Kopin Corp (KOPN) 2014 Q2 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 second quarter ended June 28, 2014. 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 You may access an archived version of the call on Kopin's website at www.kopin.com.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 and thank you for joining us this afternoon. John will begin today's call with a discussion of our strategy, technology, and market, and I will go through the second quarter results on a high level. John will conclude our prepared remarks, and then we'll be happy to take your questions.

I would like to remind everyone that during today's call, taking place on Wednesday, August 6, 2014, we will be making forward-looking statement 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'll turn it over to John.

Thank you, Richard. Good afternoon everyone and thank you for joining us. Yesterday I returned from a very productive trip to Asia where I visited a number of (inaudible) as well as a few large global electronic companies. I must say that there is a very strong excitement and interest in the wearable space everywhere I went.

As a reminder, Kopin provides critical components to our customers and partners in the wearable space. For example, our long-time partners, Vuzix and Recon Instruments, all use our optical modules in their wearable headsets.

We also developed concept systems with our critical components so we have -- to enable our customers to enter the market faster. We found our concept systems are so well received (inaudible) strong interest in actually licensing our concept systems.

Although we're very well versed in many aspects of wearable technologies, we are especially strong in display, optics, ASICS, and noise-cancellation speech recognition technology. During our transformation we're focused on these [essential] products and we're very pleased with our progress.

We now expect those products will be ready by the end of this year, on schedule for the big wearable wave expected to come in 2015.

From [various] discussion with our partners, there's really no longer any doubt that the wearable market and applications area going to be huge.

I will not go into details in this call of all the optical and audio products we're developing. It's suffice to say that customers are actively working with us in defining these innovative products. However, I would love to stress that [regular] of progress is being made.

Our [transmission] CyberDisplay product, as I stated earlier, do provide the tiniest and brightest optical modules for the wearable headsets in which size, weight, and power consumptions are critical. Since the wearables are going to be used extensively in outdoor environments, high brightness from the displays is very important. Our CyberDisplay provides the best combination of (inaudible) feature.

The superiority of our products will become very evident in 2015 as our customers start introducing their devices. We expect to see a substantial revenue growth in 2015.

I also would like to express our appreciation of the new $9 million order from one of our key partners in Thermal Weapon Sight systems. This order is for nine months starting in July, and we have raised our revenue guidance for the second half of this year.

There are also two additional options and if we are fully exercised the order will be increased to $13 million with shipment extended to the middle of next year. This order was not expected as the customer was using another display. However, because of some quality issues discovered with the other display, our rugged and well-proven display is the superior choice.

With the new order we have shipped more than 200,000 TWS optical modules with about $300 million of revenue to Kopin. We believe our market shares of the current generation [of the installed] TWS system is well over 90%.

Here I would like to point out that Kopin's not only strong innovation but also has a very good reputation in quality and on-time delivery of manufactured products.

Now it's time to discuss our IP position. Kopin has been in the wearable space for very early, initially for defense applications. We now have more than 250 patents and patents pending in the wearables. Just in 2014 we have filed 43 patents with 12 granted patents. We will continue our active IP filing in this emerging category.

In summary, our transformation is progressing very well. We have increased our revenue guidance for the second half of this year. Our (inaudible) products are getting ready and we have quite a few exciting customers and partners coming out with great products. We expect our revenue in wearable -- wearable revenues to ramp up in 2015 and our cash position will remain strong. Our future is bright.

We look forward to providing additional updates as they develop throughout the second half of this year. With that I will now turn the call over to Richard for the quarter's financial results and guidance. Richard?

Thank you, John. Beginning with our results for the quarter, total revenues for the second quarter of 2014 were $6.9 million compared with $6.1 million for the second quarter of 2013. Revenues from the sales of products for wearable applications increased approximately 100% in the second quarter of 2014 as compared with the same period in 2013. The second quarter 2014 revenues from the sales of products for wearable applications was $1.5 million compared to $800,000 in Q2 of 2013.

In the second quarter of 2014 R&D revenues were approximately $2 million as compared to $500,000 in Q2 of 2013. The increase was driven by funded programs with commercial customers for the development of wearable products. In addition, as we've previously discussed, we expect revenues from the sale of products for military applications to be stronger in the second half of 2014 as a result of recent orders.

Before we go into operating expense, it is important to remember that our expense structure is not tied to the current quarterly revenues or fiscal revenue projections which are longer-term goals. Cost of goods sold for the second quarter was 84.7% of product revenues compared with 110.6% for the second quarter of last year. The improvement in gross margin reflects a higher percentage of our sales being delivered by the higher-margin products.

R&D expense in the second quarter of 2014 was $5.1 million compared with $3.7 million for the second quarter of 2013. The increase reflects an increase in costs to develop our wearable and military technologies. SG&A expenses were $4.9 million in both the second quarter of 2014 and '13.

Other income expense was -- and expense was approximately $1.6 million for the second quarter of 2014 as compared with income of $0.9 million for the same quarter of 2013. Included in the $1.6 million expense is an impairment charge for the write-down of an equity investment of $1.3 million related to our wearables -- excuse me, related to an equity investment unrelated to our wearable strategy, and this was a non-cash write-off. In addition we recorded foreign exchange losses of $0.7 million for the second quarter of 2014 as compared to foreign exchange gains of $0.4 million for the same period in 2013.

Turning to the bottom line, our net loss for the quarter was $8.8 million or $0.14 per fully diluted share as compared with a loss of $7.9 million or $0.13 per share for the second quarter of 2013. For the 6 months ended June 28, 2014, cash used in operating activities was approximately $13 million. Second quarter amounts for depreciation, amortization, and stock compensation expense, as well as CapEx and share repurchase amounts are included in the tables attached to the Q2 press release.

Now for our guidance. For the full-year of 2014 we have increased our revenue guidance in the range of $24 million to $28 million, up from the prior range of $18 million to $22 million for the year. This is due to our recently announced order for Thermal Weapon Sight components of $9 million. Of the $9 million, only $6 million will be shipped in this year.

Our guidance for consolidated net loss remains in the range of $32 million to $40 million. We estimate we will use between $28 million to $32 million to fund operations for 2014.

And with that, I'll turn the call back over to John.

Thank you, Richard. I just want to reiterate that we believe (inaudible) continue to manage our strategy and (inaudible) will begin to show in our performance towards the end of 2014 and into 2015.

We are clearly in the right place at the right time. Our business model should position us for [greater rev] growth and provides us with higher gross margin products. We look forward to reporting exciting developments on the future call.

And now operator, please open the line for questions.

Thank you. (Operator Instructions.) Our first question comes from the line of Matthew Robison with Wunderlich. Please proceed with your question.

Hey, thanks for taking the question and congrats on the progress you're making. I guess the first question I have for you, John, is it sounds like you're getting maybe inside the 6-month window as far as some of the equipment that you can talk about in more specifics. Are we -- should we think that that timeframe early next year as being customer prototypes or kind of products that might actually be sold by the customers?

Matthew, this is John Fan. I think that you're question is talking about our customers coming out with products next year. They will not be prototypes. Many of them -- quite a few of them will be real products, and I think they will sell well.

Okay. And on the -- maybe Rich, for you, on the R&D revenue and the expenses, how should we model the repeatability of that big uptick in R&D revenue? Is that going to -- is that just a one-quarter phenomenon and I guess the same question about the expenses?

No, I think that the second half of the year will mirror in some respects the first half of the year as far as total revenue. I just don't know whether it's going to be Q3 or Q4 honestly at this point. We earn it based upon deliveries and achieving certain milestones, so we feel confident that we'll get it done in the year, but again, it's always a question of whether it's -- which quarter.

I see. So maybe we look at it as being towards the back half -- towards the fourth quarter after maybe a little less in the third quarter? Is that maybe a reasonable way to look at it?

Honestly it's all dependent on how the engineers do achieving milestones. So you know with no other information, I'd say it's 50/50 between third and fourth.

And is it pretty much just military or are you getting NRE for commercial applications in that line of revenue?

It's commercial driving it. It's all --

Commercial, not military. Yes.

Okay. Great. And on the expenses, is this kind of the run rate now?

Yeah. It's in that range of -- it's been running about $5 million a quarter.

Okay. That's it for me.

Thank you. Our next question comes from the line of Rajvindra Gill with Needham & Company. Please proceed with your question.

Hey, this is Josh Buchalter in for Raji. Thanks for taking my questions and congrats on the quarter. Could you give us -- I think this might have been touched on, but can you give us an insight into gross margins? They've been pretty volatile and how should we think about modeling that? I don't know if the last question was just on OpEx or gross margins. Thanks.

Yeah. The gross margins have been improving because as we articulated the strategy back last year, 2013, we're moving away from some of the lower end consumer products to the higher margins. So if you look at it, industrial products are up, the wearable products are up, and in the second half we expect the military products to be up. And those are all higher gross margins than maybe some of the legacy stuff that we said that we were going to move out of.

So the gross margins should be improving, but ultimately to get really significant gross margins, it's the volume because we obviously are a fixed-cost structure. So you know, you're talking about a few percentage points here and there, but there won't be significant improvements until next year when we get the volume to really pick up.

Okay. Thank you.

In the current situation we expect the wearables will continue to ramp up quickly in 2015.

Yeah. All right. Thank you. And then on wearables, could you maybe speak to some general trends you're seeing in the space and how Pupil display is being received? That's it for me. Thanks guys.

Yeah, I just -- obviously I just came back from the Asia trip. It was actually a quite extended trip. I went to quite a few countries and overall the response is actually much better than even we anticipated. It looks like almost every company, electronic companies or smartphone companies are organizing for wearable.

And the reason is actually quite interesting. I did not put it in the script today, but it's happening is that people now believe the smartphone, although smartphones are very good, but they will probably begin to be located in the bag or the suitcase or briefcase, and then many of the functions of smartphones will be broken up into wearables specifically for certain applications.

And it's true for every generation of computers, mainframe to mini computers, PC to smartphone, which is really a small computer. They think the functions are going to be breaking up. So this is a huge change and every company is lining up. They think this is happening, it cannot be stopped, and they also recognize Kopin is well in the lead because we've been in there for so long since military days and we have products which are (inaudible).

So I came back very excited about it. Everything seems to be lining up for us now.

That's real interesting insight. Thank you so much.

Thank you. Our next question comes from the line of Beth Lilly with GAMCO. Please proceed with your question.

Good afternoon. I wanted to just get a little more granularity into as you talk about the end of 2014 launching products, are we -- can you talk about kind of what that will look like in terms of tradeshows? Will we start to see those at tradeshows or is this going to be end of the year launching? Give us some visibility into the pipeline?

Yeah. That's a good question. I think of course I want to make it clear that we do not make the final device product. Our customers do. We make a component, critical components such as the optical engines and the audio engines. So our plan is to launch these products, certainly you will see that in the CES show. And our customers, many of our -- some of our customers will also launch their devices around that time.

So I think it is going to be located towards the CES show, which is January next year. We are talking about maybe 5 months away.

Okay. And then from there, will we start to see your revenues ramp up pretty quickly on the wearable side?

As Rich talked about, our wearable revenue already started ramping up, but I think you will see a much faster uptick in 2015 once the products are released.

Yes. Okay. And then the other question I wanted to ask is in terms of your financial model, if we go out to 2016/2017, is that kind of what you're targeting to be breakeven period or will you get there quicker?

We haven't given any guidance for '15 or '16.

Okay. Okay. Great. That's it for me. Thank you.

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

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

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