Kopin Corp (KOPN) 2013 Q4 法說會逐字稿

Good afternoon and welcome to Kopin Corporation's conference call to provide a business update and results for the fiscal fourth-quarter and year ended December 28, 2013. 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 You may access an archived version of the call on Kopin's website at www.Kopin.com.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. Mr. Sneider, please go ahead, sir.

Thank you, operator. Welcome, everyone, and thank you for joining us this afternoon. John will begin today's call with a discussion of strategy, technology, and market. I will go through the 2013 fiscal fourth quarter and year-end results at a high level. John will conclude our prepared remarks, then we'll be happy to take your questions.

I would like to remind everyone that during today's call, taking place on Tuesday, March 11, 2014, 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 product, operating results of our subsidiaries, market conditions, and other factors discussed in our most recent Annual Report on Form 10-K, and other documents filed with the Securities and Exchange Commission. The Company undertakes no obligation to update the forward-looking statements made during today's call. And with that, I will turn it over to John.

Thank you, Rich. Good morning, everyone. It is early morning in Tokyo, where I'm at right now, and thanks for joining us.

I want to start out by saying that we are extremely pleased with the progress we have made towards positioning ourselves into a global leader in Wearable Technology. Our strategy is still on track, and we are seeing significant interest from customers, who are looking to use our components as early as this summer, with designing coming in for a number of large customers in the second half of this year. We expect these products will ship in 2015.

This past month, we hosted a Wearable Technology event, an open house for our new Wearable Technology Center in Silicon Valley. This was a showcase event, that featured a panel discussion, and keynotes by some of the top minds in this industry. With demos of our prototype Wearable Technology, and with tours of our state-of-the-art acoustic lab. We had close to 200 representatives from all sectors of the industry including customers, potential customers, analysts, media and [panels]. The energy and anticipation of [great] things to come was very strong.

It was clear that Wearable Technologies are a viable technology category and ready go mainstream. We showed the results of some of our recent innovations. These innovations cover all aspects of our portfolio: on display for optics, noise cancellation and natural speech recognition, ergonomics, and ASICs -- in order to create a dream product of the Wearable market. The dream is to have a pair of eyeglasses indistinguishable from the pair many people wear today.

One of our new innovations was an extremely compact Pupil display module, which encompasses our innovative transmissive LCD microdisplay technology, and miniaturized optics, licensed from our partner, Olympus. Our competent design, embedded in the Pupil display module, inside the front frame of the eyeglasses, and embedded, the electronic circuits, speakers, and batteries in the handles. This is the first smart eyewear that looks natural, yet has many of the key functions usable for consumers.

We demonstrate these smart glasses, providing notifications and updates tagged from a smartphone, responding to a voice command and yet translating languages in real-time, to allow people to communicate in their natural tongue. Our patented noise cancellation technology allowed the voice commands to be reliably recognized, even in a very noisy environment. As we have demonstrated this technology in our new acoustic lab, in the Wearable Technology Center.

It was extremely gratifying to see the excitement over the progress we have made among all the attendees. Some of the editors championing with their possible review. Yet we're not slowing down a bit. I'm speaking to you today from Japan, where I'm meeting with some of the top names in the industry. Our Wearable event and the direction the market is moving further confirms our strategy.

Over the coming year, we hope to selectively tour the US with aims of displaying more of our technology. We have more than 20 years of intellectual properties geared to the Wearable Computing space. We will continue to make investments necessary to position ourselves as the leading developer of Wearable Technology Solutions, to panels all over the world, who develop branded Wearable Computing products.

In terms of partnerships and customers, we have in the pipeline, we're actively working with a number of customers on the NDA to help them bring Wearable products to the market. They have selected to work with us because we have a very strong portfolio of solutions and critical components that cover all the important areas. And the experience to integrate our technology together. While we are limited in what we can say regarding what we are doing and working with, and what types of projects we're working on, there are a number of recent developments that further [comments on our] progress.

First, we have grown our patent portfolio to over 250 patents, related to the Wearable Technology Solutions. Since we embarked on business transition in January of last year, we have found more than 80 additional patents related to Wearable Technology Solutions. We have announced Pupil, our latest in display technology for eyewear. This Pupil is a major milestone for the Company, as we help customers realize the dream of smart eyewear in the consumer segment.

We have launched a new partnership with Ooredoo, to make Qatar one of the leading countries in the world for the next-generation Wearable Computing Technology. This collaboration will focus on public safety and emergent sectors, and will help Qatar for the 2022 World Cup, by using our reference design to create products with life-saving potential.

Finally, we dedicated our patent pending Augmented Reality Weapon Sight Technology, which was developed for high performance weapon sight programs, including US Army XM25 weapons platform, and Precision Sniper Rifle dayscope used by US special forces in the Army, Navy, Air Force, and the Marine Corps.

We're seeing strong signs that Wearable headsets will begin to be in use, starting in late 2014, and grow rapidly into 2015. For Kopin, we're expecting our first-generation components, as well as the cost and reference system, to be ready by the end of this summer. And then prepare for component manufacturing in the second half of the year, with potential Wearable revenue growth expected in 2015.

In conclusion, the trends of advancing technology and greater mobile connectivity continues to reinforce our vision of the Wearable space. The dream of consumer electronics and mobile [device] communication companies are exploring the Wearable Computing Technology market. And we believe Kopin is uniquely positioned to capitalize on this opportunity. Given the robust estimate of the size of this market, and interest in Kopin's Wearable Technology and Solutions, we remain confident in our strategy and the ability to enable the progress of the Wearable headset computing market.

We Are Midway Through Our Transformation To Establish Kopin As the Preeminent Developer of Critical Components, Weapons Systems, and Total Systems Solutions For the Wearable Space. We are confidently on track and expect to see continued positive momentum throughout this year. The interest we have seen is increasing at a very substantial rate, and we believe by 2015, we will really see Wearable Computer Technology become a bigger part of everybody's life. We look forward to provide updates, as they develop throughout the he remainder of this year.

With that, I would now turn the call back to Richard for the quarterly financial results and guidance. Richard?

Thank you, John. Beginning with our results for the fourth quarter, total revenues for the fourth quarter of 2013 were $5.5 million, compared with $8.6 million for the fourth quarter of 2012, primarily reflecting the expected decline in sales of display products for military applications.

Before we go into the operating expenses, it is important to remember that our expense structure is not tied to the current quarterly revenues or fiscal year revenue projections, but to our longer-term goals. Cost of sales for the fourth quarter was 85.7% of product revenues, compared with 67.6% for the fourth quarter of last year. The increase reflects a decrease in the sale of our display products for applications and lower manufacturing utilization.

R&D expense in the fourth quarter of 2013 was $4 million compared to $3.6 million for the fourth quarter 2012. The increase reflected investments in Wearable Technologies. SG&A expenses increased from $3.5 million in the fourth quarter of 2012 to $4.1 million in the fourth quarter of this year. In the fourth quarter of this year, we took a non-cash charge to write down certain intangible assets of approximately $1.5 million.

Other income and expense, net, is primarily composed of approximately $380,000 of interest income, approximately $200,000 in foreign currency losses, and we also recorded an impairment charge in an equity investment of approximately $2.5 million. Turning to the bottom line, our net loss for the quarter was $9.7 million, or $0.16 per fully diluted share, compared with a net loss of $3.9 million or $0.06 per share for the fourth quarter of 2012.

Now turning to the results of the full year, total revenues for 2013 were $22.9 million, compared with $34.6 million for 2012. Again, primarily reflecting the expected decline of display products for military applications. Cost of goods sold for the full year was approximately 100% of revenues, compared with 70% for the prior year. The increase reflects a decrease in the sale of our products for military applications, and lower manufacturing utilization.

R&D expense in 2013 was $17.5 million compared with $14.3 million for the prior period. In the year -- prior year, excuse me, in 2013. SG&A expenses increased from $17.2 million in 2012 to $19.1 million in 2013. The increase in SG&A for the full FY13 versus the corresponding period in the prior year reflects an increase in patent and legal expenses.

As previously discussed, in the fourth quarter, we took a non-cash charge to write down certain intangible assets of $1.5 million. Other income and expense net primarily composed of $1.3 million of interest income, $1.9 million on the gain on the sale of investment, approximately $387,000 in foreign currency losses, and the non-cash write-down of approximately $5 million in investments.

Turning to the bottom line, our net loss for the year was $4.7 million, or $0.08 per fully diluted share, compared with a net loss of 18.4 million, or $0.29 per fully-diluted share for FY12. To remind you, on January 16, last year, we sold our III-V product line and investment in Kopin Taiwan Corporation, or KTC. The gain on this sale and the results of operations of our III-V product line and KTC through the date of the sale are shown as discontinued operations.

Our net loss from continuing operations for the 12 months ended December 28, 2013, was $24.9 million, or $0.40 per share, compared with a net loss from continuing operations of $21.2 million, or $0.33 per share for the same period 2012. With cash and equivalents and marketable securities totaling approximately $112.7 million at December 28, 2013, and no long-term debt, we are well-positioned to execute and fund our strategy. Fourth quarter and year-end amounts for depreciation and stock compensation expenses are attached in a table to the Q4 press release.

Now for guidance. For the full 2014, we expect revenues to be in the range of $18 million to $22 million. Our guidance assumes that our customers' products don't gain significant traction until 2015. In addition, we have recently received inquiries from military customers that we had not factored into our guidance previously. We expect a consolidated net loss in the range of $32 million to $40 million.

This guidance excludes the income from discontinued operations, net of tax. Excluding the effects of working capital, our stock buyback program, and other investing activities, we estimate the use of cash between $30 million and $35 million from operations for 2014. And with that, I'll turn the call back over to John.

Thank you, Rich. As I said earlier in the call, we are on track with our transformation, and are extremely pleased with our progress so far. Demand is growing for Wearable Computing products. The recent developments are only a sample of things to come. We remain in active discussions with a number of leading technology companies, who are looking to accelerate and enable their entrance into the Wearable Computing market.

Kopin has been a thought leader for many years, in exactly the areas that are making Wearable a reality. We expect our business model will allow us to generate substantially higher gross margin, and position ourselves for high growth. We have a very strong cash position and a debt-free balance sheet, and we expect to maintain our level of investment in the growing Wearable systems for the foreseeable future. We look forward to reporting exciting opportunities and developments on future calls.

And now, operator, please open the line for questions.

(Operator Instructions)

Our first question is from Matt Robison of Wunderlich Securities.

You had a nice uptick in funded R&D. Can you give us a little background for that, and if there's any visibility for that to continue?

The up tick is related to commercial activities. Some of the partners and activities that John spoke about in the call have funded certain product development, and that's what's reflected there.

And as John indicated, we're in discussions with a number of people, so as those discussions come to fruition, we would hope that there would be more of it. It's not like the military, where it has a little bit more visibility. These will really be dependent on when we close deals. Whereas the military is based upon the US Government procurement schedule.

You mentioned military inquiries recently. And I wasn't clear whether you meant to say that -- you said it wasn't included in your old guidance, but you didn't previously give guidance for 2014, I don't think. So is the 2014 guidance that you gave with or without incremental military business?

It is without.

Okay. So you're still in some discussions that could yield something incremental from the military then. Is that what we should take away?

Right. There's upside on the military right now.

Would we first see that as funded R&D, or how --?

No, it's programs that we have been designed into.

So maybe something that might materialize in a quarter or two, that kind of thing?

Yes.

Okay. Now, you mentioned $30 million to $35 million in cash from operations, cash use from operations this year. What's the backdrop for that increasing, about $10 million plus over what was used in 2013?

The biggest factor is coming out of last year. We had working capital, which we -- as the revenue has declined, we haven't actually had to refund working capital. So this year we had a boost of about $7 million from working capital, which I'm not factoring into 2014.

Okay.

You follow me, Matt? Question of receivables and so on.

Sure. Now, what do you think you are going to do in terms of CapEx this year?

Honestly, the number we've been looking at is $2 million to $3 million. In the current year, we did a little less than $1 million. We actually did about $750,000. But right now, we're saying $2 million to $3 million.

Okay, so 2013 was $750,000. So none of that cash consumption reflects the reverse of the working capital effect that you had in 2013? You don't expect any inventory or anything like that baked into that?

That's correct.

Okay. That's all for me. Thanks.

(Operator Instructions)

And the next question is from Joseph Zaccaria, Needham & Company.

Congratulations on the results, and appreciate the outlook. Was wondering if you could talk a little bit about the OpEx for the full year. I know you have said it is tied into your assumptions of future revenue streams.

I was wondering if you could give a little clarity on whether or not that includes any Silicon Valley Center or how we can model that into it. And then also a little bit about the -- how much leverage there is, once you start to see the ramp in wearables, how can we see OpEx trend there? Thanks.

As far as the OpEx, we have kind of given you the top and the bottom lines. The composition will probably, for the first couple of quarters of the year, will be consistent with what we've had coming out of the fourth quarter.

Then, we would expect the R&D to start declining, as more of it potentially moves into manufacturing, as customers start trying to get some prototype products out, and things like that. So there will be a shift in the second half, but in totality the run rate -- same run rate as the fourth quarter.

Okay, thanks. And I guess if I read it on a 20,000-foot level, it seems to me like the push-out, there's been a bit of a push-out in wearables. Is that fair? And if so, what are some of the dynamics at play there?

I don't think there's a push-out at all. I think we're pulling in right now.

Great. Appreciate it.

We have no further questions in queue at this time. I would like to turn the floor back over to management for any closing remarks.

We thank you, everyone, for joining us today. We look forward to speaking with you again in the near future. Thank you.

Thank you. Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time, and thank you for your participation.