Kopin Corp (KOPN) 2014 Q4 法說會逐字稿

Good day, and welcome to the Kopin Corporation's fourth quarter and fiscal year 2014 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 You may access an archived version of the call on Kopin's Website at www.kopin.com.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. 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 business update. I will go through the fourth quarter and full-year 2014 results at a high level. 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, March 10th, 2015, we will be making forward-looking statements as define 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 products, 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 the call over to John.

Thank you, Rich. And thank you, all, for joining us today. 2014 was an important year for Kopin. And we're extremely pleased with the progress we have made towards positioning ourselves as the leading provider of technologies and solutions for the coming wearable world.

We have exceeded all metrics we established at the beginning of 2014, in revenue, in cash preservation, in technical advances, in IP filings, in partnerships and customer acquisitions, and in product development.

The overall strategy that we have discussed all along is right on track. As a reminder, our overall strategy has been in 2013 was our reorienting and reinventing year. 2014 was for product development and customer acquisition. This year, 2015, will be focused on product introduction. And 2016 will be our revenue-ramping year.

As I discussed in January, we have now completed construction of new product line capabilities at our Westborough site, providing additional production capability and capacity.

We have also made significant progress with some of the world's leading players in the growing wearables space. And we look forward for those partnerships to begin bearing fruit to later on this year.

We now expect during this year to tier-one global corporations will introduce exciting products in the enterprise world with substantial Kopin content in their devices.

Of course, companies such as Vuzix and Recon have already announced products with Kopin's content inside.

Additionally, we have been focusing on consumer wearables applications and believe the first explosive consumer market may well be in Asia. We have already noticed early signs of this.

Wearable smart assets are challenging to be designed well, requiring various hardware and software advances. We believe we're very well positioned to provide the market with all the necessary technologies for the design of smart headsets for enterprise and for consumers.

We're excited with our momentum as we head into 2015.

In the important IP area, in the year 2014, we have been granted 25 new patents. And we have had 74 new patent applications, bringing our total to 285 patents and patents pending by the end of 2014.

Our better-than-expected -- initially expected results for 2014 was driven in part by the sales of products for (inaudible) applications, which increased over 65% in 2014 as compared to 2013.

The orders we received for -- were for additional units for thermal weapons rights. Our 2014 orders were carried through the first quarter of 2015. And we are in discussions where customers to determine 2015 demand.

Longer term, we have developed a precision acquisition targeting system, which we call PAT, which overlays critical data over weapon-sized radicals via our designed C2 optics to enhance the soldier's effectiveness.

This data is provided by laser range finder and a ballistic calculator, which we have integrated into the system.

The PAT technology is useful in both day and night situations and can be clip on to assist the weapon site or embedded into a new site.

We have developed the complete system and discussing how to [ensure] the system to the market with several potential customers and partners.

Also, we are pleased that Mr. Bill Maffucci has joined as Vice President of Business Development, focusing on emerging applications in the defense market. Bill has more than 35 years of working with defense contractors in the areas of display, optics, and head-mounted systems.

Bill's talent will not only be very positive impact on our defense-related activities, but also with our commercial wearable technology.

So, let's move onto wearables. It's clear that wearable technology is a huge and growing technology category and is growing mainstream.

For smart headsets, the market has recently shifted more towards enterprise application. You most likely are aware that Google recently announced the closure of its Explorer program for Google Glass. [It's] the chance that they may initially aim to next-generation Google Glass for enterprise applications.

The news was somewhat a surprise to the market and may have caused some confusion in the wearable category.

Frankly, some (inaudible) see this as an opportunity, while for others it gave them a pause.

Kopin has always been the pioneer in both the enterprise and consumer world. Our Golden-i headset activity has been focusing on the enterprise market for the past five years. And we're extremely positioned well in the enterprise category.

Additionally, two years ago, we commenced developing systems for consumer application. We believe the consumer applications, the device should be different from that aimed for enterprise applications.

The consumer device has to be very simple for consumers to use and would most likely be accessory to the smartphones and tablets. To achieve mass consumer adoption, the fashion element is just as critical as the functional element.

For example, the optical element has to be so small that, in the design, [it's] effectively invisible. However, the images that users see from the optical elements need to be large enough for a consumer to easily (inaudible) visual information.

These images also need to be bright enough to be very sunlight readable and yet use very low power.

Additionally, the principle user interface should be voice under very -- any noisy and unfriendly environment. In other words, we believe voice will become the next new touch. These are very tough requirements to satisfy.

We are pleased that we are [make] great progress in this enabling key technologies in the next -- in the last two years. And we believe we have found the key to unlock the door to successful acceptance of consumer wearable headsets.

2015 will be our year to introduce these products and technologies to the market. We're confident that consumer smart headsets are viable and actually close to reality.

We also recently announced that Yoichi Iba, formerly Senior General Manager with the Olympus Corporation, has joined Kopin Corporation as the Chief Optical Systems Scientist. Mr. Iba is one of the inventors and the team leader of free-shape prism and pupil optics.

Mr. Iba will focus on designing innovative optics and systems solutions for wearable headsets, including augmented reality and virtual reality applications. We're very excited to have Mr. Iba joining Kopin team.

We have been collaborating with Mr. Iba at Olympus for many years. Now, with Mr. Iba joining us, we expect our relationship with Olympus would become even stronger. With Iba to help, we expect to expand our lines of innovative optical solutions, which currently include our pupil and pearl module products.

2015 marks our 30-year anniversary for Kopin. During this long journey, we have developed our initial nanomaterial technologies to innovate the [power] transistor for smartphones and LCDs for commercial, defense, and consumer applications.

We were successful in those endeavors. We expect continue at current advances. And sometime later this year, we'll plan to host another wearable tech event, like we did last year.

Again, this event will not only mark our 30-year anniversary. We also plan to demonstrate and unveil some of our disruptive and exciting technologies. We'll provide more details in a later date.

In summary, the past two years of reinventing has been very successful. We're now adding a few more talented executives with key technical products, sales and marketing capabilities.

We're delighted that we have become the (inaudible) for those industry leaders to join us.

And importantly, we have more than sufficient financial resources to achieve our ambitions -- our ambitious business goals. We are all very excited here.

With that, I will now turn the call to Rich to discuss financial results. And, Rich?

Thank you, John. Beginning with the results for the quarter, total revenues for the fourth quarter of 2014 were $10.6 million compared with $5.5 million for the fourth quarter of 2013.

The increase in Q4 revenue year over year was primarily driven by military revenues, which were $6 million in Q4 of 2014 as compared to $1.1 million in Q4 of 2013.

Before we go into operating expenses, it is important to remember that our expense structure is not tied to the current quarterly revenues or fiscal revenue projections, but to our longer-term goals.

Cost of goods sold for the fourth quarter was 69.1% of product revenues compared with 85.7% for the fourth quarter of last year. R&D expenses in the fourth quarter of 2014 were $5.7 million compared with $4 million in the fourth quarter of 2013. The increase reflects continued investment in wearable technology.

SG&A expenses were $5 million in the fourth quarter of 2014 compared with $3.5 million in the fourth quarter of 2013. The increase was primarily driven by an increase in stock compensation expenses.

Other income expense was income of $635,000 for the fourth quarter of 2014 as compared with expense of $2.3 million for the fourth quarter 2013. The fourth quarter of 2013 included a $2.5 million noncash write-down of an investment.

Turning to the bottom line, our net loss for the quarter was $5.3 million, or $0.08 per fully diluted share, compared with a net loss of $9.7 million, or $0.16 per share, in the fourth quarter of 2013.

Now, turning to results for the full year, total revenues for 2014 were $31.8 million compared with $22.9 million for 2013.

Cost of goods sold for the full year was approximately 72.9% of revenues compared with approximately 100% for the prior year. The increase is as a result of the increased sales of our military products, which increased 65% year over year and have better margins.

R&D expense in 2014 was $20.7 million compared with $17.5 million for the prior year. The increase reflected increase in investment in wearable technologies.

SG&A expense increased from $19.1 million in 2013 to $19.9 million in 2014.

Turning to the bottom line, our net loss for the 12 months ended December 27th, 2014, was $28.2 million, or $0.45 per share.

As a reminder, on January 16th of 2013, we sold our III-V product line and investment in Kopin Taiwan Corporation. The gain on the sale and the results of operations for our III-V product line and KTC through the date of sale were shown as discontinued operations.

Accordingly, for the year ended December 28th, 2013, our net loss from continuing operations was $24.9 million, or $0.40 per share; our net income from discontinued operations was $20.1 million, or $0.32 per share; and our net loss for the year ended December 28th, 2013, was $4.7 million, or $0.08 per share.

Our cash used in operating activities was $19.6 million for 2014. Cash and marketable securities totaled $90.9 million at December 27th, 2014. And with no long-term debt, we are well positioned to execute and fund our strategy as the wearable category begins to ramp.

Fourth quarter and year-to-date amounts for depreciation and stock compensation are attached to a table to the press release.

As we think about our outlook for 2015, there are a number of moving pieces. As such, we are not going to provide full-year guidance. However, we would like to give you some perspective on thinking about 2015.

To echo John's statement, we are extremely excited about the wearable category and expect this category to grow as we have two tier-on customers that we expect to introduce products this year.

However, as John mentioned, there seems to have been a shift more towards enterprise applications.

When we think about military, we received a large order in Q2 of 2014. And we don't know if that will repeat in 2015.

As we have discussed previously, for our consumer electronic applications, we've been in the process of exiting that segment. [We had] those revenues decrease from $5.3 million in 2013 to $2.8 million in 2014. And we expect them to further decline in 2015.

We expect the revenues from the sale of our products for wearable applications to increase over 2014. But, it's difficult to predict our new product launches. As you can see, there was a lot of moving pieces as we head into 2015. So, we prefer more clarity before we give revenue guidance.

In terms of cash usage, we expect the use of cash to be similar to that of 2014. But, we remind everyone that, in early January of 2016, we are to receive the final payment from the sale of our III-V product line and investment in KTC of $15 million. So, we expect to start 2016 with a strong cash and marketable securities position with a debt-free balance sheet. And so, we are comfortable with our means to execute our strategy and maintain our level of investment in the growing wearable systems market.

And with that, we'll turn it over to the operator for questions.

Matt Robison, Wunderlich Securities.

Hey, thanks for taking the question, John and Rich. First, I'll bore people with some housekeeping items. Rich, can you tell me how much of the other income was interest income and what the other major features of that category were?

It was almost all interest income. For the year, there was roughly $95,000 of foreign currency gains.

Okay. What was cash flow from operations in the fourth quarter?

I don't have that in front of me.

All right. Maybe you can follow up later in the call, or -- .

-- Yes.

I heard 285 patents and patents applied for. Did I hear that right? And how many were in fourth quarter?

I don't have that breakdown, the fourth quarter. For the year, we have 25 new ones granted and 74 new patents applied. So, it's just about -- that's 2014.

I just wondered what the total was.

Yes, the total (inaudible). So, obviously, we're still patent (inaudible) right now. So, we're [part] over 300 now, yes.

Okay. Now, what -- you had a pretty good year for R&D revenue. Do you have any kind of visibility for that component in 2015?

At this point in time, I think we would expect it to decrease. A lot of that came from customers who were looking to launch wearable products. And so, I think we're past the R&D stage.

You had a pretty -- fourth quarter was good, too. So, is that what the case was in the fourth quarter?

Yes.

And do you -- is there any kind of way we can bracket the potential for the military outcome?

The military R&D contracts, or the military in total?

Total.

The government really honestly isn't doing a lot of funding in R&D anymore. So, we have seen a significant decline in R&D contract funding by the US military. It's all part of the sequestration.

As far as the military revenues, we would expect -- we're in about the same position we were last year. But, we just haven't seen what's going to happen in the second half of the year. And that's what's holding up our guidance.

Does the precision acquisition targeting system come in this year with anything?

No. No, this year will be partnerships. And then we've had some discussions. And they think to productize, it will probably take about a year. And then we'll start seeing revenues thereafter.

Yes, you had -- you talked about this production capacity build. That -- is there -- when does -- when do you start seeing revenue from that?

This year.

Well, can you be a little more specific about that?

Second half of this year.

Okay. So, you're not -- you've ramped up capacity in the fourth quarter and the first quarter. But, you don't expect to actually -- the lead times are going to be longer than a quarter to build the stuff?

Yes.

Okay.

I mean, our lead times coming out of the foundry these days are like 16 weeks.

Okay. And so, we'll have an initial build, and then we'll have to see how the consumer acceptance goes at that -- after that.

That's correct. That's exactly right, Matt.

What kind of protection do you have for your investment if the sellthrough or the consumer response is not what your customer predicts?

It's typical in almost all our -- whether it's military or commercial, if they place orders -- and they understand our lead times on our raw materials and stuff. So, to the extent that they decrease their order, they're on the hook for it.

Now, both of these tier ones for enterprise type applications?

Yes.

Okay. And did you have any 10% customers in the quarter or year?

For the year, we had two, Raytheon at 26% and Google at 11%.

Okay.

There's a third one that just barely missed it.

Okay. And then that -- presumably the second one you mentioned was -- was that all R&D?

Yes. There were units. You go through an EBT, a DBT.

Run that by me again maybe without the abbreviation.

Yes. So, yes. The answer's yes.

Okay. And then -- and so, that sounds like a military and a enterprise type application.

I'm not sure I understand your question.

Raytheon's military, right? So, and -- .

-- Yes -- .

-- Google is more enterprise.

Yes.

Okay.

Well, I think that what Rich said that we had actually three people almost reached 10%. So, the second one and the third one only missed a little bit, both second and third were for wearables.

Yes, great. Now, can you tell us what the third -- who the third one was?

No.

No, because it's below 10%.

Okay. All right. I'll digest some of this, maybe come back with another question, if there's another caller.

Raj Gill, Needham & Co.

Hi. Congrats on the good quarter. And thank you for taking my question. This is Josh in for Raji. Could you maybe give us some more details on the enterprise, what kind of product? Is that -- actually, that's falling into the wearables applications, or is it industrial? Thank you.

Yes, the question, Josh, is that how you break up the enterprise world. I think you know that Google Glass is not (inaudible) go to the enterprise world. How they're going to use it, obviously, [whether stay put] and see how they announce it. For us, in the case of Recon, they're using for sports. In case of Vuzix, they're using it for more maintenance and repair. And we have -- I think most of the enterprise world, the beginning will be for medical or repair, sports, and maintenance.

And we are very, very well situated on that. I think we're basically in almost every major enterprise application headset.

Okay. And in that -- in your revenue segment, that shows up in wearables or industry?

It's wearables because they are all wearables.

Okay. Thank you. And then you kind of touched on military, but can you give us some -- any color on gross margins? It's been lumpy, so just trying to figure out how to model it.

I would [relate it] to Rich to talk about margin. But, our basic situation in military is the margin's always very good, north of 50% on military.

Okay. So, military's above the other one. And is the Westborough, is that focused on anything in particular? It'd just be any segment, like -- .

-- Westborough has a couple of things they do. It is the manufacturing site for a lot of displays, which of course go to wearable as for military. Now, you also have a new assembly facility which just finished in Westborough. And that will assemble mostly for wearable consumer enterprise application.

Okay. Thank you. I'll hop back in the queue. Appreciate the time.

(Operator Instructions). Matt Robison, Wunderlich Securities.

Thanks. On the industrial, should we look at that as mostly fourth dimension?

Yes.

Okay. And -- .

-- Mostly 3D metrology.

Yes. Okay. And what -- in terms of your first -- your two largest customers, would we -- is it fair to kind of look at them as being similarly positioned as two largest customers in the fourth quarter or the second half of the year?

Yes.

And what -- are your two tier ones, are they different than your second and third largest customers for 2014?

Yes.

Okay. That's all I've got.

Hey, Matt?

Yes.

Fourth quarter cash use and operating activities was $2.2 million.

Thank you.

Yes.

(Operator Instructions). We appear to have no further questions. I will turn the call back over to our speaker for closing comments.

Well, in conclusion, we're delighted with our progress in 2014 and look forward to an exciting 2015 when wearable products will be introduced into the marketplace. Thank you for joining us today.

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.