MicroVision Inc (MVIS) 2003 Q4 法說會逐字稿

Good day, ladies and gentlemen and welcome to your 2003 financial results conference call for Microvision. My name is Jean. I will be your conference coordinator today. At this time all lines are in a listen-only mode. After our presentation, we will open the call to questions. Should you require operator assistance on this call, please key star zero on your tone dial phone and we will be happy to assist you. I would like to advise you this call is being recorded for replay purposes. At this time, I would like to turn the call over to your host, Mr. Brian Heagler, Director of Investor Relations. Sir, over to you.

Thank you. I would like to welcome everyone to the 2003 financial results conference call. With us today are Rick Rutkowski, Chief Executive Officer, Steve Willey, President, Richard Raisig, Chief Financial Officer, Tom Sanko, Vice President of Marketing, Tom Mino, Chief Executive Officer of Lumera and joining us by conference call is Andrew Lee, Vice President of Sales.

We will begin with an overview of our financial results for the year ending on December 31, 2003 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 in demand, future product benefits and future operations as well as statements containing words like believes, estimates, expects, anticipates, targets, plans, will, could, would, and other similar expressions.

These statements are not guarantees of future performance. Actual results could differ materially from the future results implied or expressed in the forward-looking statements. Additional information concerning factors that could cause actual results to differ materially from those in the forward-looking statements are included in our most recent annual report on Form 10(K), filed with the Securities and Exchange Commission and item one under the heading "risk factors relating to the company's business" and our other reports filed with the commission from time to time.

Except as expressly required by the federal securities laws, we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, changes in circumstances, or any other reason. I would now like to turn the call over to Rick Rutkowski. Rick?

Good afternoon, everyone. Thanks for joining us today. I would like to go through things in the following sequence. I would like to begin by reviewing the financial report for 2003, and I will be largely following the sequence in our press release today. Then what I want to do is spend a little bit of time on the Q1 outlook, and some of the highlights there.

And really the dynamic between Q1 and Q2, as we move into production and ramp-up of sales for the Nomad display. Obviously a key objective for 2004 is to continue to ramp product revenue, and a key component of that will be the Nomad display, so we are going to focus on that and what we think some of the opportunities are during that timeframe. Spend a few minutes on some of our pipeline activities, work we're doing with Cannon, the automotive companies, work we're doing on our laser printer development. I think there's positive news to report on all of those fronts.

And then turn it over to Tom Mino for a few minutes on Lumera, and particular to emphasize, I think, the importance of Lumera's readiness to begin shipping product, as well. And we're certainly pleased with both that -- that status, and the prognosis going forward, so I think it will be an interesting call. A lot of information. We are going to try and wrap up in one hour. So we are going to move pretty quickly here through this. Microvision reported on a consolidated basis for the 12 months ended 12/31, $14.7 million in revenue compared to $15.9 million during 2002.

That revenue is predominantly contract revenue. We have known since October or so that revenue for the year was going to come in below '02, and I think at that time, we had guided to a fourth quarter of about $4.6 million, which would have brought us out in the neighborhood of $15.2. Subsequent to that, there were some delays in an award of a contract, a $950,000 contract to Lumera, which was then subsequently awarded to them. They've received that contract. But that caused a much lower-than-expected result for the fourth quarter for Lumera.

Lumera is earlier in their contract business than Microvision is. Their backlog of contracts and their prospective universe of contracts is smaller than ours so we're still experiencing some lumpiness with respect to those results. And however, as I said, they did subsequently win the contract. Lumera at this time began to receive a lot of strong interest in its antenna product, so I think very correctly decided that it ought to focus resources on that development, and were successful in bringing that to a point of readiness just a few weeks ago.

So we're excited because we think there is some upside during the balance of 2004, as a result of Lumera now having that in hand. Revenue for the year, 2003, was derived from predominantly ongoing work on development contracts with military and commercial customers. Some sales of the Nomad augmented vision system, particularly in the fourth quarter, to the U.S. military, the Stryker Brigade. Amount of sales in the fourth quarter of the Flic laser bar code scanner and development contracts at Lumera as well.

From development contracts during 2003, we generated about $7.1 million from government sponsored contracts. And $6.4 million from commercial contracts, which was actually a big success for us. That number is up substantially versus 2002. Revenue from product sales was $1.2 million, and about $700,000 of that was in the fourth quarter. So we really started gaining traction certainly with our Nomad display shipment to Stryker, as well as really our first visibility on some meaningful orders for the Flic bar code scanner and I will talk about how that has continued into the first quarter. We're very pleased with the Flic performance in the first quarter.

For 12 months ended 12/31/03, Microvision reported a consolidated net loss of $26.2 million, or $1.48 per share. $1.46 per share, excuse me, compared to a net loss of $27.2 million or $1.93 per share for the same period a year prior. For the three months ended 12/31, the company reported a consolidated net loss of $5.2 million or 26 cents per share compared to a net loss of $6.9 million or 46 cents per share for the same period in 2002.

And for the 12 months ended 12/31/03, net cash used in operating activities was $26.4 million compared to $28 million for the same period in 2002. The company including Lumera ended the year with $21.8 million in cash, cash equivalents and investment securities and a backlog of $3.8 million dollars. Additions to the backlog subsequent to year-end totaled $1.1 million in new contract activity. We are indicating right now that revenue for Q1 appears to be in the range of $3.5 million. There is some upside to that. There is potentially just $100 or $200,000 dollars of downside to that as well.

The principal component of variability is really the launch date, release to production of the Nomad display and simply how many of those sales we'll be able to recognize as Q1 revenue versus early revenue in Q2. The good news there is that we've begun taking orders, and are accumulating orders and expect to have in excess of 100 units ordered before the end of this month. And we're seeing momentum continue to build on that. That is obviously independent of our preliminary orders from Honda, which at this point we would expect during the second quarter.

So the principal element of variability to Q1 numbers is really how much can we recognize from shipping Nomad in this quarter versus the early part of Q2, and it is just that very front end of the ramp which happens to be poised on the edge of the two quarters that -- that's creating that situation. Having said that, we're very pleased with the outlook for the product.

With respect to Honda, which has been one of our early launch customers. As you know, we have a letter of intent, we executed late in the summer of last year, we've been through a very well-defined process with Honda, first introducing the device to dealers, and then introducing it to service technicians themselves on-sight and performing a series of on-site evaluations and tests, those have gone exceedingly well.

In fact, we've migrated through Honda into Lincoln Mercury Ford, Chrysler dealerships, General Motors dealerships, some Porsche Audi dealerships, Mercedes dealerships, Volvo, et cetera, and in fact, those first orders will -- that I mentioned to you, will comprise seeds planted in all of those domains. A big part of the process that we are going to work here is obviously work directly with the OEMs but also to get units installed on-site at their actual dealership locations.

We feel very strongly and there is evidence to support this, that that is going to accelerate our sales cycle with them. So I think what I'm going to do is kind of preserve my comments about that market more generally with respect to Q2 when we see that ramp, but where we are with Honda is about to engage in a certification, which is one of our final milestones prior to actually negotiating the scheduled rollout with them, and this is a certification by their E-business unit.

Our understanding is that once that is complete, and that's a process that takes about two weeks, that Honda will then ramp up the internal rep network that would be supporting the rollout to dealers later during the second quarter, and this rollout would occur during Q2, Q3, and Q4. Now, we could see some additional orders coming from Honda earlier in the second quarter going to another application area.

This is one of the good things that has happened as we've continued to work with Honda. One of the first new applications to emerge with the service advisor, so not just the service technicians in the service bays, but actually the people who meet and greet and log the maintenance list in the dealership location, but also now, we're into a number of different manufacturing opportunities, and one of those could constitute, I think, several hundred units during the second quarter just as an initial evaluation of those.

We have a similar situation emerging in Europe with one of the major automakers over there on the order of 200 units for a light truck manufacturing plant. So that is really a whole new market category as compared to the after-market maintenance. Contract performance during Q1, slightly below our expectations. Probably $200 to $300,000 only.

And principally, due to the fact that we have focused resources on the final stages of Nomad development at Microvision, and the final stages of the development of the antenna at Lumera, and I think we -- both of us feel strongly that those are the right decisions, because those are going to help us ramp product revenue in both cases. And I think we can give you an indication why we feel that way. As I mentioned, the bar code scanner product for Q1, we've got what looked like some very strong results to us. We're now looking at somewhere in the neighborhood of $600 to $650,000 dollars in revenue for the quarter as compared to $122,000 during the fourth quarter of last year. Average selling price, gross margin, both favorable.

The accessory mix looks very promising going forward which is going to add to gross margin substantially. We have some docks and some boots and some things of that nature which are very nice in the mix. The reason I say it looks promising is that apparently within the NCR domain, the standard configuration is going to include some number of these accessories, and an awful -- and a very high percentage of the sales as we look ahead.

So that is very positive news for us in terms of gross profitability and in terms of topline results for the product. In short, we think we've seen good results from the product enhancements that we engaged in in the second and third quarter last year. And we've been very much focused on NCR, as well as a series of mobility applications. A lot of the sales that we put out this quarter are really seedlings. We have in many cases an order of 50 or 100 or 200 units that is a trial for something that could have substantially higher volume to follow.

We're seeing new applications in healthcare, as well as in the retail arena that are playing to the strengths of our cordless unit as well. Cordless will also have the effect of increasing average selling price because of the higher price associated with this. And what we're finding is that, in fact, a lot of new applications emerging in the market, as those in more benign office or enterprise environments, are in fact very, very well suited to this kind of low cost scanner that really doesn't exist in the marketplace today.

So we feel a good sense of affirmation about the product going forward. Having said that, in terms of our outlook for second quarter, we would like to get a little bit more under our belt before we start calling it a trend, and so at the moment, we're looking at anywhere from $500 to $700,000 conservatively for the quarter. Again the mix of business probably what we're looking for is a replication to some extent of what we've seen during the first quarter with the NCR really as the centerpiece of that.

NCR is having good success outside the United States as well as domestically, with the product, and we've spent a lot of time, probably in particularly in the past 2 1/2 months, working very closely with their sales organization. In fact, just attended a market technics show a week or so ago. Andrew, maybe you in fact could give us just a little color on that latest, if you give us just a minute and a half or so.

Well at that show in San Francisco last week, we had the opportunity to sit down with really the nation's largest retail channels, including, you know, Costco and Sears and [inaudible], and the response I think was very, very positive. And what we're hearing from those retailers is that Flic fits a very definitive niche. High performance, very low cost. That's what they're looking for right now. They want to deploy this kind of instrument throughout their organizations. Not only at the point of sale, but in cycle counts, inventory, asset tracking, so we were very heartened to hear that.

Perfect. So again, I think in terms of what we're looking for during the second quarter, we, you know, certainly should be in line with the kinds of numbers we've seen from analysts. We do believe that we can -- we will see more momentum as the year progresses here. In parallel with this, there is some metrics that are pointing to the increased activity from other channels. We've got what we're calling a micro niching strategy. It's one of the things we're finding is there are some very small vendors addressing niche categories. Probably one of the largest of these is healthcare and in particular, with the regulatory requirement to bar code pharmaceuticals in a hospital environment.

That's a significant opportunity. Some of you may be familiar with a report published by Bear Stearns on the auto I.D. industry. In this, I think one of the most interesting bits that we picked out, it does make mention of our scanner as a promising entry into the field, but one of the more interesting bits that we picked out was their assessment that the billion dollar market that exists worldwide today for hand-held scanners represents about 35% of the total potential market.

And we were able to make sense of that in that we do see an awful lot of new applications emerging for hand-held bar code scanning, whether they're in work in process applications for both large and small companies, as well as pharmaceutical marking for hospitals, and even use in veterinary offices and other kinds of small niche kinds of applications, but there are lots and lots of these small niches. So as I said, for Q2, we're sort of guiding to a flat outcome versus Q1. We think there's some potential upside to deliver to that, but we want to continue to gain traction and monitor this closely. And then drive it as we progress.

We will -- we do expect to see new contract awards from the Department of Defense. We're negotiating about $5.5 million or so of contracts as we speak with two U.S. army sponsors and so those will come into play during Q2 as well. Perhaps one of the most interesting potentials for Q2 as we get down to the Nomad product, and it is really about the mix of military and commercial systems during the quarter, we have just completed in the last two days the installation of 18 Nomads in Stryker vehicles, with the 1125th brigade which is on training exercises at the joint requirements training center in Fort Polk, Louisiana.

And this is as a result of our success with the deployment of 100 units to Iraq last quarter, the recommendation did come from Iraq to proceed with equipping the next brigade, that is the 1125th. They are scheduled to stand up in the spring, late spring/early summer, in other words, during the second quarter. The brigade and the requirements command has established a requirement through an operational needs statement of 533 units which equals one Nomad display per hatch. In a brigade, we have 300 vehicles.

So there is some mix of single hatch and double hatch vehicles. So right now, the variability in terms of guidance that we might give is not that a requirement -- that's -- we think a big success. The question now is finding the funding, this is an unbudgeted item, so it is unclear whether there will be funding for 100, 300 or 533. Obviously, the effort is to secure 533. The effect of that would be substantial upside during the second quarter at a price of $6,000 apiece. We're talking about a $3.2 million potential. So we will be getting more visibility on that in the weeks to come.

But a key to this deployment was to ensure that the brigade had time to train with the units, and we've successfully installed those as of the last two days at Fort Polk. And what we have is nine vehicles and the two per hatch configuration down there. So as we look at Q2, I will help to factor that in in terms of what that means for topline product revenue. I mentioned earlier that -- the schedule that we're looking at for Honda and others during the quarter.

The objective during this quarter would be to try and sell at a minimum 5 to 600 Nomad units, plus, at the low end of the military requirement of 100 units, that gets us to a very, very solid quarter for -- for the Nomad display. And we think there is some upside to that. As I mentioned, we expect to have in excess of 100 ordered before the end of this month. We're gaining momentum in our sales effort, particularly as devices move off the production line.

That is going to enable us to put some independent reps as well as other after-market distribution sources into play as well. I want to talk for a minute about our channel strategy with respect to Nomad. As you know, you've seen us go direct to and through OEMs. The model with Honda is exactly that, to go through them and fulfill, using either Honda's internal reps, and/or some combination of their after-market suppliers. In their case, it could be Snap-On and in the case of a GM or Chrysler, it would be SPX.

There is also opportunity with those branded after-market distributors to distribute the product more broadly. And at this point, we have done a very, very good job of covering the waterfront. And we're getting substantial interest. Maybe Andrew, you could talk a little bit about the process that we're engaged in with Ford, Chrysler, General Motors, the other major OEMs, and the category and the kind of reception that we're getting.

Well, as you point out, we have covered all of the major OEMs, domestically and some internationally. And that process always leads us back to a certification process where their folks have to look and see how the Nomad system, the expert technician system, would interface with the existing electronic media or data that is ultimately the content that's brought out to the technician. So we're in various stages. Obviously, with Honda, we're the furthest along.

And they're very pleased with the first production units that we recently delivered. So they're fully engaged in that process. We have just completed some trials and advanced trials in Detroit with General Motors and Chrysler. And again, we're in discussions with them on getting the certification process going forward, and that process is underway.

The details for deployment, although not fully baked, are beginning to emerge. So, we see -- we see traction going with not only the domestic folks that are just coming on board but also with Honda and Toyota and some of the others. So we're very pleased that -- the reception that we hear from not only the OEMs but also people in the service bays, is just uniformly very, very positive. So we're very bullish about our prospects in this area.

I think one of the things we're tracking with respect to these major OEMs is the fact that we are making a very systematic progression through the organization that very much parallels our experience with Honda. So in other words, moving to higher levels and broader levels of decision-making capacity, and really validating the business case for the product in each case. The technical case for the product also is -- we're very enthusiastic about, and what I mean by this is simply compatibility with existing service content.

For these OEMs. I'm going to make a bold statement and tell you this is very much a nonissue at this point. In most cases, and if you've watched our video, you can see that we've been into, as I said, Porsche, Mercedes, Volvo, other kinds of dealerships, Ford Lincoln Mercury, Chrysler dealerships. We walk in and half an hour later we're up and running with the unit. Probably the biggest barrier is really the access point connectivity to the wireless access point, the same way you would have going into a Starbucks or a hotel room and getting linked on to a wireless access point.

So we're very pleased that at sort of the plug and play aspect of this, the product automatically configures the information for visualization on an -- on a Nomad screen. In other words, it reverses the black and white so that we can see through the information. And these are all very positive. These are -- we've had terrific response to the product. Also, Tom, you talked to an independent and very important industry analyst, one of the major independent research houses about the product as well, and maybe you could characterize some of his comments.

Yes, this gentlemen is a technology analyst specializing in the automotive industry. And I gave him a briefing. He had, prior to that, gone to our website, watched the video. And I characterized to Rick that he was pretty enthusiastic when he saw the offering.

Hadn't seen it before. And immediately got the benefit of it. And told me that he is aware that all of the major automakers are rolling out or in late stages of evaluation of hand-held computers, because they see the need for that in the nation, in the stall, and he said in his opinion, they'll have to put those activities on hold because this changes everything.

So I think our timing is very good here. As we said in the past, in that in many cases, and certainly the case with Honda, they've tried and tested alternative solutions and found them deficient. Conventional computing, whether it is pen tablet, laptop, what you have is simply incompatible with the activities of a service technician. If you go back and watch that video on our website again, it's one of the things I encourage you to think about, is how would this look if this individual were attempting to use a more conventional portable computer in this environment? They wouldn't be able to get in and out of those tight spaces, et cetera. I want to share a little bit about the size of this market.

Give you a few data points. Automotive after-market is about $130 billion plus large, with respect to the service component of it. The total automotive after-market is more on the order of $220 billion dollars. About $60 billion of that is labor. So what we're really doing is impacting the profitability and competitiveness of a pretty significant pool of dollars that are flowing here. There are roughly 20,000 automotive dealerships in the U.S. as of 2002. 156,000 independent service and specialty shops.

And as of that same time, there were more than 860,000 service technicians in the U.S. So our target numbers of a few thousand units during the first few quarters of ramp are, we feel, relatively modest penetration of this market. And especially given that, you know, as we sample the reaction of the people that we have, in fact, interfaced directly with, they become even more modest relative to what we've seen in terms of the number of technicians that are really potentially embracing the product. As I mentioned, another element to this is new applications.

We are working those with with at least two of the automakers. Some of those could move very quickly. Again, what we find is that we're pretty much instantly compatible with the service content. This was true of the service advisor application. It took no time at all to get that up and running.

So we don't have a specific number yet for Q2 for Nomad, but as I said before, if we take -- if we look at this in this way, at the low end of the Stryker Brigade opportunity, you'd have $600,000 dollar buy, that would leave us with, call it 5 to 600 units of Nomad to sell during the quarter in order to get to sort of a $3 million topline with that particular product. And we think that that is a potential that would in fact get us to a very solid quarter. Obviously, there is two components of upside to that. One of which is if the Stryker Brigade elects to go with 300 or 500 units, there is substantial upside to that number, and the second of which is that if the ramp rate in the automotive is faster than the 5 or 600 units, that could add upside to that as well.

In short, we think that's a very achievable kind of objective, given those elements that are currently in play. I want to ask Steve Willey to give us just a couple of short minutes because I'm sensitive to the time here, on micro display and electronic viewfinder and the work that's going on there. And laser printer. I'm going to touch very briefly on the automotive head-up display. And then we are going to turn it over to Tom Mino to talk about some developments at Lumera.

Yeah, thanks, Rick. Work is continuing within the Cannon project. We will have more specifics as time goes on. But we are pleased with progress. What's different in Phase III is that we are delivering a series of sub assemblies, moving from engineering contracts and demonstrations to viable sub assembly, it is an important next phase for Microvision.

It is also worth noting the continuing cross-pollination between the color micro display program and the Nomad platform. This is, of course, intentional. And a case in point was the notification last June of a refinement of our MEMS package where the MEMS was taken out of the vacuum.

That work was driven in very large part by the color micro display specification that calls very low cost and small package, low power. The component has been developed in large part within the micro display program, is now being made available for Nomad 2. And that has enabled a 90% cost reduction in that key scanning component with lower power and lower voltage, voltage being very important, for example, for automotive applications, and all with a smaller package, and higher optical performance, so I think this leverage that we're achieving across micro display and Nomad is fundamental to our model, and it has been proven once again.

I will just take an opportunity to let our shareholders know receipt of a product of the year award from Electronic Product Magazine for the color micro display. I think this signifies important recognition by the electronics industry of the -- of this new architecture. On the laser printer, shall I touch on that?

Yeah, I can go ahead and handle that. I mean, it is pretty perfunctory. Essentially, we were awarded a $1 million contract during the fourth quarter. It had two phases to it. And I think the important milestone here is that we successfully completed the first phase and have been green-lighted to proceed to the second phase.

I believe if we're successful in the second phase, we then begin looking very seriously at commercialization timelines and requirements to take us from prototype into production. This company has been -- the sponsor of this contract has been terrific to work with. They're responsive. They're fast. And we think they really mean business here. So if we are successful, that could acquire some meaning later in the year. But as I say right now, we are viewing it as a pipeline activity.

It has yielded, by the way, other important intellectual property and technology improvements that we're going to be able to capitalize on in micro display and in Nomad and other areas and this again, we're pleased to say that, because that's been, you know, part of our -- a key part of our strategy is that we're not only deriving synergy from these products by leveraging one to the next, but then leveraging the next back into the original product path, and that, in fact, is working well. A wonderful example of this is in the automotive head-up display.

We had a very successful delivery during the fourth quarter to one of our major European OEM customers. That has led to -- in fact, it was so successful, that what was a prototype has ended up being used for purposes way beyond that and actually driving this automobile around for quite a few kilometers. As a consequence, we've gone back on two occasions and tweaked it. It has become part of a focus group test. There is a lot of momentum in this arena. And what we've seen happen in the months since October, November, when this occurred, is a very compelling business case emerge. What we have validated is that the laser scanning approach allows us to have a smaller package by more than 30%.

It eliminates components that in some cases cost as much as $160 for a single component. We are achieving three times the I-box versus the competing solution. And as a consequence of a simpler optics configuration can achieve a lower cost for the device. One of the key performance attributes of a laser projection system that is problematic today, that address a problem, I should say, today, in automotive heads-up displays, is that we can achieve higher contrast in both high ambient conditions, so daylight conditions as well as nighttime conditions.

And what that means is that during daylight, the displayed imagery is brighter than what our competitors have, and during nighttime, the display is more transparent. You actually have difficulty today seeing through the existing display. In terms of the business case that is emerging, I will just touch on that. What we understand and we've worked very closely with the OEMs on this, is that if we were to look at years one through three of production, we might be looking at somewhere in the neighborhood of 100 to 500,000 units annually ramping sort of in that range.

During that time, if you go out to years four through six of production, and bringing price down from say $500 in the first instance to perhaps $300 for the unit, you're probably talking about a million units annually. So the reason I mention that is it's a very significant business franchise that we think is quite sustainable. We've got some strong discriminators. And by the way, it is only a marginal investment to get to that sort of product potential for ourselves, because we are essentially leveraging the Nomad engine into this head-up display architecture.

So a lot of enthusiasm, a lot of activity right now, lots of trips to Germany in particular, although we recently received a purchase order from a major Japanese tier one automotive supplier for a sample of what we call the micro head as well, and we anticipate that we will sell a handful of these prototypes to major tier one companies. That's the dynamic right now. Our OEM customers are working with us and facilitating interactions with both the tier one company that we've been working with for the last year, as well as several others, particularly in Europe, in terms of identifying the path to commercialization.

We do believe that during the late spring and early summer, some key decisions could get made in this arena, and again, we are going to look at that from the standpoint of 2004, there is probably upside to our contract development piece, but I think the additional significance, if we are successful, is much clearer visibility on what that product path looks like. And again, there is some pretty big numbers attached to this. Tom, I took up a couple minutes of your time so I apologize, but I want to turn it over to Tom Mino at Lumera to talk about some of their activities.

Thank you, Rick. Good afternoon, everyone. As Rick indicated earlier, our fourth quarter revenue at Lumera was lower than we anticipated. This was tied to three issues and actions. One was that an add-on of $950,000 that we had expected early in the quarter got pushed out by the government agency to late in the quarter.

The second was that a government contract we're also working out, and we had finished phase one and phase two on, had Phase III pushed out two quarters because of the budgetary process in the government. The third action was internal and that was the reallocation of some of the resources working on those contracts to our antenna and to our coatings business. That actually, actually resulted, number one in our introduction of the antennas, the LP 24 A and the LP 53 A recently, which supply customers with a higher signal quality and directionality, higher gain, in a very compact package.

With that product family, we have focused on design wins with larger volume customers. Examples are commercial wi-fi network operators, OEMs, which would integrate this into laptops and other consumer products, and automotive companies. We've been sampling the customers. In particular two major OEMs and one major hot spot operator, that we are using as alpha and beta sites for the product. One of these companies has completed device testing, and has started field trials with very good results to date.

And we're looking forward to the completion of field trials in the very near future. These particular antenna products require a low investment cost as far as ramping the volume production is concerned. For example, the tooling cost for either one of the antennas is about $30,000. And we will be doing most of the assembly for these products at outside contractors, with about the only operation we need to perform internally is the final test of the device. It is really too early for us to have good visibility into the timing or the scale of the antenna market. But an example that we're working with is one hot spot operator who is installing 35 hot spots a day, with each hot spot capable of supporting 5 to 30 antennas.

So this business could scale up to as many as 3,000 antennas per week with an estimated value of $15-plus million dollars annually. We are continuing to provide samples to additional customers and expect to have more information in the next four to six weeks. This product offering will be followed by smart antennas. Which are the current antennas integrated with our RF phase shifters. And they will be available to customers sometime in the third or fourth quarter of this year.

As we look -- as I mentioned earlier, we also reallocated some resources to our coatings business. We have developed a bio assay chip array which we're working with several analytical companies on, which dramatically increases the accuracy of the testing that's been done. In one example, for the beta test, we had a 60% yield improvement in the products capability to do testing. Basically because of the better hydrophobic and hydrophilic properties of our devices.

Our next steps are to secure sample orders and then increase that to volume production. Right now, we're looking at a potential market of 5,000 wafers per week which would be a significant potential for that business unit. We're also working on a prototype of a low-cost diagnostic device that uses the same material as the ballet assay chip but combines that with our wave guide capability to enable a portable technology which would greatly enable individuals to do their own personal testing for a variety of applications.

The modulator market which is what we originally based the beginning of the company on, specifically the application to the telcomm space, has continued to slow. Our marketing team and myself attended the OFC 2004 show down in Los Angeles recently. The forecast is that the market will grow about 7% this year. That follows two years where it dropped 62% and 21%. So the forecast for that is really that the market will start to come back in 2005 and 2006. We are in a position where we've got high performance devices operating at 10 and 40 gigahertz.

We've done engineering evaluations of those devices. And could be ready to provide engineering samples in a three to four week time frame. We've been awarded follow-on contracts and purchase orders from existing customers and we continue to have good prospects for potential new research and development contracts. That's about it. We're in a very good position in the four business units that we've worked on to date. And look forward to getting products out in the marketplace in all of those.

Yeah, I think as I look at Lumera, the way I sort of size it up, is -- and you touched on this earlier, Tom, is the fact that we have products in advanced pipeline stages here. In other words, the costs to take these into volume production is very, very low. The opportunity is very, very large. The actual marginal sales and marketing costs can also be low because we can target a series of large volume users for both of these products and so begin generating revenue and cash flow from both of them.

Profitability looks very, very good with both the antenna products as well as the coatings or bio chip. And I think one thing about the bio chip opportunity, understand is that the business model there has evolved a bit. Originally, we were talking about probably providing coatings on either an outlicense or supply basis.

Now, we're talking about at the suggestion of one of our lead customers there, actually providing the actual wafers and chips, and that can be very nice business for us, especially if we can achieve the kinds of volumes that Tom talked about of 5,000 wafers a week. And I think your average selling price might be in the order of $250 or $300 for a wafer, if I remember correctly. So I think that covers a lot of the important elements today. One of the things we very much want to focus on is the Nomad launch.

As we move into Q2, as I said, we've begun taking orders in the last week, engaged in the certification process with Honda, that is one of our final gates there, continued to contemplate the roll-out of 3,500-plus units to them. And are working to schedule that over the next several quarters. In parallel, having said that, we're working with other major OEMs, other branded after-market distributors, by that I mean the Snap-On, the SPXs, as well as independent rep networks to leverage our own resources and add momentum to the kind of numbers that we're achieving and as I said, one of the big potentials that we're very excited about, and I think justifiably so, is our success in Iraq with the military, with the Stryker Brigade.

Obviously, the key play there would be to get this as a basis of issue, standard piece of equipment, with the Stryker vehicle going forward. Some of you may have seen today that General Dynamics announced the authorization by the Pentagon of a fourth Stryker Brigade in moving forward with that part of the contract and I think that is -- those are scheduled for delivery part of -- first part of 2005.

So we're -- we will be pushing hard for the 533 unit outcome, and it would again, if we do achieve that, there would be some substantial upside in the second quarter as a consequence of that. I think with that, we can wrap up, turn it over to questions. As we mentioned earlier, we have our VP of marketing, VP of Sales here, as well as Tom Mino, Steve Willey, and Richard Raisig, our Chief Financial Officer, so we can -- we should be able to answer pretty much any question have you.

Thank you, sir. If you have a question, please key star,then one on your tone dial phone. If you would like to withdraw your question, please key star followed by two. Once again, key star one for your question. And you have a question from Alan Robinson of Delafield Hambrecht. Please go ahead, sir.

Good afternoon, guys. Seems you have a very neat pipeline laid up for us now. I just had a few questions on some of the contract revenue issues you mentioned in your release. Do I take it that with the full back of $.6 million in contract revenue we can expect that to be booked in the first quarter?

I think in Tom's case, it will probably be over the first two quarters, because as he said, he did reposition some of his resources, but that's really your question.

Yeah, I think Rick pretty much answered it. We're allocating resources based on short-term revenue impact. We think there's the opportunity to build some of the government contracts, but we're also allocating some of those resources to getting the antennas introduced into the marketplace and the coatings. So I wouldn't anticipate all 600,000 this quarter. In fact it would probably be distributed a little less in this quarter, a little more next quarter.

Okay. And just on the guidance, the contract revenue consolidated in the first quarter, you mentioned it is to be modestly lower than originally anticipated by the order of 300,000? Is that correct? Or would it end up at $300,000?

No it is the by the order of $300,000. And I think again that -- what Tom just commented on, a chunk of that. We're probably 100 to 150 to $200,000 out of where we had originally thought we were going to be.

There was one $250,000 dollar increment on one of our existing military contracts that at one point we thought was going to get accelerated into the first quarter to support some of the work that we're doing for this next Stryker Brigade as a part of a slightly larger contract. That's not happening, so that $250 K will remain a part of the larger contract that should be awarded in the second quarter. And that accounts for most of that, that slip.

Okay. And one last question, before I step back. Could you just characterize or give us a breakdown of the backlog of $3.8 million that you reported at the end of the year? And if possible, any of the $1.1 extra that you recorded during the quarter?

The $1.1 extra, a chunk of it was associated -- we announced prior to the end of the year a $1 million contract for our laser printer. We could really only report a portion of that as backlog because there were some -- we require an authorization to proceed with the second half of the work and I think that accounts for about $600,000 of the $1.1 million. The other pieces were increments that were added to our -- I'm sorry, someone is pointing at something.

To our -- one of our military contracts that we -- we were not under contract, so we had what was called a letter contract with the battlefield information display technology, and I believe that was added subsequent to year-end as well. I think that covers most of the million one.

With respect to the $3.8 million, a large portion of it, if you remember, we announced $4 million in new commercial contracts, during the -- during the fourth quarter. That was Cannon and our laser printer contract. We were also still working under backlog for at least two military programs as well. So I don't -- do you have the precise break down of that, Richard?

And your next question --

Sorry, I'm being handed pieces of paper. Okay. So there is a few hundred thousand dollars automotive contract in there as well. Sorry, Allen.

Okay. Thanks.

And your next question comes from James McIlree of Unterberg, Towbin. Please proceed.

Great, thank you. Rick, can you just help me by putting it all together in terms of what you're looking for for contract revenues in Q1 and Q2 and can you do it both with -- can you subdivide that Microvision stand-alone and Lumera stand-alone?

I think Lumera stand-alone is on the order of 350, 400,000?

Yeah, that's good.

350 to 400,000. Microvision would be on the order of -- 2 to 2 1/2. I was going to say 2.2 to 2 1/2. And then you have the Flic revenue, as I said in the range of 6 --

No I'm just talking about the contract revenue.

Right. Okay.

And I would assume that since we're, you know, almost 20 days to go in the quarter that those are pretty good numbers.

Those should be pretty good numbers.

Now, in terms of Q2, you're saying that Lumera might have an increase in its contract revenues?

Well that's really going to depend on how I allocate resources. It really, looking at from a marketplace standpoint, we will probably increase the contract revenue at least slightly, but depending on the success of the introduction of the antenna products, and the bio chip products, we could have that number balanced against the contract number.

The way it works is we have scientists that can charge time to the contracts, and we're ahead of all schedules on our existing contracts, so we can sort of manage the work on those. And manage the time on those. And then depending on the income from the antennas and the bio chips, will balance all of that.

Right. So if you need them to do more work on the antennas and bio chips, then you can still satisfy the contracts, but the revenues would come from the bio chips and antennas instead.

Yeah, we would manage the time based on the potential revenue in each of those cases.

Right. Okay. That makes sense. And what about the Microvision contract revenue?

Microvision ought to be in the range of 2 1/2 plus -- 2 1/2 to 3 again, predictably for Q2. As we sit right now. Again, there is potentially some upside to that. But I think that is consistent with what we've been looking at. I think what we've been looking at is about a little over 2 1/2 for Microvision and about 500 for Lumera in Q2, which would get him sort of more back on the normalized path of about $2 million for the year. And I think in both cases, sort of the backlog would support the ability to do those.

Right. Okay. Great. I will circle back later. Thank you.

And your next question comes from Jonathan Auerbach of Auerbach Richin (ph). Please proceed, sir.

Hello, Rick.

Good afternoon.

I may have missed this earlier, but did you discuss what the current cash, or did you state what the current cash position is of the company and what your burn rate is looking like?

In the press release, we talked about cash position as of year-end of $21.8 million. With the current operating plan, that takes us through 2004, into the first quarter of 2005.

The -- and secondly, and I thought I heard earlier you've got some of the sales people here. I would like to hear from them just how many people are deployed right now in the sales area for various products roughly. And how that number of people deployed for sales say compares to a year ago or six months ago.

Tom Sanko here is our VP of marketing. Andrew Lee was with us but signed off but I think Tom, you can answer.

Sure. We are ramping up on the Nomad side right now. And I don't have the exact numbers because we're adding people kind of week by week. I think we've got about eight people dedicated employees, and our contractors, and as Rick said earlier, we're in the process of leveraging that footprint by setting up manufacturers reps, and going to a distribution model as well.

On the Flic side, it is roughly the same number of people, it may be a couple fewer than it was a year ago, but we've -- as we discussed earlier, we're leveraging heavily NCR in there, 400-person worldwide sales force. So that's a very important component of our selling strategy.

All right.

And I think one of the things that we have done, John, is to look at, as we look at 2004, this is the -- really a year that is about sales and marketing execution with these products in the marketplace. So I think we've got a very well defined strategy.

As a consequence to that we've looked at where resources have been allocated historically which is largely in product development and having gone through a very intense phase of development for both Flic and the Flic cordless and now Nomad 2, we're in a position to rethink the allocation of resource across the organization.

One of the things we want to ensure is that especially as we move into the product market with enormous potential as Nomad does, that we have sufficient thrust behind our marketing effort. So we've increased our sales and marketing budget by about a million-plus dollars that have -- have a corresponding reduction in the RNPD arena.

Okay.

And your next question comes from Orrin Sokoski (ph) of Liquidity Value Ventures.

Hi. I just wanted to clarify, did you guide Q2 total revenues as flat with Q1? Or was that just Flic revenues?

No, that was just Flic revenues. We said that the Nomad picture is really -- really an assuming shape so we didn't attach a particular number to it and as I mentioned, that military number could be $600,000 to $3 million to a lot of variability in that, so I think the way we've been looking at it is say, okay, well let's take the low end of the military number and combine that with, you know, a sort of a five to 600 unit requirement with -- and again, the target -- the suggested retail price for the product is $3,995.

Average selling price over time will likely be down closer to $3,000 but some of these early units in many cases will be close to full retail.

Okay, so just adding it up I'm looking about low end you were comfortable with $3 million for Nomad, a half a million for Lumera, and $600,000 for Flic, so it is about $4.1 million Q2 without surprises?

Well, no, that's -- you're -- the math on the Nomad would get you to a much higher number. You've got about $3 million in contract revenue between Microvision and Lumera.

Okay.

You've got another -- let's call it $600,000, $500 to $600 was, I think, the number that we had used for the Flic product, and then on top of that, you would have, you know, could be anywhere from $3 to $6 million, depending upon what that military number is.

Okay, so the variable is the Stryker --

One of the big variables, and as I said to us, to us, the thing that makes sense to do is have a conservative outlook at the moment and treat the upside from revenue standpoint. We're fully prepared to meet the requirement of 533 units from a production standpoint. But we don't have the purchase order in hand, so we can't yet guide to that number. So that would have us -- if we came out at the high end of the military, you're probably talking about a second quarter in excess of $7 million.

Okay. And if it came at the low end, we're talking at 4 point -- we're talking about $5 million, is that right, or $4.8.

You're probably talking closer to $6. Maybe $6.5.

Okay. Gotcha. The Flic revenues in Q1 of $606 to $650, how does that compare to Q4?

Q4 was $122,000 dollars. So it is a 500% increase.

And Lumera in Q4 was how much?

Lumera Q4 around $300,000, just under $300,000.

Okay. Fine. And what was your Cap Ex for the year? Or for Q4?

A million five for the year.

For the year was a million five. Good. And commercial revenues in Q4 as a percentage of total, roughly?

Commercial NRE revenue was just about half of total.

Okay.

Are you talking product revenue or --

No, product and development, versus government.

Okay. Contract development was the number that Richard just gave you. Product to military was about $600,000. Product to commercial was the $122,000-plus, about $200,000. And the balance would be military contracts.

Great. Thank you.

Thank you.

And you have a follow-up question from James McIlree of Unterberg, Towbin. Please proceed.

Thank you. Rick, what would be the acceptance timetable for a military order? You know, is it when you ship, you can book revenues? Or do they have to get it, and test it, and accept it, and then you can book revenues?

The way the first Stryker worked it was -- the experience we have today, it is on shipment. I don't think it is really any different than what we would normally do with commercial, which runs 10-15 days, you know -- on the shipment date.

How long would you -- what type of lead time would you need in order to produce 533 units?

We are in the mode where we would be able to produce those for a June delivery, which is -- is it late -- mid June delivery.

But if the order didn't come until the beginning of -- I mean, how long would it take to produce them? Let's say the order was delayed until mid June.

There is enough overlap between the commercial Nomad and the military version of it that, you know, we're not -- we're not strapped for lead time. There are some parts that we have chosen to order because it is a relatively small number, relative to the upside here, to stock them, is some particular optics. Other than that, the only other really differential is the packaging behind it. So I think if I see where you're going, we're kind of putting ourselves in a position where we can respond even on pretty short notice to fill the order.

Okay. And let's say that Honda ordered, and you shipped 500 units or 600 units in Q2.

Okay.

When you think about Q3, does that -- do you -- is Honda thinking that let's do this in stages, let's do 500 in Q2, 500 in Q3, you know, and just make sure that it is working, and there is no issues, or is it more like 500 and then [inaudible] the door, let's just roll this thing out?

I think it is more towards the latter scenario. The numbers would go up substantially. And I think actually it would be our preference to start in a slightly more controlled fashion, because there is so much at stake here in terms of the total size of this market. We don't mind rolling it out several hundred units at first. Having said that, we ought to be in a position to accelerate to, you know, 1,500, 2,000, kind of in the subsequent quarters, and I think that is consistent with certainly the dialogue we've been having with them. That we then hit a pretty accelerated ramp at that point.

The -- you know, we're -- from a capacity standpoint, we are, I think, very well prepared to deal with the high class problem of the ramp. Frankly, the real constraint there is really our decision-making with respect to materials inventory. And we're not going to unduly constrain ourselves there but we think we do have some lead time to work with if we create a pent-up demand situation, that's not going to kill us, it is not a share battle here, so we're able to balance that.

In terms of just capacity independent of materials, we're in a position to ramp up very quickly to 600 to 700 pieces a month. Probably normalized capacity as we get into Q3, Q4, is 900 units a month. That is all on a single shift. So, if things really went gangbuster and we found ourselves having to go to 1,800 units a month, we can about do that by simply adding a second shift.

To double capacity again beyond that, you're talking about probably a half a million dollars of capital equipment which at that point we would all be thrilled to make that investment if we were running those kinds of numbers. So I think we feel very good from the standpoint of, you know, the operational ability to scale production up to meet whatever demand arises. It is really a question of getting visibility on a rate of that demand and therefore, you know, what level of materials we should inventory.

Some of these things have reasonably long lead times and that's one of the things that we will continue to work in the bill of materials, I think kind of our outside is about 12 weeks. It is not a large percentage of the bill of materials. The bill of materials is not a huge number in and of itself. So it is manageable. But that's really the -- more the constraint in the short term than actual capacity.

Okay. And is the purchase order from Honda anticipated to be a purchase order for 3,800 units with the timetable spelled out? Or is it more likely to be something like Honda says here is a PO for 500 units and we will talk to you later after those are deployed?

Well I'm going to give you an answer that is arbitrary by virtue of me just choosing the more conservative of those two outcomes, because the honest answer is I don't really know with certainty which of those. It would not surprise me if it were the scenario that you described where they would place an order for 500 followed by an order for 1,000 or 1,500 followed by another order to get to those numbers. We're -- you know, we're still working the situation as to whether or not this will be designated a required tool.

A lot of that is consensus-building. In other words, the OEMs don't like to be purely unilateral with the designation of a required tool. They really want this to be something that the dealers will embrace. I would tell you I think we're in very good shape.

In terms of that consensus-building, the level of support that we've got from some of the key members of the dealer counsel who are involved in that, so that is, you know, that is -- that would -- I think that the scenario where we would have a 3,800 unit purchase order and work within that context would come more from the scenario in which it had been, in fact, designated as a required tool and then we were simply talking about scheduled installments, delivery installments against that.

Okay. And the manufacturing applications that you referred to, does that require a whole new set of testing, validation, certification?

No, in fact that's one of the reasons I say that may actually go faster than the roll-out to the dealers, because it is really being -- the decision is being made in a much simpler way. At a plant level.

Okay. Great. Well, I will get back in line. Thank you.

That does conclude your Q&A session. I would like to turn it over to you, sir, for closing remarks.

Thank you very much for joining us today. From our perspective, really the big opportunity here in 2004 is with the Nomad display and a very, very large market of automotive service. As I said, we're pleased. Last time we talked to you, to talk about our progress with Honda. We continue to be pleased about that. But we really honestly think this has gotten much bigger than that. We've been in front of all of the major OEMs at this point. Multiple times. And really continue to validate the business case for this. So I think the question at this point is how quickly can we ramp this product over the next several quarters. We think 2005 will -- holds all the potential to really be gangbusters in terms of what the available market is for the product. And we will continue to execute. And I think the question asked earlier by Mr. Auerbach is a key one in terms of the resources we're putting behind this effort, ensuring that there is substantial thrust in bringing the product to market and of course it is not only the quantity but the quality of those resources. The guys who have been leading this charge, Dave Johnson, Bill Holder, are doing an outstanding job. One of the OEM models by the way, is an OEM catalog model. One of those OEMs has set a time line in terms of including the product in its catalog, as Andrew mentioned earlier. There is a certification process leading to that as well. So we will look forward to reporting all of these milestones to you in the weeks ahead. And continuing to grow this business towards some pretty exciting opportunities. Thanks very much.

Ladies and gentlemen, thank you for joining us on the call. You may now disconnect.