slight uptick in the fourth quarter.

Slight uptick? What -- how do you define slight?

Less than 5%.

Okay. Last question from me and I'll pass on. The CapEx, Rich, that was -- it seems like we're now above -- wasn't the original guidance $5 million to $8 million for the year or something? Now we're over $9 million.

Yes. We're going to go over $9 million. It's a -- today's a political day and we don't want to talk about regulation, but as you know, we've put in a whole gallium nitride system as part of our III-V operation, and I won't get in to all the details, but there were a lot more regulations around particularly bulk ammonia storage that we've put in that required some over-runs -- some facilities that the EPA and the State of Massachusetts wanted us to develop, which we hadn't thought about or didn't anticipate. So --

Okay.

That's where the over-run came from.

And what did you say it was on? What's the compound?

Gallium nitride.

Okay. So (inaudible) but what was it? Did you say it was ammonia?

Yes. So we use bulk ammonia in --

Bulk ammonia. Okay.

And so we had to build storage facilities outside to control the bulk ammonia and they're pretty elaborate.

Yes. Yes. Yes. Yes. Okay. Thanks, guys. Good luck.

(OPERATOR INSTRUCTIONS.) Our next question comes from Blake Harper of Wunderlich Securities. Caller, please proceed.

Thanks. Could you guys talk about -- in your III-V business, do you have any -- what type of role or exposure you have with TD-SCDMA?

You're talking about the (inaudible) CDMA?

Yes.

We do not exactly fill all the [PAs]. We provide the (inaudible) for our customers that do PAs. As far as we know, our biggest customer called -- are Skyworks TriQuint -- and I -- as far as we know, they're very much in this area. So I'm trying to -- exactly trying to understand your question.

Well, do you have any exposure, I guess, to really any of the -- any more -- in China, with lower-cost smartphones that are being introduced on the TD-SCDMA standard -- are you going to have a role there with those customers that you mentioned?

Well, I think if you heard Dave Aldrich's comments, or the Skyworks management's comments last Thursday, they're fairly bullish on their ability to penetrate. I think Dave's got this right. He said he thought they had about 40% of the 2G in China, and he -- and because of the customized solutions that were required in 3G, Skyworks is pretty bullish about next year. And so they are our largest customer and we're a critical supplier to them. So we would get exposure through that.

Okay. That's great. Thanks, Rich. And then just following on that, with the III-V business, you had made some investments into it recently. Could you just talk about some of those newer -- the newer design wins that you have and with some more integration. Is there anything that you see with the newer designs as far as the margin trends that we could see going forward that would be different from where you are with re-order designs right now?

Well, the newer designs are these BiHEMTs, which I can spell but don't really understand. John can give you the science behind them. And I think that those are the more sophisticated -- again, as Dave -- as Skyworks management was talking about, you need much more customized, much more sophisticated solutions for 3G. And we, in concert with that, have developed new structures -- these BiHEMTs -- which are aimed specifically for those applications. It's actually a combination of an HPT and pHEMT. And so we expect those to be a larger piece of our business next year. They have higher price points, and so net/net, we think it's a good trend for us.

Okay.

Yes. I think I will elaborate a little bit of what Rich said (inaudible) speaking. We're seeing additional activities in the BiHEMT right now, which is really a combination of HPT and pHEMT, and suffice it to say, almost all our customers are beginning to use them.

Gotcha. And then, John, you also had said to stay tuned for some stuff with Golden-i coming out. Are there any other drivers besides -- is there anything else besides Motorola or any other drivers or applications or customers that you can -- that you kind of have on the horizon that are something to pay attention to? Or can you kind of elaborate more on that a little bit, if you (inaudible)?

[But] obviously, in my discussion today, I focused a lot on the Golden-i, and it's not accidental. We're seeing -- I would consider it a turning point. The Motorola HC1 is really the first. There is really a very large demand and requirement for hands-free devices and it goes all the way from industrial military all the way down to consumer. It's an entire new class, and it's not going to be commanded by touch screen or keyboard. It's all going to be by voice, voice control, gesture control. And we've been talking about it 4 or 5 years in a row and we've invested the last 4 years, and this is a new device. And I mentioned about the Jupiter Research. I haven't read the report yet. In fact, I never even talked to them and then they send me this announcement yesterday. So I would tell you, whatever it is, I do agree and it is going to be a surprise. I don't think people get surprised anymore. I think (inaudible) hands-free device that people are talking about, and there I guess it got the Invention of the Year from Time Magazine. Yes. So I think stay tuned as we see a lot of activities nowadays.

Gotcha. Thanks, John. And then just in that area that you're talking about right there, can you talk about the number of patents that you have been filed for and have been awarded in that area that you're talking about right there?

Yes. We have over 250 patents. Over -- about 60%, 70% of them are right now on display and related devices like Golden-i platform. And we vary all the way from devices (inaudible) to software. We're -- I would say we have had [1 or] maybe several patents per month -- maybe more than several patents per month. Our IP filing cost is getting very high right now. But this is it. This is the [big battle] right now.

Gotcha. And those several patents per month -- are you talking about -- those are all in display, right?

More and more (inaudible) Golden-i right now. A few of them in III-V because we're also on the III-V working on getting (inaudible) on silicon, which we're also pretty excited about it, but Golden-i is a complete device. Go from A to Z, software, hardware, seamlessly integrated together, and is a -- the new class of mobile device. And I think it's going to be extremely exciting to a lot of people.

Okay. Thanks a lot for that, John. And then I just had one more just housekeeping item for Rich there. Can you -- Rich, can you break down the other interest there? It was a loss of 600. I just wanted to see where the -- how (inaudible) or if you can kind of break down anything that made up that.

So there's a -- it's kind of a crazy accounting, but when we acquired a controlling interest in Ikanos, we actually ended up taking a write-down on our previous investment. So we took a controlling interest in Ikanos in two stages. First, we acquired 25% and then later on we acquired 26%. It required us to revalue the original 25%. I won't get into it, but the bottom line is that resulted in a $557,000 write-down. And then there is a roughly $500,000 loss on foreign exchange. And then the rest is all interest income.

Okay. Thanks. That's helpful to clear it up. Thanks for taking my questions, guys.

Yes.

Thank you.

Our next question is a follow-up from Blaine Carroll of Avian Securities. Caller, please proceed.

Yes. A couple other ones, guys, if I can. First of all, John, as you're looking at towards 2013 with the Golden-i, any thoughts on projections for units or any clarity on that?

Yes. Well, I obviously cannot comment on it, but all I can say is Motorola people (inaudible) that business can be very good for (inaudible). So the next -- the first year, of course, the ramp-up is slower.

Okay. It's what you're saying. It's more of a (inaudible).

Yes, but I think it's important to look at this class of device. It's not just the HC1 and how many they sell next year. It's really what -- how that whole class of device is going to be accepted. So our milestones is really very interesting. It's -- additional [partners] we will bring [on] next year and what are they for. I think you will see industrial go down to professional in the (inaudible). It's a whole entire class. And we will continue to have alliances and partnerships that will show the people that this is a really -- a huge class of devices.

Okay. And what's your turnaround time on the [i piece] (inaudible) into it?

You mean the -- filing to issue?

From the time you get an order to getting it out the door. And I guess what I'm trying to get at is visibility on that business. Do they have to give you an order 3 months in advance or 3 weeks in (inaudible)?

For us, it's not so hard. Maybe 1 month. But the whole assembly's done by Motorola.

Yes. Blaine, I'm not quite sure I understand the question. Are you asking if someone calls Motorola, how quickly can they get a unit?

No. It was more on -- I'm looking for visibility for you guys, Rich, and so if Motorola calls you and says, "We need 1,000 units," do you have to say to them, "Well, we need 60 or 90 days"? It sounds like John's saying you can send that out in 30 days.

Under the terms of the agreement, Motorola is required to fund the working capital, and I don't want to quote because I don't know exactly what it is, but I think Motorola has specific policies in place that if a customer like Wal-Mart calls, they have to be able to deliver the units within X days. It's a very short time frame. So Motorola will be working with that and building inventory to meet those demands.

Yes. But we still provide them with the whole optical unit, and optical units include display and the lenses. We have enough storage and enough inventory and, of course, our display turnaround time. So we can do that within 5 months visibility, yes.

Okay. And Rich, you recognize revenue when you ship it to Motorola?

It's a software-related product, so to the extent that it's just the optical pod, the answer is yes. To the extent it's the licensing revenue, then you get into all the crazy software revenue recognition.

Okay. And then, John, jumping back to the III-V business for a minute. Any change -- and actually, Rich, do you want to give us who the 10% customers were in the quarter? And the, John, is there any change going on with your customers? Skyworks, as Rich was saying, was very upbeat last week. RFMD signed this relationship with IQE. Is there any change in your business with RFMD?

As far as 10% customers, we don't disclose it on a quarterly basis, but it hasn't significantly changed since last year-end.

Okay. And then, John, any change with RFMD in the IQE?

We don't see it so far. Of course, we're staying long-term (inaudible). Right now seems to be -- it's equal (inaudible) better. So we should see what will develop. It's something to watch out. And, of course, as we all know, RFMD seems to have many different activities. They just bought a silicon PA company yesterday, so --

Right. Right. Okay. Great. Thank you.

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 very much for joining us this morning. We look forward to keep you updated on our [process]. Bye-bye.

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