Kopin Corp (KOPN) 2020 Q2 法說會逐字稿

Good day, and welcome to the Kopin Corporation Second Quarter 2020 Earnings Conference Call.

Today's conference is being recorded.

At this time, I would like to turn the conference over to Mr. Rich Sneider, Chief Financial Officer.

Please go ahead, sir.

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 second quarter results at a high level, and then we'll be happy to take your questions.

I'd like to remind everyone that during today's call taking place on Tuesday, August 4, 2020, 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 for our subsidiaries, the 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.

Good morning.

And thank you for joining us to discuss our second quarter results.

Given the continued unprecedented circumstances that we all are currently facing, I want to start by expressing our hope -- my hope that all of you and your families are staying well and safe.

We are very pleased with our Q2 results, both from an operations and technical standpoint, with a solid Q1 momentum continuing into the second quarter.

We had very strong revenue growth, driven by our defense business, which increased 150% over the prior year.

We saw expanding gross margins for improved manufacturing efficiencies and our cost structure continued a decline significantly as we continue to execute our strategy that we introduced here.

The single quarter also saw the first production shipment of our OLED backplane wafers, an important step as we increase our focus on OLED displays.

We also made a very exciting announcement this morning in a separate press release of our further technology development and advancements in OLED.

I will discuss that more in a minute.

So we had a very successful first half of the year.

And we look forward for continued momentum into the second half of this year and beyond.

Well, let's look more closely at our defense business.

As I have discussed previously, we have commenced production in our 2 important programs, the F-35 Fighter Jet program and the FWS-I program.

These 2 programs, again, drove our defense business and revenue in the last quarter.

We also made further progress on a number of other development programs moving them closer to production as the scope of some of these programs continue to expand.

It is important to stress our defense programs are actually related to many different areas, including fixed-wing and rotary planes, armor vehicles and outfitting our soldiers directly.

We gained additional leverage for these development dollars as we can use the knowledge in the future industrial and customer applications.

This large portfolio of programs points to significant revenue opportunity.

So there's no guarantee all of those programs will reach production phase.

We expect 3 additional programs will reach production by the end of 2021.

So Kopin should have 5 programs generating production revenues at that time.

Shifting to initial production order of our OLED backplane wafers was an important step in our expanding OLED business.

We're also pleased to receive a follow-up order.

Shortly after last quarter end, we introduced the breakthrough Lightning, 2.6K x 2.6K OLED frame based on our ColorMax technology.

This technology -- this display utilize what was referred to as a double-stack OLED, which is really 2 OLED structures go on top of each other.

The 2 OLEDs were connected in a series, so they carry parts to introduce that OLED will generate ultra [tracks instead of one] like in conventional single-stack OLED.

The 2 stack provides a lot, however, a lot more flexibility in the OLED design, a mature selection versus a single-stack, which can result in a much higher efficiency, brightness and yet still use low power consumption and has longer lifetime.

What's particularly impressive about this dual-stack display is the ratio and mix per m. But let me explain this.

This is the measure of brightness.

Historically, you can achieve very high brightness by running a lot of current through the display.

But the problem was that the high current significantly shortens the life of the display and additional cost to supply the power.

Kopin has developed a unique technology, we call it ColorMax, that allows the Lightning 2.6k x 2.6k display to achieve remarkably color fidelity, greater than 115% RGB brightness on a very low current.

The ratio of candela per m, which is really the index how good they are, was over 6, which is particularly exciting.

What the press release we issued this morning takes the next discussion to entire new network level.

Our results came in about a month ago.

They took us a month to understand and confidence is real.

So it is hot off the press.

But the quantum jump has such a high-reaching, far-reaching applications for VR and AR that we want to share with you today.

Essentially, Kopin has now achieved 7,000 nits with our load with our new Lightning 720p OLED display.

Go back to the figure a minute.

The candela per m has gone up from 6 to our 2.6k x 2.6k, which at that time was a very impressive number.

Now it has gone to 14 in 2 months.

The panel's dual-stack technology really now addresses the challenging issues around brightness for AR, including VR.

Since COVID-19 has accelerated interest around AR/VR, this important technology breakthrough could be the turning point.

While it's too early with this technology development and look forward to sharing more, much more in the coming months.

Finally, I have to thank the Kopin employees who are continuing to work throughout these challenging times.

Their dedication has made results possible, and we appreciate all of the efforts to stay safe and healthy.

With that, I will turn the call to Rich.

Thank you, John.

Turning to our financial results.

Product revenues for the second quarter ended June 27, 2020, were $6.7 million compared with $4.4 million for the second quarter ended June 29, 2019, a 50% increase year-over-year.

Project research, development and other revenues were $2.1 million for the second quarter ended June 27, 2020, compared with $4.7 million for the second quarter ended June 29, 2019.

Included in the $4.7 million of revenues versus the second quarter of 2019 was a onetime license fee payment of $3.5 million.

Total revenues for Q2 2020 were $8.8 million versus $9.1 million the prior year, with 2019 reflecting the $3.5 million onetime payment.

Cost of goods sold for the second quarter of 2020 was $4.8 million or 72% product revenue compared with $5.3 million or 118% for the second quarter of last year.

The significant decrease in cost of product revenue as a percent of net product revenues for the year for the 3 months ended June 27, 2020, as compared to 3 months ended June 29, 2019, was primarily due to lower material costs, along with improving manufacturing yield efficiencies due to higher sales volumes, which reduced fixed cost per unit at our U.S. plant.

As a reminder, we were commencing production of certain products, and we experienced higher-than-normal scrap for the first 3 and 6 months of 2019 as compared to the same periods of 2020.

R&D expenses in the second quarter of 2020 were $2.2 million compared with $3.3 million for the second quarter of 2019.

The lower R&D cost for the second quarter of 2020 as compared to the prior year was a result of IP commercialization strategies put in place in 2019, specifically the licensing of Golden-i Infinity and SOLOS smart glass.

SG&A expenses were $2.9 million in the second quarter of 2020 compared to $5.4 million in the second quarter of 2019.

The decrease was primarily due to lower compensation expenses, including stock-based compensation, bad debt expense, professional fees, information technology expenses, travel and the accretion of the NVIS contingent consideration.

Other income expense was expense of approximately $6,000 for the second quarter of 2020 compared with $627,000 of income for the second quarter of 2019.

During the 3 months ended June 27, 2020, we recorded $10,000 of foreign currency gains as compared to $184,000 of foreign currency losses for the 3 months ended June 29, 2019.

The 3 months ended June 29, 2019, also included a mark-to-market gain on an investment of $768,000.

Turning to the bottom line.

Our net loss attributable to controlling interest for the quarter was approximately $1 million or $0.01 per share compared with a net loss of $4.3 million or $0.05 per share in the second quarter of 2019, a 77% improvement.

Kopin's cash and equivalents and marketable securities was approximately $15.3 million at June 27, 2020, as compared to $21.8 million at December 28, 2019.

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

The above amounts discussed are based on current estimates, and listeners should review our formal -- final Form 10-Q for the second quarter of 2020 for any possible changes and additional disclosures.

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

(Operator Instructions) And we'll take our first question from Glenn Mattson with Ladenburg.

Congrats on the results.

So a couple for, I guess, for Rich first.

Just -- you just mentioned some of the operating highlights, the decrease in cost of goods sold.

It sounds like a lot of that was due to efficiencies related to volume.

I guess, the gross margin was really impressive, better than what we expected.

So is that kind of the run rate we should expect, ballpark going forward for a while here?

Or just some color there, please?

Yes.

The current gross margin percent is a good barometer over the next couple of quarters.

Great.

And on the SG&A expense is lower also.

Is that -- some of that is, like you said, reduced travel and things, but is that also -- maybe there's a lower sales expense related to selling to military perhaps being that that's a bigger portion of that pie right now?

Or is that also sustainable?

Yes.

We would expect SG&A may bump up a little bit over the next couple of quarters.

We do have some litigation, which, frankly, has been on the back burner as the courts have been closed.

Assuming they come back, there's probably going to be some additional legal expenses, a couple hundred thousand, $200,000, $300,000 a quarter.

Otherwise, it should be relatively consistent.

Okay.

And do you have any operating cash burn or CapEx from the quarter or operating cash flow?

Yes.

So the burn for the quarter -- our cash used in operations was $2.9 million.

CapEx was de minimis, $100,000.

And lastly, on the top line, was there anything in terms of the order flow that would have boosted this quarter?

Any pull-in on the military side?

Or is this just a function of the programs kicking in?

Well -- yes, I mean you do see that the contract assets on the balance sheet is up, and that's a function of the 606 revenue recognition standard.

So 2 years ago, units that we would have made that they would have been sitting in finished goods.

Today, those are sitting in contract assets and there's revenue recognized on them.

And that's really probably the only difference.

The other piece, of course, is that we have a significant number of R&D programs going on, and that revenue was also recognized on a percent completion basis.

So until we hit a billing milestone, the "unbilled receivable" collects in that contract asset account.

But that's fairly consistent with what we've been doing for the last 20 years.

Right.

And on the military side, I missed the quote, was it 3 programs to reach production by the end of 2020 or 2021, 3 new programs?

So this -- we'll end 2020 with the 2 programs in production, and we expect 2021 to end with 5 programs in production.

Right.

And can you give us any -- a big investor on the call, some sort of order of magnitude about how the size of what the -- either what that incrementally adds?

Or what the total pie would look like with those 5 programs running revenue-wise?

No, we're not going to give any revenue guidance for 2021 today.

I mean these are all very large programs.

I can't say that, but they have to go through qualification.

And so when and if during the course of next year they get -- go into production will be dependent upon the Army qualifying them.

So we don't -- we do feel confident that we'll actually be able to get them in production, but exactly when the Army puts them in production is up to them.

Okay.

Great.

On the industrial side, whoever wants to answer this will be great, is just the -- I guess, 2 things, one, the way I think about it, correct me if I'm wrong, is that the -- 2019 was a year when a lot of these head-mounted display headsets were put into various corporations, Honeywell, people like that.

And perhaps they went into the field kind of quickly.

And in 2020, maybe there is a bit of a digestive period where these companies are kind of deciding just where they want to put the product, how to most efficiently use it, how to maybe work around some safety and security issues or things like that.

And then maybe 2020 becomes a digestive year; and 2021, maybe there's a bit of a bounce back.

Is there any -- is that the right way to think about it from the head-mounted display market?

Yes.

I think that's exactly right.

In other revenues for the quarter there's $300,000 million to $400,000 of royalties, and that's consistent with prior years.

So it tells us that they're selling units -- our customers are selling units, but they may be working off of the inventory because, as you said, the products were introduced last year, and so you're really doing a lot of guess work as to inventory levels.

But it looks like they are selling through at the endpoint because they are paying us royalties.

Okay.

Great.

And then I guess, lastly, I don't know, John, I know you have new product announcements today, but I guess, one of the exciting news about Kopin is that at some point down the line, when VR or some sort of mixed reality or maybe it's related to sports or general entertainment, when it gets a hold on the consumer side, you guys are standing to benefit.

Is this product announcement today one step closer to getting to that point?

And just can you give us some outlook for a time frame on when you think that kind of market could come alive for you guys?

Yes.

Thanks for asking the question.

I think it's important to understand in the world of AR/VR, which, of course, is actually getting very strong interest because of the pandemic, the biggest problem facing everybody is really the brightness and the efficiency -- power efficiency of the display.

And we've been focusing on that for the last few years how to get very high brightness with very low current.

And what happened today, this announcement, in fact, what happened the last 9 months is the last chain seems to be broken, and we actually gain very rapid improvement.

And there'll be a lot more discussion about it because what happened today needs a lot of explanation in physics because it's not intuitive [to harvest for the last couple of months, to understand it.] But I think it will be explained.

We will explain to the world what we think happened.

And I think it could be the turning point now.

And next, I move to Jeff Bernstein with Cowen.

Yes.

Nice quarter guys.

So a couple of questions for you.

In the past few seasons, I was thinking the best might start by the end of this year.

It sounds like it's still out into 2021, is that right?

I'm sorry, Jeff, you broke up a little bit.

Could you repeat the question?

Yes, the FWS-C program.

I guess you've won that, but we're waiting for production to begin?

And is that now?

Or early 2021?

Yes.

We're still through in development, but we expect production in 2021.

Yes.

Got you.

Early or late 2021?

That ultimately depends upon the military, but we would think it's in the first half.

Great.

And then on the FWS-CS, I guess, you're still contending for that.

Have you won that yet?

Or what's the progress of work there?

Okay.

So Jeff, I misunderstood you.

I thought your first question was the CS.

We need talk to I.

I'm sorry -- I'm sorry, Jeff, I misunderstood you.

I thought the first question was CS.

In the first question was FWS-I, we're in production in that.

Right.

I knew that.

I thought there were 2 more.

I thought there was a C and a Crew service CS or something?

No, it's 2 pieces.

It's the FWS-I and the CS, crew service.

Got you.

Okay.

So that's production in 2021, potentially?

Yes.

Okay.

And then the Elbit helicopter helmet?

So that's still in development.

They've actually been awarded the program.

We've been awarded the contract, but it's still in development.

And again, we expect that to go into production in 2021.

Okay.

And then the Forth Dimension, it looked like industrial, took a little bit of a step down.

Pretty understandable considering what's going on out there.

Can you just give a little update on what's going on in terms of design wins there?

How you expect that to bounce back as the economies reopen?

Yes.

Actually, FDD was pretty consistent with the prior year.

As Glenn just mentioned, it was really -- on the industrial, it was really more of the wearable headsets.

FDD, as a reminder, does a significant volume of business for 3D metrology.

And that, as I said, was pretty consistent.

They also do military development for us.

Some of their displays go for instance the General Dynamics armored vehicle, FDD's displays go into that.

But it was really the wearable headset, and I really believe it's, as Glenn alluded to, that's more of a function of the units just came out last year, for the most part, people kind of guessing at the inventory levels and adoptions.

But -- so sales of their displays, 2 of them were down.

But as I mentioned, the royalties were consistent with the prior period last year, which tells us they're selling end units.

So it's just they're getting their inventory managed.

So on those Forth Dimension LCoS Displays that go into machine vision.

We've been waiting for a ramp here with the Chinese buyers being kind of the biggest market for this.

Where are we on that?

So I think the question from Jeff is how the Chinese are thinking into that FDD's metrology.

They're still working on it.

As you well know, China, [of course had the pandemic], and they did slow down for a few months, but they're getting back to work right now.

So the team is cautiously optimistic about the situation right now.

Got you.

Okay.

And it sounds like you're hitting now with the new dealer stack technology -- hitting kind of metrics that other people haven't been able to hit, but that people have been saying this is what you have to get to be able to make it through the market in AR and VR.

So I guess the final element is can you make these things at a cost and a gross margin [that's worth it]?

Yes.

You're kind of breaking up.

So Jeff, I'm going to guess what your questions was.

Your question is that we'd be working on the dual stack?

And how easy can it be manufactured?

And how much additional cost with this performance?

I think I've answered these 2 questions -- these questions separately.

On the micro OLED, I think we know there's a lot of activities also on the micro LED.

In fact, the latest count is about 200 companies in the world are working on micro LED.

Why is everybody going to micro LED instead of micro OLED?

Because micro LED potentially can give you the brightness versus current, which is really required for AR/VR now.

So what we've done is that on dual stack, we basically increased the potential brightness by about 4x or 5x, and that will go into the range where AR/VR can use.

Now what happened additional cost on making this micro LED -- the dual stack is actually quite miniscule because it's all in the same system and it just grow a little longer and you get double stack.

The difficulty is not in the growth, the difficultly is in the technology.

How do you maximize and peak and optimize it?

And how do you understand the physics?

It took us a while to understand the physics.

We do understand it now.

And as I say, we stay tuned, we will come out and explain to the world what we had happened.

Okay.

So -- but you're saying that from a cost standpoint, you've got a view here that these can be made at a good gross margin and a reasonable cost to users?

In fact, I would say, in a year or 2, nobody will do single stack anymore.

I'm sorry, no one will still think of what?

Nobody is going to do single stack.

Because the additional cost of building double-stack versus performance improvement is overwhelming.

And there are no further questions.

At this time, I would like to turn the call back over to Dr. Fan for any additional or closing -- excuse me, there was one question that came in.

Would you like to proceed with it?

Yes.

Okay.

We'll hear from Patrick Metcalf with I-bankers.

Congratulations on a great quarter.

Just wanted to ask you guys most recently, we saw Facebook invest in Plessey for their technologies.

Considering the breakthrough today, do you believe that you can get a partner like a Facebook to come and invest behind you?

The question from Patrick was that there was activities from Facebook into Plessey, which is in micro LED.

As I mentioned, in the last few months, people begin to recognize brightness versus current is the most important factor and theoretically, LED -- micro LED has great advantage.

But what happened today -- what happened the last -- since we announced the 2.6k x 2.6k, which is have the index around 6 over -- candela over m, today, we announced 14 candela over m and decreased current.

All these numbers really have never been achieved yet as far as we know in the world.

So it's going to be very fantastic.

But I think people will digest it.

I'm sure the first 6, 7 people, first, will not believe it.

And secondly is we have to explain it.

And then I think people will react.

This will now get into a range that most applications of AR can be satisfied, VR definitely.

They then go over the level of brightness, I think LED is still can be useful.

So micro LED will be a low range.

So -- but we will micro OLED with certify a large range of applications now.

It's a different world today.

Okay.

Great.

And then my next question is, I see your investment in RealWear and your licensee in RealWear is gaining real momentum with Microsoft Teams and Cisco Webex now behind them.

I want to see, a, does RealWear have an exclusive on the device or on the Golden-i software?

And b, what is the Golden-i software if they do not have an exclusive, what does it mean to Kopin, to shareholders, in the future if AR actually takes hold and goes forward?

So they have exclusivity in a field for certain Kopin technology.

But RealWear, I believe, and you really should talk to RealWear, but they've developed quite a bit of software themselves on their own.

So we've kind of provided the hardware aspect to it.

And I think they've kind of provided the software in the equation.

Maybe I'll bring a little bit more color to that.

The RealWear's Golden-i system is actually a very, very good system.

What we did, we have several things we do.

We licensed the technology to them.

Their license is the design for the system as well as some of the software.

The software allows them is a voice.

So everybody can listen to it, everybody raves about how good the voice command of the system is.

In addition to that, they require and they do, in fact, bought our module, our display module, which is very especially designed for that purpose.

So they're exclusively to buy our modules.

They use our software for the audio.

And so they also licensed the design of the whole Golden-i system they're using.

So we have several ways to help them, and they're doing pretty well as far as we know, in the market right now.

Okay.

And then lastly, Lenovo.

Does Lenovo have a Golden-i license?

Or is Lenovo a different joint venture in itself?

It's a different kind of a license, and those are also doing pretty well.

But they are focused more in the Asia and China market.

And there are no further questions at this time.

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

Well, thank you for joining us this morning.

And please, everybody, stay safe.

Thank you.

And that will conclude today's call.

We thank you for your participation.