MicroVision Inc (MVIS) 2003 Q2 法說會逐字稿

Ladies and gentlemen, welcome to Microvision incorporated second quarter earnings release conference call. At this time all lines are in listen-only mode. My name is David and I will be your coordinator. If during this call you should require assistance please key star zero on your touch-tone phone. I will be happy to assist you. As a reminder this call is being recorded for replay purposes. I would like to now turn the call over to your host of today's conference Mr. Brian Hagler, director of serve relations. Please go ahead, sir.

I would like to welcome everyone to Microvision's second quarter 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, and Tom Mino, Chief Executive Officer of Lumera. We will begin with an overview of our financial results for the second quarter, 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 and production, future contracts and commercial arrangements, growth and demand, future product benefits and future operations, as well as statements contains words like believes, estimate, expects, anticipates, target, planned, will, could, would, 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 in product development, 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 10-K. Except as expressly required by the federal security laws, we under take 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. Rick?

Thank you, Brian. Thank you everyone for joining us today. We are pleased to report a strong second quarter with revenue of 4.5 million dollars compared to 4.7 million for the same period last year. For the six months ended June 30, we reported $8 million revenue versus $8.5 million for the same period last year. And our revenue in this period was derived predominantly from development contracts with both government and commercial sponsors. And if you recall, in previous calls, I really highlighted this transition that began in 2002, to an increasing proportion of commercial activity in this contract mix. I think that is especially important because what we're really focused on strategically is driving a product pipeline, and we're going to talk about that in the call today. And some of the areas where we've had successes, some of the areas where we're still working to really push product through that pipeline. But we are generally bullish on both the Flic bar code product and the Nomad where we've really had some upside surprises already in terms of what we think the potential is for 2004. The letter of intent from Honda and the volume indicated there certainly exceeded what we had originally been planning for in our earlier estimates. So that to us is very, very encouraging news.

Development contracts with government agencies for the quarter was $2.7 million. Commercial contracts was about $1.6 million for the period. And product sales comprised only about $146,000 of revenue for this quarter. We did have a Flic order that we had anticipated would fall into the second quarter. It is substantial volume that would have increased that number but that has pushed forward slightly and we're still working that order. So I will speak more to that as well.

Net loss for the three months ended June 30 was $6.7 million or 38 cents per share, compared to $ 6.6 million a year ago or 49 cents per share. The net loss for the six-month period ended June 0 was $14.1 million or 8 cents per share, compared to a net loss of 14.9 million, or $1.12 per share. And our overall cost base is coming down. We did have some one-time costs this year associated with the consolidation of our northern California operations into Seattle. So once those costs are out of the mix, our overall costs should continue to settle in here at a slightly lower number.

For the six months ended June 30, net cash used in operating activities was $14.4 million compared to $15.1 million for the same period in 2002. And again, that $14.4 million does contain some of those charges associated with those discontinued operations. The company including Lumera ended the quarter with $ 11.8 million in cash. Cash equivalents and investment securities, and a contract backlog of $3.4 million. And this was generally a very strong quarter for us. Not only with respect to the financial results, but as importantly, with respect to some key business and technology milestones. What I will do going forward here in terms was how we are going to structure the call is I would like to spend some time focusing on the Nomad opportunity with Honda and the larger market opportunity in the automotive category. But we will also spend some time focusing on Flic and where we are with that product, and moving it into the marketplace. And as I said, I think I will share with you some of the sense of affirmation that we have about the product's fundamental conception and where we think we can go with it.

Two really significant technological milestones, though, were also reported during this quarter. The first was our first public demonstration of a laser scanning camera. That is significant because it really opens a whole new product category for us. We think of the business very much in terms of displays, or image output and cameras or image input kinds of devices, and I think many of you have heard me talk in the past about the big picture as to why those kinds of things are especially important in today's information technology marketplace. And all you have to do is look at recent announcements from companies like Sony and Hewlett Packard, and look at the focus on the kinds of devices that they're talking about going forward, and you can see that the trend is really this one of smaller and smaller and more and more personal kinds of computing and information devices, and therefore the information of input and output or screens and keyboards or other ways to get information into these systems are, we think, very timely at this point. I think that shows in a number of the products that we're doing.

So the laser scanning camera really to us is a platform of its own. It is absolutely derived from the same core scanning technology. In fact, the demonstration that we have done, this ws done under contract to a major medical company, medical device company. But that demonstration was largely based upon scanning technology from the Nomad display systems. And of course that was then adapted to provide this functionality but we've been extraordinarily pleased with the image quality and the competitive features of this. I think you will be able to read in one of our recent newsletters more detail, for example, about why this is important, this functionality is important in bar code scanning as well as medical aimaging so we think there is a whole family of product that come out of this platform implementation. And what is most encouraging to us is the rate at which we were able to achieve a very high level proof of concept that points to a a relatively fast path to commercialization.

Now, in that context, we are going to continue to pursue the same strategy that we always have, bringing technologies to the level of commercialization, which is to continue to partner with third parties. That also enters into the mix here when we talk about some of these future commercial contract revenue opportunities. At the moment, with respect to medical imaging, that's where we began this work. We think there is a very strong chance that we could get to continue that work in a very meaningful way. But there are also other opportunities and we've had, since we began to publicize the laser camera, substantial number of inquiries from prospective partners in other categories where this kind of device can be extremely useful. So we're really encouraged about that. And about the fact that that message seems to be getting out there into the marketplace and customers are contacting us with real interest beyond the medical imaging applications.

A second technological milestone achieved during the quarter was very significant, I think perhaps one of our most significant technological milestones to date, and that is my own estimation. But it has to do with moving to a new scan engine architecture and by that I mean not just the silicon die, the micro scan itself, but the entire package and the drive electronics that surround it and we are able to demonstrate a system outside of a vacuum. The scanners that we've built to date in all of our prototype systems and in the Nomad product have been enclosed in a vacuum package. And as with anything, that will add cost and other forms of complexity to the system. So what is powerful about this particular breakthrough is the degree to which it impacts so many aspects of the technology. It has a very favorable impact on cost. I think I heard in a meeting internally not too long ago that this is a -- by the way, we will be planning to drop this scanner into Nomad 2 production during the year next year.

So again, this is a relatively short path to commercialization of this development, and that's a theme that we're seeing, the time lines are shrinking here in terms of our ability to take things from the laboratory into the marketplace. That's currently on the plan. But I think what I had heard recently was that based on our current estimate of that scanner it will call -- scan engine, it will cost roughly 10% of what the first scan engines in the early Nomad units cost just two years ago. So that is exactly the kind of progress we've been striving towards with this technology, exactly the kind of disruptive curve that we think we -- this technology has available to it, and we think we are seeing it move into. And therefore, just sheerly from the standpoint of cost, that is a powerful breakthrough but of course it doesn't stop there. This development also enables us to have a much smaller package size. Very important in our consumer electronics applications, in particular, both hand-held and wearable, as well as digital camera, implementation of the technology power consumption, also key for any kind of portable device, and reliability. So this is a major breakthrough, in my estimation. Not only for consumer electronics products where these are really essential requirements, but clearly those are attributes that will benefit other requirements in -- for other products as well.

We had a very good quarter with respect to contract awards with new awards totaling $5.1 million from both government and commercial customers. The commercial contracts have a slightly different character than the government contracts. They sometimes are shorter in duration. But they also tend to have a shorter sales cycle associated with them. And so- it is that variability that we're sort of coming to grips with here, as we go through and enter into Q3, we have a number of commercial prospects floating in the pipeline currently, but we don't have the kind of backlog visibility that we sometimes get with defense contracts, which have the downside of having a longer sales cycle associated with them. So I think we're getting to a place where we're starting to get comfortable with the mix of government and nongovernment, and obviously, as the number and range of types of contracts grow, we will be seeing a smoothing function as well there.

But in general, as I say, we had a very strong quarter with respect to new contract awards. I want to talk about our activities with Flic. We do see this beginning to gain much more traction in the third quarter, and as we move through the balance of this year, and into next year, and in fact, I think just today, we've had a very encouraging report from what is it called, the Cash Register Distributors Dealers Association Conference, where we found that there is a lot of Windows-based activity going on in that environment.

Let me just begin our discussion of Flic with some recent data that came from Venture Development Corporation, which is also known as VDC Corp. One of the primary associates for market research in the automated I.D. space. A couple of things. One, generally, they are bullish on the market. They 2002 sales for AIDC hardware, including hand-held scanner, stationary scanner, portable data collection terminals and bar code printers came in at just over $4.4 billion. It is a very large market. The forecast is for that market to grow at just over 8% , compounding annually through 2006. So decent growth for a market of that size. One of the points we've made previously, and part of what has guided us in our strategy of defining the Flic product, is that it has been our observation that unit volume for hand-held scanners has been growing at a faster rate than sales volume. And I don't -- those numbers are not quoted here. So -- but generally the point is if we're seeing sales volume grow at 8%, the unit volume may be growing at 12 or 15%. And what that indicates is that the action, the growth is really at the low end of the market.

Well, Venture Development Corporation cuts right to the chase here, and they said key factors impacting the market include, and they talk about foreign markets, country and regional markets, in China, Taiwan and other places, but also the shifting of the competitive landscape and increasingly the availability of low cost solutions. And then point number three, under key factors impacting the market, include, it says. price has become the overriding end user purchase consideration. With replacement units representing the majority of hardware shipments over the past year, decreasing differentiation among competing products and tighter budgets, end users are citing price as the key selection criteria when selecting hardware, giving it more weight than features or service. Well, this plays very much, we think, to Microvision's strength. One of the things that we have again used to inform and guide our strategy is the notion that what we are seeing in auto I.D is a commoditization of sorts, is a dislocation of sorts. And one way to think of this and a catalyst for this is when we start to look at the impact that conventional off-the-shelf PDAs made by companies like Compaq and Dell, and Sharp and others, are having in the space. So increasingly, what we're finding is that IS managers, end user customers, are looking to the market and saying, gosh, do I buy this ruggedized, more specialized $12-1400 dollar piece of equipment, from one of the established auto I.D. vendors or can I make do with a $200- 300 dollar PDA, that may not have the durability and ruggedness, but in terms of total cost of ownership, may be significant advantage.

Well, we think that as I said, we've got ample evidence to suggest that that is the case. One of the points I've made before, I will make again, is that where we are seeing traction on Flic is in relatively large unit volume purchase potential. So an awful lot of our sales funnel ranges from 500 up to 5,000 units, in some cases more than that. And that's -- that's a very interesting phenomenon. But what it really means is that here, when we are looking at purchasing 1,000 or 2,000 units, and saving 30 or 50 dollars per unit because of price, that's where the numbers really start to add up and when you've got that number of users, that's where your total cost of ownership pencils really get sharpened.

Now, that doesn't happen without inertia, without conflict, and we think that one of the things that we have now refocused our strategy on is addressing that inertia in the channel. The channel is somewhat conflicted over saying gosh, do we really want to go down the price curve as fast as end users want us to do? Because if I am a reseller of products I would rather sell something that I get $300 for than something that I get $100 for. And so at that point, you have a disjuncture between the end users desires and the channel's desires and that we believe like any -- anything driven by economic momentum, will sort itself out. We've also taken some measures here to really refocus our execution strategy to address that. Given thatthat that is the case, it becomes evident that one has to really drive end user awareness to create the pull effect through the channel to overcome that inertia specifically.

So we've allocated more resources to end user awareness, which comes in the form of certain kinds of direct advertising campaigns, some very cost-effective telemarketing, as well as editorial coverage. And as we roll out some of these early design wins with the Flic, you will see us really using those as reference accounts as well, and publishing case studies around those. So we are encouraged that the product is well conceived. It is on the right path. We have, as we anticipated we might, encountered some connectivity issues. although again, one of the things that is coming out of today's meeting was that perhaps there are fewer of those in the retail point of sale space than we might have previously thought.

Our relationship with NCR has gone through an interesting change. There has been a reorganization internally. We think ultimately putting us on a much better footing. We had lots of very encouraging prognostication early on. But now we feel like we are getting a much more realistic view and a much more proactive approach to bringing the product into the market. We have better visibility on NCR's sales force and real data coming back from real customers. We recently had a very encouraging test of our cordless scanner, which we will announce to the market very soon. And so we think that the NCR relationship going forward will continue to provide value.

They have placed orders with us. We have filled thosd orders. We have filled those orders but it hasn't met our prior expectations. We now believe that we can make this relationship value going forward based on the new players and some rethinking of the strategy. Part of that by the way is -- there are some connectivity issues associated with the device as we look to become compatible with an installed base that has a variety of different connectivity solutions. so we're doing some work to support RS 485 connectiviity with the product as well. Tom I don't know if you've got anything to add. That was kind of a long spiel on Fic. But --

Well, a couple of things. One, you touched on briefly, and that is that a shift in the market and we're seeing it in a couple of places. And one is that the existing competitors have sort of gone upscale with their offerings. And they've fumbled more and more and more features into their product, bundled, and'ded a lot of ruggedization and these devices are stand alone data terminals with a scanner built in, and sell for 1800, $2,000. Well, a lot of people, we are hearing, don't need that. They don't need the extra ruggedization. They don't need all the features. And one of the trends that we're taking advantage of is the proliferation of very low cost PDAs based on pocket PC and palm operating systems, which we can connect to, with our Flic, and provide a system for a fraction, 25%, 20% of that cost. And we're getting a lot of very positive response in that area. It is early, but there is a lot of positive response.

The other one that Rick alluded to was this Cash Register Dealers Association that we're working with. And it turns out that just as in the previous example, the commoditization of computers is having an effect here. So virtually all, 95%-plus, of all new cash register installations are based on Windows operating system. And what that means for us is very good news. We just plug directly into those, and they have an exceptionally low cost solution with their PC-based cash register. And then the Flic, whether it is corded or the cordless version of it, provides an exception scanner in the case of large grocery stores and retail, or could be the primary scanner in the small stores, and it is being very well received in that particular application.

Great. Well, again to summarize in terms of a sense of where we are here, we have a number of opportunities in the pipeline. There tend to be clustering around larger unit volumes. As I mentioned in our previous call, that is the good news. The bad news is that those do tend to have a slightly longer sales cycle associated with them. But several of these are moving through that sales cycle as we've been working them. And we're seeing the number of opportunities grow.

We've refocused that tier two portion of the channel because we think that is the best way to access those types of large unit volume opportunities. And in particular, what we're finding here are resellers and integraters who are responding to the customers' desire to move towards these Windows and Windows CE-based kinds of solutions with PDAs around pen tablets and things of that nature. So I would look for us again to make some announcements on some of our first unit volume sales. We've been working one that is several thousand units, we believe that will come to fruition soon. We've really worked very closely to support that customer's requirements, and inventory collection.

Obviously, one of our biggest pieces of news recently, which we are just delighted with, is the signing of a letter of intent by North American Honda, with respect to the purchase of 3800 Nomad next generation display units for use in their maintenance and service organization. One of the things I thought I would do here is kind of share with you our perspective on this customer and more broadly, this market category. What we have found, and this by the way is contrary to some of our expectations going back about a year. We certainly realize that there was opportunity in maintenance repair and overhaul, but we misjudged the complexity of the application, and thought that in fact that this would be a longer lead market development, because of the requirement for software, or specific electronic training manuals for the different vendors. Well, it turns out that they were actually much farther down the road than we believed. And so in addition to Honda, we have an active dialogue going with several folks in this automotive maintenance arena.

Some of them additional automakers, some of them people who supply these kinds of solutions to automakers. But it turns out that in fact the digitization of maintenance manuals and service technician support information is actually vert, very advanced, and to the extent that our numbers show that fully 80% of the 1.4 million service technicians worldwide have access to online data in some form or another. This is an activity that is actually interestingly enough led by the U.S. and Europe, not by Asia. They tend to be trailing in terms of digitization. But it is a very large number. And so we're deriving our addressible market, in terms of top-down analysis, from looking at that. So we need to be looking, talking to customers who have access to digital information. That is a key requirement that they have developed the application.

And we'll look at the classic adoption curve and suggest that 50% of that 1.1 million, which is the 80% of 1.4 million, about 50% of that would be an addressible market which would include innovator, early adopters and the early majority. If we peel that back further, roughly 13% or so of that 1.1 million, between 13 and 14%, represent the innovators and early adopters. Now that is really encouraging because it means we have an early adopter segment of this market which is potentially 150,000 users deep. And that is a very, very large market from where we sit today. We also further have, we think, fully qualified this market with respect to price elasticity information. We've got a very close, even intimate relationship with Honda, and they've been very open with us about how the ROI is driven by themselves, as well as by the service technicians.

Now it is an interesting model. People ask the question, why would service technicians take money out of their pocket to buy these kinds of tools? The reality is that is what they do all day long. I was astonished last night at dinner with an automotive customer to learn that a toolbox without anything in it is $8,000. And in fact there is a bit of sort of a status orientation, around, you know the size and depth and extra drawers that you might have in this thing. So when we start talking about the several thousand dollar per unit kinds of tools, this is well qualified market data.

Further, this is not an unexercised channel. This channel of Honda acting as a distributor to their service technicians in their own dealerships, as well as to third party service technicians, is tried and true, it has been successful with them, for a variety of different tools, one of the other gentlemen at our table last night who is now a senior manager at an automotive company in the service arena, and was previously a service technician, indicated that he spent somewhere in the neighborhood of $50,000 on tools. Why would they do that? Why do they engage in these kinds of expenditures? The reason is that they have available to them very sophisticated models that explain to them that by buying this $2,000 or that $3,000 or that $4,000 tool, it can increase your earnings potential by 5 or 7 or 10,000 dollars. And the reason that they're able to did that is because a lot of the work that they do, they are paid not on an hourly wage rate, but on an a basis of work completed. So the number of procedures that they can complete directly goes to their earnings potential. And therefore, if they have a tool that demonstrably can increase their potential to complete procedures, they can calculate pay back. Further, Honda has provided in the past and has indicated that they will provide in this instance leasing terms to these service technicians as well. And I believe, don't quote me on this, but I believe that in some cases, that is done in conjunction with Snap-on Tools as the finance provider.

So we've had some real insight into this market. Through our relationship with Honda. And obviously, are continuing to grow that. So what we're -- we're viewing this as, is a very big leg up on a product launch for 2004. We are spending a lot of focus and time on capitalizing on this, and expanding this. Our effort would be to have a as significant a backlog as we can going into 2004 as we begin production because that makes this obviously a much lawyer risk proposition. In terms of gearing up capacity. And we also believe that there is a substantial market out there. I would hesitate today to tell you what we think the growth curve of that looks like going forward. And internally in fact, there are varying opinions. Some of them very, very aggressive in terms of where this can go in the short term.

So we hope that those are the people who turn out to be correct in terms of their prognostications on the rate of adoption, but the fundamental case here, we feel, is very, very sound. We are scheduled I think in reasonably short order to perform a second field trial with a major manufacturer of trucks and automobiles, and in this case, we're focusing on the truck maintenance portion of their operations. But we do believe that the work that we have done and continue to do with Honda is very relevant to the automotive space at large and to maintenance at large and other areas as well.

The other categories that we're seeing - strong interest in Nomad, continue to be our medical work with Stryker, their early exposure to the next generation system has met with very favorable reviews. If you recall, I talked earlier on, I think, in a previous conference call about the fact that surgeons really liked the functionality of the Head-up display, as a sighting system to support precision alignment in knee and hip procedures, but were concerned a little bit with the total weight of the system on the head. And that has been radically improved, cut in less than half of what previously existed. So there is a good deal of excitement there.

We continue to focus on really anything that is GPS-based. It turns out, and it's -- it's not obvious, but it is clear to me, I suppose, is a good way to say it, in hindsight, why this makes so much sense, that when we now are using information and connecting that information through a GPS-based system, that using a head-up visualization system makes abundant sense. It allows us to correlate that information with the real world. So whether we're talking about geological instrument survey for construction or agriculture, machine control in that same environment or whether we're talking about military operations, this is a very, very powerful kind of functionality.

Now, I'm going to say very little here about military. Only to point that we did have some tests several months ago in ground vehicles, armored vehicles, that were quite successful. We now believe that this is a very real opportunity and in fact, may be even a very near-term opportunity. We are cautiously optimistic that some of these things could come to fruition relatively quickly. Further, we believe there is substantial growth opportunity here for the reason that they're scheduled over the next several years, are somewhere in the area of 65,000 GPS-based systems, scheduled for retrofit and new build into various kinds of military vehicles, primarily armored vehicles, and helicopters, oro toe-craft, as we call them. And this is a very powerful situational awareness tools, which enables pilots, tank commandesr, drivers, and others, to view information head-up and correlate it with their outside view of the battlefield, in order to really maximize situational awareness. So, as I say we're hopeful that we could see that begin to take root very soon. And it is really gratifying in that what we're seeing here is the very best kind of synergy between our commercial products, our government development contracts, and the potential for government production. In most of our internal longer-term forecast, we do not show any kind of significant production for military until about 2006, and we based that assumption primarily on the work that we have done in the airborne helmet mounted display arena and around informationing to the schedules of those new builds and -- relating to the schedules of new builds and retrofits for those aircraft.

There is a potential,l given this new system, that that could be accelerated. And we think that the Nomad display makes an excellent add-on to the system. And we are hearing similar feedback from the field. And that's -- that's I think a very powerful thing. So that is one of the things that we are -- continue to be excited about, in addition to our work in automotive and with respect to Nomad generally. I will close on the Nomad by saying that in short, I think this is potentially a significant validation of the technology of the product of the paradigm of heads-up visualization.

And I've said before, I will repeat this for those of you who haven't heard it, that what we have seen is some cycles in the deployment of information technology into the these work spaces. What I mean by that is that we have seen people like Honda, like BMW, like others, deploy pentablet based systems, PDA based systems, other kinds of information systems into the service base, and reach the point where they are now concluding that we really need hands-free functionality, and we really need a better integrity with the human form. If someone is clambering in and out of something, or up on top of something. And those are really just the fundamental pragmatic driver was this. It is not nearly as exotic as it may all sound. It is simply providing someone access to a visual display with their hands free. In a way that makes it easier for them to operate in the environment that they do. And therefore, providing gains in productivity, quality and safety.

So we continue to be really enthused about this validation of the Nomad next generation product. We will be working through several milestones with Honda. We will report those as we go. And as I said, our effort is to turn this into as much backlog as we can. In the short term over the next couple of quarters. And then to continue to grow that going forward as well.

The work that Steve has been doing in Asia with respect to our consumer product thrus, which is I think as many of you know, squarely focused on digital cameras and camcorders, as a launch segment, product segment, is going exceptionally well. We are not able yet to report a lot of details because there are many things that are formative and so some of this may seem repetitive, but the key here are two things. One of which is demand. Design wins are what will ultimately drive revenue. The other of which is supply. We need to be able to scale production of these devices to very large volumes. Keep in mind we're looking at an addressible market of some 89 million units a year ,between digital still cameras and digital camcorders and that is I think by 2005 so it is really just around the corner. So to scale into millions of units a year, gets us into a different sort of high volume production paradigm.

And I think what is gratifying is that we are seeing -- it has always been our strategy that we would -- we would leverage this through third party manufacturers, who do this kind of work, and I've talked before about the profile of those manufacturers and how the capacity of a company that would make something like a DVD pickup head, or CD-rom drives, those kinds of things, fits the capabilities requirement. Obviously, there would be some specialized tooling associated with this. But we are -- we are in, I think, a very strong position, and continue to advance on both of those fronts.

So Steve, having sort of framed that, in that way, you might want to talk about some of the more recent developments. I know one of those is that we've started to see more focus on digital camcorders, as well as digital still cameras. By way of teeing that up, I will mention that of the two categories, digital camcorders has the high growth rate prospectively going forward. And is expected to grow from I think 20-some-odd million units to 40-some-odd million units in the next couple of years. So it is a very exciting potential. And Steve, why don't you talk a little bit with us about some of what you're seeing there?

Yeah, certainly. That really speaks to our micro display product strategy and we are staying the course with our initial focus on the view finder solutions, and in the past, we have discussed digital still camera and camcorder and as Rick points out the camcorder category is looking more interesting than it ever has. In part because of the convergence of still cameras into camcorder models. And it is accurate that we're reading that the camcorder market will be as large as digital still camera market. So we now squarely have to two key targets.

Furthermore, the move, the general move in the industry to HDTV, wide screen format, is perhaps offering us an opportunity. Shooting wide screen obviously is going to be a requirement for a wide screen view finder. And we believe -- we believe that the achievement of this standard, the wide format is going to be very challenging for flat panel micro display competitor, we further believe that our solution can achieve the wide screen standard, and perhaps even a flexible so-called aspect ratio. So -- and in fact, the demand that we accommodate, both existing and wide screen simultaneously, could well be playing to our competitive advantage. We've also seen some sudden growth in the digital SLR cameras, single lens reflex camera category. Uses of this product are typically really quite discerning. And they demand high quality imaging so again we might anticipate that they will be equally demanding once electronic view find has been made available. And therefore would react well to a high performance solution. So we now have the digital SLR. General digital tall still camera and camcorder, digital cam cord corder as three key targets in the UVS application space.

I can make a general statement about what we're seeing in the market in terms of the competition. And that is that there appears to be no equivalent or near equivalent competitors today. And we've confirmed that in a recent AB test that we conducted where we compared the best current EVS that we could obtain with our advanced prototype EVS. And on our side, we measured 700% greater resolution, some three to 4,000 percent improvement in contrast, and of course, much, much wider color range, with no pixelation. So from a standpoint of offering a very high performance solution, in the market that appears to be demanding higher and higher performance imaging, we continue to be extremely well positioned.

Relationship building in Japan is certainly progressing. Our partnering as we call it. And the awareness of Microvision in Japan is certainly increasing, also. We were featured for example just last week in the technology section in the Nikeii magazine, essentially Japan's equivalent of Business Week. And I think we can anticipate further exposure as we continue to make our trips. Thanks, Rick.

Thank you, Steve. I think the point that Steve makes about the competitive margin has been one that -- has been extremely encouraging to us. We have continued to look for what might pose a competitive threat, you know, in this market. We've continued to position our solution as something that we believe can be a majority, if not a dominant share contender as the designs support these higher resolution requirements. And we are really encouraged that we've not seen anything that -- in a practical way can close those kinds of performance gaps that Steve talked about - 700% greater resolution, 3,000% greater contrast. In anything approaching a marketable or competitive price.

And so we continue to have an enormous sense of validation. We are working on what we think can be some very, very exciting relationships, in bringing this product to market, and I will just touch again on some of what we think are the additional growth opportunities beyond cameras and camcorders. Increasingly, we believe that wireless types of terminals with either hand-held displays built in or wearable peripherals are viable, both with respect to 3 G telecom rollout, we've just done -- actually in the process of making a delivery to a major network operator in Europe - as well as to WI-FI broadband applications. We believe that there will be a demand for more compact types of terminal units so that when one does elect to go into Starbucks or McDonald's or the hotel lobby or the park, where increasingly we're seeing people provide either low cost or in some cases free broadband, wireless broadband access, that by virtue of that availability of that connectivity, people will experience that, and begin to look for solutions that are more compact than laptop displays, but offer greater functionality than PDAs. And so I think there really is a significant driver here. We've seen some major companies begin to back the roll-out of WI-FI, into these spaces, including companies like Intel, who have made a major commitment to WI-FI connectivity solutions in their Centrino family of chips. So I think that is going to play out in a very interesting way and it will be interesting to see over the next several quarters how things begin to evolve in that regard. Also, Steve, I know you've talked in the past about gaming as a potentially significant application. And we've continued to see interest in portable gaming and entertainment applications of wearable displays as well. We're not ready just yet to publicize some of the form factors that we think are achievable here. But we are very excited about the models that we've created, based on optical designs, and we think it will not be too long before we're able to talk about and show where we can take this in terms of a consumerable sort of wearable display product.

One of the challenges have been not dissimilar from what we've seen in the industrial space, but achieving very compact and even stylish form factors is a challenge for wearable displays, and also again driving to affordable costs while providing acceptable leveling of performance. So we think there are several things that are absolutely unique about the scan beam approach in these various aspects, cost being one, and but also form factor, the ability to actually wrap the beam path around the head and the temple, becomes a key enabler to these more compact form factors that we think are a critical part of user acceptance and this is -- a lot of the work that we're doing right now in this wireless domain is all about use ability and user acceptance, and the appearance and comfort of wearing these devices.

I want to just turn this over to Tom Mino in just a moment, but I do want to touch on just some summary remarks that with respect to our laser camera activity, our automotive displays, and with respect to the electronic view finder, we think these are significant pipeline activities. And again, our model is about continuing to enable new kinds of products and solutions based on the core platform technology. And I think it is very significant when we can achieve a milestone like the scan engine breakthrough that I discussed earlier, because of the degree to which this broadly impacts size, cost, and reliability, and even the ability of scale performance. So it is achieving those kinds of breakthroughs that is going to really make this -- this model realizeable, and we're very, very encouraged, based on that alone. Tom, I know you've got some equally encouraging developments going on downstairs, some of which you're ready to talk about and some of which I think we're going to have to wait a short while for but maybe you can tell us what you've got.

Thank you, Rick. The last quarter, the best way for me to describe it, was both exciting and challenging for Lumera. We got the opportunity to announce $900,000 in contract awards with the government and a major government government contractor. That is the beginning of a series of contracts we are negotiating and we will look forward to in the future. We continue to expand our polymer platform strategy Into several product areas.

As many of you know, the company began originally focused on an neo modulater for the telecom market, and as we became away of the fact that the telecom market was going to have a longer downturn than we originally anticipated, we brainstormed with our existing team, with some outside consultants, into areas where our polymers brought a distinct advantage to the marketplace. So we've been working in those product areas, and we have currently shown capability for RF phase shifters, with lower power requirements, and wider phase shift for antenna and radar applications, both commercial and military. We have worked on a more stable material for OLED applications, with some exciting results in that area. We have provided samples of our material on slides that are used by biotech sampling companies to evaluate things like DNA and proteins and new drugs. We've got several companies involved in evaluating those slide samples.

We are working in each one of these areas with potential partners. And that includes a large American semi conductor company that we're working on future work for optical interconnect for future high speed chips and back planes, where copper will no longer provide the performance required. So a lot of things are going on in a short period of time. We've been aggressively pursuing these areas. Aggressively talking with potential partners. We have several meetings set up with people in both the antenna, the biotech, and the optical inter connect areas as we sit here today. And a major meeting set up in the future in the OLED area.

So I think it has been a quarter of accomplishment And evaluation. And reflection on the best way to address the marketplace with our particular materials, and the advantages they bring to different areas. We've really focused recently on the RF phase shifter for antennas and radar. We expect to be able to announce some progress in that area very soon. We made the original announcement about the low power, high performance, we've included the low cost capability in that, and we expect to be able to expand on that in the near future. So that's a pretty good summary of where we're at at Lumera. And I guess I'm ready to field any questions if Rick is.

Yeah, I think we can take questions. Just very quick comment on financing for Lumera. We will make the statement that fund raise something ongoing. It is -- fund raise something ongoing. It is going very well. We expect to announce financing very soon. We are unfortunately not able to discuss further details at this time although we expect to be in a position to do so very, very soon here. And so I think it will all be self explanatory at that time.

I did want to just sort of put a fine point on what -- what Tom mentioned here, which is I think what we found is that we've been very successful validating that this is in fact a platform technology, has a wide range of applications. We're in the process of really prioritizing our approach to the market. One of the areas that seems extraordinarily promising, simply because of the scope of the market, is in the wireless RF communications arena. Where smart antenna really have a significant ROI associated with them. And everything ranging from automotive communication and collision avoidance, to military systems, to cellular networks, to WI-FI even and obviously there is a range of costs and performance requirements among those things. But what is encouraging to us is that we believe that our phase shifters can cover a fairly broad range in that regard as well. Tom mentioned the combination of low power with the phase shift which is a significant driver for us of these -- Tom I don't think you mentioned but it is my understanding did you have a conversation with a European auto maker who gave you a specification for an antenna, for example, that would be used as both a GPS as well as satellite communication system in the vehicle. So there are, I think, some very promising applications emergenging. And one of the things that I want to note is your time to commercialization on these is not years. I think what I've heard you say is that, based on the technology that we cuurently have and where we are with some of these prototype systems, that you felt that you could move pretty rapidly with the phase shifters into commercial production.

Based on the results we've got so far, that's true. We're probably talking quarters to get into production, rather than years.

I think that's obviously a significant point to make. Well, Tom, thanks for your comments. We can open it up to questions if we have some in the queue.

q-and-a.

Thank you very much, gentlemen. Ladies and gentlemen, this is your question and answer session. If you have a question or comment, please key star one on your touch-tone phone. If you wish to withdraw your question or your question has already been asked, please key star two. Once again, that is star one for questions. We will pause one moment for the questions to queue. Thank you, and our first question comes from Carson Block from W.A.B. Capital. Please go ahead.

Hi, fellows.

Hi.

A question, first question regards the Honda letter of intent. I'm wondering if you, from your statements, do you think you can start to see volume from Honda in Q1 of '04?

That is the plan at the moment. We are working to refine that roll-out schedule. But the plan is to get these to them as quickly as they can. In fact, I think that is pretty close to a quote from our contact at Honda, that they are very anxious to get the displays in their facility.

One thing by the way that I think is germane, if I can expand on that a little bit, Carson, is that the state of readiness of this customer, they have been engaging in preparing the application side of their system using the current generation Nomad. And so they, we think, are going to be fully prepared as the first of the year rolls along to integrate these. Some of the milestones that that we are addressing along the way are in fact systems connectivity issues, and there is going to be a wireless connectivity solution coupled to this first product. But to answer your question more pointedly, the answer is yes, we believe that we could start seeing volume in Q1.

With the reduction in the cost on the latest version of the scan engine, what do you anticipate the ASP for the Honda Nomads to be?

We haven't said that yet. I think what we disclosed was that our list price for the product is going to be in the high three, low 4,000, depending upon the configuration. With Honda, what we're working on is a tiered pricing scheme that gives them lower prices as volumes escalate.

The other data point I can give you is that we think that, in terms of price elasticity, if we get down into the low-to-mid-$2,000 range, with the product, that is where we can start to see significant increases in volume come back as a result of that. We haven't seen a lot of price sensitivity or elasticity sort of below the $2,000 mark, so you know, we can start to refine within those boundary conditions, but that should sort of give you a couple of data points to outline it.

Okay. And finally, where will you produce the Nomads for Honda?

Initially, we will produce them here. We are, in fact, working right now on our production strategy in terms of when and where we will be able to outsource more and more of the production. It won't be a flip of the switch. Let me sort of describe what I mean by that.

Today, some percentage of the sub systems are already outsourced, even in the current version of the Nomad. So the process will be one where we will outsource more and more of the sub system production, to the point where the final integration task becomes more straightforward and therefore more portable. And our strategy suggests that we should be in a position to make that transition sometime next year.

Although again, we're really working on that and there is obviously a fair number of moving parts to that, including qualifying some of the third partiesthat might be on the other side of that. But initially, we will produce them here. Our plan is to have more than sufficient capacity to support Honda with a single shift, so we will have the ability to scale that by adding more shifts, if demand dictates as well.

Okay. Initially, can you just give me an idea of what you think your production capacity will be, and also post-transition, what you think that capacity would be?

Yeah, I think that is part of the work that we're doing now. Probably, you know, the initial capacity I'm going to say is going to be in line with -- if we took the Honda demand and made it more or less linear, say something less than 1,000 units a quarter, that is a reasonable target for our kind of initial capacity. And as I said, we will be able to scale that, that would be single shift capacity, so I think that is a reasonably good starting place, in terms of how you're looking at Q1.

With respect to what capacity we're at, you know, prior to making transition, obviously, the best case from our perspective - or maybe it is not obvious - but the best case from our perspective would be to be able to make the transition without having to really substantially increase that capacity. In other words, we would like to maintain the fixed operating costs as they are and be able to make the transition to maintain the quality and then scale volumes once the outsource is complete. But that remains to be seen whether that is doable. But certainly, you know, within the boundaries of those 1,000 a month -- 1,000 a quarter on a single shift, say 2,000 a quarter in a double shift, those are reasonable guidelines.

Thanks, Rick.

Sure.

Thank you. Once again, ladies and gentlemen, if you have a question or comment, please key star one on your touch-tone phone. And our next question comes from Paul Sethy from Vertical Ventures Investment. Please go ahead, sir.

Hi, Rick. Good afternoon, how are you?

I'm well, thank you.

I wanted to ask, you know, follow-up on American Honda and really get a sense - and I do apologize, not having not been on the entire call, so if you got to this I do apologize. I want to get a sense of, you know, what other opportunities are there of the American Honda ilk, in terms of other car manufacturers here both here domestically as well as abroad? Do you see these types of contracts in the near term, the long term and kind of the chances of hitting them in both the near and longer term?

We've got a couple of these things in the pipeline that I did mention earlier. I didn't go into a lot of detail but I can give you some more metrics. Honda has 18,000 service technicians in the U.S. at the dealership level, the Honda and Acura dealership level. They make use of 50,000 third party service technicians at qualified third party service providers. And so, you know, the total universe of -- that Honda will be addressing is about 68,000 potential service technicians in the United States. It is a fairly significant chunk. I don't know that -- the math won't correlate strictly in a linear fashion, but Honda's market share in terms of an automotive company in the U.S. is about 7% of the total market. Of those 50,000 third party service technicians, many of them repair Hondas and Acuras as well as Toyotas, Nissans, other brands, So we can't take that 58,000 and multiply it, but we can certainly take the 18,000 and multiply it, using sort of 7% number.

We, I think the number we had for U.S. is about 590,000 service technicians who have access to digital information, which is, you know, to us a key qualifier, and as I mentioned earlier, somewhere in the neighborhood of 100,000 to 150,000, that could be categorized within the early adopter range, just based on statistics. So it is a very large market. Certainly, as large as any that we've seen in the category.

There are lots of what we would call adjacent applications in other areas of maintenance, whether we're talking power plants, or aviation maintenance. We had a very interesting meeting recently with a congressman on the transportation committee who was very keen to understand what we were doing in the area of aviation maintenance, because the FAA had recently produced a study or an audit which indicated that maintenance, the quality of aviation maintenance, really needed to be improved to further avoid air raids. And another interesting thing I think we heard from Honda, I think, is they're now looking at a second application beyond maintenance repair and overhaul, which is the rebuilding of transmissions. And I think we heard this very recently, that the number one reason for those rebuilt transmissions to fail was based on misassembly. So again, there is a very compelling return on investment case here, for being able to provide meaningful support to these people, while they're engaged in those kinds of tasks. So we think that is a very large market.

One of the other ones I mentioned that we think potentially has some scale, and the market leaders in this category are companies like Trimble and TopCon, is in the geological instrument survey. Increasingly that is all GPS driven. It is really moving away from the optical line of sight kinds of systems to these hand-held, GPS antenna-based systems. And we've actually done a fair amount of work behind the scenes with one of these companies, with actually a couple of these companies, and we think they're really is a compelling application here as well. So those are -- we're focusing our resources certainly on automotive because we think there is a direct correlation there.

It is also an interesting irony, and Tom here worked at General Motors years ago, and what you see in the automotive space is actually an industry that is fairly quick to benchmark best practices because of the slow growth nature of the industry. It is almost counter-intuitive, or certainly not readily discernible as a conclusion, but it sort of makes sense when you think that through. So we do think that, while Honda certainly is the head of the pack and is very much an early adopter in this instance, that there is some potential that, to the extent that we can continue to really prove out the results relating to quality of service and productivity, that there could be some meaningful follow-on demand. And as I say, right now, that is really the task, is to get our arms around that as much as we can this quarter and next, and as we go forward into 2004.

Just really briefly, I wanted to get a sense of, and clearly this is I guess following not only Honda's you know, establishing the fact that there is superior technology here, but the three-month trial since April, how do they arrive at the 3800, I guess, you know, LOI number, and what do you see in terms of how quickly that could ramp to something bigger? And how do you derive that kind of number.

You want to take that one, Tom?

Sure. They've got I think roughly 1300 dealers in the United States. And they are actually interested in a couple of different configurations. So, the first configuration is what we would expect to launch in January. And they're anticipating kind of two per dealer, to start off with that. And the later configuration would be one per dealer, initially. So that gets you to somewhere around 38, 3900, which that is sort of three per dealer, if you add those up. We've learned that they've got, on average, about 10 technicians per dealer. So maybe more than that, with the 18,000 that we talked about earlier - but didn't do the math. But anyway, what we've learned is, as Rick talked about earlier, it is really all about really making money for the technicians. If they can do the task faster they get paid at the same rate but they can do more tasks. So, as soon as they see the early adopters among colleagues take these systems and start to generate that kind of return, then we will get additional penetration into these same dealerships.

Nice. Excellent. Thanks for the opportunity. Thanks so much.

Thank you. One of the things that is worth adding there is that part of the notion of really targeting these 50,000 third-party service technicians as well, is you know, it is a great challenge when you use this sort of model of having a captive service support, as well as contracted service support, to maintain quality standards across a great many organizations that comprise that 50,000 third parties. And so the use of tools of this kind really is a critical component in standardizing processes and procedures. Because you can then have a very rigorous information systems driven support for the procedure, and that gives you the ability to standardize quality across those disparate third parties.

Thank you, sir. I would now like to turn the call back to Mr. Rick Rutkowski for some closing comments. Please go ahead, sir.

Thank you very much. Again, one of the major highlights of this quarter is what we've just been discussing here, and we believe it is really an indication of the beginning of a significant market, not just for automotive maintenance, but for augmented vision systems generally. We can discern several trends here that obviously come together at Honda, but also, we think, are analogous to a lot of the productivity and quality challenges that are being faced in a variety of other enterprise environments. As I said, we will continue to focus on this category. We have several activities in the pipeline. So I would continue to stay tuned for further developments in the automotive arena.

I mentioned earlier, also, that we have a military opportunity with Nomad. We will be able to talk more about that, we hope, very soon. But we think that in the intermediate to longer term, that this is a really compelling opportunity. And we are, in fact, totally enthused about the system's functionality.

So we think what this means is that '04 is really the beginning of a strong transition to product sales. It's something the company has really worked towards as a major milestone. We're continuing to work Flic. We have all sorts of affirmation that we believe about the fundamental product premise here. Most recently, the study from Venture Data Corporation citing the emphasis on price by end users, and the shift in this market towards the more platform-based Windows-based and CE, or PDA based kinds of solutions. We're -- we should be able to talk to you soon about, we think, some real orders, as well as some reference accounts, and also some interesting partnering arrangements with people who are providing these kinds of solutions.

We should be ready in very short order as well to announce the Blue Tooth enabled version of the product. That is key to this whole area, I think, of PDA and pen tablet combatibility, because Nomad does not have a display screen on board. But with the Blue Tooth version, both your input and your display become really solved by virtue of the fact that you can handle those functions on a conventional PDA. In fact, we have one client and it is, I think, about a 1200 unit opportunity, it is a major consumer brand here in the U.S. that is looking at coupling the Flic scanner to a Handspring Trio, which is not just a PDA but also incorporates cellular telephone functionality as well. And I think we are going to see more and more of those kinds of solutions, because the total cost of ownership is truly compelling.

The pipeline, first and foremost, with respect to the electronic view finder, the activities in the second half of this year, should lead us to product launch late next year and into '05. We have several target launch dates on several candidate products during '05. And by those, I mean digital still camera and digital camcorders. We're continuing to refine that, and Steve mentioned the renewed interest in the digital SLR lines which actually will have some surprising volume associated with them as well.

Lumera, I think, is going to be able to talk to us very soon in more detail about financing. We also have some future options there that we're encouraged by beyond the current round. And as well, equally important, is I think really converging on a product focus for the company, and the domain of RF phase shifters and wireless communications, and I think they are going to be able to announce some pretty impressive developments in that regard. So our key focus continues to be focusing on cash flow, focusing on productization and ramping product sales and crossing that bridge into commercial production with a view towards growth and profitability. Again, this pipeline that we continue to talk about and demonstrate measurable progress towards, is really a very key metric for us. And the fact that we are able to -- we mention these technology milestones for that very reason, that they are evidence to us that we are moving towards a more and more general purpose technology which can support this sort of product pipeline strategy in which growth compounds in two ways. One, because we get internal growth within the product category, and two, we get the compounding effect of introducing new product categorys as we move through '04, '05, and going forward, in consumer electronics, automotive, and as I mentioned today, image capture, opening up a whole new side of the business for us. And we think potentially a very meaningful one. So we continue to be enthused, motivated, and very pleased with the results, as well as the outlook. Thank you very much for joining us today.

Thank you, gentlemen. Thank you, ladies and gentlemen, today for your participation. This concludes your conversation call. You may now disconnect.