Kopin Corp (KOPN) 2017 Q4 法說會逐字稿

Greetings, and welcome to the Kopin Fourth Quarter and Fiscal Year-End Conference Call.

(Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Mr. Rich Sneider, Chief Financial Officer.

Thank you.

You may begin.

Thank you, operator.

Welcome, everyone, and thank you for joining us this morning.

John will begin today's call with a discussion of our strategy, technology and markets.

I will go through the fourth quarter and 2017 results at a high level and discuss our 2018 outlook, and then John will conclude our prepared remarks.

Following that, we'll be happy to take your questions.

I would like to remind everyone that during today's call, taking place on Thursday, March 8, 2018, we will be making forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995.

These statements are subject -- 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 for joining us this morning to discuss our strong finish to the year.

We were pleased to post our strongest revenue quarter since we transformed Kopin to focus just on wearables.

Revenue growth of 78% in the fourth quarter as compared to 2016 allowed us to achieve our goal of 70% revenue growth in the second half over the first half of 2017.

Strengthening our military operations primarily drove our results.

As we have discussed about in the past, our displays and optics have been developed initially for the military, meeting its demand for quality and reliability.

In Q4, we saw good momentum in shipments for the F-35 fighter jet helmets, and we expect that to accelerate in 2018.

The FWS-I program substantially completed development in 2017, and with an initial volume production to commence this year, reaching full production in 2019.

The FWS-C program is also on track, and we believe it will contribute a significant production revenue stream in 2019 and beyond.

In addition, we are in the early stages with a new military program win for armored vehicles, which we mentioned last quarter.

And we believe this will be important for longer-term military revenues.

Finally, our Brillian LCD microdisplay product line, which we introduced in Q3 last year, was created to meet the requirements of extremely high brightness for the next-generation of avionic AR applications.

Full color Brillian displays exhibit contrast ratios higher than 500:1, and brightness levels greater than 34,000 nits or 10,000 foot-lamberts.

Brillian displays are now being designed into full-color pilot helmet on the display systems, and our customer believe they are the best for the application.

We also have seen great -- good intake -- uptake in the military enterprise AR [ELF] business.

Two of our partners, Vuzix and RealWear, have indicated strong reception with their new industrial products.

Other industrial customers have been doing pilot programs over the last couple of years and forecast now they will go into higher volume production in 2018.

We believe most of the industrial and enterprise AR headsets in production nowadays all use our displays.

CES 2018, which is last January, was very exciting for Kopin.

The new generation SOLOS smartglasses received a good deal of attention on the show floor, and our booth was very busy.

This new version enables cyclists and runners to leverage wearable sensors, provide real-time progress updates such as speed, power, heartbeat and many other matrices (sic) [metrics], and use the SOLOS platform to track their progress.

With this new-generation SOLOS on plan to begin shipping in the next few weeks, we took an important step to establish SOLOS marketing and retail strategy, with the addition of Tom Futch as our Senior VP of SOLOS, Sales & Marketing.

Tom's experience in leading global fitness, health and wellness brands such as the Fitbit, BodyMedia, Jawbone and Weight Watchers is a great fit for Kopin's direction, and we're very excited to have him join us.

We also demonstrated our latest development in OLED displays at CES.

We first introduced our Lightning OLED display at CES 2017 a year ago.

And now, in just 1 year's time, we have increased the brightness of OLED displays by a factor of 10, an amazing improvement in performance.

At CES this year, we also showed the Elf VR headset, which won the CES Innovation Award.

We believe Elf is the most compact and lightweight virtual-reality headset developed today.

The Elf incorporates our two 2k x 2k Lightning displays, deliver a picture-like image and eliminates potential dizziness with our 12 -- 120 hertz refresh rate.

We believe this is the first VR headset that meets the size, weight and performance that may drive adoption of VR technology.

Also with our partner, Pico, we introduced Eagle, a lightweight mobile headset that creates a home theater experience on the go.

The Eagle, another CES award-winning product, incorporates our two 720p Lightning OLED displays in a 0.49 inch diagonal size.

In effect, the user gets the experience of an 80-inch HD screen viewed from 10 feet away while still maintaining their situation awareness.

We expect the Eagle to begin shipping in 2018.

The Eagle and Elf would not be possible without the coming volume production of Lightning OLED displays.

You may recall, Kopin and OLiGHTEK jointly purchased a new OLED deposition equipment, and now it has been installed at OLiGHTEK's facilities.

We expect to begin production of Lightning OLED displays later this year using the state-of-the-art OLED deposition system.

We also have positive developments on the new OLED on silicon foundry being built with BOE and OLiGHTEK.

We were honored to have Mr. Liu Xiaodong, the President and COO of BOE, attended our reception at the CES, and told the group that he believes the fab is on track for mass production by the end of 2019.

This fab, located in Kunming, China, will be the world's largest OLED on silicon fab.

I have long shared Kopin's view of what it takes for wearable to be done right.

The design capability of SOLOS reflects our thought.

I also shared these ideas when I spoke recently at MIT Media Lab and discussed my 5 rules for helping companies succeed in AR.

The video of that talk is now on our website if you would like to watch it.

We are increasingly confident in our outlook as our technology is helping to drive the AR/VR industry.

We anticipate the momentum of our strong finish in 2017 will continue into 2018.

We believe the continued ramp of our military business, the growing adoption of AR systems for industry and enterprise and the demand for SOLOS, along with other new product rollouts, will allow us to increase revenue in 2018 by 25% to 40% to a range of about $35 million to $40 million.

In addition, we're anticipating increasing demand for our products and components to allow us to achieve breakeven profitability by year-end 2019.

As always, we're careful in utilizing our capital.

So with $69 million in cash and no debt, we continue to move forward on our global vision for AR and VR.

Now, I will let Rich to provide more details.

Thanks, John.

Beginning with the results for the quarter, total revenues for the fourth quarter of 2017 were $11.4 million compared with $6.4 million for the fourth quarter of 2016.

The increase in quarterly revenue year-over-year was primarily driven by sales -- by military sales.

In addition to sales to our military -- normal military programs, F-35 and FWS-I, this quarter, we also shipped components to an army training and simulation program.

This was a short-duration program so the fourth quarter results should not be considered a run rate for our military revenue.

Cost of sales for the fourth quarter was 64.9% of product revenues compared with 71.7% for the fourth quarter of last year.

Gross margins improved due to an increase in sales of our military products, which have higher gross margins than our other products.

R&D expense in the fourth quarter of 2017 was $4.7 million compared with $3.8 million in the fourth quarter of 2016, where the higher cost reflected higher funded R&D expense in 2017.

SG&A expenses were $4.4 million in the fourth quarter of 2017 compared with $4.9 million in the fourth quarter of 2016.

Included in Q4 2017 operating expenses is a $600,000 impairment of goodwill.

Other income and expense was income of $1.3 million in the fourth quarter of 2017 as compared with $2 million in the fourth quarter of 2016.

The fourth quarter of 2017 includes a $1.7 million gain from the mark to market of a warrant we received when we licensed technology to a customer.

The fourth quarter of 2016 includes a $1 million gain on the sale of investment.

The fourth quarter of 2017 includes approximately $600,000 of foreign currency losses as compared to approximately $900,000 of foreign currency gain in 2016.

Turning to the bottom line.

Our net loss attributable to controlling interest for the quarter was approximately $2.9 million or $0.04 per share compared with a loss of $5.2 million or $0.08 per share for the fourth quarter of 2016.

Turning to results for the full year.

Total revenues for 2017 were $27.8 million compared with $22.6 million for 2016.

Cost of goods sold for 2017 were 72.8% compared with 84.6% of product revenues for '16.

The decline was due to an increase in sales of our military products, which as I said, have higher gross margins than other products.

R&D expense in 2017 was $18.9 million compared with $16 million in 2016.

The increase in R&D expense year-over-year was primarily driven by an increase in funded development programs.

SG&A expenses were $20.5 million for 2017 compared with $17 million for 2016.

SG&A for 2017 increased as compared to prior year, reflecting an incremental SG&A of $1.4 million for our acquisition of NVIS and $1.5 million in professional fees.

The incremental SG&A from NVIS for 2017 includes approximately $800,000 of amortization of intangibles resulting from the acquisition.

2017 operating expenses include $600,000 related to the impairment of goodwill.

And the loss from operations for 2016 included a $7.7 million gain on the sale of a facility in Korea.

Other income and expense was income of $2 million for 2017 as compared with $600,000 for 2016.

2017 included a $2 million gain from the mark to market of a warrant we received.

2016 includes a $1 million gain from the sale of the investment.

2017 includes approximately $1 million of foreign currency losses as compared to 2016, which had approximately $700,000 of foreign currency loss.

Turning to the bottom line.

Our net loss attributable to controlling interest for 2017 was approximately $26.3 million or $0.38 per share compared with a net loss of $23.4 million or $0.37 per share for 2016.

10% customers for 2017 were the U.S. Army at 12% and Rockwell Collins and DRS, who were both 10%.

Fourth quarter and year-end amounts for depreciation and stock compensation are attached in a table to the Q4 and year-end press release.

As John mentioned, turning to 2018, we expect full-year revenues to be in the range of $35 million to $40 million.

We expect the revenue to ramp through the year similar to 2017, corresponding with the introduction of new products later in the year.

We believe operating expenses will remain relatively flat compared to 2017.

As always, the amounts discussed are subject to final audit, so please refer to our Form 10-K for the year ended December 30, 2017 for final year-end dispositions as well as important risk factors.

With that, operator, we'll take questions.

(Operator Instructions) Our first question comes from the line of Robert Mertens with Needham & Company.

I just wanted to get a better sense around the military revenue ramp.

I know this quarter was unusually high with the onetime contract going through.

I just wanted to get a little bit more color around that.

And maybe how we should think about it throughout the year.

So currently, the F-35 program is pretty much on a sustainable ramp, should be increasing somewhere in the neighborhood of 20% over the course of the year.

We believe it will be pretty much on a linear basis.

And then the FWS will go into production this year.

As John mentioned, we pretty much finished all the development efforts, so now it's in full production.

And we -- and so that's all going be incremental revenue.

So year-over-year, it should be increasing in the 10%, 20% range.

Great.

If I can add one more.

Along the industrial sector, you mentioned that you're in the majority of the industrial AR headsets.

I just wanted to see if you knew of any sort of competition in that regard or if that business line is really just contingent on some of your customers ramping throughout the year?

This is John Fan.

I'll answer that question.

As you well know, the enterprise -- AR headset for enterprise has been considered to be very important for our -- for business.

The actual ramp has been slower than we'd think.

But right now, we see the tipping point.

The tipping point's really occurring sometime probably late last year or beginning of this year.

We actually -- basically, we're almost in all major systems for enterprise and almost all the customers are now seeing double-digit growth this year.

So we're very excited about this.

We think that finally, the large projection for enterprise application for AR headsets are here.

Our next question comes from the line of Jeff Bernstein with Cowen Prime Advisors.

So just wanted to follow up a little bit more on the guidance.

You talked about profitability in 2019.

Was that sort of a run rate somewhere in 2019?

Or is that a full year number for 2019?

Yes.

Yes.

That would be an exit.

So that's an exit run rate?

Yes.

Got you.

Okay.

And then just on military.

So you said overall, military probably grows around 20%.

So it's going to be less than the 50%-or-so of revenue in the coming year?

Yes.

I mean, it depends, [there's different] programs.

I mean, there are programs like F-35, which now is in a growth rate of about 20%.

But we have, now, a large new program that's coming online, even in military.

So just in terms of the -- is it still -- you think military is still going to be about 50% of the business in 2018?

It's a fair assumption.

As you know, SOLOS and all the other enterprise products are still just coming up.

SOLOS, (inaudible) introduce them a few weeks from now, so yes.

This year, it's still a military thing.

Let's go back to military.

I'm sort of hedging a little bit is -- because military, as you well know, the military budget's increasing.

And we do not know exactly how this increase is going to affect us.

But since we are the really the sole provider of displays for all the helmet systems, so I think we may be benefiting a lot from that.

So that's why I'm hedging it.

We're already seen a discussion about increased volume so -- for military.

So let's put it that way, it's all good news.

I understand.

And then you have new programs in consumer there coming out for the back half of the year, and it's kind of hard to say what those ramps will look like, I guess.

When is the SOLOS actual launch?

As we discussed, in a few weeks.

As you know, the devil's in the details.

There's so many details that affect us, including packaging, how the box looks like, how -- everything.

So we're in the final stretch right now.

So don't jinx us, please.

Okay.

And then, again, for the Eagle product, at this point, just sometime in 2018.

No better precision on that?

Yes.

That is a very brand-new product.

I don't know whether you have seen it when we showed it at CES.

It's actually very well received.

But yes, so many new ideas in that system.

There are a lot of mechanical parts moving up and up, up and down, detachable.

So we just have to make sure it's reliable.

And then just switching gears for a minute, the -- on the industrial side.

What's going on with 3D Machine Vision application?

I'm glad you mentioned it, Jeff.

It's actually using a display, our ferroelectric LCD display that we are -- LCoS display that we make in U.K. and Scotland.

That business is actually -- in many ways is ramping very rapidly now.

People finally find that 2D [methodology] is not good.

Everything's going to be 3D as is the packaging becomes more complicated.

Our market share there is over 60% in the world.

But as this business ramps, and I think this can be ramped much faster than people would think, because once one factory converts, many factories will follow.

So we're going to see a very significant growth this year.

I think the real growth will come in 2019 and '20 -- 2020.

And then there was an upgrade coming, I guess, in the Scott helmet.

Any news there?

What's happening there?

The -- we didn't mention it in the narrative, but Scott helmets are actually shipping pretty well.

And the new version should be coming out, hopefully, soon, but that depends on the customer.

This concludes our question-and-answer session.

I would like to turn the call back over to Dr. Fan for any closing remarks.

Well, thank you very much for joining us, and things are going pretty well.

Thank you.

Thank you.

This concludes today's teleconference.

You may disconnect your lines at this time.

Thank you for your participation, and have a wonderful day.