Kopin Corp (KOPN) 2019 Q2 法說會逐字稿

Greetings, and welcome to Kopin's Second Quarter 2019 Earnings Call.

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

I would now like to turn the conference over to your host, Rich Sneider, Chief Financial Officer.

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 second quarter results at 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 Thursday, August 8, 2019, 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 materially differ 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 report -- 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, Richard.

Good morning.

I would like to begin by giving you a brief summary of the strategic and the corporation changes we have undertaken.

And because of the importance of these moves, we will then expand on each of the topics.

Over the past months, the management team working closely with our Board of Directors have taken a very thoughtful approach in analyzing and evaluating every aspect of our business.

With the technology expertise, section leadership and competitive landscape as well as the maturity of the relevant AR and VR market, our analysis confirmed that Kopin's greatest asset is our ability to develop innovative technology with superior engineering capabilities to turn innovations into high-quality component products.

We have used this innovation and engineering skill over the past few years in developing advanced concept wearable systems for both enterprise and customer markets.

Leveraging these concept systems, we were uniquely positioned to understand the needs of the market.

This has led to the development of industry-leading microdisplays, such as our product which is now included recently in the new Google Glass.

Our technology also help accelerate the growth of the enterprise market, which we believe is now the fastest growing application for AR.

Much of this momentum has come through RealWear, an early Kopin customer, which is recognized as one of the leaders in the emerging market.

In fact, Kopin's early-generation Golden-i technology was key to our RealWear's position as we license Golden-i technology to RealWear for an equity position and ongoing royalty stream as well as for component sales.

This model worked so well that we have now look for -- to replicate this.

One of the strategic steps we take this quarter is a result of our goal to repeat our success with RealWear along with reducing our cost structure while strengthening our position in microdisplay.

Our strategy and focused mission is to become the leading microdisplay component and IP company, following the very successful examples of great semiconductor IC companies.

Let me outline 4 key parts of our strategy.

First, our focus will be on our core LCD display module and subsystem products for military, enterprise and public safety customers as well as developing our Lightning OLED microdisplay products.

Our unique product portfolio was specifically developed to address the required requirements of the military enterprise segment as well as also fulfilling the demand for the emerging consumer applications for AR and VR.

Second, we have entered agreement with RealWear to commercialize our Golden-i Infinity product.

Also we anticipate reaching an agreement shortly that will end our direct participation in the consumer system business.

Third, we have streamlined operational elements of our core display business with corresponding reduction to expenses.

Finally, with all these changes outlined in Golden-i's explicit SOLOS concession, by the end of quarter 3, we anticipate reducing our total company payroll expenses by about 30% and will eliminate significant product development costs.

Kopin will still benefit from our higher investment in the wearable system technology and products as we focus more tightly on our core microdisplay business.

Let's look at each of the elements of that plan in more detail.

Our LCD business currently serves many military, enterprise and consumer customers, which designed our components into their finished products.

Our military business comprise of both display components and what we call HLA or higher-level assemblies, which includes sophisticated electronics and ruggedized hardware design elements.

The HLA provides significant value to our military customers as well as by some of our enterprise customers.

Currently, our military revenues reflect investment in key military programs such as FWS-I and F-35 Joint Strike Fighter.

We expect revenue for our military programs to continue increasing.

In addition, we're making excellent progress in developing programs such as the FWS-Crew Served and armored vehicle.

In the enterprise area, we're seeing a good growth for our microdisplay.

We have long discussed that enterprise market for AR is developing faster than the consumer market, which is reflected in our success with partners such as RealWear.

We will sell to Fortune 500 companies across many industries, including Pepsi-Cola, Georgia-Pacific, Cisco Hewlett Packard and Colgate to name only a few.

Of course, we have talked about our success in Google Glass, which is deploying their glass in many enterprise applications.

The consumer applications for AR, however, has been slow to develop.

But just recently, we're seeing some series of announcements.

In addition to our old cycling activities -- solutions, there are other -- there are now displays using swimming goggles and motorcycle helmets for just a few examples.

Kopin dominate, this area of the market for microdisplays.

We continue to invest in development of our Lightning micro OLED technology, which has unique capabilities that we believe will meet the needs of customers across a range of market applications: military, enterprise and consumers.

As we have described previously, we have a unique fabless business model with our OLED, which give us flexibility as well as require less working capital while enabling us to deliver highly sophisticated OLED displays with key performance advantages.

This year, we have entered to develop [a contract with] customers.

While Kopin is really the only microdisplay company in the world that offers 3 different types of display technologies: transmissive LCDs, reflective LCDs and OLED microdisplay, this is a unique competitive advantage as our customers can work with us no matter what specific display they need for the application or product.

As I mentioned earlier, our mission is to be the microdisplay provider to the world.

Regarding commercialized Golden-i Infinity and SOLOS, we have executed transaction for our Golden-i Infinity product design and technology with RealWear.

With their success in enterprise AR, they have the experience in developing product with Golden-i Infinity technology and the infrastructure and relationships in place to maximize the distribution and drive the adoption of the product.

In the most recent transaction, Kopin received $3.5 million.

We then used the $2.5 million to invest in RealWear Series B equity.

Similar to our first agreement with them, Kopin will sell displays to them for their systems and receive a royalty for each unit sold.

Our expectation is that Kopin will benefit as RealWear ramps their sales as well as for any increase in value of RealWear due to their equity position.

RealWear's most recent Series B equity offering is a good indication of the strength of the company.

Certain Kopin employees connected to Golden-i joined RealWear, which also reduced -- will therefore reduce our cost structure.

We have also engaged in negotiation to spin out SOLOS along with our Whisper technology to a group of employees and outside investors.

If the transaction is completed, we expect to receive equity, royalty in the new -- and royalties in the new company in exchange for the transfer of intellectual property, inventory and equipment.

In addition, Kopin expects to maintain the right to utilize and sublicense the current Whisper Audio Technology as well as any future enhancements for defense and enterprise applications.

We anticipate this transaction will close by the end of third quarter this year.

With these anticipated transactions, we expect to eliminate all spending on SOLOS and Whisper technology development.

We believe the focus and flexibility available to the new company will allow it to monetize the growth of consumer AR eyeglasses.

Similar -- we should emphasize here, similar to RealWear case, we will be providing, supplying microdisplay to the new company.

To turn into more operation issues, during quarter 2, revenue were $9.1 million, which includes $3.5 million proceeds for commercializing Golden-i Infinity.

During the quarter, we also announced Google as our Tier 1 enterprise customer as well -- and which will also increase the Kopin supplied display for Google Glass 2. As you well know, we have -- we will also be supplying the Google Glass 1.

In Q2, the enterprise AR market was up too and a key contributor to our results and will continue to drive growth in the second half of the year.

Our military business continued to develop in line with the plan.

The F-35 program has been consistent, and therefore, the [plan by the plane] continues to expand globally.

We're confident this is a significant revenue opportunity for us in long term.

We currently received another purchase order for the FWS-I.

Now we have -- currently have orders for both F-35 and FWS-I, which will go through the middle of 2020.

On the development side, both FWS-CS and armored vehicle programs continue to be on schedule.

In short, working with military takes a long-term commitment, and our partnership that have established with U.S. military for the last 30 to 35 -- 30 years is a very important asset and will continue to drive our growth.

Micro OLED, as I mentioned, will be the coming microdisplays of choice in many AR and VR applications.

We are now the leading micro OLED company in the world.

We currently have 2 development contracts for the advanced micro OLED display, and we'll continue to engage aggressively with additional customers for other opportunities.

To summarize, these strategic changes accomplished a number of our objectives.

First, they allow us to monetize higher investment in IP and product design while reducing our patent maintenance costs; partnering with companies that will drive the adoptions of AR/VR, allowing us to benefit from the growth in the industry through component sales, royalties for IPs, equity position in those [partnership positions]; also significantly reduce our cost structure, allowing us to focus time and resources on our core strength in microdisplays.

With our strategic realignment, Kopin is a streamlined, simplified company, laser focused on our position as a leading microdisplay supplier to companies building the next-generation AR/VR products.

We are excited by the opportunities ahead and clearly appreciate your loyalty and support for our next chapter of the journey.

Now Rich can provide additional details, and then we'll take your questions.

Thank you, John.

For the quarter, total revenues for the second quarter of 2019 were $9.1 million compared with $5.9 million for the second quarter of 2018.

In the second quarter of 2019, we licensed our Golden-i Infinity IP to RealWear for $3.5 million.

On this agreement, we will receive future royalties based on sales of products and we will sell them display components.

Cost of goods sold for the second quarter of 2019 was $5.2 million or 118% of product revenues compared with $3.5 million or 78% for the first quarter of last year.

Included in cost of product revenues for Q2 2019 is a $1.2 million write-off of excess inventory.

R&D expenses in the second quarter of 2019 were $3.3 million compared with $4.5 million in the second quarter of 2018, reflecting some of the expense reductions John previously discussed.

SG&A expenses were $5.4 million in the second quarter of 2019 compared to $6.9 million in the second quarter of 2018.

SG&A decreased for the 3 months ended 2019 as compared to 3 months ended June 2018 primarily due to a decrease in compensation expenses, including stock-based compensation; amortization of intangible assets; marketing expenses, including product promotion; and the accretion of endless earnout, all which were partially offset by an increase in legal expenses.

As mentioned in our press release, we made certain expense reductions and anticipate further reductions if we can complete the SOLOS transaction.

To give you a sense of the amount of direct SOLOS, Whisper and Golden-i Infinity, expenses included, in the 6-month period ended June 29 and the fiscal year ended December 29, 2018, were approximately $4.4 million and $9 million, respectively.

Other income expense was approximately $627,000 for the second quarter of 2019 compared with an expense of approximately $52,000 for the second quarter of 2018.

During the 3 months ended June 29, 2019 and June 30, 2018, we recorded $200,000 of foreign currency losses.

In the second quarter of 2019, we recorded a gain on our RealWear investment of $768,000.

Turning to the bottom line.

Our net loss attributable to controlling interest for the quarter was approximately $4.3 million or $0.05 per share compared with a net loss of $9.2 million or $0.13 per share in the second quarter of '18.

Second quarter amounts for depreciation and stock compensation expense are attached in the table to the Q2 press release.

The amounts discussed above are based on current estimates, and listeners should review our Form 10-Q for the first -- for the second quarter of 2019 for any possible additional disclosures.

And with that, we'll take questions, operator.

(Operator Instructions) Our first question comes from the line of Glenn Mattson with Ladenburg Thalmann.

A lot going on obviously for you guys in the quarter.

Curious, we haven't heard much.

There hasn't been a lot of publicity from Google on the Glass 2. Maybe you can give us some feedback on how you guys think it's doing in the marketplace.

And I think last quarter, you said that you received an order from Google Glass and that you thought another one would be forthcoming relatively shortly.

So perhaps, you could update us on whether or not that came through or if you still expect it in the short run.

So Glenn, you really have to talk to Google about their perception of the success of the product in the market.

We don't really talk about our customers' individual products.

And we continue to ship to Google.

And then a question on this deal with RealWear on the Infinity product.

As far as -- how long to market before they release a product there and as far as getting display revenue and royalties and what not?

Is there a lot of the development still on their side?

Or is this something they'll turn over pretty quickly?

Your question is about Infinity, Golden-i Infinity.

Now of course, the introduction with the product will depend on the RealWear schedule.

Of course, we see a lot of activities on their part, and we've seen growing requirement from them now of their overall product line.

So...

But I think you'd have to talk to RealWear directly for their product launch.

I think they put out a press release shortly after we did.

Yes.

I think they will.

Again, this is really a situation that belongs to them.

Yes.

Okay.

And then last for me is just, as far as like what your guidance was prior as far as the growth in unit volume and things like that, were Golden-i Infinity and SOLOS part of that calculation?

And is the -- or not?

And can you give us some sort of feedback on how you're feeling about that former guidance as far as unit growth this year?

Well, we think overall this year, we'll grow about 60% unit volume based on current estimates.

The better part -- $6 million growth is very good.

And on top of that, it's been more favorable.

The sales that we've been making are tomorrow what we call value-added customers as opposed to straight display sales.

So the mix has been very favorable, along with growth.

Our next question comes from the line of Matthew Galinko with National Securities.

You mentioned 2 OLED development contracts.

Can you say whether those are military or enterprise or if they are -- or if you can't talk about that, maybe if you might see a similar time line to military program?

So I tried to -- I think I answered the question on the OLED contracts we have with 2 companies, are they military related or they are consumer -- commercial related.

Is that the question?

Yes.

These 2 programs are consumer related -- commercial related, yes, commercial related.

Okay.

And do you have a sense of what the time line is on the development?

Is it a multiyear kind of setup?

Or is it something that might be -- you complete your work on it in the next -- by year-end let's say?

The anticipation is they will be finishing up by year-end or early next year.

Got it.

All right.

And then just a couple...

This is all product in mind.

This is all product in mind, yes.

Got it.

And I mean is there a lot of heavy lifting that you need to do to sort of get the product in shape or for those products?

Or are you pretty much there technically?

Yes, we have been engaged in that contract by a year now.

It is -- it will be the most advanced display for both AR/VR.

Got it.

Okay.

I guess just asked another way, is there anything dependent on you to get that out the door?

Or is it purely the customer's time line at this point to start shipping units?

It's multiple equations there, but again, we feel this display is what market needs at this point, not just these 2 customers but maybe many customers, too.

Got it.

All right.

And just a quick cleanup on the math here.

Did you say you had a inventory write-off in Q2?

Did I hear that correctly?

Yes, $1.2 million.

Okay.

Excellent.

And then you also had realized gain on RealWear this quarter as well?

That's correct, $768,000.

Okay.

And then last one for me before I jump back in the queue.

So you've talked about a 30% reduction, taking sort of everything into account.

Can you kind of share what the -- is that starting from kind of a 2018 OpEx number?

Or how -- what should we be framing that against?

Well, I tried to give you some direction there.

I mean it's very hard to predict what future savings would have been since they're costs that never were incurred.

So that's why I tried to give you the $9 million for last year just to give you a sense of magnitude.

Right.

But I think you also executed some or executing some sort of core cost reductions, what it sounded like, so I mean -- so for the all-in number.

I'm just trying to get a sense of if we take kind of a Q2 OpEx number, what does it look like in the -- in Q4.

And so the $9 million is direct program costs, and I don't have an estimate that I could reasonably give you that.

Obviously, certain overhead costs from the corporate are going to go down, certain insurance costs, all that.

Certain fringe benefits will go down.

There was a lot of subjectivity in using those -- in coming up with that type of number.

And so I just -- we went with the hard costs.

So we expect additional savings in addition to the $9 million, but I honestly couldn't come up with a number that I thought was possible for lack of a better term.

(Operator Instructions) Our next question comes from the line of Patrick Metcalf with Newbridge.

My question -- my first question will be what percent of RealWear does Kopin own post the $2.5 million investment.

Less than 10%.

Less than 10%.

Okay.

And what is the royalty rate you get from RealWear per device?

We couldn't disclose that.

We're obviously -- we negotiate with other customers, so we would never disclose that rate.

Okay.

And is the licensing deal with Golden-i Infinity exclusive?

Or is it open to license to others?

So for certain fields, it's exclusive.

Exclusive.

Okay.

So I guess the goal here is to get RealWear as profitable as fast as possible and maybe IPO it as quick as possible.

You have to talk to RealWear.

Okay.

And then you guys have an Elf VR headset that you designed maybe 1.5 years ago.

Is that design part of Kopin?

Or will that design be part of SOLOS now going forward?

We have a VR headset?

He's talking about the Elf headset.

Oh, the Elf headset.

No, it's not part of the SOLOS.

It's not?

No.

I don't think so.

No.

Okay.

And then guys, you're breaking up 2 important pieces of the growth puzzle, SOLOS and Whisper, and you're not giving us any detail on the valuation of them or the investors that are actually participating in them.

Would these be large companies that are participating, large tech companies?

Or would it be large venture capital or small-time players?

We're still negotiating with multiple parties right now, so we're not privy to talk about it right now.

Can you give us a little bit of flavor to it?

No.

Honestly, it's being negotiated.

There are a number of people that have expressed interest.

How it will shake out, we hope to know shortly.

Okay.

Great.

So we'll see announcements on that, those 2 situations when they come to closure.

But again, I think it's important to understand, we still retain rights to Whisper and future improvements for the military, industrial applications.

Okay.

And then my question is regarding IDC is calling for $31 million enterprise AR headsets by 2023.

Recently, you guys have come out and said you had 90% market share in the enterprise AR.

If you can look out a year, 12 months from now, are you seeing new players coming on that you're not participating with?

Are you seeing new players that you will be participating with?

Can you give us some transparency on the whole AR enterprise market, what kind of players you're seeing entering, where you think you're going to stand at the end of the day here percentage-wise?

Maybe we go down to 50%.

We go down to 30%.

Just some sort of 30,000-feet type of view on the industry would be great.

This is very good question because the AR market is getting very hot right now.

There are many, many different new entrants or people who want to enter.

So we cannot look at the number of people entering the field.

We have to look at the number of people, the companies who actually go into production and selling the units like Google, like RealWear, like Vuzix.

Those guys are selling units, and therefore, our market share is based on the things going to production.

Okay.

So do you see -- in 12 months, do you see a new holding firm with a strong double-digit percentage of the market?

That's why we are laser focused now.

We're laser focused.

Do you see yourself that -- I guess my question is this, John.

Do you have more design wins for the enterprise that you're not showcasing to the public yet?

Are you guys sitting on -- how many design wins are you sitting on for enterprise AR?

Any type of devices, whether they're low end, high end?

Or is this all you have, the Golden-i Infinity and the Golden-i?

I don't even know exactly how I can answer the guys without revealing other companies.

We're working with multiple companies at this point, in fact, very, very busy right now.

Obviously, I think we are seeing also real engagement in our micro OLED.

There are a lot of expectation to micro OLEDs will be a display of choice for many applications.

So we're the #1 in micro OLED, so people do talk to us and work with them now.

Okay.

And then with micro OLED, I want to conclude on this.

Is there any way...

Oh, yes, micro OLED.

Okay.

Is there any way you guys could potentially -- since you're in the business of spinning off some assets this year, becoming what looks to be a holding company, is there any way you could maybe work a deal out where you get a big upfront payment and a royalty stream on micro OLEDs?

Or do you plan on keeping the model the way it is?

Are you advocating we should spin it out or what, become a holding company?

Are you actually helping us to formalize and crystalize the strategy?

I think that micro OLED is very interesting right now.

It is still a growing emerging business.

It is our component business, and it's divided into 3 parts.

One is the military part, and one is the industrial commercial part, the safety part, and then finally the consumer part.

So yes, you -- one might be able -- it depends on the maturity and depend on the opportunity.

We may -- I mean you have to be opportunistic to slice the salami.

Okay.

I just figured, since you're doing business with the Chinese maybe get the money upfront and then get the royalty payment down the line.

Yes.

I think as I say, we would like to be the company that's very much like some of the semiconductor companies.

They get royalty stream and sell components or lease their technology, components technology and in this case, also get some equity stake in a situation.

Meanwhile, we minimize some of the capital-intensive or development-intensive costs, which we like to minimize.

So I think the strategy is a good one.

Okay.

And last one, when do you see it first -- did we see any revenue from BOE this past quarter?

And when do you see revenue coming, any kind of revenue coming from BOE?

I can't -- I would not be able to answer your question, but our relationship with BOE is very, very strong.

Ladies and gentlemen, we have reached the end of the question-and-answer session.

And I would like to turn the call back to management for closing remarks.

Well, thank you very much for joining us this morning, and I hope to talk to you again the next time.

Thank you.

This concludes today's conference.

You may disconnect your lines at this time.

Thank you for your participation.