MicroVision Inc (MVIS) 2003 Q1 法說會逐字稿

Good afternoon. My name is Katie, and I will be your conference facilitator. At this time, I would like to welcome everyone to the first quarter 2003 financial results conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. If you'd like that ask a question during this time, simply press star, then the number one on your telephone keypad. If you'd like to withdraw your question, press star, then the number two on your telephone keypad. I would now like to turn the call over to Brian Heagler, Director of Investor Relations. Please go ahead, sir.

Thank you. I'd like to welcome everyone to our first quarter 2003 financial results conference call. With us today are Rick Rutkowski, Chief Executive Officer, Steve Willey, President, Richard Raisig, Chief Financial Officer, Tom Sanko, Vice President of Marketing, Andrew Lee, Vice President of Sales, and Tom Mino, Chief Executive Officer of Lumera. Bill Fitness, our Chief Operating Officer, is traveling today and unable to join us. We will begin with an overview of our financial results and then take your questions.

The information in today's conference call includes forward-looking statements regarding projections of future revenues, plans for product development, production volume, future development contracts and commercial arrangements, growth and demand, future product benefits and future operations, as well as statements containing words like “believe,” “estimates,” “expects,” “anticipates,” “targets,” “plans,” “will,” “could,” and other similar expressions. These statements are not guarantees of future performance. Known and unknown risks, uncertainties, and other factors may cause actual results to differ materially from the future results implied or expressed in the forward-looking statements. Such factors include our ability to raise additional capital when needed, market acceptance of our technologies and products, our financial and technical resources relative to those of our competitors, our ability to keep up with rapid technological change, our dependence on the defense industry and a limited number of government development contracts, government regulation of our technologies, our ability to enforce our intellectual property rights and protect our proprietary technologies, the ability to obtain additional contract awards, the timing of commercial product launches and delays of product developments, the ability to achieve key technical milestones in key products, potential product liability claims, and other risk factors identified from time to time in the company's SEC reports, including our most recently filed annual report on form 10K. Except as expressly required by the federal securities laws, we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, changes in circumstances, or any other reason. I would now like to turn the call over to Rick Rutkowski.

Good afternoon, everyone. Thank you for joining us today. We generally had had a very good quarter for the most part in line with expectations. We were probably about $300,000 or so short of our budgeted revenue target, although that's primarily a timing issue. From a cash flow perspective, which I think is something we're keenly focused on, we are operating on our best-case plan at the moment. And so we're very pleased with that and with our cash position and the outlook going forward from here.

Gross margin, again, we would highlight this quarter as an area of success. We have -- I think one of the things being reflected in the increased gross margin is the premium value we're able to ascribe to the relationship component of our contracts with commercial partners in particular. What I mean by that is that there is clearly a technology value implicit in this, a value of having a window on this technology and being in the position that many of these companies are in. As many of you know, we've been especially successful over the last year, and this is continuing with commercial contract revenue. And I'll just quickly go through the numbers for the quarter here.

Revenue for the three months ended March 31 was $3.5m compared to $3.8m for the same period a year ago. Gross profit, however, was $2.1m compared to $2m a year ago. And again, that reflects that 60% gross margin versus 52% in the year-ago period. Our revenue was derived from ongoing contracts with the U.S. military, non-government contracts, those commercial contract contracts that I referred to, sales of our Flik laser bar code scanner, some sales of the Nomad augmented vision system and development contracts at Lumera, our subsidiary company. And where I was going here a moment ago was to highlight this fact that our non-government commercial development contracts for the quarter were $2m, which is the highest quarterly level in the company history. We did receive also government contract revenue for $1.4m in revenue from product sales of $135,000. So we see a shift here and balancing and more commercial sponsorship coming into the equation. There is also some encouraging news to report on the military and government side. We'll get that when we talk about the Nomad display, as well.

The net loss for the three-month period was $7.4m or 46 cents per share compared to a net loss of $8.2m or 63 cents per share a year ago. Net cash again, where we're really placing a significant emphasis was $6.7m versus $8.3m for the same period in 2002. And again, we're encouraged with that trend and see that continuing as we go forward here towards our objective of achieving profitability. The company, including Lumera, ended the quarter with $19.9m in cash, cash equivalents and investment securities, contract backlog of $4.4m. We did announce and sign, I should say more precisely, additional contracts subsequent to the end of the quarter totaling $2.5m. We actually announced a $2.2m contract with the army subsequent to the end of the quarter, but the contract had actually been signed prior. So that is actually appearing in that backlog number. And again, this is a healthy position compared to where we've been historically.

We do expect continuing activity in both those existing projects and new projects relating to activities in, really, these four principal areas, defense our continuing activity with the military, consumer electronics. Steve is going to talk to us about our ongoing activities with Cannon and other developments upcoming in that arena. The automotive arena is becoming particularly interesting and actually progressing quite rapidly, and we'll speak to that as we go forward as well.

We are looking at a much stronger second quarter, getting back on track with the kind of growth that we have been targeting, and we certainly expect product revenue to be a piece of that, although, again, what we are engaged in here is really the front end of the ramp on the Flic bar code scanner. Andrew and Tom are going to get into some of the details of how that is progressing, how we're working at the strategies we're using, some of the metrics that we're using to measure our activities in that arena.

And again to highlight this commercial contract revenue, and I think I've said this before, a couple of things are important about this. It's a very good source of revenue for us. Clearly, the contract business is not a bad business, but that's not what this is really about. The much more important aspect of this is the pipeline of products which we are putting in play with significant commercial partners who are invested in the development of these products. And again, I think it's important to us. We certainly view it as an aspect of our success and, therefore, we think you should, too. To understand that these are not just players. These are not just recognizable players in these various industries. These are companies, companies like Cannon, the J&J Ethicon Endo surgery unit, BMW, some of our other European automotive partners, these are companies that are really known worldwide for technological excellence and innovation, and we're certainly proud to be working with them and be selected for them for really a rather unique role. Some of the things we're doing are really somewhat unusual with some of these companies.

We do expect overall development of contracts to remain strong throughout the year, as we've said in the past there is some lumpiness in the total revenue and in the gross margin component. It has often to do with the degree of which materials are a part of this. Increasingly, it has to with the mix of commercial and defense contracts as well. But generally performance has been very good. And one of the internal metrics that we're using and very pleased with is our capacity utilization of our R&PD resources. It's running at very high rates currently and has been. We expect that to continue.

Other good news on the Flic production side, as you remember at the end of last year we were struggling a little bit to get the product into production. We now have that well in hand. Production capacity for the product is currently in excess of 1500 units per week with yields exceeding 90%. As you may know, this product is manufactured through Singapore and Bethem (ph) Indonesia. We evaluated any potential interruption of production related to SARS. That does not appear to be a problem. What we did to account for that was to run production a little bit ahead of demand and create a small inventory as a reserve in that eventuality. But fortunately, we have not had any interruption of production due to the SARS breakout in Asia. We received orders today for more than 1600 Flic units, signed distribution agreement agreements with 14 companies, including our OEM agreement with NCR.

And I think what we'll do here in terms of proceeding through the conference call is really focus on Flic first. This is where we are placing our efforts in terms of ramping product revenue. We will talk about Nomad in the market development efforts going on there, and we've got some, I think, terrific news to report, although today we're going to be a little bit vague about that, I think some of that's going to come to light in the next several weeks when we are able to actually talk about the results that we've achieved in some of these important field trials and the nature of some of these prospective customers. And it's really a significant development for us going forward. We'll then talk about our work with Cannon and in the consumer electronics arena and where we are with respect to development of a high volume consumer electronics product. In particular, we see that as an important part of our revenue mix beginning late next year and through 2005 and particularly it could become very significant very quickly because of the volumes associated with that. And then we'll move on, as we did last time and talk about what we refer to as new developments or pipeline activities, which will include automotive as well as a series of other projects that we're working on that are slightly longer term. Automotive seems to be on its way to sort of moving up in the stack because, frankly, some of the automakers are really just relentless in pulling us along to what we think could become serious production. I want to just place a frame of reference around that, because I was asked this question several times both after our BMW call and again after our last conference call.

In terms of the potential insertion opportunity in the automotive arena, we are talking and have talked about the 2006 model year for automobiles. You have to do a little bit of calculating here, because the 2006 model year actually ships from the dealers to the dealers and to customers in the fall of 2005. Those cars are in production during all of 2005 and obviously a lot of the component parts that go into those cars begin to flow before that and during that period of time. So to the extent that a serious production decision is made and we understand from our customers that that is where they're headed later this year, there would be substantial activity next year in preparation for that. So that is potentially a pretty exciting development. The contracts that we've received recently are phased. There will be, we think, additional contracts later this year. We're negotiating a contract with our second European auto maker. Steve, again, in his travels in Asia has talked to virtually every major automobile manufacturer in Asia as well as some consumer electronics manufacturers who do a good deal of automotive after-market business and there is a very, very keen interest in what we are achieving in the automotive arena. And again, I think we can attribute that in part to the fact that having a lead customer development partner like BMW is something that really is a very significant calling card.

Others in the industry really do look to BMW as an innovator and a leader in the segment. For consumer electronics, obviously, Cannon is also noted for a similar kind of excellence. Having said all that, I think what I'd like to do is get into the discussion of Flic. I'll just mention before I turn this over to Tom and Andrew to talk about sales and marketing activities that we are still on plan with reference to introducing the Flic freedom product later in the year. That is a wireless blue tooth base version of the scanner. We are getting -- we do have working prototypes of that. We’ve actually, I think, just finished showing that again today at a trade show and continue to get very keen interest in that product as well. So as we frame the discussion here for Tom and Andrew, I want to talk a little bit about what applications we're seeing pull, what we're doing now in terms of capitalizing on this opportunity, how we're rolling out that channel and some of the sales cycle issues that you guys are both working. Tom, why don't you talk to us a little bit about the go-to-market strategy with Flic?

Sure. Thank you, Rick. To refresh everybody's memory, Flic is what we consider to be a truly disruptive price performance package. It's a laser scanner performance at the price of a lawn scanner, about $129. So it appeals to a pretty large underserved price sensitive market that's small business or low volume data collection applications. And we've done an investigation. The market is large. It's addressable, and it's very responsive to marketing and selling. So our basic strategy is to develop a distribution channel and to create awareness among the channel and end users. Our goal this year is to create product awareness among 25% of the prospective end users in this automated identification marketplace and to get about 12.5% purchase consideration in the target markets that we're going after. And further, to develop this distribution channel, multi-tier distribution channel, to reach about 33% of that overall market.

And we're well on the way to doing all of that. There are very specific applications that I'll let Andrew talk about in a little more detail that we're targeting and that we're seeing pull. We also are selling, as I said, through a multi-tier channel where we've got distributors and then sub-distributors within those. We've also got specialty resellers or system integrators who sell into very specialized vertical segments, and we're also targeting a little bit different distribution -- catalogs, e-commerce, and also retail. We think that a combination of Flic and some application-specific software addresses an underserved market in the small office, home office target niche.

I think there's a couple of things that we are observing and learning here as we go. One of the things we mentioned in the press release is that we're finding one of the places where we get a very, very quick response, initial response on the Flic is when people are looking at large volumes of bar code scanners, so that can be in the thousands up to the tens of thousands. Andrew will talk about the 30,000-unit sales funnel that he refers to here. That sales funnel actually excludes an individual opportunity which is about 100,000-unit opportunity. And the reason for that is it's just -- that skews towards the large end of an individual purchase opportunity, and therefore, it's difficult to blend into a forecast of that type. I do want to, however, make the point that in that scope of opportunity when you talk about the price performance and the total cost of ownership issues, these add up to very, very significant numbers. We found out in one instance that we had about a $2m plus overall cost advantage and about a $3m plus annual reduced cost of ownership versus the competition that was being considered for a particular opportunity. So that's a very good news type of thing, in that, yes, these large volume opportunities appear to be really well suited for Flic.

The challenge, of course, is that they tend to have a slightly longer sales cycle associated with them. A lot of what you see in those product shipments in the first quarter are evaluation units. We've had, I think, any number of cases where we'll go in and do a test of a couple of units and then roll out a dozen units. I think, in fact, we have a large retail chain that has just completed testing with about a dozen units. And I think we're very close, Andrew, to locking down on our first significant order from a major retail chain, which we hope to be able to announce soon. In fact, maybe Andrew, that's kind of a starting place. I know you've spoke to our reseller working that account just an hour ago. And maybe you can share some of that.

Okay. Well, I'll go right to that. I think that retail becomes a very important component of our initial beach head strategy with Flic. Fully Two-thirds of our in the funnel opportunities have to do with either point of sale or inventory retail counts, either on the floor or in the back of the house. And the reason for this is simple. Flic is affordable, it's robust, and it offers some advantages over the competition that I'm going to be purposefully vague about for competitive reasons. But suffice it to say that in head-to-head competition with the leading names in the legacy bar code devices, Flic has comported itself, and this is according to our end user customer by way of our channel partners, it has comported itself flawlessly, both in terms of its ability to integrate with the existing IT structure, as well as the training piece, as well as the robustness, as well as the drop test. It's really up and down we see an extremely satisfied series of partners and customers that are now beginning to express pretty significant and meaningful demand. As you indicated, we are on the cusp of announcing our first significant sales in this area, and we are extremely excited. I would hesitate to say, however, that our channel partners are even more excited, because they're actually down in the trenches with these individual customers.

And I guess the message today to the shareholders is, clearly, it's a basic strategy to build a channel out, to create awareness through Tom and his team's great marketing efforts, and the free Flic give-away that we put out in the first quarter is beginning to really fill our funnels up with opportunity. So just some metrics. Tier one signings, we had two in the last two weeks. These are very significant opportunities for us that promise a lot of volume. But more importantly, we've been focused on the tier three and we've been working with our tier one and OEM channel partners to go out and sign up vertical bars, bars that are actually the closest to the customers that are working these issues, and we're happy to report that we've got 17 signed in the last month alone.

We anticipate that doubling over the next month. So we're well on our way to building up the channel. I would also hasten to add, rather, that our internal team is really made up of some superb seasoned veterans in this particular segment and we're very, very pleased and proud to have them on our team. So we're confident of our ability to continue to get both design wins through the awareness that marketing is doing. Our trial and validation approach and process is significant in terms of the initial demand that we're seeing created. And we are doing what a lot of people thought was going to be very difficult. We're displacing the old legacy behemoths that have been in this particular channel for quite some time.

I think one of the questions that we've been asked a lot, Andrew, is about the status of NCR, and we've had a lot of dialogue with NCR recently. Two things are notable. One is that we've had to do some ongoing work in terms of optimizing the interface to their flatbed, their bi-optic scanner to which this is marketed as a companion product. That has had to do with the baud rate. It was a software modification. I believe we've delivered that to them and they're testing that. The other element, though, and it's probably really more significant is that the approach that NCR has taken to the product is really a top-down approach in terms of their organizational sales structure and the tiered nature of their accounts. They have largely focused on some of their major national accounts to date. And by the way, you can comment on, I believe there have been a couple of successful trials in that regard. Again, the issue here is it's a slightly longer sales cycle, so we do expect to see this ramp accelerate as some of these larger opportunities begin to converge later in the year.

I think with respect to NCR, however, it's also worthy to note, and Tom, you omitted to mention this, one of the things that we're doing in our marketing strategy is really trying to come at this market because, as I said, we've got some inroads through our reseller channel and some direct sales with some very large market opportunities. What we're now trying to do, and this really goes to the point that Andrew made about those 17 new tier threes that signed up is come bottom up, because it's also the 10 and 20 and 100-unit sales that are going to drive the revenue for this product as well. And I think an important piece of that, and this really goes to the issue that Tom was talking about earlier, is simple awareness, getting the end user awareness to create the pull of the product. I think a product at this price point depends more so than another type of product on really having a critical mass footprint in the channel, because this is a product that is very affordable and we need lots of incentive for our resellers to move this product. So we're in the process of really trying to drive that footprint and grow that as rapidly as we possibly can, and we think we'll see significant gain from that. Maybe you can talk a little bit about some of those large retail accounts and some of the test results.

Well, I wish I could name names. I would love to be able to tell you, but I guess leave it to say that in the retail world, these are really the household names that you find in any big mall. And what we're seeing there is, as I indicated, a pretty carefully prescribed sales process that allows the awareness piece to be married with, you know, a great group like NCR's advanced technology group, where they take it in and they're using our Flic scanner in the NCR branded proprietary logo, livery, if you will, and using it as a companion to the existing installed base of their bi-optic scanners. There's just north of 100,000 bi-optic scanners installed out there. NCR has told me they intend to go out and attempt to penetrate that, and everyone of their bi-optic scanners really becomes a target for this.

But this is especially true when you're checking out of the check line with large items and the checker needs to actually lean over or leave the cash register and go over and scan the large dog food or the large item that you've purchased. And what we've seen is tremendous interest and tremendous acceptance of the form factor. We've had comments that the unit looks far more expensive than it is. We've been told by our channel that we should charge, you know, charge more, but, you know, we've really seen a tremendous opportunity here for those same group to say, my gosh, this opens up opportunities that we simply didn't have with the existing product unit. So again, getting the unit in front of the retailers, putting it in trial, driving an ROI argument and we've seen as Rick mentioned, I got word back today on a trial in the east where an inventory inside a small retail store that would normally take 12 people, 12 to 14 people will now take six people. And the payback on using a Flic scanner is going to be in a matter of two months, as opposed to the legacy device or other proposed devices from some of the big competitors at 18 months. So we think it's compelling. We are hearing significant interest in not only the performance, the looks, and the ergonomics, but as I mentioned, the results are very compelling in terms of dovetailing with their existing data.

Sure. I think one of the important aspects of that, this is a company that we have been a in a test with. It's a good model. We did go from two units to a dozen units and are now working a much larger order. The opportunity with this particular customer, I think, stretches to 900 retail stores in the United States. And so that's an example of the kind of things we're seeing come through the funnel. We do think that long term, the product actually has some unique opportunities to actually appear in retail distribution at office supply stores and catalogs of office supplies, because of it ease of use, its very small size. We've had some dialogue with -- as Tom mentioned, the software applications company. This particular platform is used widely by small businesses. I believe there are about 700,000 small business customers of the primary vendor software. This is one of their value added software developers, that we're in contact with, but it would make a nice bundle for, again, small businesses. And of course, where the volume can really be with a product like this, I like one of the other things Andrew told me earlier today the same reseller who's working this particular back office said this product is perfect for convenience stores.

So it's really that base of the market that we're advertising to. Another point I want to pick up on that Andrew mentioned is this notion of price quality performance. One of the things we're finding is that there is an opportunity to really build a line of products. There's certainly an opportunity for a ruggedized Flic. We're already in process on the wireless version of Flic. One of the other segmentation facts that we've picked up on, I think we'll be able soon to announce a co-marketing arrangement with a very recognizable name in computing, portable computing, in particular pen tablet systems. And one of the key advantages of Flic is its low power consumption and the fact that it has an independent source of batteries. One of the challenges people have had in using bar code scanners in conjunction with these pen tablet computers is they tend to draw substantial amount of power from the pen tablet computer and run down the battery very quickly. So we are pleased to date. We are doing everything we can to turn the crank faster. We are adding sales staff.

We are launching our awareness campaign and based on the results we have today and the clarity and visibility we have with respect to the lay of the land in the market, we think we can execute over the next several quarters against this developing demand. We did make a development related decision here. As many of you know, we had a small satellite office in San Mateo, California. A good bit of the development worked for the Flic product was being conducted there. We've chosen to shut that operation down and relocate several of the people here. I believe there's a net reduction in head count of about nine or --. Six or seven only? Okay great. We do think there will be some costs associated with that in the next quarter, but over the next year, the net savings is about $1m. So again, we're very pleased to be able to report that in the context of our emphasis on cash flow and profitability. We really have chosen to focus on marketing the Nomad product and continuing the development of that product to achieve improvements in form factor and cost and we're really seeing significant successes on both fronts. Again, we're not going to be able to talk as much today about some of the things that we should be able to report very soon. But I think the point we make here in the press release is that we have had several of our most successful and important field trials to date with both military and commercial customers. And again, we can't say too much yet about the military -- I think what we can say is that these were used on maneuvers, a number of Nomad units were used for a number of hours. This was –-.

80 or 90 hours.

80 or 90 hours.

In each vehicle.

In each vehicle. I wasn't going to get that specific. [Laughter] But Andrew's helping me. And the results as reported by the users and the operators were very, very encouraging. There's a lot of background to this, but it is something that could be significant for us going forward. As importantly and probably more an immediate focus of ours, in terms of really developing this market in a meaningful way, we recently conducted some tests, productivity measurement studies with a major industrial manufacturer and, again, I'm being careful not to say too much. We will report this soon. The point I want to make is that the productivity gains were enormous. And we'll release a white paper fully documenting this, and I think there will also be potentially some media coverage of this, because I think we're going to announce this alongside of this company. The gains were significant. The company is very, very large.

There's a new level of excitement in terms of really potentially bringing this product to market in a meaningful way going forward. One of the most important aspects of this was, in the past, we have done some field trials where we've gone in and some of you may remember some of the work we did with American Medical Response working on ambulance maintenance. In that case, we went in. We actually developed with another company here in Seattle the software application and went in and documented a couple of different procedures. That is very different from the case that we're talking about here. One of the key features of some of these customers that we're talking to is they have an existing information system. The content of the maintenance manuals has been fully digitized. And they have pushed this to the point where they have a a solution and a problem. The key to this is Nomad really solves the problem piece of the equation that they've created with this solution. So the real point here is you've got an existing application. What we deliver is really a Nomad and an interface. There is going to be some potential for a wireless Y-FI interface. But because of that readiness of that application, this is a real opportunity.

We've kept this particular customer very close to the results of our work sponsored by the military in terms of further improvements to the product. They've had a sneak peek at some of those things and there's a -- just a powerful impression and a great deal of excitement by them. And we'll be able to share this with you. I think you'll even be able to see some of the video testimonial from a very significant customer going forward. So that is obviously a big deal for us going forward. The strategy continues to be to really focus on a handful of vertical launch segments for the product, but we think this one can be very good, and again, Steve has also talked to other companies in the similar market category going forward.

One other thing that we'll, again, be able to report on, I think, very soon is a note that we mentioned here where we have recently been notified, recently as in I think the last two days, that Nomad has been selected by a major aerospace company for use in aircraft maintenance. I believe that's actually an '05 shipment of that particular aircraft. But this is a test bed. That aircraft is really an advanced technology test bed including the maintenance suite. And I think the intention is to then migrate that maintenance suite to a variety of other platforms. This is development work that has gone on behind the scenes for a long time now. And we're very pleased to get that news that they have actually made that selection. And as I said, we will be able to talk more about that publicly, I think, very soon.

And specifically configured their software for the Nomad, which is, I think, noteworthy.

Perfect. Tom, do you want to just talk about, again, sort of this vertical market segmentation and just kind of refresh people as to the core markets that we are focused on as those --. And what you think some of those -- maybe the volume potentials can be.

Right. Well, Rick's already touched on the military and aerospace markets, and we have had some pretty significant trials recently in the military area that we hadn't had the last time we had a conference call. So we've always known that Nomad technology augmented vision is right for military personnel because the key benefit is enhanced situational awareness, which translates into what they term operational effectiveness, and we're starting to get a lot of momentum going both for land vehicles and air vehicles. So we think that's a really good point of progress.

And I think it's worth noting that there is a lot of enthusiasm right now for these realtime networked information systems that support the situational – I don't want to describe the particular system that we're talking about interfacing with. But this system was deployed in Iraq. Actually, it is deployed throughout the fourth infantry division, which did not see much action. But it is a system that supports situational awareness and again, it's a situation where Nomad extends that by a significant increment, and is virtually plug compatible with the existing system. I think those are –.

Exactly. And on the aerospace side, we continue to make progress both on the aircraft maintenance application, as well as the pilot head up display or HUD. And we've got some trials in that area that have been very positive and promising as well.

Moving into the industrial segment, that's the very, very broad one, the -- we've been conducting some trials in that area. We think that by far the most promising area and one that's going to result in -- I guess can't say going to. We expect to result in some significant sales is automotive and truck maintenance, and they're similar and yet they're different. The mechanics need to have their hands free and access to information, and as Rick mentioned, there's this wireless component that keeps coming into play. It's a really an enabler of our technology. The difference between the truck and the automotive is that the truck maintenance is all about ROI as we’ve talked about several times, whereas the car maintenance is called our customer satisfaction, fixing it right the first time and maintaining a competitive advantage by keeping those customers. But the key component in all of those is the Nomad system and the augmented vision that we can provide.

And there are other categories as well. One that is very exciting to us that is booming application right now is surveying, using computers and these wireless networks. It's called GIS, Geo-Spatial Information Systems and once again, right now what they're doing is using a handheld computer that's not particularly viewable in daylight. These are outdoor applications. What we can do is mount a Nomad on a hardhat and I give that worker much more mobility and much more safety as a result of having augmented vision. And then finally, our other vertical market segment is the medical segment. We continue to make progress there in computer-assisted surgery with our partner Striker Medical. And there are other applications that will be enabled by some of the development work we're doing, telemedicine and a lot of patient information systems once we get the form factor a little bit smaller.

I think one of the things we talked about in the last call, too, was in terms of the go-to-market strategy with respect to general aviation, what we have is a product and a distribution channel, and, what we need is a marketing partner who is equipped to really market direct to end users. We also think some of the improvements to the product are going to play significantly in that market. And in fact, in some of our discussions with prospective partners who are significant players in the general aviation space have been very successful in that arena.

One of the keys to that is having an FAA certified device. And I believe we're on path to achieve that certification in the early part of next year. So I think general aviation will also become a factor in the launch. Steve, can talk to us a little bit about not only our development work with Cannon and some of the applications that we're targeting there, but we're really engaged in laying the groundwork for a variety of applications within consumer electronics and obviously also interfacing with a variety of different consumer electronics companies. Again, I think most of you know that our strategy there is to target digital camera view finders, including Camcorders and both digital camcorders and other camcorders as a launch segment. But then really addressing other market opportunities with a common module that could be produced in very large volumes. And I'm going to let Steve kind of pick up and talk to us about some of those activities. I'll just note, as we do in the press release, that we are continuing to meet our development milestones with Cannon. We will be ready to begin probably mid to late summer on the on this phase of development for electronic view finder. We are in the process of identifying launch camera models and timelines, but it is too early to talk in detail about those kinds of things yet. Steve, why don't you take it away?

Yeah, thanks, Rick. In February, we announced a new agreement with Cannon that (inaudible) had been conducted earlier. We viewed this as further validation of consumer Microdisplay strategy. What was also noted in that release was that Microvision and Cannon were looking at a range of applications. This is consistent with our platform strategy for Microdisplay, including, as Rick had mentioned, view finders for digital still cameras and camcorders. We are on target with this work. And we believe we're entirely meeting Cannon's expectations.

For those of who want to understand the full impact of this EVF opportunity, I can also refer you to a section on our website. I think it's going to be in place within a week under news, which lays out the electronic view finder's engine in some detail. And its importance to Microvision. So please check for that. We also moved quality of our EVF demo up a notch or two in the first quarter of this year, in that we began interfacing with live video content. This is really a first, and it came at the request of a major consumer electronics manufacturer who was looking to have a stage a shoot-out, if you will, an A-B comparison between our view finder and the incumbent view finder in a camcorder. We did this work, and we had one of their camcorders interfaced to our view finder and, in fact, attached to the camcorder so that the potential customer would be able to A-B, view side by side our performance with theirs. Needless to say the difference was striking. We demonstrated 700% higher resolution than theirs without the normal pixilation, much higher contrast, dynamic range, and not only was that important for us, but we now have a new marketing tool. And it's something that we will be using, actively interfacing to digital still cameras and camcorders. for that sort of A-B comparison.

Further to that we interfaced our color wearable Microdisplay with live imagery from an electronic game console. There's obviously several game consoles that dominate the marketplace and we now have yet again we have that as a tool for wearable display solution in that very large and explosive gaming market. That's probably the highlights without going into too much more detail.

One of the on things we touch on here in the release is in addition to these application customers who would take this display module and integrate it into still cameras or potentially wearable products to be used with gaming and other consumer electronics applications, another key element of succeeding in this strategy is manufacturability, the ability to scale to hundreds of thousands and millions of units a year very quickly. And in fact, in the process of scaling to those kinds of volumes, drive towards extremely high degrees of miniaturization and cost reduction. And I think one of the most significant events that is now developing is that we have several manufacturers, some of whom are very, very recognizable companies.

You might not recognize them for their manufacturing capacity as much as for their consumer brands, because in some cases we're talking highly vertically integrated company. But in one case, a company has committed to draw on resources from as many as 19 separate manufacturing facilities throughout Asia.

One of the things that's interesting to note about this, we've talked in the past about why our product can have this sort of cost performance advantage. And from a manufacturing packaging standpoint, it's really about integrated optics, which is the same manufacturing disciplines that apply in the world of CD-ROM drives and DVD drives which is a very large, very high volume business. And so we will be able to capitalize on and latch on to those economies of scale and the knowledge base that a company like this has. That's why they're able to draw on those resources. So we often get asked the question, you know, since this is such a new and disruptive and innovative technology, are there highly specialized kind of manufacturing techniques that need to be applied to bring this to market and the answer is, yes, they are highly specialized, but it's highly specialized work that has been done in this arena of optical storage in particular.

So we're -- I think we're very pleased about that. I know in one case, Steve, in a very advanced stage of discussion and we hope to be able to announce some significant manufacturing partnerships going forward as well to support the emerging demand from the consumer electronics category.

Lastly, in in terms of some of core opportunities, automotive development work during 2003 has been off to a very strong start. We received work orders and contracts totaling over $1m so far this year. We're working, as I say, negotiating a new contract, as we speak with another auto maker. We have developing interest in Japan in particular. The European center is now kind of migrating over to Asia. We're starting to get real interest from other auto makers as well. So we think this continue to be successful through the balance of this year.

Earlier in the call, I mentioned to you that the gate we are moving towards is a series production decision. We can't talk yet about which particular display applications within the car that we're targeting. We do mention that, I think, we did mention in the last couple days that we expect that some of these will be available to be seen at an upcoming auto show later in the year. And we are really pretty excited about it. One of the other things that's interesting about automotive, those of you who are familiar with the company know about the quest for green and blue lasers, semiconductor diode lasers. We are very close to some companies here and in Asia who are working on these technologies. We are hearing very encouraging things about the availability of semiconductor diode lasers. The reason I mention this in the context of automotive is automotive is a high-volume market that can pull through commercial demand for that technology. We're doing a lot of cross pollination with our automotive customers pointing to that demand for some of the suppliers of this as semiconductors diode lasers. We've heard more encouraging news than we have in a long time.

Again, as you know, that's been largely driven by optical storage requirements for the blue laser, particularly in Asia, some of the companies that are working that have been very successful and are highly confident of being able to achieve the slightly longer wavelengths that we need for visible blue lasers to support our application. So that's been some encouraging news on the technology development side.

I just want to follow up very quickly on one of the things we reported on in our last call. One of the things that I think is really a new chapter for the company is, we're very excited about the launching of our laser camera technology, laser scanning camera, and the potential range of applications that that can address. We think there's a very significant business there, potentially as large and as exciting as the display arena. What will be coming up shortly here, as I mentioned in our last call, we had just demonstrated a proof of concept model, and we were then going to engage in some benchmark testing against existing CCD and C Moss based camera systems out of specific applications. We did some early work with an endoscopic camera. We'll talk more about that as we're able to. But independent of that, we did do some benchmarking against an existing commercial two-dimensional bar code scanner. We have documented those results. We've obviously photographed the results through our camera versus their camera, if you will. We will publish them. They will be compelling. And we will target some widespread publication of those results. I think it could create quite a stir.

So we're very encouraged. The advantages that we have both measured and visibly shown in these photographs are in usable range of the camera which is superior to an equivalent CCD or C Moss. Motion blur immunity is just staggering, the degree to which we can capture images while there is relative motion between the target and the scanner. And also contrast which is, as I've said before, gets into not just superior imaging in the bar code domain but especially when we get into direct parts marketing, stamping and engraving of codes on to a variety of different types of parts. So we're very pleased with that and we look forward to, I think, very soon publishing some of those results in some technical journals and other media outlets.

We did complete a demonstration that we referenced in our last call with funding from a major Asian display manufacturer. It's not just a display company. They make displays as well as printers and of variety of other imaging related kinds of things. In this case, we were a using our micro scanning technology in a rear and front projection display for large-screen televisions. I can't yet talk about the architecture. We will likely do that in conjunction with our partner here. What I do want to report to you is that that test was very successful. The action coming out of that was that our development partner wanted to do some additional work on another element of the system that they are working on. And I -- I apologize for not being able to say what that is, because it's -- sort of gets into how the thing works. They're then going to come back and we believe that we'll resume that work later this year based on the results of their work. But we were, and I think they were, very encouraged with that.

We've also been asked recently by a major Asian company to submit a proposal for developing an engine for high-speed laser printing applications based, again, on our core micro scanning technology. So we're leveraging off that same base. This is incremental development to us, the scanner does the same kind of thing that it does when writing images or capturing images. So this is not a whole new range of functionality. But it is a whole new product category. And we do think we have some very compelling designs to offer to support very high speed laser printing applications.

Steve mentioned some of the other consumer areas that we're in and targeting and he mentioned some work that we've done with a wearable prototype of the full color display. We have also mentioned that we had a contract with one of the world's largest wireless network operators. That work is underway right now. The big issue there is to develop products that address the usability requirements so we're going to get into talking technical terms of eye relief and exit pupil size. What those really mean is how do I hold this thing or wear it and to what degree is it comfortable and non-intrusive looking to those users? We're seeing I would characterize really as renewed interest in this product category. I think that correlates with some of -- we're seeing a little bit of health come back into wireless communications category generally speaking. But a lot of focus on next generation products. We've seen two companies in our neighborhood here recently announce portable media players. One is Microsoft. The other is Realnetworks. But both have talked about new portable devices that don't play just MP3's but actually are small video devices. So again, you get very quickly into the constraint of the screen and how the value of the content correlates to that. So we're getting some very good visibility, and I think this really is the point of Steve's mentioning earlier of the new kinds of tools that we have to demonstrate this with.

Rick, the sudden penetration digital cameras enhance, specifically is really rekindled interest in advanced displays in three G handsets. So particularly in Japan and Korea, it's now booming. Now we have a booming handset business.

I think that's a very good point. There is a corollary here where we saw camera technology migrate into digital telephones, this so-called convergence kind of path. And that has really validated that that kind of migration can occur and the notion of now having a content viewer, not just a view finder, but something that will enable you to view content in this way has really resurfaced in part due to that. I think that's a very good observation.

Lumera is engaged in some very exciting development activities. As we mentioned recently, they have developed a phase shifter, are getting substantial attention from military and government customers on that front. There actually are a variety of different technologies coming out of there. Some of which represent out licensing opportunities in the materials domain, relating to things like mass coatings and things of that nature, which we think could be meaningful for the company going forward.

In summary we believe we're back on track for achieving quarterly sequential revenue increases. We're very encouraged by our results year-to-date and especially encouraged by the promising outlook for the second quarter. We believe that we're well positioned and on track to achieve objectives that we've set out, including establishing Flic as a significant revenue contributor, introducing Flic freedom wireless product, and developing markets and applications for the Nomad display product, as well as achieving the technology milestones that Steve and I have just been talking about relating to our targeted launch of consumer products and applications. Like to turn it over for questions.

At this time, I'd like to remind everyone, if you'd like to ask a question, press star, then the number one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. Your first question comes from Daniel Earnst from Rodman & Renshaw.

Good afternoon, gentlemen. Couple of questions. I guess they're all kind of geared towards expectations for the year. So first one, of the $6.9m in contract backlog, the $4.4m you had at end of the quarter plus the $2.5m you signed subsequent to the end of the quarter, what do you think the recognition period of that $6.9m is?

Almost all of that will be over the next several quarters during the course of this year. I mean, some of -- I don't know how to characterize an average, because I think some of those projects run through June and some of them ruin through December or even the first part of next year.

Okay. So some of these are longer term projects than you typically sign. Mostly what you get are typically sub-quarter projects? Is that correct?

To some degree, Dan, all although what we're seeing is a different mix than we have in the past. I think generally it's a smoother mix because it's more contracts. There are some that are long duration. Some that are sort duration. Actually, if we go back a couple of years we had a very few kind of one-year to 12 to 14 or 18 month projects. With the commercial contracts, they are tending to run kind of in shorter phases followed by another phase. So there's a slightly different dynamic associated with those. And as I say, we're getting a kind of a different mix than we've had in the past.

Got it. But I mean, the $6.m9 you have are phases you have not signed already. Correct?

Correct. That relates to only what we have in backlog today.

Right. Exactly. On the Flic side, if you do, you know, simple math on the, you know, production ramp you're at today, you know, assuming yields stay the same and you could produce something like 55,000 of these things for the remainder of the year, you've got, you know, sounds like you've got 1500 in the pipeline of one large order for 30,000, another large order for 100,000. So you're pretty sure you could use the capacity of the – say 55,000 you have for the year?

Yeah, actually, you know if you sort of follow the production discussion over the last little while, one of the things you may remember -- I think we talked about this. I apologize if we didn't, was what we were doing on the front end of this was kind of turning the crank and really trying to move yields up. And when we're in the thick of that process, we're running a couple of shifts to do that. And we think that turned out to be the right way to quickly get to, you know, our cost objective and yield objective. We've now cut -- we're now achieving those yields and that production run rate with a single shift. We are also doing -- and I believe it sort of makes reference to this -- I know it did in one of the earlier drafts of this, but we're also doing work on tooling to increase capacity. So we're moving from a single cavity mold to a four cavity mold. That's where we have one of our production bottlenecks. So I don't think production capacity is really a meaningful constraint for us at this point.

But if you had an order for 100,000, you could fill it this year?

Yeah, we could fill it this year.

Okay. In other words, you could easily turn the key -- at the very least you could go double shift --.

Absolutely.

-- 110,000 production?.

Double even triple shifts. What our production plan calls for in terms of being able to achieve capacity, we'd like to be able to run at a run rate of about 200,000-plus units as we exit '03 in support of what we see -- requirements of '04 being. It's really a question of what we ramp up to that based on the product coming through the pipeline.

All right. Corporate gross margins are 60% this quarter were largely driven by the fact you were doing all development work. You had very little product revenue. So I would assume that as the product revenue ramps up, then your margins come down. What is the margin, remind us, on Flic?

We think it will normalize at around 50%, possibly higher. I think you're right. You'll see a short-term contraction but that should re-expand again pretty rapidly. I don't know what the hurdle rate is on that, you know, at what point volume production we get that absorption and it kicks back up. But I think it's in the thousands of units, not in the tens of thousands of units. So there could be a short contraction in the gross margin mix.

The offsetting factor and to a certain extent our 50% number is -- might be conservative because we don't account for any -- any of the blended margin that would come from accessories or software, which are higher margin kinds of things. We think gross margin on the Flic freedom unit initially will probably be a bit higher than 50%, so those are some of the variables in any case that go into the mix. But I think it's fair to say that we will, as we go through probably Q2, see potentially a slight contraction in the over all gross margin.

Right. Still have a question on the Flic margin. Presumably if you signed 100,000-unit order you're getting better price points so your margin might be a little birch different for an order of that nature.

Oh, absolutely. We would never think of doing anything but giving the customer the best possible price on an order -- no, I mean, I'm -- I don't mean to be glib about it. Obviously, we want to be -- exercise some care there. We think -- there's another variable here that somewhat would depend upon the timing, because we do have a program to cost reduce Flic. We think in the natural course of just achieving the manufacturing efficiencies and the yields that we're going to get down to a better cost point that would increase those margins above 50%. With some additional design work that is also scheduled, that cost can come down further. We've got an optimistic outlook in terms of where we can take the cost. And I suppose to some extent a lot would depend on the timing of that order.

But we are able to price this already. I think I mentioned in that instance that we've got a pretty significant cost advantage. Even if we assumed a $50 cost or more. And then when you start to factor in the cost of ownership advantage, it's so compelling that we don't really have to compete a lot more aggressively on price than the product is already set to do at that $50 ASP.

Understood. Okay. On the contract revenue, you gave us a great deal of depth into different areas you're working on, different vertical markets, expanded areas, second stages of things you've been working on in auto and in consumer. You know, is there something some kind of guidance you can give us in what you think you can target for contract growth during the year and how we look at that in terms of what you can do in cash flow?

Yeah, I don't think it's changed from what we talked about last time. We had an exceptionally good year on the contract side last year.

Right.

And so I think the, you know, the prognosis we talked about in our last call that, you know, the sort of the guarded forecast would be to be flat, maybe even a little bit down from last year. We haven't really tried to set up the contract business as a growth business. And if you remember, I sort of went into why it would be a little bit dangerous to do so, because of the leverage in terms of cash flow that cuts both ways. So we've kind of chosen to really take a pretty conservative outlook and treat additional upside as a high-class problem because the cash flow impact of it.

Okay. Then on the cash flow, what do you think the restructuring charges are going to come out to be? Six, seven people, not going to be that extensive for restructuring. But I assume you have to close out the leases on that facility?

Well --

Buy more material.

We won't be closing out the lease but we have to book the present value of the obligation. The estimated closing costs, including the lease obligation are in the neighborhood of $500,000 onetime charge. That will be booked in Q2.

Another 500,000, just under, for employee compensation?

No, that includes not only booking the lease but severance costs and all other costs.

Oh, so your estimate is $500,000 all end --.

Right.

And you think this is going to save you what for 12 months?

About a million dollars.

Caller: Okay.

Annually. That's net of the costs of having certain people up here and so on.

Right. Okay. So what do you think cash burn is next quarter and for the year?

We haven't give an cash burn number for either of those. Did you --

We expect the cash burn to be down from last year, for the full year this year. It's fair to say that.

Right.

But we haven't been giving quarterly estimates.

Okay.

I mean, I think the objective is to continue to take it down and get the overall operating structure in a place where we can achieve, you know, as we've said in the past, profitability at a $45 to $50m kind of annualized run rate and revenue.

And then the other component is that our cash balance currently will get us through the end of the year at Microvision and into the first quarter of next year.

Excluding Lumera.

Correct.

Okay. Thanks.

Thank you.

Your next we comes from Paul Sessy (ph) with Vertical Ventures investment fund.

Hi, guys. Want to get a little bit more color on your relationships with manufacturing partners across verticals whether it be CE, medical, auto, and for that matter even the Flic side. How does the team evaluate and prioritize which potential partners to reach out to and once to you have the partners engaged, what do you see for I guess for future partners? What do you see triggering their proactive involvement and sponsor development work for new products and new applications?

Well, it varies a little bit from case to case. In the case of a product like Flic, we're able to find a manufacturer in Singapore, PCI, who has and does manufacture a lot of consumer electronics kinds of products. The product doesn't have the same sort of level of automated assembly that we might see in -- so it's more labor intensive than capital intensive. And so they were a good candidate for that. We have people here obviously who have a lot of experience working with the suppliers in Asia and really globally. You know, certainly both Dr. Veeraven (ph) and Bill Sydnes (ph) have done a lot of that work at LexMark and IBM and Commodore respectively. And they're, of course, highly capable of evaluating those as well.

In the case of the Microdisplay, which is the one that we touched on a little bit earlier, what you really want to have there is we're talking about trying to really highly miniaturize the entire package and you're going to do a lot of automated pick and place kinds of things. I often tell the story about touring an Asian plant that was one of the world's leading manufacturers of semi-conductor laser diodes. And it was amazing. They had this incredible raft of capital equipment, a lot of this done in a highly clean environment, a lot of it in a semi-clean environment. But every once in a while you'd come to a workstation and there was a human there sorting little tiny parts under a magnifying glass and we'd pause by that workstation and the comment would be, this person has very special touch. [Laughter]

And so it really is that identical to that sort of thing. And I think if you -- the closest model there, as we've seen, and I think this is one of the really significant advantages of our technology is that it can take advantage of capacity and knowledge that has been developed in principally the optical storage domain, CD-ROM, CD players, DVD, all of that matured very, very rapidly, and with very, very high volumes obviously drove tremendous efficiencies and process innovation in manufacturing those kinds of things. And one of the manufacturing partners that we're very close to has done just some pioneering work in that arena and, in particular, it's direct analog to our light source module. If you look at the light source assembly for a DVD pickup head, it has two lasers that are combined through a prism, and typically will reside in sort of an aluminum or plastic chassis and what this particular company has done -- and that thing might be an inch by two inches or so. In this case, this company has reduced that to a single chip on a ceramic substrate, and the micro miniature prism that is mounted on that single chip, and it's about, you know, probably 5mm by 8mm or so. So it's that sort of integration and packaging of these optical components and, of course, the cost advantages were huge. They've been very successful gaining share with that component.

And so that's really a -- I mean, what we would do instead of using two lasers, we would use three LED's and the same identical type of combining prism. So it's a very legitimate analog and those producers are in Japan, Taiwan, to some extent mainland China, and I think we've got actually three or four -- in the case of one of these companies, I think it's not known about them that they have this sort of component business. But they also have branded consumer products in products in several of the product categories that we're talking about, including digital cameras, camcorders, gaming systems, all manner of media product. So it's a particularly exciting potential.

I think in your question you said, how do you also kind of get these people on board? It's very much about what you've seen in the last several months when we're able to go to these companies and say, well, let's go talk to your product divisions and see what they're using today. Let's also, by the way, here we have this interest from the following several camera manufacturers creating that business case with them and showing them that there's a business opportunity for them is a key part of it. And, Steve, maybe you can best characterize this, but I have seen what I would call a real urgency on their part to get this going. And that's really new. That's in the last three-plus months.

Absolutely. It's all about creating a business case for them, because we're asking them to invest substantial resources on their side. That's why we don't refer to them as contractors. They are very much partners. They also add substantial IT of their own, process IT. Just anecdotally, in a recent discussion with this particular party, they had congratulated us on the packaging work that we'd done, which is highly competitive, certainly competitive with any current viewfinder on the market today, but at much higher performance levels. But their comment was, nice work, Microvision, but we can do much better. And this is music to our ears. These are the partners we're looking for and they're at our doorstep now.

That's excellent. It sounds like they're really undertaking allocating the funding and resources themselves and in short time frame.

We took great care. When we started learning of this to make sure that we were operating at a high enough level of authority to be able to make these sorts of commitments of resources and we've qualified that several times and, in fact, literally said, now, we are talking about being able to access all of these resources at that level. And the answer has been yes. So I think there could be some very exciting developments in that regard. It's hard to say exactly when. If we were on their time frame, it could be a matter of weeks, but we're also evaluating other opportunities and trying to decide how much of this we want to consolidate with a couple of one or two manufacturers versus to what degree we want the supply chain to remain to some extent horizontal. So we're working through those pretty rapidly, though, because we do want to get this product out to the consumer market.

Great. Thanks very much.

Thank you.

Your next question comes from Michael Mularkey (ph) with Marshton International (ph).

Yes, I have a -- I guess a high level of abstraction type question. When you look at the company five years from now, do you see yourself being a component supplier or do you see yourself controlling markets in the way, say, that Intel started as a component supplier and wound up controlling a market?

Well, I think it's an interesting question and an interesting model. And I think a lot has to do with the nature of the component that you supply. And the analog to Intel, I just had this conversation the other day, is -- the reason that they're able to exercise control over the PC market is that they control a component that directly drives functionality of the personal computer. And which defines the architecture. It's what we refer to as an architectural franchise versus some of the more commodity components that surround that defining component. So we see ourselves in a similar light as having a component that is strategically important component because it really defines product functionality, and, therefore -- and by the way, also analogous to Intel has high barriers to entry around it in terms of both the intellectual property and just the design, the sheer complexity and lead time and the other components of that. So I think when you take that high value added – by the way, and Steve made a point earlier that I think is germane in this regard, we're not talking about improving functionality versus the miniature liquid crystal displays by 20 or 30%, this is truly an S-curve type of disruption where our going in position is 6 to 8 times the resolution of what some of those technologies are able to achieve today. And that's -- we think that that is also a piece of that, you know.

Let me ask you it, though. If you have such disruptive technology and if you can deliver six to eight times improvements or you can deliver products that have a payback of two months, why are you operating at 60% gross margins as opposed to, say, 80% gross margins? And, you know, why aren't you at an 80% gross margin model so that when you go out for the next funding, you can get enough funding so that you will actually be able to control some of the new markets that you helped create rather than winding up like, you know, so many other engineers have as component suppliers?

Yeah. Well, I think the gross margin question is a reasonable question. Part of the reason you see the mix that you do is we can't make 60% or 80% gross margins on our government contracts very well. So and they are certainly part of the mix. We also have as we go forward a product -- the products really differ with respect to the kind of strategic position you can create in the franchise. So the strategy for Flic is one really of gaining share in a market, not as a commoditizing market but as a means of generating cash flow quickly. We think that there's a significant benefit to that for the reason that you mentioned, that, you know, the cash does have a significant value here.

So I think we weigh all of those things. Gross margin in the hardware arena, I mean, I'm sure there are examples, but they're rare examples of companies achieving 80% gross margins. The reason you see those kinds of gross margins in certain aspects of the software industry is because you have a very, very low cost of production in the actual intellectual property content is high. The challenge we have is we're going to achieve that six to eight times resolution but we still need to be price compatible with consumer electronics product so there is a cost sensitivity there. So you translate that into share, some mix of share and margin and we think that's where we can get those kinds of dominant franchises. I don't think that Intel is making 80% gross margins on its microprocessors. But I think they make, you know, good gross margins compared to other folks sort of in the commodity end of microchip business.

And it's a good analog to look at what -- in the silicon world, in the display world, gross margins tend to average in the low 20's. And sometimes down into the teens. So these kinds of gross margins are very, very good. I think if we started talking about 60% or 80% gross margins, even if we saw that to be the case, we'd have a credibility challenge as well. And it's not to say it's out of the question. I think a product like Nomad can enjoy really significant gross margins over time as a finished goods product, because, you know, when we get to -- what we're targeting there is a franchise where our bottom up numbers come out to 100,000 units plus a year, maybe at a $2,000 price point.

Well, we think that we can make the product for substantially less money than $1,000 a unit, especially when we get to that sort of volume. But again, I think gross margins is always a sensitive topic, because we have customers that are sensitive to that as well as and share holders a different way obviously.

So at the end of day, is it fair to say that the board really has not decided whether or not they want the company to control specific markets and they may be resigned to being components suppliers to consumer manufacturers, consumer product manufacturers that have established positions and are going to demand technological sharing if a Microvision product component is going to be included, say, in a Cannon device?

I guess I'm having trouble, because you used Intel as an example of a company that controls markets.

Well, they actually helped create an industry and in doing that essentially, you know, create -- helped create a Dell.

Sure.

So I think the duopoly between Microsoft and Intel, they create -- they do control the PC market. I don't think there's any question about that.

Sure, but they're also a components supplier. And I guess my point is --.

But that's the genius of it. That's particularly the genius of it.

But I guess the point is it's hard to – the way you posed the question is, are you going to be a component supplier or someone who controls market? And the example is a component supplier who controls market. And I think there is some analogies that hold up quite well as to why certain types of component suppliers can exercise control over markets and it has to do with the fact that Intel has a defining piece of final product functionality. If we take apart the personal computer, the microprocessor is strategically important from a functionality standpoint.

It also has to do with the fact that they have moved from a 286 to a 386 to a 486 to a Pentium and beyond, continuing to advance on the cost performance. And I think both of those analogies relate directly to this. So it's -- no, it's always been our intent to have that kind of model of a high value added and strategically important component and, therefore, to be able to exercise that kind of influence in enabling, creating markets and controlling them. You know, it's -- in our position -- I mean, and I think if you were to get on a conference call with Intel and ask them if they control the market, they would very quickly tell you, oh, we do no such thing. We never aspire to such a thing. And their FTC lawyers would be --

Yeah, but they're gushing cash. Ever since they embarked on this strategy in the early '80's, they've essentially been gushing cash.

I'd love to have the conversation with you because I do think we have a strategy that allows for us to have a unique role as a strategic cone components supplier and to exercise the advantage of having that additional value added, but we'd be happy to talk with you more about it offline.

Thank you.

Like to move to the next question. Thank you. Good question.

Your final question comes from Don Hutchinson (ph) with Merrill Lynch.

Good morning -- good afternoon.

Hi, how are you?

I'm great, Rick. I have just one question, a quickie. I'm a little bit not up to speed on what it is that you have in mind that hooks up to one of these video games. Is it wireless, and what do you mean by portable? Does it project 3D? Would it do something like virtual reality? And I'm also curious to know as to when this thing might be perfected, what your objectives, at least, would be for price point and profitability.

Wow. Okay. Lots of questions. The answer in terms of functionality is it can do all of the above things. I mean, in general, the product concept here is that you've got a wearable display that plugs into a gaming or media platform. That could be a DVD player. It could be a gaming console. It could be either a portable gaming console or one that you play in your home. And we've talked with manufacturers of all of these things, and actually gotten some very strong interest.

In every case, display quality is really starting to be a limitation. I talked with one of the major console manufacturers recently, and he said one of the challenges we have is in the Asian market, a lot of people have these flat panel displays. And, frankly, you can't tell how good the gaming console is when you look at it on flat panel display as compared to a CRT. We showed them our display and they said, my God, this kind of unleashes the quality of the underlying platform. So I think in terms of the application, think wearable display. Think either one eye or two eye to the extent that we had a two eye system, absolutely, we can accomplish stereoscopic 3D imaging. That's kind of a next phase of growth, because then you're going to need for the software to support that underneath it.

Clearly, the image processing capacity that exists will be able to support that kind of functionality. And portability is also a key driver. And I've used in the past the example of myself making a purchase of a portable DVD player, which I bought for my now 6-year-old daughter to watch movies on the airplane. And I found myself saying, gosh, I really want that DVD player with the eight or ten-inch screen, because that gives you a decent viewing experience. But, gosh, now it's getting to be the size of a laptop computer. Well, what's happening is the ability to put that media on a smaller package than that five-inch disk is upon us. You're going to be able to store that movie on something that's, you know, a couple of inches and so that piece of this thing can get smaller. So that constraint gets even more pronounced. I'd be able to have a portable media player to play movies, probably at this point, Mpeg compressed kind of movies, some of them either real time transmitted or stored, that could be the size of a mobile phone, but, you know, I certainly can't look at a movie and gain any kind of a visual appreciation for it on that size screen.

So in a portable environment, the idea of a wearable display has a whole other compelling aspect to it, which it gives you the ability to get the equivalent of a 14-inch monitor hooked up to that very, very miniaturized media player. And that is also a very, very compelling concept that is -- and I think the important thing there is the timing is very, very good on that. There's a lot of movement towards -- and it's been our contention for a long time. I suppose in part because we're in the display business that mobile computing in the mass market sense, you know, mobile internet, if people want to call it that, is not really mobile -- it's not about going on and browsing a webpage. It's going to be about accessing video clips. Whether you're going to watch CNBC or "American Idol" or whatever choice of content that you've got, it's really going to be about the ability to access those things conveniently and from remote locations. And that's coming around. And there's a recognition of that in the industry right now. And as a consequence, we're gaining, I think it's fair to say, Steve, visibility pretty quickly on that front.

You'd asked the question about what the price of those things would be. For consumer markets, you have to have something down in the low hundreds of dollars. It's just kind of, you know, the outer boundaries of what SKU's will be supported in consumer retail environment. And that's very attainable with our technology and, in fact, I think the contention that we have made and would make is that it's uniquely attainable with our technology to achieve that combination of high image quality and low cost. That's really the salient feature of this, that we can deliver, you know, super VGA kinds of resolutions at those price points that are uniquely compatible with consumer electronics products.

Can I ask you one more question?

Sure.

Regarding Lumera, what are the financing possibilities for a continuation of that? And number two, since a lot of their customers are under the weather these days or potential customers, at least, what is the outlook for I guess their first product was supposed to be the modulator replacement. What is the outlook for that stuff now?

Well, I tell you, I think the telecom industry is in decline. I think it's an industry that discovered that it was cyclical in the middle of a cycle. And it was a pretty significant whip saw cycle. But, you know, unless we're going to stop pushing bandwidth around over hardwired networks, I don't see it going away anytime soon. And I've described this before.

What happened in the telecom boom was that the long haul portion of the network got dramatically overbuilt. There was really no work done in the local and subscriber loop. And some of those areas. So there's tremendous pent-up growth potential in terms of really balancing that network and allowing that bandwidth to actually flow down to your desktop. And that's where Lumera's technology is really uniquely positioned. The reason being this, when I build a long haul truck, I might have a handful of nodes and I'm bundling traffic as I aggregate up through the pyramid structure of the network. Right? So I may be handling 1,000 or 10,000 calls or data transfers simultaneously, and that's why that bandwidth is really important there. As you come down through that pyramid, you've got a great deal many more nodes, and so you now have to do your math and say on a capital cost per subscriber, as I'm down further into the pyramid, the cost of your component technologies, the cost of operating those from a power consumption, real estate, all of the above, is going to be significant. And that's the power of what Lumera is doing.

They're going to have electronic modulators that are going to cost less, cost less to operate, cost less to integrate into a transponder. There's a ramified cost structure around those things that I think is going to be tremendously important when that comes back. Having said that, you know, I think another important thing about Lumera, it is not dependent upon the telecommunications market. I hope to look back a number of years from now with amusement on the fact that people thought Lumera might be a one-trick pony, because of all the things that are potentially a platform technology when you're talking about a fundamental breakthrough in materials technology, you know, the analogy to silicon being able to support higher levels of electronic component and integration is very, very good. And of course, integrated circuits are used in more than just computers. So they're going to be, as we've seen, we've talked about, you know, the phase Duran antenna. I think you're going to hear news up coming about a lower cost phase Duran antenna. That’s not just confined to military markets where it is really something that can impact everything from weapons guidance to surveillance to satellite communications.

But you also get into other forms of wireless communications including cellular communication. You get into automotive applications. And the company is also working on some applications that we can't talk about with some major names in electronics. That get into a whole different domain actually, of computing markets. So, no, I think Lumera is every bit as viable technologically and more so in terms of the product opportunity today than it has been.

As I mentioned earlier, there are also some outlicensing opportunities. One of the terrific things that Tom has done, and this is one of the things we had hoped for when the company started out was that as we set up this operation to go from molecular chemistry right through final device, that we would capture not only proprietary technology on the materials side but also on the process side and we've done that. We've also developed materials for processes that have -- one example is a mass coating material that can be useful in the photo lithography and semiconductor field, and those represent other kinds of licensing opportunities as well. So I think Lumera has a number of options available to it.

Tom is now actively working with existing and prospective investors as well as pursuing some of these other kinds of alternatives. And I think as he's mentioned in the past, talking to other potential strategic partners as well.

Thanks, Rick.

Thank you. That was Tom Mino. Tom, I apologize. I didn't realize you were there. Did you wand want to add anything?

No, you said it as well as I could have. And I support everything you did today.

Tom logged in from -- I think you're in Pennsylvania, if I'm not mistaken.

Yeah, I've been here the whole time. Did you a good job.

Good. Well, thank you very much. [Laughter] And glad for the pat on the head.

Thanks, everyone, for joining us today. And we look forward to chatting with you again soon. Is and as I said, I think upcoming we're going to have some really interesting things to say about Nomad activities and some of the results of those trials that could be very significant with significant companies. Our selection by an aerospace company and in that arena. We're looking forward to our -- some of our first meaningful orders as we are have gone through the process of bringing Flic to market and getting flew those early test and evaluation cycles, ramping that and turning a crank on the sales execution strategy

And also I think there's some very important relationships developing on both the customer application side as well as the supply manufacturing side in our consumer electronics arena. And that's really simply put those are the two halves of this equation that need to come together to be successful. I don't think we could aim higher than the partners that Steve has been encountering on both sides of that equation. I think there's going to be a tremendous validation forthcoming here. Again, publishing our results on our image capture which I think, also going to be some very important news going forward. We look forward to reporting to you again next quarter. And as I said, we are looking forward to some accelerated growth for the second quarter. Thanks again for joining us today.

This concludes today's first-quarter 2003 financial results conference call. You may now disconnect.