MicroVision Inc (MVIS) 2003 Q3 法說會逐字稿

Welcome to the Q3 2003 Microvision financial results conference call. (OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded for replay purposes. I would like to now turn the presentation over to your host for today's call, Mr. Brian Heagler, Director of Investor Relations. Please go ahead, sir.

I'd like to welcome everyone to Microvision's third quarter 2003 financial results conference call. With us today are Rick Rutkowski, Chief Executive Officer; Steve Willey, President; Rickard Raisig, Chief Financial Officer; Tom Sanko, Vice President of Marketing; Andrew Lee, Vice President of Sales; and Tom Mino, Chief Executive Officer of Lumera. We will begin with an overview of our financial results for the third quarter and then take your questions.

The information in today's call includes forward-looking statements regarding projections of future revenues, plans for product development and production, future contracts and commercial arrangements, growth andin demand, future product benefits and future operations, liquidity and capital resources, as well as statements containing words like believes, estimates, expects, anticipates, targets, plans, will, intends, seek, 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 technologies and products 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 and our prospectuses pursuant to Rule 424-B filed on November 3, 2003. Except as expressly required by the Federal Security 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. Thanks for joining us today. We've got a lot to talk about, but we will try to end the call shortly after 2.30 West Coast time.

So jumping right into it, I want to quickly review the third quarter and emphasize really cash position coming out of that, contract backlog building up in the fourth quarter, as well as the prospects for product revenue in 2004, and certainly make that a central focus of the call since it's a key growth driver for us as we move into next year and a key transition phase that the Company is entering.

Revenue for the third quarter of 2003 was 2.6 million compared to 4.2 million for the same period in 2002. That downturn was largely due to delays in executing a couple of contracts. Those contracts did show up very early in the fourth quarter. So with respect to results for the year, we're going to be largely on track with where we thought we would be with respect to contract revenue.

For the nine months ended September 30th we reported revenue of 10.6 million compared to 12.7 million for the same period in 2002. And the revenue was derived from ongoing work on development contracts, both commercial and military -- sales of our Flic Laser Bar Code Scanner system, some sales of the Nomad Augmented Vision System, as well as Lumera, our subsidiary company's, development contracts with both government and commercial sponsors.

For the nine months ended September 30th revenue from development contracts with government agencies was 5.9 million, revenue from commercial contracts was 4.3 million and revenue from product sales was $300,000.

For the three months ended September 30, 2003 Microvision reported a consolidated net loss of 6.9 million or 39 cents per share compared to a net loss of 5.4 million or 37 cents per share for the same period in 2002. For the nine months ended September 30th the Company reported a consolidated net loss of 21 million or $1.22 per share compared to a net loss of 20.3 million or $1.48 per share for the same period a year ago.

For the nine months ended September 30, 2003 net cash used in operating activities was 20.5 million compared to 23.2 million for the same period in 2002. Those changes are largely due to changes in working capital associated with inventory, and I believe with respect to our payables liability, contract liability, University of Washington at Lumera and we can detail that differential for you in the Q&A if you'd like to dig into that.

Cash flow for the quarter, net cash burn for the third quarter was 6.3 million. We're anticipating that in Q4 that number will be in the range of 5.5 to 6. The variability there is largely due to the timing of capital expenditures associated with the ramp up for production of the Nomad 2, which we currently plan to release to production in mid-February. We did end the quarter with 6.2 million in cash consolidated. Subsequent to the end of the quarter Microvision closed a $22.3 million equity offering. And this was omitted from the press release -- Lumera also closed an additional $800,000 in their ongoing financing as well. So we have substantially strengthened the balance sheet and we are on track to make the capital that we ended the quarter with run through the end of this year and into next. And as I said, we've added substantial strengthen the balance sheet in the context of our offering.

We are affirming our previous revenue guidance for Q4 in the range of 4.6 million or higher compared to revenue of 3.2 million in the fourth quarter of 2002. We are, we think, going to see some smoothing of the quarter-to-quarter results in contract revenue to the extent that we can continue to increase both the size and number of development contracts, and we are seeing some evidence of that trend certainly with respect to our most recent contract with Canon and an increase in contract value in our laser printer effort as well. We have several other pipeline activities that are candidates for similar kinds of increased levels of funding, including our work in the automotive arena.

So with that brief financial summary -- and as I said we are open to the questions at the end of our call to provide additional detail -- I'd like to proceed with a discussion of the plans that we are currently executing with respect to bringing online product revenue for 2004 associated with our commercial products, the Nomad Personal Display and the Flic Bar Code Scanner.

I think the place to begin there is to mention that we have two things that we are reporting today in our press release; one of which is that we have delivered 100 Nomad displays. These are specially modified for military purposes to the Stryker Brigade and they have accepted delivery of those in Tacoma. We will be actually shipping the units -- they will be shipping the units to the Middle East, and they will be installed on board the vehicles there and then deployed into the theater at the Army's discretion.

That shipment, by the way, occurred subsequent to final tests that occurred in Aberdeen proving grounds. That test was very successful. There was a modification to the product associated with the pressure required to release the product upon egress from the vehicle. We made that modification, met the criteria and have delivered the units to the bBrigade. And we're going to talk a little bit about what we think the follow on potential here is in the short and intermediate-term, as well as what the bigger picture is with respect to what we believe is happening here in the market for these kinds of displays.

The other event that I referenced was our most recent purchase order for 2900 Flic Bar Code Scanners. We are seeing increased traction with respect to the product. We have made some modifications to the product in order to meet some requirements for NCR's installed base. Those relate to RS232 and RS485 conductivity. We do see every indication of increased activity during the first quarter as well, although we continue to look at the ramp for 2004 being a sequential one associated with both products.

So with that, I would like to bring Tom Sanko and Andrew Lee into the conversation as we move into the discussion of product sales. Our primary focus, or certainly one of our primary areas that we're focused on, for us is the launch of the Nomad display, in particular into the automotive maintenance category, with Honda as a leading candidate as a launch customer.

So I'd like Andrew to walk us through some of what has happened since in July we announced the signing of a letter of intent relatinged to the potential purchase of 3800 Nomad units in 2004 and to report a sense of the progress and an understanding of the process that we are engaged in to lead to purchase and distribution of this product.

From what I understand -- and we're getting new information all of the time -- we've just attended two conferences in the last week or ten days, one of them sponsored by Honda and jointly with Honda. We continue to be very, very encouraged, very optimistic and see a lot of enthusiasm growing within the segment.

So Andrew, why don't you pick up from the letter of intent and take us forward through the events of September and October to where we are today and how that looks going forward?

Thanks, Rick. Yes, I agree. I think we've made tremendous progress. Since the signing of the LOI at the end of June, we have moved out very smartly with Honda to test and validate on a user level the real value proposition of the offering. And I'm happy to report to shareholders that the response has been overwhelmingly positive and the acceptance of our product offering and its unique proposition has been just spectacular.

As you mentioned, we've had three or four tradeshows, we have had a number of dealer interactions and I will just highlight a couple of them for you.

We were honored to be included as one of the few outside vendors at a Honda only dealer show in the September time frame. And following that we were featured in the Honda publications and tech parts booth in the Acura dealers meeting. So we had a chance to really talk and present our product, our whole solution if you will, using Honda's unique content, Acura's unique content in demonstrating that in a wireless configuration to dealers that they could actually try this on with their parts manager, their service manager, and that resulted in a great deal of interest and subsequent actual appointments and demos and trials at dealer facilities on the West Coast and we've got some scheduled for the East Coast.

The long and the short of it is that we've actually tried this in dealer settings, with individuals trying int on, people that actually repair cars; people that actually used actually use the Honda information. And I'm happy to report that the quality of that interaction that demand, if you will, has been unexpectedly good.

Testing and validation continues. We're looking at continuing that through the end of the year. We continue to be invited and be hosted by Honda at various events, as you mentioned SEMA and APEX. We also expect be involved in the JAMA show -- the Japanese Auto Manufacturing Association -- in a few weeks time.

It looks like we're going the teamed up with -- I can’t give you the precise details at this point, but it looks like we're exploring ways that the channel is going to develop for that. Certainly Honda will play a role and other OEMs as we explore this, as well as third parties that may be involved to represent us directly into that particular channel.

So we are exceedingly pleased with the very rapid progress we're making, and we're very much on track and I am going to hopefully report very soon that we have some significant orders and we will share that very shortly.

I think a couple of things are important here as contract context; one of which is the background behind the 3800 unit number. And I think we may have gone through some of this before, so I apologize if it is repetition for some of you.

There are 1300 Honda and Acura dealerships in the United States. So in essence what we're talking about here in the first instance is a scenario in which there would be some number of displays per dealership. And as Andrew said, we're working through the model of exactly the logistics on how that purchase occurs and the process by which it occurs. And there are several different avenues Honda has, as we have mentioned before, of very well exercised distribution model in this regard. The distribution of specialty tools is not a new thing for them. So there is that piece of backdrop -- 3800 displays going into 1300 dealerships.

The larger context here within the Honda and Acura universe is 68,000 individual service technicians; 18,000 of them resident at the dealership locations; another 50,000 at third party locations. Clearly in terms of achieving a benchmark best practices quality of service, the motivation would be to penetrate that universe as deeply and broadly as possible. And we have, as we said, on a number of occasions the individual service technicians are motivated to purchase tools of this type because they do increase productivity and earnings potential for the individual service techs.

I think one of the things that been very interesting since July as well is that we've seen a lot of interest, as you might imagine, coming from other automotive manufacturers. The productivity challenge that Honda is facing is not unique to Honda; in fact, far from it. It's a well-recognized challenge. It's one that people have tried various efforts at.

And the recognition which is becoming more and more instantaneous is that more conventional solutions like laptops, pen tablet, PDA, even wearable computing solutions are really not optimized for this particular kind of work environment. In essence, the value proposition with Nomad is we have an information delivery system which is more practical and better-suited to the environment in which these technicians are working. It allows them to be heads-up, hands-free to get in and out of awkward spaces. And that is a very powerful selling proposition.

One point I would like to clarify because I'm not sure how many people have been sensitized to this, we're currently marketing this product without a wearable computer. It has an integrated Wi-Fi thin client and that nets down the system cost dramatically to the end-user. So we're eliminating several thousand dollars per head in computing costs by using this distributed computing paradigm that has obviously caught hold more broadly in the marketplace. And it gives us a great deal of flexibility in terms of very rapidly becoming compatible with systems in the space.

Tom, maybe you could give us a sense, because you were at the SEMA show, of some of the things that you saw from other automakers? I know we do have some additional field trials scheduled. I'm sure most folks have seen that we announced the results of a field trial with Volvo trucks. There are others in the large truck segment that we're working closely with and there will be some additional automakers as well.

But I think one of the key questions here, and one of the key drivers for us, is really the state of readiness. Do the automakers have the applications? Have they digitized the content? And what's the leadtime in terms of preparing for someone to be able to make productive use of a Nomad display in that environment? Was your sense of that?

We went to the show kind of to do some exploration. We weren't really sure outside of Honda, who we've already talked about and really understand their offering and value proposition, what the rest of the industry, both OEM automakers, as well as the aftermarket, what they would make of this. And I was more than pleasantly surprised to find that everybody got it immediately.

In the past we've had to go through quite a bit of gyration to explain what we are and what we do with the previous version of Nomad. We got a lot of, "oh wow, what do I do with it?" But here the difference was that we were showing something that was very accessible. For those of you who don't know, we're about mounting the Nomad display on the underside of the bill of a baseball cap. So everybody can relate to that. And we had demos set up showing some typical content from the Honda web site, which would be basically the same as a service manual. So they looked and that and got it immediately. "Oh, I see. So it's wireless, I get this information while I'm working on whatever it is."

And then the immediate next question was, "Iit looks like you guys are just featuring Honda and it can only show Honda content, right?" No, the difference is that because any information that is digital that can be shown on here, you can actually use this with any digital content. And at that point the next question was, "Wwhen can I get it?"

So we're very pleased with that and pretty much got the same reaction from the automakers that we talked to. So to use some jargon, we're very agnostic with respect to these information sources and everybody realized that.

As opposed to what we were doing before, there's no longer a long development cycle on the content. And one of the key things that we did in this version of Nomad was built into it the ability to Nomad-enable the information. So previously we were relying on software developer to reverse video and change the fonts and everything. All that is done internal to the Nomad. So this truly is plug and play and I think everybody really appreciated that it's ready for use right now.

I think going into the show we already had appointments with a couple of a larger automakers in the US and another in Europe for field trials. And I think our sense coming out of the show is that we can continue that trend; certainly through the current quarter and the first quarter of next year be conducting field trials more broadly in the automotive space.

If you can talk for a few minutes, Tom, about what you see as some of the other vertical segments that we might see product sales into during 2004 in particular, and then we can maybe focus on what we think the growth path is?

Probably a little bit different than we've talked about in the past. In addition to automotive maintenance, there are other automotive service applications that we've discovered or been made aware of. And one is service parts. In addition to the mechanics wearing these things, there's a need for the parts person at the dealership to be able to have access to all this information while their hands are free because they're picking parts, putting parts back, and all that type of thing. So we got a lot of very strong acceptance of the Nomad wireless system for that application, as well as for the service writers, the people who are greeting the customers and taking them through the complaint and write up of exactly what service is going to be performed because they've got wireless, hands-free, head-up access to all of the information about that particular vehicle.

And following on that theme, military maintenance. So there are a vast number of vehicles in the US military, track vehicles, aircraft, very complicated vehicles, a lot with sophisticated computers and what not. And we've targeted that and had some good feedback as a result of the recently concluded AUSA show in Washington. And it's the same kind of a thing. Training is a big issue, turnover is a big issue because every few years those people move on to different assignments and they're constantly needing to retrain and quality is a huge issue. The things have to work once they repair them.

We have talked for a couple of years now about medical application, and I'm pleased to report that we're still moving forward with our medical partner, Stryker Instruments. And they have seen the latest version of Nomad. They are as excited as we about it and we will continue to report progress in that area.

And finally, we talked a little bit in the past about geospatial information systems -- GIS -- and GPS -- geographic positioning systems. There are a couple of premier companies in the professional part of that segment that specialize in surveying and construction. And we're working with them on some very neat applications that eliminate bodies from a lot of the work; instead of having a two-person crew you have a one person crew. And also improves the safety because instead of looking at a small PDA screen, you're now head-up, daylight-readable and all the information is integrated, all the components are integrated together as well. So those are just a few of the best.

I think in short we're tremendously excited about the response to the product from a price performance perspective. The major changes to the product from the earlier version were, of course, dramatically reduced cost and a dramatically improved form factor. I believe the weight on the baseball cap is about five ounces --

Four and half ounces.

So we've made major strides and those have proven to be significant acceptance criteria. In short, we expect over the next couple of quarters to be able to report increasing visibility, both on our primary launch segment which is automotive. As Tom says, it goes beyond maintenance into other areas within the distribution channel, as well as manufacturing. I believe we did recently conduct a successful demonstration in a manufacturing environment and have interests there. And also some of these other verticals, which are generally going to be, I think, smaller unit volumes, certainly initially, than we expect from the automotive segment.

In the military domain we believe that our delivery to the Stryker Brigade and the events leading up to that delivery are very significant. In the short term, we believe there's a potential for a follow on quarter of four to five times what we saw with this first deliverable, which was a $600,000 quarter of 100 units. That would be aimed at equipping a second bBrigade of Stryker vehicles that would be deploying some time in the spring or summer of next year. So we're working actively with the bBrigade and the force transformation command to affect that outcome.

In terms of the larger opportunity there, what the catalyst for the Nomad display requirement is really a system called FBCB2 and it is very much like the moving map display that you would see in automobiles today, except that it is a ruggedized version on what is essentially a ruggedized laptop computer. But it does have a moving map GPS functionality that can be updated with tactical intelligence data in real-time through a wireless link as well.

The reason that that creates a need is that that platforms is in a place today, inside the Stryker vehicle where it is unavailable to the vehicle's commander, driver or gunner. So the requirement, as articulated by the bBrigade, is actually for as many as 1000 units per Bbrigade. Our first delivery is about 10 percent of that Bbrigade level requirement. But the larger picture is that the FBCB2 platform is aimed at vehicles that go well beyond the Stryker vehicle to include Humvee, M1 Abrams, Bradley Fighting Vehicles and other rolling stock. There is an airborne version of this as well with the primary benefit being blue force tracking for rotorcraft pilots to avoid friendly fire incidents.

So the numbers associated with the FBCB2 are about 60,000 units that are currently scheduled to be delivered and deployed over the next five to seven years. And as we say, this notion of head-up visualization of the FBCB2 content is something that we think can apply in many if not all of those application environments, the challenge being how does the person who most needs that information visualize it most effectively in the environment.

We also have some other growth paths there in terms of total system improvements that would then take even greater advantage of the head-up visualization technique to give a combined composite ground eye view with the gods eye view that is standard or native to the FBCB2 today. And we think those represent substantial growth opportunities as well in that space.

I would also mentioned that Tom has touched on an area in military where we are seeing increasing interest. The logistics footprint and logistics productivity are significant issues for the military. They are viewing our work with Honda and in the automotive segment with great interest as well because this correlates very strongly with certain challenges that they have, productivity challenges that they have in maintenance and logistics on the move as well.

So we're very pleased, very optimistic about the outlook for the Nomad display. Our current plans are to release to production in the middle of February. We're on track with that plan. As of the moment we are looking at in terms of the revenue growth for 2004 not having a lot of expectation in the first quarter, in part because of that mid-quarter production date. So we're being somewhat conservative about the outlook for Q1 and suggesting that we will see a sequential ramp beginning in Q2 and accelerating through the balance of the year. And we do think there is potential upside based on what we may cover the next quarter or two, particularly coming from the automotive segment.

With respect to Flic, we have a similar outlook in terms of the ramp that we do expect to see increased order activity during the first quarter. NCR has given us some very good visibility. We've seen, as we said, our largest purchase order to date today. We have a number more of those in the pipeline. Maybe Tom, you can talk a little bit about some of the key elements of the strategy andat some of what we're doing in terms of critical mass in the channel and end-user awareness.

I'll start out just touching a little bit on the product. We did make our first customer shipments of the Flic cordless, which is our Bluetooth version of the scanner, in October. And we've had a pretty good customer interest in that. We currently have an nice little backlog that's existing and we're building (multiple speakers) about 500 units. We've actually shipped about 100 units out in largely quantities of one. And these are evaluation seedlings. So we're pretty optimistic that that will grow nicely.

Rick mentioned earlier we have made a number of improvements to the base product, mostly in the area of conductivity. The product as it was originally released was primarily intended for Windows PCs, and what we found over the course of the year is that there are a lot of different things to connect to that represent quite a bit of scanner volume. So our engineering team has released a lot of those different things, including conductivity to some point-of-sale terminals, cash registers that NCR specifically requested, as well as PDAs and a lot of other things. So that's all come in kind of the last quarter. So we kind of have a full toolkit now to go out and sell into a lot of different things.

We've really repositioned the product. We've re-launched the Web site. And a number of you may have remembered at the beginning of the year we were talking about laser performance at the price of a wand scanner. What we found is that doesn't really mean anything to anybody who's not in the channel. And the way we describe Flic now is simple and affordable. So we're trying to really leverage the fact that it is ultra simple. Anybody can use it, including a two-year old kid. And it is very affordable. So this is something you can deploy in large numbers inside of an enterprise where you couldn't make economic arguments for higher priced scanners. So that positioning is really starting to resonate for us. We're doing a lot of marketing to end-users in enterprises and also small to medium businesses. So that's starting to take hold.

And the other thing we're doing is really trying to position the product in three different operating modes. We've already talked about cordless and then the base unit. We're primarily focusing on the batch capabilities of 500 bar code memory. And then we also sell it as a tethered scanner primarily for use with PDAs so that you can have a portable data terminal that competes with Symbol and Intermec and other much more expensive devices for about a quarter to a fifth of the cost of those.

And we're focusing now on some applications and market segments. Rick already talked about NCR and they're our retail point-of-sale partner and they're really driving awareness into that market space. We're also focusing on inventory management in kind of retail chain stores, very good value proposition there for the product. Mobile work force automation. The PDA application where you can eliminate mistakes of people keying in numbers. And also just automate, so increased productivity by eliminating them eliminating them. Manufacturing shop floor applications. We've got a large Fortune 500 customer that we will be writing a case study about shortly that has deployed Flic as a way to automate their manufacturing process. One of the intriguing markets for next year is the medical market and a new rule by the FDA requiring bar-coding of medication dispensed inside of hospitals. We're targeting that as well. And finally, a very broad category called record and asset tracking where people who just need to keep track of all different kinds of things, and if you can put a bar-code on it you can keep track of it.

So we've been working with our channel partners, and really we've talked in the past about tier two partners kind of more value added resellers. We're even drilling down more specifically into developers and system integrators. And these are people who are developing applications that are wrapped around a Flic, so they're selling a complete solution turnkey package. And that's turning out to be very successful as well. We will be promoting those applications and solutions in the future.

So again, I think what we're looking at for 2004 is a continued gestation period, certainly in the first half of the year. In any case, we're starting to see more visibility and increased traction with respect to the product. We hope to be able to report more aggressive activity and more visibility as we move into the first half of next year.

With respect to contract development, we've indicated that in the current quarter we've achieved record bookings of $4 million thus far for commercial contracts. We do expect during the current quarter to generate additional bookings relating to government contracts for both Lumera and Microvision, and therefore to have a good backlog position at the end of the year.

Our 2004 government contracts outlook with respect to Microvision is good. If we use the Appropriations Bill as a guideline, we've seen already about a 50 percent increase in the dollars appropriated versus last year. Those contracts are typically awarded late in the first quarter or early in the second quarter. And they would relate to our Virtual Cockpit Program, ongoing work with respect to the Virtual Cockpit, as well as to new activityies with respect to the Kiowa Warrior Aircraft.

One of the things that we think is very encouraging and very gratifying is that these are becoming very synergistic. The program effort for improvements to the Stryker display, as well as the Virtual Cockpit and Kiowa Warrior have a lot of commonality that we can leverage for the military customers' benefit. And we can also address that from the perspective of the common platform which provides leverage and flexibility to ourselves as well. So we think this is emerging as a very solid win-win situation. And as I said, we're pleased with the funding levels where we sit today.

We've also seen some renewed activity. Our government program office has approached us and solicited from us input for an additional $6.5 million technology transition initiative. We do not have visibility on whether and when that would be awarded, although it would be a three-year program beginning in '03. It was solicited, it was selected by the program command as the single solicitation proposal that they would be pushing upward to the Office of Secretary of Defense and it's specifically aimed at accelerating the transition from development into production of this type of product. And so we're obviously working hard to secure that award.

We do have other prospects for government contracts in the pipeline as well as for commercial contracts, which brings me to a discussion of some of our pipeline activities. In the context of our commercial contracts, as you all know, the duel meaning of these is that yes they do produce revenue and cash flow, but they also relate to products that will be emerging from the pipeline beginning in 2005 and beyond. And I think we're very gratified by what we're seeing in this regard as well.

I'll talk for just a moment about our work in the laser printer domain. It's really very straightforward. We think we have a design for high-speed print head for a high-speed laser color printer that will help improve cost and performance of those products, taking high-speed color printing functionality down to the desktop level, is I suppose the way of thinking of it. We're working with a worldwide name brand, a recognized brand in this category, and the $1 million will allow us to do an awful lot in terms of proof of concept demonstration. That was preceded by a paper design study which we think looks very promising. So to the extent that we're successful, there would then be a follow on phase. The earliest commercial production we would see would be in 2005.

We see similar prospects in automotive. In particular we have recently had what I would characterize as a highly successful delivery of an automotive head-up display. This head-up display is, we believe, superior to the competing displays in the market today in that it is 30 percent smaller and offers dramatically increased contrast both in high ambient and low ambient light. So both in bright light conditions and nighttime conditions we're achieving improve contrast, smaller package size, as well as increased resolution. The display, by the way, is installed in a vehicle that is being driven in Europe right now and in fact fully functional with a user interface as well. So we're encouraged that there is a product path emerging here. To the extent that this continues to play out we could also see upside in the form initially of increased contract dollars to support continued development with of course the objective of commercial production. We're looking at the '06 or '07 model year for introduction of this -- '06 is a very aggressive schedule as it would necessitate deliveries beginning late next year; '07 would put us in the same sort of position relative to mid to late '05 with contract development continuing through next year. I believe that there will very likely be a follow on phase here in the short-term to go from our current prototype to a next phase prototype design. But we're very encouraged by the package that we've got in hand right now. It is something that we can really visibly see a product path to in terms of how we would get it to market.

Image capture -- our work with Ethicon in the laser scanning camera domain has yielded tremendous results. We have seen interest from both end-users, as well as commercialization co-development prospective partners in the product relating to two-dimensional bar code scanning, machine vision and other applications. Again, this is an area that we're going to actively pursue.

The importance of these from the perspective of 2004 is that if we are successful in several of these areas, we could see a net reduction in our internal R&D budgets by virtue of the contribution that this increased contract revenue would provide.

There is an awful lot of synergy, by the way, between these three product categories. The image capture product, the automotive head-up display and the Nomad have an awful lot of commonality in terms of the basic engine components. There are clearly different optical design parameters that go into these, but there's a lot of leverage here for us.

So Steve, I'm going to ask you to talk a little bit about our recently announced contract from Canon. It is our largest contract from Canon to date and they have now made a very substantial commitment over the last year plus to our technology. Perhaps you could characterize what this phase of the development is about and where that places us?

I'd be pleased to do that. Perhaps I can really frame my response by way of describing the process that we apply to these strategic contract partners to include Canon.

It's a fairly traditional path of the so-called phases and gates in between those phases and we apply it consistently. It begins with a technical feasibility assessment phase. With Canon that takes us back a year or so. And during this phase performance of the engine is measured -- resolution dynamic range, color range, etc. But the customers are looking for a quantum leap and performance in order to move from that first phase to a second phase.

The second phase is what we refer to as a commercial feasibility assessment. And equally important factors such as power consumption, package size, pricing targets, they're all considered. This is where the business groups get involved within the strategic OEM partners.

The third phase typically includes delivery of advanced prototypes for what we call pre-commercial testing. And we provide interfaces with these prototypes and the customer then is able to place the prototype into potential products that they may be developing.

With regards to Canon specifically, we're very excited. They are a powerful group, very capable, very professional. And it is our understanding now that they stand as number one or two in the digital still camera market. They've been earning significant market share from their competitors.

From a marketing perspective, we continue to position our micro-display is a premium display, and have recently extended its reach. I think this is important in terms of the portfolio of OEM targets that we have. We've extended its reach to offer widescreen HDTV performance to potential customers. This is consistent with the growth we're seeing in availability of HDTV widescreen content, particularly in Asia and Europe. We believe we can eventually see perhaps in the near term widescreen capture in camcorders, and therefore a significant demand is going to develop for viewfinders in such camcorders. The product extension to widescreen is absolutely consistent with Microvision's base technology and our abilities to provide flexibility. In the case of micro-display, this extension to multi-sync and multi-format is an important area and an area where our competitors are almost definitely struggling.

Thank you, Steve. I'd like to give Tom Mino a few minutes to talk about some of the developments at Lumera and then we will wrap up and take some questions.

Lumera once again had a very active quarter. Our focus in the quarter was on fund-raising and product development. As we have announced, Lumera has raised $2.7 million to date with its Series D preferred offering. We are continuing our efforts and hope to have some additional news in this area in the coming weeks.

In the quarter we announced the availability of a high-performance, low-cost Wi-Fi antenna product, and should follow that up with a smart antenna offering, combining the antenna with our high-performance phase shifters later in the fourth quarter. In the area of optical interconnect, we have had ongoing discussions with several large integrated circuit companies and various government agencies and have provided samples to two of the integrated circuit companies and one government agency.

The coating we're providing for the biotech area are working very well in the trials we have run and we're currently negotiating for an order that would take place in this quarter and we would have to provide some product in the December timeframe.

The a well OLED team, in partnership with Philips, has written a development proposal to the United States Display Consortium for $1.5 million. A decision from the USDC is expected in December.

We were awarded $900,000 in contracts during the quarter. We made announcements related to those. And we have final phase proposals amounting to $1 million submitted for Q4.

We have added a CTO to our staff. This was revealed in the press release. There will be additional information tomorrow. His name is Dr. Robert Petcavich. He will obviously be responsible for all technical aspects of the Company and he is chartered right now to shorten our product development cycle times.

In all Lumera had a busy and productive quarter.

Thanks very much Tom. We're looking forward to what looks like a very solid fourth quarter with respect to contract revenue. We are seeing, on the basis of our shipment to the Stryker Brigade as well as some of the order activity that we're seeing today in Flic, increased product sales as well. And we expect that trend to continue in the first quarter. As I said 2004, we are gearing up for a significant launch with respect to the Nomad product and for continued incremental progress developing a market and increasing our sales volumes with respect to the Flic Bar Code Scanner, both the base and cordless version of the product.

I think we can now turn it over for questions and as I said try to end by 2.30 or shortly after.

(OPERATOR INSTRUCTIONS) James Mcilree, Unterberg Towbin.

I think you've referenced a couple of times in the written release, as well as in your comments, that there needs to be some further modifications to the Nomad for Honda. Could you explain what those are?

I'm not sure what you're referencing. The product as specified is basically specified for Honda, so there are no additional modifications. There is a work that we're doing in terms of the final phases of the development before releasing to production. That has to do with firmware and some refinement of optics, fittings and things of that nature just in terms of optimizing image quality, which is very similar to the process we went through in the same phase of the first product.

I think when we have made reference to modifications, we've talked about having to modify the Flic Bar Code Scanner somewhat to achieve compatibility with some of NCR's requirements and the conductivity requirements thereof. But there haven't been any real substantial modifications to the Nomad product and none are scheduled.

I was just looking at -- maybe the word modification is what hanging us up. You say "development work on the automotive display continues" --

Right.

And so that's the firmware and the optimizing the image quality?

That's exactly right. Let me find the place in the release that you're referring to because we're also referring to -- it's confusing because we talk about automotive displays in the context of our head-up display work.

I got you.

And I think that's what we're referencing. I apologize. As I look at it is ambiguous, "development work on automotive displays." In that context we're referring to the work that we're doing with BMW and Volkswagen, Audi (multiple speakers)

That's fine. I think you said in your verbal remarks, "a potential follow on order from the military four to five times the initial order." Is that something that's in the fiscal '04 budget? Or can you help me understand how that might come about, the timing, as well as what needs to happen in order for that order to be let?

Let me take the second part of it in terms of the process that would occur here.

This first purchase was funded under what's called a rapid fielding initiative, which is funding that's actually controlled at a very senior requirements level in the military. And an awful lot of its focus is actually on the Stryker Brigade because of its central role in transformation. General Soriano is in fact in charge of force transformation and in charge of the Stryker Brigade and has access to those RFI funds.

Those there is an existing budget line. That is a pool of funds designated for exactly these kinds of things that are not predetermined or in specific line items. I don't know the exact numbers available in the RFI line. I do know that in the context of the $87 billion supplemental that $100 million was added to the rapid fielding initiative, along with additions to a lot of other pools of funds as well. So that is one mechanism that could be used again.

Let me give you some sense of where the number is derived from. You've got 300 vehicles in a brigade. In the first instance we're shipping 100 displays to equip a brigade, so that leaves 200 vehicles without displays. Where the number 500 comes from would equip the second brigade and then retrofit the remaining 200 vehicles in the first brigade as well. So you would have two brigades fully equipped with 600 displays. That's the conversation we've had with the brigade command structure, as well as people at the requirements level in the Army.

With respect to timing, there are a couple elements that drive that. Ideally, you would like to have at least some sort of after action report from the deployment of these first 100 units. So that would be a timing event that could occur late this year. The challenge we have, of course, is you have also got a leadtime associated with the product, in particular in this case because we have to order some specialized optics that are used in this particular configuration of the product.

The other timing constraint that you're driving towards, your schedule that you're driving towards is the actual schedule for the deployment of the brigade. I think that is -- and I don't speak for the Army, but my understanding is that it is sort scheduled for the April timeframe. But I don't know that that is a firm schedule or if the Army is committed to that schedule yet with respect to the deployment of that brigade.

So that's exactly what we're about to engage in right now because the brigade, as you can imagine, has been very much focused and preoccupied with the logistics of deploying these 300 Stryker vehicles to the theater. And so now that that is occurring in the next couple of weeks we will be able to sit down and discuss those various aspects of the timing. But that sort of frames the issue for you.

Okay, great. I think you said that it's possible your government contracts in '04 could be up to 50 percent over '03. Can you give us what the base was in '03 for the government contracts? Or what the reasonable (multiple speakers)

The total appropriations for '03 were just above $4 million, I think. And this year we're seeing an appropriations number of about 6.5 million. That relates to bookings more than billings because there's a backlog component that enters into it as well. So I think we will see some increase in billings for '04, but I don't know that it will be a 50 percent increase versus '03.

In general with respect to contract revenue year-to-year, we're taking the view that it's largely going to be flat, and as I said treating some of these other opportunities as upside with respect to contract revenue. So for purposes of prognosticating year-to-year in terms of the model that we're building, we're looking at contract revenue as being flat to up slightly, with the real increment in growth coming from sales of the Nomad product and increased sales of the Flic Bar Code Scanner.

Thank you very much.

(OPERATOR INSTRUCTIONS) Warren McCluskey (ph), Equity Value Ventures.

I'm kind of new to your story; could you tell me your orders to date this year and shipments for Flic?

Flic in total is 2700 units shipped to date.

Most of them were this year. There is a few last year, like 20 units.

Just a handful were shipped at the end last year. So the order that we've received in the last couple of days is obviously a significant increase relative to that. It's this order for 2900 units.

What is the revenue breakdown approximately between Flic and Nomad this year?

They are about equal for the nine months, roughly equal.

You had mentioned your sequential revenue growth next year beginning in Q2. So should we assume then model a drop off sequentially from Q4 to Q1?

Not necessarily. I think the way you could look at it is if we're going to do 4.6 in Q4, there's some variability in Q1 that would be plus or minus that same sort of number, so call it flat to up or down slightly. But I don't see anything dramatic sequentially either way.

Thank you very much.

There are no for the questions at this time.

Thanks very much for questions. We will be providing more visibility on Q1. That is early in the current quarter with respect to that. But as we get down the road and particularly through the latter stages of our development with the Nomad display, we will be trying to provide greater refinement of our Q1 outlook for you.

Thanks again. We continue to be enthusiastic, particularly with respect to the reception that we've seen to Nomad and the increased activity in Flic sales. But our pipeline activity, we think, could provide substantial catalyst during 2004 as well. Thank you again.

Thank you, sir. Thank you, ladies and gentlemen, today for your participation. This concludes your conference call. You may now disconnect. Good day.