Kopin Corp (KOPN) 2012 Q4 法說會逐字稿

Good morning and welcome to Kopin Corporation's fourth-quarter 2012 financial results conference call. Today's call is being recorded for Internet replay. You may access the 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, operator. Welcome, everyone. Thank you for joining us this morning. John will begin today's call with a discussion of our strategy, technology and markets, and I will go through the fiscal 2012 results at a high level. John will conclude our prepared remarks and then we will be happy to take your questions.

I would like to remind everyone that during today's call taking place on Wednesday, March 13, 2013, 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 Golden-i technology platform; operating results of our foreign subsidiaries, Forth Dimension Displays and Ikanos Consulting, Ltd.; 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.

Our earnings release and prepared remarks contain revenue disclosures that have not been calculated in accordance with the United States generally accepted accounting principles or GAAP. We are disclosing non-GAAP revenue to enable investors to reconcile with guidance that management provided during fiscal 2012. For more information on our non-GAAP financial measures, please see the tables for reconciliation of our GAAP results to non-GAAP measures included at the end of our earnings.

And with that, I will turn the call over to John.

Thank you, Rich. Hello, everyone, and thank you for joining us for our fourth-quarter and full-year earnings call. I would like to start off this morning by discussing our long-term strategy, giving a bigger picture on Kopin's technology and markets, and laying out a few milestones for investors to watch for as we embark on our growth path.

Richard will then give you a clear picture of our results and finances. Then we will open the line to questions.

The sale of our III-V assets at the beginning of this year, January, was a very significant milestone for our Company. I've been asked many times why we decide to sell which has for a long time been such a successful in core part of our business. The answer is that the sale is consistent with our multiyear strategy to position Kopin for the future.

Our business model now has moved from a commodity business to a business with high gross margin potential and growth potential which mirrors technology companies such as Qualcomm. The future is car-based, hands-free, voice-activated mobile computing systems and Kopin is now focused and proficient to be a leader in providing critical components and licensing reference systems to partners who develop branded, wearable computing products.

In 2012, the wearable computing market was estimated to be about $800 million. Analysts expect this number to grow almost exponentially in the coming years. [Shugotai] Research expects the market to be $1.5 billion by 2014. IMS Research expects to be around $6 billion by 2016. ABI Research forecasts the wearable computing device market will grow to 485 million annual shipments by 2018. We actually believe that in truth, the way these analyst firms are defining this technology does not encompass the full breadth of how we view the coming wave of products and solutions that will make up this wearable market.

Recently, Verizon launched a national advertising campaign called Powerful Answers that focuses on how emerging technology will change the world. The centerpiece of their ad shows a firefighter using Kopin's Golden-i technology to see through smoke and save lives. In his CES keynote speech this year, Verizon CEO, Lowell McAdam, introduced a video of our Golden-i technology, saying it was an example of something that would transform society and change the world.

Now we also have seen Google make a big media splash with their Glass technology. There is clearly an intense consumer interest. Just recently, this fall, a fake Google Glass on eBay sold past $15,000.

Many major companies are now increasingly approaching this market. And Kopin is uniquely positioned to partner with them to reach the market faster and more effectively.

We have been anticipating the wearable computing wave for 25 years. Our experience, our portfolio patterns enable us to work with partner companies to help to achieve to their goals. So with most of those solutions, we have created first commercially available wearable computer, the HC1.

In order to enter the wearable computer market, the Company needs six core competencies. They need software, feature enhancements, display, ASIC, optics, and ergonomics. We believe we have achieved -- we have the strongest IP portfolio in this market to cover all six of these areas.

We filed the first patent in this market in 1993. Now we have more than 600 -- more than 200 patents in this area, with several new patents filed every month. We also have strategically acquired and partnered with companies to further develop our six core competencies in this area.

What will the future of wearable computing look like? Well, in the industrial and professional markets, let me give you a few examples. Engineers in a jet manufacturing facility will be able to see full blueprints in the corner of their eyes instead of having to stop their work and check a tablet. Police will be able to pull up directions and records as they are running down streets.

Pilots will be able to view flight instructions without looking down. Workers in the fulfillment center will be able to scan packages simply by looking at them. Doctors will be able to see medical information and vital statistics as they are doing the operations. And stock analysts will no longer need to hunch over their desks all day; they will be able to walk around their offices with the equivalent of 15-inch screen right next to the eyes.

In the consumer market, we believe the Glass-type products will replace smartphones sooner than many people think. You will be able to instantly take a picture or video of what you are looking at and share it with your friends. You will be able to immediately translate foreign languages.

You will be able to see directions without looking down. Also, you will be able to receive more information at about a piece of art by just looking at it. Of course, you can make phone calls, type and send messages hands-free.

Kopin is already fulfilling many of these areas with our Golden-i technology. So let's talk specifically how Kopin fits into the future. As we discussed before, a Company needs six core competencies to create a wearable computing product. It needs software, feature enhancements, display technology, ASIC, optics, and ergonomics.

Through our 25 years of real-world experience, patents, IPs, R&Ds, acquisitions, and partnerships, Kopin is the leader in all six areas. More importantly, we know how to simply seamlessly integrated hardware and software, a critical path for any company entering this market.

Let me give you a little bit more detail. Regarding software, we have made strategic investments in Ask Ziggy, which combines Nuance's voice recognition engine with unique algorithms to deliver the world's most advanced natural speech search engine. We have purchased Ikanos, the developed software solutions which can run on both Windows and Android.

With regard to speech enhancements, as we have all noticed, speech recognition software in the real world does not really work well. The technology must recognize the voice of the user and block out background noises. We believe the inability to do so has held speech-activated wearable technology back.

Through years of trial and error and [how it pushes the errors' balance], Kopin has developed the most advanced capabilities in this market, which are now being currently used in Golden-i technology.

While with regards to display, as many people on the call will probably know, Kopin has been the leader in ultracompact display modules for over 20 years. In order to enter wearable computing, companies must integrate their compact optics with their small ultra-bright and power-efficient displays. Kopin's industry-leading transmissive LCD displays, which we call CyberDisplay, are literally tailor-made for this application.

Regarding the ASIC, Kopin has a group of partners to develop the lowest power proprietary circuits designed for micro-display screens in these markets. Now with respect to optics, in order to achieve success in wearable computing, the optics [display] is very small and shows excellent images. Kopin has its own intellectual property in this area. In addition, we have partnered with Olympus to develop the smallest and most advanced optics available.

Finally, regarding to ergonomics. Again, experiences count here. For years, we have been working with organizations such as US military and Motorola Solutions to develop assets that are comfortable and that people will want to wear. I never thought we would work with fashion consultants, but we have on several occasions. We know that in order to succeed, we need to make products that will look good and wear naturally. We have built significant expertise and IP in this area.

As you can see, here is an incredibly complex ecosystem of technologies that go into making wearable computing devices. And we have successfully managed the complexities to fuel such commercial products into the market, first commercial product in the market.

In October last year, Kopin celebrated a milestone event several years in the making -- the commercial launch of the world's first hands-free computer headset, the Motorola Solutions HC1, based on Kopin's wireless hands-free technology platform, Golden-i.

We are not just talking about core competencies along each of the six critical areas. The Golden-i technology emphasized our business model to partner with major companies to develop wearable computing devices that will change the world. Motorola HC1 is just the first what we expect [when you see] to see a new class of cloud company handsets based on Kopin's Golden-i technology platform.

We are working with other partner companies to provide the full range of technology required for their offering. We expect to announce additional partnerships in the coming months.

Our balance sheet remains very strong and debt-free. We know we are ideally positioned from an engineering talent and intellectual property perspective to fulfill our mission to use our expertise in six technology areas to provide critical components and to license reference systems to partners which develop branded wearable computing product.

We expect our license-based model will drive us towards high gross margin and faster growth and recurring revenues. We believe we are now very focused and structurally financially positioned to be a leader in this emerging area.

2013 is an investment year for us and for our partners. We think 2014 will be an inflection point in wearable computing from which the market will grow rapidly. Given our business model and our position, we expect to grow faster than the market once it kicks off.

We will keep you updated on our growth and our progress throughout the coming quarters. With that, I will turn the call to Richard for the quarter's financial results and guidance. Richard?

Thank you, John. Now let me provide an overview of our 2012 financial results.

Please keep in mind that in our 2012 results we have classified our III-V product line, which includes our Taiwan subsidiary, KTC, as a discontinued operation. Accordingly, while these current assets, long-term assets, and current liabilities related to our III-V product line are showing a separate line item in the consolidated balance sheet entitled Assets Held for Sale, and the results of operations of our III-V product line is shown as a separate line item entitled Discontinued Operations in our consolidated statement of operations.

GAAP revenue for the 52-week period of fiscal 2012 was $34.6 million, down from $64.7 million for the 53-week period 2011. The expected decline in 2012 was primarily related to lower military display revenue and decreased display sales in consumer electronics segments.

On a non-GAAP basis, revenue for fiscal 2012 was $94.5 million, in line with our revised guidance of $90 million to $95 million. Non-GAAP revenue includes our III-V product line revenue of $58.8 million, which is included in discontinued operations. Gross profit margins for fiscal year 2012 was approximately 30%, compared to 42% in 2011. The 2011 period included higher revenues from military display applications, which tend to generate higher gross margins than other display products.

Research and development expense in the year was $14.7 million or 42% of revenues, compared with $16.5 million or 26% of revenues for 2011. The decreased R&D expenses related primarily to lower funded R&D by the US government. For the full year 2013, we are targeting R&D expense to be in the range of 50% to 55% of revenue.

Selling, general, administrative expenses were $17.2 million or 49% of revenues in 2012, compared with approximately $16 million or 25% of revenues a year earlier. The increase in SG&A as a percent of revenue in 2012 clearly relate to additional stock comp expense. For full-year 2013, we are targeting SG&A expenses in the range of 42% to 45% of revenues.

The tax provision for the year ended December 29, 2012 was $835,000 as compared to $174,000 in 2011. The increase is related to the closing of our Koreans subsidiary, Kowon. As a result of the closing, we have provided for the taxes on Kowon unremitted earnings, which will eventually be repatriated to the United States.

During 2012, we invested a total of $3.2 million in Ikanos Consulting, acquiring a controlling interest in the company. As I noted on our Q3 call, our condensed consolidated financial statements now include the accounts of Ikanos.

On the bottom line, the net loss for fiscal 2012 was $18.4 million or $0.29 per share, compared with net income of $3.1 million or $0.05 per diluted share. Results for the 2012 period included a $600,000 non-cash write-down associated with our Ikanos investment.

Cash and marketable securities totaled $92.5 million with no long-term debt on December 29, 2012, compared with $105.4 million at year-end 2011. Please keep in mind that our year-end 2012 cash balance does not include consideration received from the sale of our III-V product line to IQE.

The aggregate average purchase price subject to certain adjustments was $75 million. Kopin received a total of $55 million from the sale of the closing, with an additional $5 million placed in escrow pending a final discrimination of working capital and other adjustments. The remaining $15 million will be paid to us on the third anniversary of the closing.

Net cash provided by operating activities was $3.8 million for the year. Capital expenditures were $1.4 million for the quarter and $9.8 million for the full year. Depreciation and amortization was $1.4 million for the quarter and $9.1 million for the full year.

In 2012, we repurchased $3.5 million of our common stock. We did not repurchase any shares in the fourth quarter. Stock-based compensation was $0.7 million for the fourth quarter and was allocated as follows -- $500,000 to SG&A; $123,000 to cost of product revenues; and $95,000 to R&D. Accounts receivable days outstanding on December 29, 2012 were 53 days, compared with 46 days at the end of the fourth quarter of 2011.

Turning to our guidance, we expect revenues in the range of $18 million to $22 million for fiscal year 2013. While we expect that Motorola Solutions will begin shipping its Golden-i-based HC1, our ability to forecast revenues derived from Golden-i will be limited until the product has crossed the commercialization threshold and has been on the market for a period of time. So we have therefore not factored revenue from Motorola in our revenue forecasts.

Near term, based on our expectations for significant development and marketing expenses this year to commercialize Golden-i technologies for additional applications, we expect our consolidated loss for the fiscal year 2013 in the range of $15 million to $19 million.

While we have always been fiscally conservative and will remain so, investors should understand that we believe we have a great opportunity to position ourselves in a growing wearable cloud computing market and therefore we will measure success in 2013 by our ability to develop products and establish relationships, and not necessarily by achieving a financial metric.

As John described, we believe the wearable computing market is growing to expand significantly over the coming years and we have been executing a strategy to build the critical components and reference systems to go into customers' branded products.

Our financial fundamentals, particularly a strong cash position and zero debt, put the Company in a strong position to make the investment and form the partnerships necessary to be a leader in the wearable computing space when products began hitting the market later this year.

With that, I will turn the call back to John to conclude our prepared remarks.

Well, thank you, Richard. Before I turn the call over to questions and answers, I would like to tell you that in our 25 years, we have never been so much -- we have never seen so much excitement from both consumers as well as partner towards our pursuit of wearable computing market.

We believe that we have seen an inflection point that combines advances in wireless communication, cloud computing, voice recognition and speech enhancement, audio technology, optics and ergonomics that will allow the vision we have 25 years ago when I left MIT and founded Kopin to become a reality.

Kopin is positioned now to lead in providing critical components and licensing reference systems to partners with developed branded wearable computing products. Our recurring revenue business model will position ourselves well to leverage our resources and grow faster than the market.

With that, operator, please open the line for questions.

(Operator Instructions) Matt Robison, Wunderlich Securities.

Hey, good morning. Thanks. Hey, Rich, on the operating cash flow, can you give us what it was for the continuing operations in the fourth quarter?

No, actually, I do not have that in front of me. I can get that to you later.

Yes, that would be great. I obviously saw the filing made to your pro forma for three months but didn't see a quarterly breakdown -- I mean for nine months, so a little tough to impute things at this point. And there wasn't cash flow, as I recall in that filing either.

We will be filing our full 10-K tomorrow, which will have everything. But if you call me this afternoon I can get you that number.

Okay, and CapEx, same story?

CapEx for -- you want for the fourth quarter?

Yes.

$1.4 million.

Was that only for continuing operations?

Yes.

Okay, so discontinuing operations, whatever you spend to keep that going is not included in there, just the --?

Right, it was a couple hundred thousand dollars.

Okay, and of the depreciation -- of the D&A, was it all depreciation?

We have amortization associated with the intangible assets.

That's what I would expect, so what was that amount?

The actual breakdown of that number I think -- I can get that number later, I believe it was $150,000.

Okay, and that depreciation is obviously only for the ongoing, right?

I've provided that breakout in the table.

Okay, headcount?

Right now, we are about 200 people.

Where do you expect to see that going this year?

Right now, we would just leave it at the 200 number.

Okay, why is the revenue guidance for '13 so far below the run rate in both the third and fourth quarter?

Well, we expect a continuing decline in the military during the course of the year. We think what is going to happen this year is that it's going to be more R&D-oriented. We are in a number of research and develop programs in the government that are really expected to deploy in 2014, so some of the legacy stuff is unwinding and so we are kind of in a transition year there.

Is there any potential for some business that might be associated with your ability to supply versus competitors?

I'm not sure I understand the question.

Do you have any -- are there any opportunities for customers to come and change their requirements because you have got a heritage of supplying on some of the legacy business that might not be supported so well by competitors?

Yes, I mean the spares business is always difficult to prepare -- not prepare, to predict. So there is potential upside there. As we have indicated, there is really no Motorola revenue or any other types of really Golden-i type technology revenue factored into the forecast. So those are all potential upside.

What is going on with the Forth Dimension and the other eyewear and consumer-type applications?

Forth Dimension has actually done very well over the last 6, 9 months, penetrating the 3D metrology market. I think that they have signed up with the two largest players in that market and they are working on developing a number of other agreements, so they have received a tremendous response.

They may get -- John can speak to this better than I can as far as the quality of their display, but extremely high-resolution, beautiful color, and it fits very well into that market. So they are actually doing very well.

And the other type of wearable technology in the camera business?

Well, you see people like Vuzix have products that are being offered that we supply. Recon-Ready is another group that is supplying products that are all tangentially related to the wearable computing market.

So we are supplying to those guys, and they are all pretty bullish on the entire market.

Yes, well that has been true for quite some time, as we know. I did see the Vuzix stuff at Consumer Electronics Show. It looks like maybe something late this year. That would be a big improvement, but how did that business compare with last year?

You want the breakout? Is that what you are asking?

Well, if you could just give me the tone of -- I wasn't -- how the trends -- did it improve? Or have you got offsetting effects with camera versus wearable? What is the --?

Yes, eyewear was essentially flat and digital still camera was down.

And you expect that -- any reason to expect that the eyewear would come up enough to offset the trend in the digital camera?

If you believe the customers' projections, yes.

Fair enough. Thanks a lot.

(Operator Instructions) Joseph Zaccaria, Needham & Company.

Hi, guys did this is Joe calling on behalf of Raji. I was wondering if you could talk a little bit about the cash burn moving forward.

For 2013 we think cash burn will be in the range of $13 million to $60 million

All right. Thanks so much. Can you talk a little bit about what the revenue expectation is for wearable computing once it hits its run rate?

How far out you do want to go?

I guess as far as you would be comfortable.

I think as John's prepared remarks started at the call, we think this is a huge market. We think that we are very well-positioned in it. And so our drive is to become a billion-dollar company, frankly.

Okay, all right, I appreciate it. I guess that is over, what, the next four to six -- for to eight quarters? Not the billion-dollar company, but the run rate?

Yes, as John's remarks indicated, I think we expect products to start being offered probably in the fourth quarter this year and then '14 is the inflection point where it really starts taking off.

All right. Thanks so much for the time. I appreciate it, guys.

Aram Fuchs, Fertilemind.

Yes, John, I was wondering if you can give a survey of the market as you see it, both in displays and in the hurdles that have to be overcome. The weight of these glasses tends to be -- when I put them on personally and interviews I have done with potential consumers, the weight wait is a key variable. Are there other variables that you worry about, that you think you have to overcome?

Yes, very good question. I think you are actually asking the ergonomics and comfort of the six areas. In fact, I think this is one of the most important areas because if people are not willing to wear it, you can't even get started.

It is not just the weight. It is the balance on your head or at balance around your ears. You have to be very comfortable to wear. That is one important thing. Another thing that is very important, you have to be willing to wear, you have to look good on you. It is not just the comfort, no. It has to look good or look -- in some way look familiar. You don't want to look odd.

All those things are very subtle and of course also depends on your application. In the case of industrial application like Motorola's HC1, those are to really perform a task. You fix a jet engine. You try to catch a criminal. In this case, those comfort and looks are not as important, but in that case like Glass for consumers, become very important.

So all this tells me that -- tells us that ergonomically important, also tells you the weight is very important, like you mentioned. So the optics, everything, it's actually everything -- electronics, every packaging has to be very light-weight.

You may have gone to CES, see how our Golden-i, which model is 3.8, is extremely lightweight. It is made out of magnesium. You put on the head extremely comfortable and that is really in many ways game-changing.

So to answer your question, yes, it is very important. We knew about this for a long, long time. We work with the military. We work with Motorola. We work with other companies and we are very acquainted how to solve problem.

And then on the display, there are all these different technologies -- LCD, LCOS, OLED. Where do you see yourself fitting there, obviously in Golden-i?

That is again a very good question. Of course, I am slightly biased, but let's take away the bias hat. Just looking at the situation, if you go back to your first question again, the weight is very important.

That means the optics and the weight, size has to be very small in order -- and also has to be very bright because the image has to be very bright because you have to go outside in the sun. You have to be very bright, so ultimately we look at all this and our customers and partners agree there is only one technology fitted for this type of application.

There is our technology, the CyberDisplay technology, the transmissive LCD is best tailor-made for this application. It is not an accident. Remember, we have worked on this thing for 25 years. 25 years ago we already had the dream that wearable mobile computer would come.

We developed our technology specifically tailor-made for this market and right now we are right. We are giving the lowest, highest -- lowest power, brightest, lightest optical system for wearable computing. I think the market will certainly prove that to be right in the near future.

Great. Thanks a lot.

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

Well, thank you for joining us today and we will hope to keep you updated very soon.

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