MicroVision Inc (MVIS) 2004 Q1 法說會逐字稿

Good day, ladies and gentlemen, welcome to your first quarter 2004 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, and we'll be taking questions toward the end of the conference call. If at any time you need operator assistance, please key star 0 on your touchtone phone and an operator will be happy to assist you. 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 first quarter 2004 financial results conference call. The information in today's conference call includes forward-looking statements regarding projections of future revenues, plans for product development and production, future contracts and commercial arrangements, growth and demand, future product benefits and future operations, as well as statements containing words like believes, estimates, expects, anticipates, target, 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 on our most recent annual report on form 10-K filed with the Securities and Exchange Commission in item 1 under the heading risk factors relating to the company 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 reasons.

I would now like to turn the call over to Rick Rutkowski. Rick.

Good afternoon, everybody. Thanks for joining us this afternoon. Brian and I are calling in long distance from overseas, so I apologize if the connection is not perfect. I understand there is a little bit of noise, background noise. Microvision reported first quarter revenue of $3.0 million in the quarter ended March 31 versus $3.5 million for the same period in 2003.

Of that contract revenue was 2.3 million versus 3.4 million for the same period last year and those of you who were on our previous call will remember that we anticipated that the decline in contract revenue at both Microvision and Lumera due to the fact that our resources at both companies were engaged in final stages of product development. In the case of Microvision, with respect to the Nomad display, in the case of Lumera with respect to it's antenna products and biochip array. I think the good news is coming out of this quarter both companies are in a position to begin shipping product and generating potential revenue associated with the respective product.

Product revenue for the first quarter for Microvision was $675,000 versus first quarter revenue last year of $135,000. This is attributable almost entirely to sales of the Flic bar code scanner and we're very pleased with those first quarter results for Flic and we'll talk in more detail about Flic and the prospects going forward for our bar code franchise as well. As of March 31, 2004, backlog totaled $3 million of which 2.7 million was for development contract, $239,000 for Nomad units and $93,000 for Flic scanner product at the end of the period. And the number with respect to Nomad and I believe Flic has increased since the end of the period.

Company reported a consolidated net loss of approximately $6.7 million or 31 cents per share in the first quarter of this year compared to $7.4 million or 48 cents per share in the same period in 2003 and we do expect to issue our completed financial statements in the next few days. Ordinarily, we would issue them with this press release, but we had a small outstanding issue with respect to a preferred issue with Lumera that needed to be resolved. Jeff, I don't know if can you quantify that for us.

What, I'm sorry?

Can you quantify the issue with reference to Lumera's preferred that is outstanding that we're completing on the financial statements.

Rick, it's not going have further effect on these numbers. These numbers are filed. We just have one reclassification adjustment in the details numbers to provide, to do before we issue the financial statements.

Right. Okay.

These numbers are complete.

Great. Okay. I know we had a late issue that Price Waterhouse brought up that we needed to resolve before we could issue those. They should be coming along, but essentially the numbers are complete.

Let me just say there aren't any open issues at this point. We just need to make one adjustment.

Great. Thank you, Richard The company, including Lumera, ended the quarter with 14.8 million in cash, cash equivalents and investment securities and subsequent to the end of the quarter, Lumera did complete $2.3 million convertible note financing, which also included warrants in that financing. We have indicated that we expect second quarter revenue to increase significantly from the first quarter due to expected shipments of Nomad display, and we also are looking at sequential growth in both the contract business and the Flic bar code scanner with the contract business, really, returning to more normal levels.

We do have some contracts in the pipeline that we expect to be closing very shortly here and that will have, we think, a positive impact as well. So I want to review in the next 40 minutes or so the Nomad launch, which clearly a lot of our energies are focused on, a lot of our objectives for the current quarter in the year have to do with ramping sales of this product. I want to talk also about Flic and the progress that we're making there and then address contract development, both from the perspective of revenue during this year and from the perspective of the pipeline products that are being developed and in particular the OEM design objectives there in automotive, consumer electronics space and also with respect to our laser printer work.

In that context I think I will also mention that there have been some significant technology developments recently, which really are an indication that we continue to be on what we think is an accelerating curve with respect to technology development and maturation generally, and then we'll let Tom Mino talk to us for a few minutes about activities at Lumera and some of the prospects there. Today, we reported in our press release that we did achieve a milestone that we have been targeting here, which is the certification by American Honda of the Nomad unit. That essentially sets the wheels in motion with respect to Honda's rollout of the product. Another outcome that we were very pleased with was the designation by American Honda of the Nomad as a recommended tool.

The process here is that 125 internal sales reps have been trained and are ready to facilitate order taking and distribution to Honda dealerships around the U.S.. The dealer counts that we expect will issue its recommendation, identifying Honda as a recommended tool probably within the week, and the Honda in conjunction with their internal sales reps will aggregate orders and come back to Microvision during the quarter, we believe, to place a volume order in order to achieve the most favorable pricing if they can, and to get effective and efficient use of their channel distribution. So that's the process that we have been driving towards and we are there now and ready to roll with Honda. In parallel, as I think we have discussed before, we have been making good progress with both the direct and indirect sales activity. We have received purchase orders for 85 units to date.

Some of those were subsequent to the end of the quarter, so not all of them are reflected in that $239,000 backlog. We're continuing now to ramp production with the priority to actually release early units to sales representatives in order to grow that backlog now so that we can achieve the several hundred unit target that we're aiming at for this quarter. We expect to then start delivering units to customers sometime in the next several weeks, and during the quarter ramp production to 100 to 150 units a week for the remainder of the quarter and probably achieve on an ongoing basis somewhere north of 150, between 150 and 200, as we get into the end of this quarter and next quarter.

The other progress that we have been making I referring to in Nomad has to do with our efforts both with respect to other OEMs. Working through those OEMs in the manner that we have with Honda, certifying, et cetera, but also direct sales through an independent Rep network that we have been very successful in creating over the last couple of months. And Andrew Lee is with us on the phone. I'm going to ask him to talk about some of the process with the other OEMs, including the majors, GM, Ford, and Chrysler, as well as our activities with this independent rep network and the role that we see them playing and what kind of scale we think we can grow the business to. Basic strategy here is to really come at the market, both direct to dealers and through the OEMs. We think the sale cycle with the other OEMs will be accelerated versus what we experienced with Honda for three primary reasons.

One is the availability of the product itself. Two is the experience with Honda and the fact that Honda will be in the marketplace with the product. And three is the momentum that we create by selling direct to dealers. I should mention that of the 85 units that we have booked orders for, those represent a cross section of dealers from a variety of different brands including General Motors, Ford, Chrysler, I think we have a Porsche and a Volvo dealer in the mix as well as some Honda dealers. So those units are not limited to Honda and we have already begun to sow seeds at the dealership level with the other OEMs. Andrew, maybe you can talk a little bit, first about the process of selling to the OEMs and how that's working and where we are in that process.

Well, first I want to make the point that it sounds a little unusual. We've actually sold more units to Toyota dealers than we have Honda at this point in time. The interest has been exceptional, obviously, from both, but from a pure numbers standpoint, and it's still early, Toyota and Toyota dealers have been ready buyers. In terms of the overall process, we see this repeating itself with the OEMs, the original equipment manufacturers, such as you mentioned, Chrysler and GM and Ford, and so forth, of which we have initiatives, trials, validations, reviews, loan products, integration with their software packages, ongoing both here and in Europe. With the large dealers, dealer networks, I'm traveling right now in the southeast and calling on a number of them in this past week.

The certification process is similar, although truncated, so we're utilizing our units to go into actual dealerships or in the case of OEMs, into their quality control areas, into their so called sandboxes where they test new technology. This is certainly viewed in that way. We're putting it on technicians, we're putting it on folks that are in charge of certification in the case of the OEMs, or in the case of the large dealer groups in the service managers and the fixed operations folks and we're being very well received in essentially all of those places. We're very optimistic about our ability to take the sales cycle of which we're estimating it could be somewhere between 60 and 90 days, and we've got evidence to prove that. Sometimes, obviously, it's smaller than that, but in general we think that it's going to be somewhere in the 60- to 90 day range.

The process is certification of a type either with the OEM or with the dealer groups. We do that in parallel, we create poll as we have been doing with these preorders, we have been doing that literally nationwide with our independent rep organization and also our sales organization. Our sales organization, as you note today, numbers about eight individuals. We have feet on the street right now as of the conference call today or about to be signed, of somewhere just south of 50 individuals that are covering states from say the west coast up in the northwest down through the sunbelt and up through the east coast. We have got some good coverage, we've got some good progress, as I say, both with large dealer groups and with OEMs.

Two things. One, the feet on the street that Andrew's referring to are independent reps who sell product and, in particular, similar kinds of product, electronic diagnostic product to the automotive industry. They have been qualified by our team who has a significant background coming from Reynolds and Reynolds and ADP in setting up these kinds of rep networks. We're confident that they're going to do a good job in the field. We have begun delivering units to them so they can get out there and sell, and we have a prospect funnel internally probably consisting of several hundreds of units for Nomad as well. The other point, with respect to the OEM sales cycle, Andrew referred to the certification that are planned or in process.

The support by the parts and the service organizations at the major OEMs is strong. In fact, I think we had a call from one of our contacts at a major OEM the other day indicating that he had gotten a call from a senior officer in the parts and service organization wanting to make sure that they were, in fact, doing something with this Nomad product he had heard about. We feel that the awareness is good. In terms of how that model will work, what that certification can lead to is a cataloging of the Nomad in the parts catalog of the OEM, and in many cases, the OEM parts and service organization is intertwined with after-market distributors and particularly Snap-On and SPX who, in many cases, publish those catalogs and then you have others like Reynolds and Reynolds and All-Data and ADP and others.

Rick, if I can jump in I would like to make the point that with the Honda, the anticipated Honda rollout, looks like Snap-On is going to be doing the fulfillment on behalf of Honda's special tool program.

Correct, I believe we're near completing the agreement with Snap-On. One thing that has also occurred here and I think there are a couple of instances of this. We recently completed two days of trials, not just demonstrations, but trials at a major aircraft engine manufacturer. That was a very successful demonstration. In fact in trial and in fact they did bring in some of their major customers. And as we understand, the interest level was quite high. We're going to be doing ongoing work there more to quantify the productivity and the return on investment metrics to push that sale forward, but I think there are, certainly, sales of small quantities to the aircraft engine company later this year and potentially looking at that growing late into the year or into next year. And, again, it's sort of an obvious migration category to move from automotive maintenance into aircraft maintenance engines.

The other place where we have seen this kind of migration is in the military logistics and maintenance. We have had very strong interests coming from there recently with respect to the Nomad display. In fact, a senior officer in the logistics and maintenance command recently asked if he could visit a commercial automotive dealership and see the Nomad in use in that environment, so we're encouraged that that potential exist as well. Having said that, we've got plenty of wood to cut in the automotive after market and remain squarely focused on ramping the product here.

As Andrew mentioned, the quick start path here, and I think what we expect a substantial amount of Q2 to be comprised of is the dealer-direct channel which are these independent reps. I think you did talk about that we had about 50 people or thereabouts, either signed or in process now, and we expect to grow that to about 75 to 100 people across seven regions in the United States. Andrew and I were talking about this during the last week and we think a reasonable target in terms of the average quarterly unit volume for each of these regions is on the order of five to 600 units per quarter per region.

We think it will take us four or five, maybe six quarters to get to that kind of level, but that's very promising now, and it may be conservative. The reps themselves are really quite anxious to get going with the product, and there is a lot of enthusiasm for it. As Andrew mentioned, the sales cycle. We're very encouraged by what we have seen in our somewhat limited experience. As I mentioned we've taken orders for 85 systems and the sale cycle has been very much within bounds and showing a positive trend even as awareness builds.

It's too early to call that a trend, we think, until we really have more experience in the channel and that shouldn't take long now that we're delivering units into our channel. We'll be tracking that very closely. So as I mentioned, we're getting good numbers indicated by these independent reps. We're going to put them on quotas. They'll have incentives to meet those numbers and we continue to be very excited about the potential for the product during this year and next year and it's obviously one of these things where we're going to build to critical mass and we think see accelerating growth a couple of quarters out. So, for the second quarter, we think Nomad still has some variability to it.

As I mentioned, we don't really know what the sales cycle is until we start seeing the order flow, but we do have enough prospect numbers to support the several-hundred unit level and by that I mean in the neighborhood of 400 units or more. In addition to that, we continue to have good success with the army. We now anticipate that we will see an order likely in the current quarter for the 1-1-25th Stryker Brigade. Since our last call, we conducted a training session at Fort Polk in Louisiana with that Stryker Brigade commanded by Colonel Brown. The results of that were excellent, Colonel Brown in his debrief identified this as something that he really very much needed to have and was high on his list of priorities.

Having said that, there are competing priorities, so while as is our hope that the full 533 units be equipped and that is what the Brigade has asked for from the Pentagon, we still don't have a final number on that, but our confidence that there will be an order is growing high. Long-term opportunity as consequence of this really gets better all the time as well, obviously, with the longer time horizon, it gives us more time to move funds into the budgets for procurement on these kinds of things, but the experience both in the field and with the training of the 1-1-25th Brigade has taken us a long way in that direction and we see a significant market emerging here and one where we have got significant advantages versus any other product that the army has seen in this category. I mentioned in addition as a logistics and maintenance opportunity.

We're working one order, potentially within the army. We think there is a contract there at an army depot. That is likely a Q3 event at this point. And as I mentioned, there is a broader opportunity leveraging off of our momentum in the commercial automotive space as a reference point. This is something that the army does historically in the logistics and maintenance arena is borrow heavily from commercial automotive and, in fact, of course they buy a lot of their mechanized equipment from the major auto manufacturers.

With respect to Flic, the sales for Q1 came in at a very satisfying level, $674,000-plus with a high average selling price, probably in the neighborhood of $85.

That was encouraging as well, and we attribute that to both the mix of product between the base unit and the blue tooth unit, as well as some accessories. The accessories are strong in the mix and those have higher margins on a normalized basis, so we're gaining confidence that going forward we can start to grow this franchise, at least at the rate that we described in the short-term. And we do think that there is potential to accelerate this based on some of the data points that we're seeing in the market and, in particular, as we head into the later part of this year and next year. Of the key one activity, NCR was responsible for probably greater than 60% of that. Q2 right now looks very promising.

We do see sequential growth there, probably looking at 7-800,000 even with conservative assumptions with respect to NCRs participation in the quarter. So we're seeing more activity from our channel partners in Europe and in Asia and what we want to be able to do, obviously, is sink up the NCR activity with the reseller activity and see if we can get both of these things moving. We do see reason to believe that the sales cycle is going to begin to accelerate and shrink at NCR. The several indicators that we're seeing here, Andrew, I think, are repeat orders from customers. We've had customers that have come and ordered tens of units that have come back with orders for hundreds of units. We have customers that have ordered 100s of units that are showing us potential for thousands of units.

These are very positive indications. We also have more large volume opportunities in the funnel, and by that, I mean opportunities that could number in the thousands of units or even 10,000, and I think in a couple of cases, there are 25,000-plus types of unit volume purchases. There is some upside to Q2 and certainly we see the potential at the moment if this begins to transpire to accelerate this further in the second half of the year consistent with what we said in our last call, we're monitoring the activity very closely to the extent that we see activity in the funnel accelerating. We also have the opportunity to put additional resources behind it.

We do have a couple of strategies, including a web-based marketing tool that we think is in particular going to facilitate our mobility customers, where configuration with PDAs and things of that nature is really a key enabler for them. We also see potential for additional OEMs in the mix. And maybe, Andrew, you could talk about some of the OEM opportunities without naming names, but identifying sort of the nature of these OEM opportunities.

Yeah, thank you. I think in a nutshell, we're seeing some pretty significant design wins and I'll get to the OEM piece in just a second. In the previous quarter, Q 1 and really at the end of the last year, we began to see the significant design wins against our competition. Those are accelerating. We're also seeing our competition moving out of the space that is really dominated by Flic, which is heavily targeted on small and medium sized businesses. That's really the sweet spot for Flic.

This is not lost on people that want to bundle solutions for that market. So when we talk about a shrink-wrap solution, this is an area that the auto I.D. industry has just not played very well. Sure, you can go in and buy a bar code scanner and some software, but it will cost you over $1,000. With Flic, in a retail setting. But with fleck, we have an opportunity to be a fraction of that and to get, really be, if I can borrow a phrase from Apple, the scanner for the rest of us, because I think it can be affordable.

I think you can have a very small, unique package that can plug and play with your PC in a small business setting and then has huge implications for the kinds of quantities that we built our business plan on. Aside from that, we're seeing acceleration in the healthcare, changes in the requirements from the FDA have mandated more extensive use of bar codes for dispensing meds and other applications, and we're seeing some real traction in that. We have won some significant design wins in that as well just recently as you know, and we have some ongoing trials with some big opportunities, large upsides with household names in the medical industry. Finally, there's some significant opportunities on the enterprise level, convention data retrieval, the bar code has long been held out of that again for costs.

Another good example of how we can extend Flic's foodprint in areas that bar code scanning has simply not gone. Finally, household names like, well, I shouldn't really give the specific examples, at your suggestion, but large telecommunications giants are really looking at this to incorporate with their cell phones and other portable data devices. So we're seeing a lot of traction in that. We have some design wins and some orders are flowing. We expect some more in the coming quarter.

Sure. I know in one case in Canada, a wireless network provider actually won a service contract on the basis of Flic and we won that head-to-head against another scanner - .

Yeah, two competitors. In fact, we did them out. I think there is good momentum going into this, extending in this quarter and also next quarter. I think when we were firing on all cylinders, we have some good rollouts just poised to go with NCR, we have been working long and hard at getting that going and now we're finally getting the action where the shareholders can see it.

Yeah, I know in the case of that win we won on the basis of total cost of ownership on a head to head competition. To put a finer point on your office products discussion. I think what we're talking about here is we are working with a major office products company on a package that we would find in distribution, for example, at a place like Office Depot.

Right.

And the idea is that Flic would be bundled with shrink-wrap software and labels and you would have the ability to open the box, connect your PC and the ability to print and read bar codes into a variety of different prepackaged applications, including inventory, tracking and things of that nature. That's really aimed at small businesses. And as you said, I think the unique thing here is the ability to come in with a level of simplicity, both in operation and setup that the industry hasn't seen before as well as a low cost. As I understand it, the short-term potential would be for several-thousand unit test market at a handful of stores in a geographic area, and then based on the outcome of that, a potential product rollout.

Again, I think it's early to say that we're looking at hundreds of thousands of units annually just yet, but the data points that are emerging suggest that we could take the franchise in that direction over the next year or so. We continue to look at 2004 as a building of this kind of critical mass and a gestation period for the product. There's one other OEM that is meaningful, which is a major manufacturer of PDAs. We know that the product has been short-listed there and qualified for price. I think what we're not pointing to here is that next quarter we're going to have this breakout numbers with respect to either both of these OEMs, that those two data points are probably not isolated and that it's an indication of market potential more than anything.

We do have other data points coming back through the NCR channel, major retailers have made very strong commentary about their desire to get their hands on Flic and we're moving to meet their needs. There's some product configuration requirements that NCR has itself engaged in writing some software and they're about through that process so that will open up a new channel as well. So what we want to do in 2004 is really gain, in particular the next two quarters, an understanding of this ramp potential and what kind of talents might put these larger opportunities in play and we'll know more as we progress through that process, but I think we've got some very high-quality staff internally and, as I said, we're really starting to see more activity from the NCR sales force as well. And I think again that web-based tool approach is going to be significant in enabling our mobility of bars as well on Flic.

So, generally Flic looks encouraging in Q2 with the sequential growth and we think additional up sight to that, we're going to monitor that closely and to the extent that we can drive it faster with marginal increase in resources, we'll evaluate that as well. With respect to contract development, as I mentioned, we're expecting anytime now to enter into an extension of our Virtual Cockpit Optimization Program contract. The army has supported more than $25 million in funding the development of this helmet mounted display for roto craft to date.

It's unique helmet mounted display solution and converges very nicely with the work that we're doing with Stryker into a series of platform solutions that can be used in both mechanized units and rotorcraft and that we think there is real promise here. VCOP, of course, is a full color helmet mounted display for helicopters and for blue force tracking but the application is really quite analogous to the kind of GPS based system that we're tying into with the Stryker Brigade. We have some other military contracts in the pipeline that there's funding for and we continue to work on negotiating in advancing those as well. Commercial contract activity in terms of new contracts, I think we're looking predominantly at second half kind of activity. I think there is one or two things that could move into the late part of this quarter. Those relate principally to our automotive display work, our consumer display activity with Canon.

There are others that we're targeting in the consumer electronics arena as well, and our work on laser printer engine and our image capture platform as well. With respect to automotive HUD, I think one of the things that is really of note to us is the increase in the intensity of activity in the last quarter. We delivered a system in the fourth quarter that really set some wheels in motion, and I guess I ought to quantify for people the kind of competitive advantage that we're talking about here. The system currently in use by BMW is the projection system based on a miniature LCD display. Its volume, in terms of the space required in the dash between the instrument cluster and firewall, is about five liters. Our prototype delivery in November was three liter.

The current set of prototype designs would require only 1.3 liters, so we're talking about potentially a 70% plus reduction in the volume required and that's very meaningful, especially as we get into compact cars and some of our customers are targeting the more compact cars in their line. That's also encouraging because the volumes of those cars are substantially higher. We're probably looking now in terms of new builds that are 2007 model year, which would necessitate production late next year and design production decisions later this year. We have, in addition to working with those OEMs in particular, really seen dramatically increased activity with tier 1 perspective partners, especially in the last quarter as the results of the OEM tests and activity have become known. The other competitive feature of the laser based HUD is much better contrast in both the high and low ambience.

In high ambient, we can see the image better. At nighttime, it's more transparent. Again, smaller package size, much better performance in terms of contrast and this has been validated by certain consumer focus groups as well. There's some informal data points coming out of the industry that suggest that consumer demand is outpacing by a significant margin what some of the OEMs had estimated, so the BMW 5 series, as we understand it, and this is not a published number, but as we understand it, demand going forward is more than double what was originally anticipated and I believe is on the order of 80,000 plus units. So all that suggests to us that we're entering this space at a really propitious time, and a time that is propitious for two reasons. One, because the demand is really being validated in a meaningful way.

GPS navigation has been one of the real drivers for this demand interest. And also propitious in that the OEMs have had an opportunity to understand the limitations of existing architectures and products for head-up displays in vehicles. With respect to the laser printer, we continue to make very good technical progress. That's really the name of the game at this point in time. It's really just hitting those proof-of-concept milestones and moving towards what we hope is a development contract, and, again, the thesis here is the ability to move very high-speed color printing down into a cost-effective solution that can be sufficiently low in cost to be a desktop type of printer. The rotating polygon scanners, because when we go to high-speed printing they have to move much faster and grow in size, become cost prohibitive for that as well.

Image capture, and I'll touch on this just very briefly. We have continued to do work on internal R&D. We're continuing to look for sponsorship from third parties as well here. But we recently had a very, very encouraging breakthrough in that we were able to produce a laser camera with a very, very low cost analog sensor in it. That was one of the feasibility questions, probably one of the most meaningful feasibility questions that remained for us to answer in terms of cost and, of course, cost in turn will dictate the kinds of markets that we can address. So it's a great powerful proof of concept. Our last phase was sort of a bench top prototype.

We'll be moving toward the handheld scanning camera which can be used for bar codes and other applications, two-dimensional bar codes in particular, and that will be able to use this very low-cost analog sensor which is a significant move up the curve technology maturation curve for us. Steve Willey, if you would talk a little bit about where we are in our process with Canon and the consumer display as well. I think also, as a result of our internal development efforts, our own research efforts, some advances that potentially leapfrog some of the developments that we have been undertaking and move us further down the path to our low-cost objectives as well.

Yes, certainly. On the development side, we're making good progress within the camera, electronic viewfinder program. We're also making good headway in the design of related solutions for non view finder applications. So this opportunity to serve multiple applications from a common architecture is obviously providing us with important leverage and is consistent with overall microdisplay plans. Good strong progress on the development side.

As mentioned in the last conference call, we're beginning the transition from pure technical development into key elements of manufacturing and production engineering. In this process we're further honing our electronic view finder solutions for specific products. Well said from a standpoint, Rick, from a standpoint of progress within our relatively modest but very productive internal microdisplay research team, we have seen a significant innovation recently. This is going to guarantee us a continued pipeline of highly competitive solutions. The most recent developments fully confirm our ability to scale the microdisplay architecture to meet a broad range of applications. Finally, I'll confirm not only our belief but continued observation that we'll offer unparalleled display performance into the various industries and targets that we have in mind. Thank you.

That's great, Steve. One other foreign aspect of where we are with respect to Canon is transitioning from our development work to a focus more on product solution design and engaging the product groups more in that process. So we're engaged in somewhat of a handoff and parallel looking at some other types of applications of the microdisplay architecture outside of the electronic view finder. I'm not sure we can say too much about what those are yet, but we continue to make good progress technologically and with respect to our relationship with Canon who has been really a terrific partner to work with. I think that covers the pipeline activities.

I think to put strategic context around that, one of the things we really want to do as we grow the Nomad business and the Flic business is prepare to launch additional revenue streams that can compound growth as we get through '05 and into '06 and beyond, and in particular, do that through what we call OEM design wins where we will accomplish the objective of achieving higher volume levels of production as well which will deliver scale economies, not only to help us achieve the cost targets for those particular markets but to help us consolidate our competitive position in the technology more broadly in all of the markets. So, we think again, it's part and parcel of moving up the curve is to achieve the sorts of volume OEM design wins and that's very much a third element of our plan for 2004 and very much part of the rationale for our whole contract of business activity.

We engage in the contracts not simply to generate revenue and profit contribution, but more specifically, to engage customers fully in the development of products and solutions and have an informed pipeline strategy. I think in terms of where we sit today as we look forward and talk about these various opportunities that we have just reviewed here, these are things that we have a real depth of understanding from having worked closely with customers and/or channel partners and development partners in developing these opportunities. I would like for Tom Mino, if you would, Tom, to give us a few minutes on Lumera and then we can summarize and move to the Q&A.

Thanks, Rick. I'm always envious of Brian because he gets to make a disclaimer. I'm going to make one. If I happen to stop through this presentation and you hear like somebody coughing up a lung, that would be me and none of that coughing is a forward projection of any (inaudible). From a financial standpoint, the first quarter was a disappointment to us. Our revenue was over $200,000 less than we originally expected. The reason for that was tied to contract delays. Turns out that we have milestones where we ship materials to the customer.

They do some evaluation and send the material back to us and give us directions as to what to do. There was a delay in that testing within the government agency and we were not allowed to charge some hours that we expected to charge. Other than that, it's been a very busy quarter in the four business units. With the antennas we have continued sampling customers. We've gone up from two major OEMs last quarter to three this quarter, and from one major hotspot operator up to two.

The company that we said had completed device testing last quarter has completed the one kilometer field trial and is now expanding their efforts to looking at three kilometers and a capability they didn't have before because our antenna has longer-range in then the existing product. Our smart antennas, which we talked about last quarter, would be available in Q3, Q4. We're currently evaluating other options that could pull this up by one quarter. In the biochip area, we're working with several companies and we have received sample orders and we're currently modifying our facilities to increase to address volume production. We're working on the prototype of the low diagnostic device that we talked about last quarter and with regards to that we're having discussions with a potential partner, with a leading company in a bio sensory area.

So, that's moving along per the original expectations and the interest of the new potential partner even gives us a better feel of what direction the market may take for us. Rick's been in Europe. I'm not sure he's even aware of this, but in the modulator area we've received our first engineering order for a sample of 10-K modulators from a major Japanese communications company. We have been working with them for about a month and they've asked us to supply them our chips. We will ship those in the next week or so.

You know, Tom, something we talked about in our last call was that we might report some of the results that had been achieved with the modulator in terms of dry voltage, optical loss, et cetera. Maybe you could talk a little bit about why we're seeing this kind of interest in the modulator.

Well, we provided some material that they were very interested in, and in the devices we've worked with, along with USC and UCLA doing some evaluation for us, we have achieved the dry voltages as low as 2.5 volts and losses around 60v, which in the current domain would give us a significant advantage of 10 gigahertz over the competitors. So those are very good numbers and they're not our best set of numbers. We have material that we could use in the core that has R-33, about 30% above that and should get results about 15 or 20% better than we have seen to date.

So I think you did talk previously about the modulator business in terms of what the path to recovery looks like in fiber optic communications.

Yeah, we talked last quarter about 2005, early 2006.

Thank you. I think generally from a microvision prospective, as we get to view Lumera from a little bit of a distance. What is appealing to us is the fact that the company has product in production both the 5.3 gigahertz version of the antenna as well as the biochip are in production and can be ramped up in response to demand.

The reason we like that is obviously we can start growing a product stream of revenue for the company and in the case of Lumera we're doing that from a very low fixed operating cost base. The scope of that revenue potential relative to the total cost of the operation, we think, is quite appealing and we, therefore, want to continue to pursue financing the company with alternative strategies. We did close a $2.3 million convertible debt round and we continue to evaluate additional opportunities for larger scale fundings so that we can build a modest but effective sales and marketing organization to drive these products and the associated revenues and, Tom, you did hire recently a vice president of sales and marketing, I believe.

That was my last line. We have been working recently with a government agency and have had discussions on two initiatives in the optical polymer field. They could be valued as greater than $10 million. Obviously it will be a competitive situation, but we're in a very good position and that Larry Daldun(ph), our principle investigator, has been added to the review committee for this particular agency. We've also, because of all these opportunities I just talked about, as RIC mentioned, hired a new VP of marketing and sales. We have taken two of our internal technical people and made them technical marketing people to work with the new VP, and his first job is, number one, pursue all the opportunities we have right now. And, two, establish a technical rep network that is going to get our products in front of more companies and more engineers that would want to design them in the system.

Great. Well, Tom, thanks very much. I think with that, we can summarize and then move to the Q&A. Again, 2004 for us is very much about executing on the ramp of product sales and I think now we're focusing on both companies, in particular at Microvision and Nomad and the Flic bar code scanner with the Nomad offering a greater potential for revenue during the course of this year and Flic as we say, continuing to gestate through this year and begin to scale later in the year and into next year. We are encouraged, though, by where, at this point, where we think we may be able to take the Flic franchise through the midland and latter part of next year, and as I say, we want to continue to validate that with more data points but we shared with you some of those that are giving us that sense of encouragement as we sit here today. And as I said with respect to Lumera, also product that, again, now the key challenge certainly with the antenna and the biochip is to execute with those products and start the sales cycle going with both network providers and OEMs with respect to the antenna and continue the process with biochip customers. And congratulations, Tom, on your modulator customer. I was not aware of that yet. So, thanks very much. So again, thank you everyone for joining us today and I think we can now turn it over to Q&A.

Thank you, sir. Ladies and gentlemen, if you would like to ask a question, please key star 1 on your touchtone phone. If you'd like to withdraw your question, please key star 2. Questions will be taken in the order they're received by. Please hold for your first question . We'll take our first question of the day from Mr. James McIlree of Unterberg Towbin. Please proceed.

yes, thank you. Can you tell us what the cash burn was for Microvision standalone, Lumera standalone also, please.

Certainly. Microvision standalone was 6.8 million for the quarter. And consolidated cash was 7.5.

That 6.8 was operating burn.

Okay.

A couple hundred thousand in capital.

Say it again, Richard.

About 200,000 in CapEx.

Okay. Great. And if you did get an army order in this quarter, would you be able to manufacture it and ship it in time to recognize revenue for the quarter?

It depends, obviously, on the timing of the order, and the size of it. But our sense in terms of the requirement is that we would be able to deliver a portion of the order in any case. If the order were on the large end of the 533, I think, there is the question, depending upon when the order came, as to whether we could get all of those delivered within the quarter, but we could certainly make a partial delivery within the quarter. At the hundred-unit level or the 300-unit level, obviously, the certainty of delivering those within a shorter time frame goes up.

What is short in your lexicon?

Right now, I think, what I've heard from manufacturing is that we have a four-week turn, potentially, from the time we get the order, and I don't think that applies to a full 533 at this point. But as I say to the 100 and 300, obviously, greater confidence.

Okay. Can you address what you believe the ASPs would likely be or a range of ASPs for both Nomad and Flic in Q2.

In Nomad, I think we're looking at a reasonably high number. The 85 units that we have booked to date are close to the 39.95 list price. We have got some reseller channel allowance for some of the mix for the current quarter, but I think it could be in the $3500 range plus or minus. With respect to Flic, depending to some extent on the mix of accessories, although that's encouraging. I think we can look for the number to stay in this 80 to $85 range, potentially move a little bit higher. I think in terms of an objective that we have internally, we think we could start to see $100 ASP, again, depending upon the mix between the cordless version and the base version as well.

Okay. And lastly, can you just go over again the Nomad manufacturing that you think you'll have the capability to do. Did you say 150 a week?

Yeah, I mean, we're moving towards, in the next quarter would be about a 700-unit-a-month rate, and then as we get in through the third quarter and the end-of-the-year, about 900 units a month in a single shift, and then to expand that capacity initially, we would add a second shift and beyond that, add capital equipment to replicate certain portions of the line.

Right. And then the sales goals that you have for the independent reps. If you can, again, just summarize what you thought they're capable of doing. I think you said in four to five quarters you could get them to some level.

Yeah, I was kind of using an average number across the seven regions. Some of the regions are obviously smaller than others, but, Andrew, maybe can you talk a little about your objectives. The number I gave, Jim, was on average about 500 units per quarter per region, and you have seven regions by that time. So, we're trying to move toward the 10 to 12,000 unit a year kind of number.

Yeah, Jim, I think for the balance of this quarter, we would love to see the majority of those sales coming out of the independent reps being somewhere in the neighborhood of 300 to 400 units between now and the end of the Q. I think Rick may have mentioned that earlier. But I think that's unusual because we're just getting a lot of these guys stood up and we've got a sales cycle in there. I think once we build out the channel, the independent rep channel, that is, domestically, I think we're looking at trying to get an expectation, that each rep could be doing, I don't know, somewhere in the neighborhood of 10 to 20 units kind of per month. So we'll see how that goes. I'll know better in a month or so once we get the sales cycle started and see how we can go. So.

And I'm sorry, this will be my last one. This would be independent of, or maybe it wouldn't be, of potential orders from, let's say, a Toyota corporate or Honda corporate.

That's correct.

Okay great. Thank you very much.

We'll take our next question from Mr. Alan Robinson of Delafield Hambrecht. Please proceed, sir.

Good afternoon. A lot of moving parts to today's release, so just taking it from the top. With the expected order of the development contract for the Virtual Cockpits program, is that likely to take contract revenue for the year to a level above what we saw last year?

No. Contract revenue is likely to be in line with last year. I mean our strategy for 2004 has been to maintain the level of contract revenue and to really grow the top line with the two product streams, in particular, at Microvision. The Virtual Cockpit contract in particular, is something that has been anticipated, certainly by us. We have been working for sometime. It's been part of that expected mix.

Okay, so flat with respect to '03 on contracts. And with the Nomad manufacturing process, have you formally released the Nomad into production now?

We have not released it to customers yet, although we're day-to-day on that, we're doing some final design verification tests. We have released units and it's been our priority to release units to the sales representatives and we began doing that about a week or two ago and are seeing some increase in the yields coming out of the plan.

Okay. So none of the demos that you have in inventory so far have been released to customers as of yet?

No, that's right. We have been giving customers a long lead when we close the order. And then really trying to build backlog by getting units into the hands of the sales reps.

Okay, very good. With the 85 or so units on purchase order so far, could you characterize the breakdown there. I mean it looks like you've got about a dozen units per customer. Is that accurate or is it more a case of one customer ordering the lion share?

No, I don't think so. Andrew maybe you could --

The average order size is two to three units per customer. Some lower, some higher.

Okay.

Generally what they're doing is they're buying a few units and they're testing it within their facilities or within their training groups.

So you've got a considerably larger number of customers than the half dozen or so household names mentioned.

Well, I think, what Andrew's referring to, the actual individual dealerships.

Gotcha.

If we aggravated those under the OEM names. It obviously becomes a smaller number. But I think, Andrew, you're referring to a customer.

That's right. There's dealer groups, there's OEMs, there's quite a few things mixed in there.

Okay.

I think one of the critical milestones that we would like to achieve here, and we do see the potential for it, is, and we think this is going to be a significant catalyst. There's some very large, very high visibility dealerships in the U.S., and I think probably one of the most encouraging indications that we have heard is from one of those that has under one roof some 70 service technicians and they indicated that they would like to equip a large percentage of those. The reason that's important is that really becomes the catalyst broadly for the industry. So we're encouraged to see those kinds of indications this early in the game. Andrew, in terms of the number of customers that are on our current list, I think, if I'm not wrong, one of the larger indications is on the order of 25 to 40 units, and I think the initial order from that customer was something like five units.

Right. Okay, very good. And just moving on with the Flic now, I was quite interested in your Flic prepackaging program there aimed at the small businesses. Did you have a retail or wholesale partner yet for that product? We're negotiating that as we speak.

Okay, and this is presumably going to be for a, excuse me, a tethered-type Flic. Is that correct?

Yes, that is correct. Tethered and we're also in discussions on blue tooth as well. The initial interest is in bundling a real high value solution aimed right squarely, as I said, to the small and medium businesses.

Okay, very good. Rick, finally, just with the head up displays, has anything that you have seen over the last week or so made you think that it's less likely that something like this may be rolled out into a 2006 vehicle?

I think we're looking at model year 2007, which is 2006 production.

Uh-huh.

I had this conversation this morning. I'm actually in Germany now and I was asked the question about well, gee, given some of the things that are going on in the automotive industry, and my response was, certainly the information that we had heard from -- , and again, informally with respect to BMWs dramatic increase in the order and also, again, some focus group data that has emerged from the industry. I think this is the kind of thing, actually, that the industry looks for to drive the purchase cycle and in particular in Europe, we're not as sensitive to this in the U.S. because the thing that is really driving this interest and demand here is the prevalence of the GPS navigation system. It's not nearly as popular in the United States as it is in Europe. In fact, it goes beyond being popular in Europe.

GPS navigation is virtually pervasive and it's quite dangerous, in fact, to look at the small LCD screen in the panel. So the consumer pull-through has been quite strong. The majority of the real cost burden here is going to be born more by the supplier network than it will be by the auto companies themselves because you really tying in existing systems to this display function. On that point, actually, one of the things that is really compelling to us about this business case is that the marginal cost for Microvision to develop the head up display product is very low relative to the opportunity.

We see the opportunity as being characterized by a unit price of $200 plus or minus at volumes and this would be a 4 to 5 year sort of time horizon from launch, but we see volumes in the seven figures and so we think it can be a substantial business and the cost of getting there is quite low relative to that. The reason for that is that we're leveraging the Nomad and all of the other work that we're doing, in fact, often I will illustrate to people by turning the Nomad upside down. It's essentially like a miniature version of the HUD. And that's really essentially what we have done is to put some larger optics in front of the Nomad display engine to scale the image up and the windscreen takes the place of the combiner lines in the Nomad. That's how we were able to deliver so quickly these prototypes that have gotten all the attention that they have. So the product path is one that looks very, very encouraging from a development standpoint as well.

Okay, I just thought you real finally. Back to the Nomad military units, what is the date beyond which, if you receive an order for the Stryker Brigade, what is the date which beyond that date, you will have to book the revenue into the third quarter?

We probably could achieve a hundred-unit level in less time than that, but I would say we take it back, probably be the end of this month.

Okay.

Third, fourth week of this month. We would have to see that order to book it in the current quarter.

Okay. Very good. Thank you.

That does conclude the question portion of this conference call. I would like to turn it back over to the speakers for their closing remarks. Please go ahead.

Again I want to thank everyone for joining us today or tonight if you're in the part of the world that we are, and thank the team back in Seattle as well. And we look forward to catching up with you again and in not too long a period of time here. Again, we're very encouraged by what we see with respect to the Flic continued progress and traction and the prospects from Nomad rollout, the recent certification by Honda, significant milestone in terms of getting that marketing effort and sales effort geared up and underway. And we have been taking steps in parallel to ensure preparedness of that with the internal sales representatives as well.

So we're ready to hit the ground running with that, with our independent sales reps, with our ongoing efforts with the OEMs, and we continue to see an enthusiastic reception to the product. One of the things that has become very, very clear is that dealers really depend heavily on service and maintenance activities for the the bulk of their profitability. So, anything that can increase those profits or help them be more competitive in their service business and growing their service business, really continues to get a lot of attention and we're going to capitalize on that and deliver something that we think can really help their business grow. So, thanks again for spending time with us today, and we look forward to speaking with you again soon and Tom, congratulations on your modulator order again.

Thank you, RIC.

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