MicroVision Inc (MVIS) 2004 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to your Microvision Second Quarter Earnings Conference Call. My name is Bernie [sp], and I will be your coordinator today. At this time, all participants are in a listen-only mode, and we will be facilitating a question and answer session at the end of today's call. If at any time during this call you require assistance, please press star, zero, and a coordinator will be happy to assist you.

As a reminder, this call is being recorded for replay purposes. Now, I'd like to turn the presentation over to your host for today, Brian Heagler, Director of Investor Relations.

Thank you. I'd like to welcome everyone to the second 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," "estimate," "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 in our most recent annual report on form 10-K filed with the Securities and Exchange Commission in 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?

Thanks, everyone, for joining us this afternoon. We'll begin with the financial results, and then walk through the various categories of the business. In particular, I want to focus on contract revenue on the front end because this is an area of where we've had what I think is a temporary dislocation, but something that we can put back on track very quickly, and I want to explain why we're confident that we can do that.

We reported revenue for the three months ended June 30th of 2.4m compared to 4-1/2m for the same period in 2003. The thing I want to point out here is that, in 2003, 4.4m of that revenue was contract revenue. It's almost entirely contract revenue. We did not have an expectation of repeating that kind of performance. In fact, what we were aiming at for contract revenue for this quarter was closer to about 2-1/2m. So, the underperformance here, we missed that target by about six to $700,000, but the major contributor here is really the delay in release to production of the Nomad product, and I'll focus on that and update you fully on the status of that, both with respect to production and with respect to the market. I think there's good news on both of those fronts.

Contract revenue in the second quarter was negatively impacted, accounting for that six to 700,000 below our estimates, by the delay in $3.85m award Virtual Cockpit program, as well as lower than expected progress on certain contracts at Microvision and Lumera, and delays in the timing of other new contract awards. So, it was a piece here and a piece there that sort of aggregated up to that six, $700,000 number, and I think the bulk of that came-- about 400,000 of that plus was attributable to the later than expected award of that Virtual Cockpit program.

Product revenue for the quarter was 587,000 compared to 147,000 in the same period last year. For the second quarter, that was comprised of 169,000 from sales of Nomad, well below our expectations, certainly in the very earliest part of the quarter, although those expectations diminished as we continued to encounter production delays. And 418,000 from sales of the Flic scanner, and that is also about 200,000 plus below our expectations. In the case of Flic, one of the challenges we had there, while the average selling price was more or less in line with Q1, in the neighborhood of $85 plus, which is actually encouraging for the product patches, we had targeted an even higher average selling price because we do, did, and do continue to expect to see greater proportion of sales coming from the higher priced Flic 2 cordless unit. We weren't able to deliver on that during this quarter because we had a temporary interruption in production on the cordless unit as well. So, we did have production problems impact us there as well. We also had some delays in expected orders. Generally, the prognosis for Flic, we're very pleased with. We continue to be encouraged by a number of different factors, and I'll address that as we go here.

Revenue for the six months ended June 30th was 5.4m compared to 8m in the same period of 2003. Again, 2003, an exceptionally good first half in terms of contract revenue, not something that we had expected to repeat. Contract revenue was 4.1m for the six months of '04 below our expectation of, again, about 4-1/2 to five, and that compares to 7.8m for the same period last year. Product revenue was 1.3m for the six months of 2003 compared to 281,000 last year, so, obviously, that's moving in the right direction, although not nearly fast enough yet, and we'll talk about how and why we think we accelerate that. But that is predominantly, again, production delays associated with Nomad.

As of June 30th, our total backlog was 5.1m, of which 4.9m was for development contracts, 106,000 for Nomad units, and 127,000 for the Flic laser barcode scanner and accessories. We're reporting a consolidated net loss of 8-1/2m, or 40 cents a share for the second quarter compared to 6.7m, or 38 cents per share in the same period in '03. And for the six months ended June 30, we're reporting a consolidated net loss of 15.2m, or 71 cents per share compared to 14.1m, or 83 cents per share for the same period in 2003. Including Lumera, the company ended the quarter with 6.7m in cash, cash equivalents and investment securities. Very little of that at the end of the quarter was Lumera cash. Subsequent to the end of the quarter, Lumera completed an Initial Public Offering of 6m shares, raising gross proceeds of just under 42m, and net proceeds of just under 39m.

Microvision owns approximately 5-1/2m shares of Lumera, and we're very pleased with the fact that that company is now well funded. We can't talk a lot about the company today. The quiet period will end on August 16th, and I think the company will be able to say more at that time, but we continue to be very satisfied with our position as investor in the company, and think that the company, especially now that it is well capitalized, continues to enjoy great prospects.

We are, of course, disappointed in our financial results for the second quarter, and as I've mentioned, in particular I want to begin with the issue of contract revenue, which is something we typically can rely fairly well on. We were, as I said, adversely affected by delay in the $3.85m Virtual Cockpit. A delivery to Canon was also-- did not meet the deadline in terms of being bookable for-- recognizable for the second quarter, and so that moved into the first part of the current quarter, and Lumera contributed to that as well. And as I said, we were about six to 700,000 below where we expected to be when we last talked in May.

However, the $4.9m backlog is very healthy, and we have prospective contract bookings for third and fourth quarter probably totaling in the neighborhood of $3m. If we look at them in the aggregate, there's a higher number, but discounting it, we can get down to about $3m. In particular, there is a single U.S. Army contract for approximately 1-1/2m that was originally going to focus on equipping Kiowa helicopters with helmet-mounted displays. The Army has since elected to move away from the Kiowa platform, and so we've been working with them and they've been working with us to reprogram that money for an application which also utilizes a helmet-mounted display, but is more relevant to its current requirements. In the normal course, that contract would have likely been awarded during the second quarter, and now likely that it will be awarded late in the current quarter or very early in Q4, and that's a component of that 3m that we talk about for the second half. That breaks out that is roughly 2m defense and 1m in commercial contracts. Those commercial contracts would be coming from ongoing activities in the automotive head-up display category, consumer electronics work funded by Canon and others, and our work on 2D barcodes and laser print engines. And I'll come back and talk about that from the perspective of those pipeline development activities and the OEM products that are in the pipeline as well.

But from the perspective here of looking at putting this business back on track to a satisfactory and sustainable level, I think the important thing is we do have that backlog, we do have those additional bookings to look forward to, and we think, during the current quarter up through the fourth quarter, we should be able to do that.

Nomad, as I said, has been really the disappointment for this quarter. This quarter was one in which a lot was hanging on a timely release of this product. The thing that really held us up at the end of the day here was a scanner assembly that was vacuum packaged, and the supplier of that, who incidentally is a very, very respected packager of optical components, simply could not get the yields with that vacuum package. And as I think some of you know, we had, beginning last year, had a significant design breakthrough in removing the scanner from a vacuum, what we call a "free air" scanner assembly. The benefits of that are that we can get not only better yields because we eliminate the packaging step, but we also have a lower power, more reliable scanner, and since it does rely on a new and innovative drive architecture, it also is getting us better scan angle in terms of scalability and high resolution. So, it's a significant step forward technologically.

Our plan had always been to cut that scanner in during the middle-- early to middle production phases of Nomad. We had thought that we could do better with that package scanner than we were ultimately able to do in the final analysis. The good news is that, in fact, we are now completing the design verification test of the unpackaged scanner, the free air scanner, and we believe we'll be able to scale production of that initially to probably about 50 units a week for the balance of this quarter. That is by choice, not by necessity. That's in sync with what we think that that number-- I mean, we could scale to a higher number than that from a capacity standpoint, but we think that's the right rate to run at in terms of what sales is seeing and also with reference to our inventory and purchasing plan.

We built just over 200 Nomad units to date. Of those, 75 of them have been shipped to customers, with 47 of those being delivered in the second quarter. We received orders to date for 95 units, so that means that, during the current month-- excuse me, during the month just finished, we're right around the 50-unit neighborhood. Those are going to dealerships across the United States. We've installed systems in seven dealers, with the oldest being out there for 45 days, and we expect the number of dealerships to double in the next two weeks or so with the recent orders being delivered.

These are representative of Honda. We have Honda dealers, General Motors dealers, several General Motors brands, Volvo, Lexus, they're in Seattle, Portland, Dallas, Fort Lauderdale. Upcoming, we expect to see installations in Greensboro, North Carolina, New Jersey, Iowa, Kansas and more in Florida and Texas as well. So, this is a very positive aspect of this in two senses, one of which is that we now have real customers with real experience in the field using the product, and the usage pattern is very encouraging. We've seen continued and regular use over as much as 45 days. The usage pattern probably averages around four hours right now, with some users opting for a shorter, more occasional use, and some using it as much as for a full eight-hour shift. And the feedback is quite consistent. Now, one of the things that's also going on here is a lot of market segmentation in terms of really understanding where the Nomad delivers the greatest value, but we've heard some very, very encouraging ROI sort of criteria from customers who believe that this may offer them very aggressive payback, indeed.

We now have 35 independent reps across the Southwest, Southeast and the Northeast. Our internal salespeople are in charge of both developing and overseeing those reps sales, as well as dealing with the strategic accounts themselves. We're seeing very encouraging trends on the sales process itself, and the cycle time. We're seeing both an increased number of multi-unit sales and increased first call sales as well, and we attribute that to a couple of things, most of which is really just our own sales force and our rep forced getting up the learning curve, really learning how to sell the product, and we feel actually very, very good about that, and of course marketing is able to continue refining its positioning and its communications strategy in parallel with that.

A key piece of this rollout, which we have just begun to get good traction with, is what we call our reference account program. Here, the objective is to get Nomad into not just any dealership, but a dealership that is going to be highly visible in a key market. We have a regional focus to this. The idea is that we will go into a-- in most cases, certainly not at all, a top-tier dealer, in many cases the folks that you'll be hearing about in the coming weeks will be among the top dealers in the country either within their brand or in all of the automotive aftermarket. So, we're very pleased to with the folks that appeared to be queuing up for reference account programs, and the idea here is to deploy anywhere from 5 to 10 units, depending upon the size of that dealership, into these locations, and focus media attention on that as well as really use that as a hub of our sales activity in that particular region. So, you will be seeing news of these developments and, within the industry, certainly it will be important because the names will be quite recognizable. Again, a very broad cross-section of brands are going to be represented here, and so we're very pleased with how that is going.

Also in the category of channel development, there are a couple of aftermarket partners that are merging. We've mentioned in the past sort of the three-tiered approach here, which is to suggest that, on the one hand, we have independent reps which may be like a conventional manufacturer's rep, an individual who employs anywhere from four to 13 salespeople, and it's their business to sell a variety of different types of product into the automotive aftermarket. Obviously, we're focused on those who have experience with electronic and information technology kinds of tools. An example would be the diagnostic tools that have become very popular in the market in the last couple of years.

There are a couple of larger companies that have very much an information technology focus. We've gotten very strong interest from one of the companies that's doing about $1b in automotive aftermarket sales today with strictly software and IT products, so it's kind of a pure play in systems integration, electronic systems integration, for the automotive aftermarket. We also are talking to another smaller company that has an installed base of about 8,000 wireless diagnostic tools in the market.

One of the other interesting things that's going to emerge here-- I don't want to place to much emphasis on this now, although it's I think really quite powerful, but we have what I would call our first real product extension, and that we have established that we are out of the box compatible with this wireless diagnostic tool. What that means is that the tool provided by this company can be connected to what is called the OBD2 port, on-board diagnostics port. Its standard in all vehicles, and it will immediately transmit a variety of electronic information to the Nomad via a server, and so you now have an integration of the diagnostics, the service content and a tool that is used by the technician in the service bay. It's a very powerful concept, and one that I think you're going to see real excitement about. Certainly, the vendor of this tool has been very successful with it, is very excited about coupling Nomad to it and working with us in the aftermarket. And I think we'll be able to talk more about that as well.

The update from the military on the Striker Brigade with respect to Nomad, it continues to be an issue of sourcing funds. The command of the Brigade is very much wanting to bring Nomad with them when they deploy to Iraq. Their deployment schedule has been relaxed until October, but we are probably now looking at a 100 to 200 unit deployment of Nomad systems in the short-term. In the intermediate and longer-term, there continues to be some very, very positive developments here, and especially in light of the suspension of future combat systems program. The Striker Brigade was referred to as the Interim Brigade, and the interim meant that there was an interim solution prior to the deployment of future combat systems. With future combat systems being delayed, Striker is having to-- going to have to survey longer interim purpose, and so there's more forward looking for about what can be done to really made Striker a 21st century network-centric kind of platform than there has been before. And of course, there's some funding that frees up there, as well.

We do have reason to be encouraged by a funding line and a congressional appropriations bill. Of the 6.4m that we mentioned in the press release in this regard, little more than half of that-- excuse me, a little less than half of that I think is associated with a program that would be directly relevant to taking our Striker solution and advancing it to a next-generation level of capability. So, we think again, long-term, there continues to be substantial opportunity here.

In terms of additional market segmentation-- and again, our primary focus obviously continues to be on executing in the automotive segment-- we're refining that positioning with reference to specific use and application. Another segmentation aspect here is focusing not just on automotive dealerships and aftermarket maintenance shops, but fleet maintenance shops. The numbers there are quite compelling. We expect to have a sale to a significant municipality soon. We also expect in the very short-term a small sale to the United States Air Force, who is quite excited about using the Nomad for flight line maintenance and, obviously, intrigued by the issue of productivity and managing complex service content.

There's other military maintenance applications for-- in other areas. One of the more interesting things that we have seen is we've been contacted by two Fortune 100 companies, one a major semiconductor company, the other a major consumer packaged goods company, with reference to the Nomad. We wanted to qualify these opportunities to see if we were going to require modifications to the system or whether these were potentially nearer-term than that. The good news is that, in both cases, there appears to be application for the system as currently designed and configured. We're not counting on any particular sales volume for 2004, but I would not rule out that all that, in 2005, these could become part of the mix. Our initial approach to this would be to approach them as large strategic accounts and not allocate enormous resources to those. Our phase 2 market development program for Nomad does include a business development activity that would partner us with integrators-- systems integrators who would focus on customers in markets like these, and so this is a good early indication of that potential.

And Steve, I think you attended one of these meetings just in the last couple of days, and were quite enthused by it.

Yes, I was very much intrigued. I think this interest is not surprising, as the Nomad's more general applications beyond auto maintenance is really being recognized by the broader market, and these large and global manufacturers, particularly domestic plants, are somewhat threatened by the move to offshore facilities, and they're looking to gain any benefits in productivity, quality, worker safety, etc., that they might. So, the parties that I have met with recently are very much intrigued with Nomad, and, in fact, barcode, our BlueTooth barcodes. They believe that we could really make a difference. But we've been defining for them how the Nomad solution specifically can impact every facet-- practically every facet of plant operations to include the maintenance, process monitoring, process control, materials handling, training. As Rick said, these are large accounts, large strategic accounts. Any one could take 1,000 or more Nomads quite easily.

So again, the focus certainly continues to be on automotive, building out our rep network, building other distribution channels, aftermarket partners, our reference accounts, I think you'll begin to see news of these activities here. As they've come together and, as I said, as we see continued evidence of a shortened sales cycle, first call sales and multi-unit sales, we should be able to build on the 50-unit start that we have in the first month of the quarter and start seeing some sequential growth in the next two months and through the fourth quarter of this year. We do expect that to-- those things to begin to converge in a critical mass sort of fashion as those various channel development efforts come to bear fruit.

As we mentioned, Flic is below what we expected in part due to a lower-than-expected ASP, but mostly due to the timing of some orders. We are very encouraged by the broader picture of market development. July has been a very, very strong month for Flic, I think on the order of 2,100 units or so. We do have the cordless back in the mix. We do think we can continue to migrate from that $85 ASP up initially to $100 or more, and then probably beyond that, and we do have a strategy for achieving that with reference to the mix. There is-- will be three variants on the product, the basic product, the-- what we call the plus product, which has a slightly more powerful microprocessor, and the cordless product, and those will be available beginning in the current quarter.

So, we're looking for strong growth back to Q1 levels in the current quarter. That was about-- Q1 was 674,000, possibly higher. Longer-term picture continues to build momentum and strength. The positioning of the product really continues to play well. The notion of simplicity and affordability, so I think we really have a validation of the market concept. And market development is really focused on four key areas, major wireless, Telecom and mobility players, particularly those in Canada and Europe, so here we're actually talking not about the hardware providers but about the service providers, Roger's Wireless in Canada, Orange, British Telecom and others in Europe, who are showing a product today, and we've seen, and continue to see, very encouraging activity there. We have been contacted by a very major wireless hardware player in Asia, so by that we mean a smart phone manufacturer, very recognizable brand, who is looking for potentially a companion scanner for distribution in China with their handheld product.

Another category continues to be retail point-of-sale with NCR. NCR accounted for very little of our sales in the current quarter-- excuse me, in the past quarter. We expect to see more from them late this quarter and into next quarter. In particular, NCR has begun to focus on some other markets, and we've done some very effective cross-pollination with Utilitran [sp], who is a partner of ours. Utilitran has been very successful. They came to us with an opening order of 2,500 units. It's a very powerful platform that basically allows convenience stores to achieve very sophisticated supply chain management and a-- very, very affordably, and that's something that hasn't been available to them.

Rick, if I could just jump in--.

-- It's Andrew.

This is Andrew Lee, Vice President of Sales. What we've seen in the last quarter developing, and we think we'll see some very strong sales in the late third and early fourth quarter, especially with NCR on this, Utilitran offering up a software, very compelling and very low-cost software solution. We talked about it on the last conference call. And with ourselves, with the Flic device both in its BlueTooth and/or its batch configuration, teaming with NCR and their sales channel. So together, the three companies, we're targeting the top 200 c-store chains in the United States, Canada and Europe. These include-- we've announced some of these partners to be Shell Oil and Texaco and some others. But we have essentially all of the major players to having a look at the very compelling, very low-cost, very quick ROI solution that these three companies can put together.

We have similar partnerships with players like Jumptec and Trax [sp]. I think we'll be talking to you about those in the coming weeks, and we have talked to you in the past about what-- bundled plug-and-play solution that would be either shrink-wrapped or in a blister pack and be sold through Office Depot, Staples, OfficeMax sort of distribution channel. That is actually progressing quite well. We do expect the first sales into that environment to a major office products supplier who would be branding the packaged peace. It would be shrink-wrapped with software, barcode printing and reading applications. We expect to see that in the current quarter and more in the fourth quarter of this year.

So again, the focus here is put the contract business back on track. We've got backlog and new contracts to help us do that. On Nomad production, we should be ready to ramp to a more consistent and sustainable level to achieve much more meaningful revenue contribution in the current quarter and continued ramp through the end of the year and, in particular, with those various channel elements kicking into play, the independent reps, the aftermarket partnerships, the reference-- the benefit from the reference accounts, and I think positive word-of-mouth media as well as advertising in the industry to support that.

But one of the things that I don't want to understate the importance of is we've now have an opportunity to see customers work with the product in the field and understand really well how it's being used and see sustained and regular use of the product, and that we think is obviously very, very important, a difference from where we've been before. And so, in terms of putting those three basic revenue generating producing pieces of our business online, that is a good status.

I want to talk for a moment, though, about our OEM product pipeline activities because these are certainly the source of contract revenue in the short-term. But from a value creation standpoint, the longer-term picture is obviously much more our focus here. And we think there-- we have had meaningful successes in every one of these-- the product areas that you're pursuing. And while not yet meaningful in financial terms, we strengthened both the technical and business case in each of these areas, and are seeing growing interest from very significant prospective partners and customers. I think the one that folks you're very well aware of certainly is the work that we've done with Canon, focusing on an electronic viewfinder for digital cameras, still cameras, and we've achieved some very significant technical milestones there. I touched briefly on some of this in our last call. Without saying too much about the specific architecture, and I think we will report on this again very soon here, but the significance of the breakthrough here is taking us closer to achieve the very, very low cost required for consumer electronics applications, generally speaking. So, very simply, what we're aiming at here is a display that is much higher in quality than anything else available on the market from a flat-panel-- miniature flat-panel vendor, but much more affordable, and especially on a price performance basis. And we've achieved an architecture, which has really accelerated us towards that objective.

On the automotive head-up display, tremendous success there in miniaturization of packaging. This is one of the key discriminators. We're dealing with two very well known German automakers, BMW and VW/Audi. In the case of one of those companies, the actual physical size-- volume of the package is key to their implementation. It's potentially a very broad-based implementation in that they're aiming at a platform upon which three models of cars are based, essentially their entire line. So, we expect to see a follow-on contract here. We'll focus on integrating our latest configuration of the automotive head-up display into a vehicle as we've done in the past with the Audi A8 car, and we continue to think that we have a very powerful business case emerging here. One of the things that you will see some of on the automotive head-up display is a greater focus on potentially some vertical market applications as well.

Two-dimensional bar-code scanner, very significant delivery recently, very successful delivery. Customers delighted, we're delighted. Again, recapping the achievement, the technology milestone there, it was about achieving a very low-cost analog sensor and, therefore, potentially enabling a very low-cost handheld laser scanner, laser camera for use in barcode scanning and other specialty imaging applications. We are negotiating with another player in the category as we speak. I think there's a very strong chance that we will close a second development contract with a second sponsor, and we've recently been contacted by a major portable data terminal provider in this vein, as well. So again, we think there's reason to be encouraged by activities and potential for activities there.

On the laser printer development, getting ready in the next weeks to deliver to our sponsor, but again a major technology success here. The key attribute of this system is achieving a very, very wide, unprecedented kinds of scan angles, and we've used some very creative techniques to achieve that. We have achieved it. It has generated significant intellectual property, and we think the interest is there.

Steve, one of the things that I think is notable recently is, certainly within the consumer electronics world and in some of these other categories, just in the last four weeks we've seen the interest and inquiries really scale up from major players in the consumer electronics arena. Can you maybe talk a little bit about what's going on there and why you think we're seeing some of that?

Well, on the portable side, I think it's driven in large part by widespread availability of digital content, so we've seen significant opportunities appearing in the cellular handset market, the portable gaming, the portable media player market, and the need for the multimedia displays is all the more apparent. So, what you had mentioned earlier about our architecture, a key breakthrough on the architecture is very relevant to that not only from a cost standpoint, but the breakthrough enables us to move to the HDTV widescreen format potentially to larger format projection system solutions, so the combination of the architecture breakthrough, which has very much unlocked the greater potential of the micro-display and these emerging markets, it's very exciting.

So again, I don't want to create a near-term expectation here. I do want to put in perspective that we are seeing the highest level of interest ever from major global players in the consumer electronics industry, and many of those obviously in Asia, and the technology, and we're seeing renewed interest in applications like gaming-- electronic gaming for both gaming consoles as well as portable systems, as well. And a reason that that's significant, of course, is the volumes in those categories are very meaningful.

That, of course, is really one of the things that we are trying to do here is, on the one hand, while executing with finished goods products like the Nomad and the Flic in a series of vertical markets, our OEM solutions are aimed at achieving real scale and very significant volumes in markets that are as broad and horizontal as consumer electronics and the automotive market space. So, I think that that will be, to the extent that we can be successful even forging those relationships and securing funding and/or partnerships in that domain, that can be a significant catalyst for creating value as well.

Thanks very much. I guess I do want to point out before wrapping up that-- just to clarify that our position in Lumera is one where we own and continued to own 5-1/2m shares of Lumera stock. We did not sell the stock or distributed it. It's not as if we no longer are in the owner in the company. In fact, we believe that the funding is a value-enhancing event because it now allows that company to move forward on its business plan. So, if at any given point you're wondering how to calculate the value of that, the mathematics is simply take 5-1/2 million roughly, multiply it by the current market price of Lumera stock, current stock, or if you choose what you believe it may be worth, and then divide that number by the 21.8 million shares outstanding of--.

Twenty-one-five.

Twenty-one-five million shares of Microvision. So, the reason I mention that, we've been asked a lot of questions about that, and that's really sort of the simplest way to get a proxy for it. If you did that today-- not a great day to do it-- but if you did it today, you'd come out just north of $1 and change for the value of that.

We're ready for Q&A now.

Ladies and gentlemen, this begins your question and answer session. If you wish to ask a question, please press star, one on your telephone. If you wish to withdraw your question or your question has been answered, please press star, two. Please wait a moment while we compile the list.

Your first question comes from Alan Robinson of Delafield Hambrecht.

Good afternoon. Rick, I was wondering if you could just give a little bit more color on the Nomad backlog. It seems that, according to your press release, you've taken quarters for 95 systems, delivered 47 of them. So, by my calculations, you have 48 units in backlog, which, given your stated dollar amount in the backlog, would indicate a per-unit price of just north of $2,000 each. Does this represent some kind of pricing pressure for Nomad, or am I just getting the calculation wrong here?

No, I think the only thing you're missing is that the backlog would have been as of June 30, so not all of those-- only some of those 48 units have been sold as of June 30. The dollar backlog in the press release that you're referring to, Alan, would have been as of June 30, whereas the 95 units that we referred to was ordered to date.

OK. Are you facing any pricing pressure at all in terms of the initial sales that you were making through the sales rep network?

No. This is Andrew, Alan. We are seeing unexpectedly low resistance to price. Really, what we're seeing is customers wanting to ask the following questions: "Does it work with my system?" "Will my technicians wear it?" "What can I fix with it?" When we get through that and we show the ROI, it's-- we have not have the kinds of discounting pressures that one would expect.

OK. And just--.

-- I think our expectation, Alan, just to put a finer point on that, is that certainly for the short-term, ASP will be reasonably close to list price. I think we'll see that come down, but not through particular end-user pricing pressure but through the normal thing that happens as we expand channel and create allowances-- more allowances for channel partners in that.

OK, I'm with you. And looking at the gross margin line there, I know you have some development startup costs which affects the margin line for initial product shipments. When is that expected to move out of the equation there? When are we expecting to get gross profit out of these Nomad units?

Alan, Richard Raisig here. That depends on when we reach mature production. Right now, we're looking at probably Q4 where we turn into-- turn the point where we are realizing the normal gross profit margin, and we'll start fully absorbing. Of course, the gross profit margin will depend on the volumes at that time, too, so I would expect it to start out small and then move up from there as volume increases. We're not expecting to reach mature production in this quarter.

There were a couple of other things that impacted gross margin for the quarter, one of which was a cost overrun on a contract in our automotive head-up display. Total gross profit [inaudible] affected by other things. As Rick said, we had a couple of contracts-- fixed-price contracts that we occasionally take on because of the opportunity to work with very high-quality customers on very large market opportunities, and we experienced technical difficulties beyond what was planned, so that hurts margin. We also had a write-off of inventory on Flic, which went through cost of goods sold. So, that hurt the product margin this quarter, but that's hopefully non-recurring kind of event.

OK. Now, with all those elements combined there and with the spin-off of Lumera behind you, what do you see as your quarterly revenue break-even right now?

I think it's still around the $14m revenue, 14 to $15m in revenue that we've talked about consistently. That obviously to some extent is dependent upon the contract mix. If contracts tend to-- if there's upside in contracts, that number can come down. If the contract mix is lower, that number would go up. But that would assume contract revenue running at sort of a 14m to $15m annualized rate, which we think is achievable during 2005.

OK, and just in general terms, what are your funding options now over the near-term?

Well, I think in the very near-term, the funding options are better actually-- ironically. I mean, it's obviously a pretty tough capital markets environment. But having even partially monetized or the Lumera asset partially liquid, puts us in a better position to really seriously consider convertible preferred and convertible debt kinds of instruments that can be priced at a premium to the market. The-- as we get through-- further along and look to the more intermediate-term, I think that becomes even more meaningful, especially to the extent that we see any meaningful appreciation of that asset.

As I said, if you did the math today, you'd come out in the neighborhood of a $25m piece of equity. If all goes well, that could be substantially more as we move into next year, for example, and I think we-- so, we're really right now focused on I think our most immediate short-term needs, letting things sort of-- letting [Tom Minnow] in particular put some of his capital to work and seeing if we can't create some value there. We think that can have a real impact on it. But, even in the short-term, I think it makes-- puts us in a better position to access instruments that, frankly, we have, for the most part, avoided in the past.

OK, thanks for your time. I'll let someone else take a turn.

Your next question, said from [Jonathan Blostein] of Chestnut Ridge Capital.

Hi, Rick, how are you?

I'm well, Jonathan, how are you?

A couple of questions. Why hasn't the Nomad product, both the commercial and the military, gained more traction? It seems like there are a lot of paid pilots, a lot of people looking, but we never seem to get that foundation order where somebody says I'm going to buy X amount of thousands of units, and the company really needs to get to the next level. And then I have another-- a follow-up question about the financing.

OK, good. Let me take this one first. I think in general, what we're really seeing is just sort of a push forward of the ramp that we've expected, for the most part. If you take the planned released to production versus where we are now, we think the ramp is going to look pretty consistent versus what we had planned.

Now, I think what we have said in the past is that we think we will see some sort of tipping point like that. I think the likelihood is that those larger scale kinds of orders that you're referring to are going to come from maybe some of the Fortune 100 customers that Steve is referring to, who may be buying them on an enterprise basis. The markets that we're focused on today is one where it's not a common practice for the OEMs to buy stuff and give it to their dealers. It is a practice occasionally for OEMs to require purchases of their dealers. I wouldn't, by the way, rule that out. I think that potential still exists.

So, in terms of how we would characterize the ramp into the automotive segment, we're not seeing anything unusual or that gives us pause to ask that same question. I don't think that's our expectation. I do think we'll see traction take place as momentum and critical mass builds and you've got more salespeople selling-- making more multi-unit sales in a faster rate of time. Those are the dynamics that are going to allow these things to aggregate up into larger numbers.

One sort of-- not an exception but really a variant on this theme is the mode that we are in with Honda is one where what they have asked to do is to work with us to market alongside them to their dealers so that they can then help aggregate orders to achieve better purchasing terms on behalf of their dealers. So, they're sort of acting as a broker in that transaction to try to consolidate purchasing, to achieve purchasing economies to benefit their dealers and get them a better price. And that has-- is just now-- and again, you push it forward from the production delay because that's still necessitates being out in the field with the units, conducting demonstrations and evaluations on-site, and we've really sort of, just in the last month or six weeks, gotten to the place where we can legitimately do that.

So, I think we will see a tipping point. I'm not sure it will be characterized by a single customer placing a giant order. I do think in 2005, as some of these large enterprise players come into play, you could start to see more of that kind of thing, but I don't know that that's the dynamic that we expect in the automotive marketplace.

Yes, but here's the thing as an investor, and we've been with this thing probably two years. There are certain names like Honda and like Canon that were kind of like really high-profile names that were - had paid pilots, and my attitude is when I see them never converting this thing to a foundation order, I become more and more skeptical that they're ever going to do that. And I know what you're talking about a tipping point, but, like, there's also an atrophy point where they have had the product for a certain amount of time, and the longer that they have it tested and don't actually convert from paid pilot to foundation order, the more cynical I become that it's ever going to happen. You can address yourself to that.

And the second question I had was, looking at the balance sheet of the company, it appears that you run out of money by the end of the year. I'm looking at Lumera stock. It's closing at a new low every day. It's pretty illiquid, too. It's in the nanotech industry. I know that there was a big nanotech offering that was just pulled the other day. We're going into the kind of market at the end of the year where there's lots of cynicism for the small cap stocks and all the what I call "I promise you" stories. It just seems implausible to me that you're going to be able to leverage off of Lumera, given the situation it's in as a new company. And if that's the case, how do you guys get yourself financing for '05? Because at the end of a year, you're out of money.

Yes. Well--.

--If you could address yourself to both of those questions.

If I was a contrarian, I might have thought you were calling a bottom there a moment ago with all that nanotech thing. No, I think-- and I'm being facetious. Look, I don't think we are suggesting that Lumera does a lot for us in the short-term, and I think it's important to be clear about this. We're not talking about liquidating this. We're not talking about necessarily hypothecating this. What we're talking about is having greater comfort looking at instruments that are convertible, whether preferreds or debt instruments, which tend to have about a three-year term on them, because what you-- what would cause you to tend not to look in the direction of those kinds of instruments is your concern about the redemption window and what happens at redemption time. So-- now, I don't want to get into a long discussion about what Lumera is worth today and what we think it's worth a year or 18 months or three years from now. Obviously, that remains to be seen. You're right to certainly point to the negative effects of the Nanosys deal being pulled. I don't think that's fundamentally a negative for Lumera.

Yes, I'm not talking about the fundamentals of Lumera. I'm just saying you have a company, Lumera, that doesn't have a long track record. And if you're going to try to sell a security, one security is fungible into another security--.

--No - well see, Jonathan, I think maybe you're not listening to me, because I think I just finished saying that's exactly not what we're talking about doing. All I'm saying is that, from the perspective-- look, it's real simple. If I've got $25 million and I'm an individual, am I more comfortable borrowing money from the bank than I would be if I had $10? Answer: yes. Yes, and that's all we're saying. We're not trying to say that we're going to create any fancy, bizarre arbitrage strategy using this thing or leveraging off of it in the short-term. We are trying to say that we think, over the longer term, we're comfortable-- and we have a somewhat advantaged position relative to this asset versus the rest of the market-- that that is going to put us-- it's not a bad position today, but we think it can get even better and, therefore, that makes us more comfortable looking at different types of instruments. I'm not-- we're not going to do any cross-convertible thing like that. That's not what we're talking about here. My simple brain can't [inaudible].

So, [inaudible] will do-- I mean, obviously, there has to be some type of funding event between now and year-end, so can you kind of give us shareholders some kind of insight, then, in terms of how we're going to continue on past--?

--Well, I think, other than what I've just said, it would probably not be prudent of me to do that, especially in light of the kinds of articles that you've seen in the Journal. Do you really want to be in possession of inside information relative to a financing? So, I mean, I don't think it would make sense to provide a lot of details on when we're going to do what we're going to do. I'm just saying that we've got some structures available. It's not that they weren't available to us today. I just think that we're in a more comfortable position relative to those kinds of structures than we were in the past because we've got an asset, and we're comfortable with the value of that asset, we're comfortable with what we think the outlook for it. So, we're not going to rush out and do anything.

OK, all right, and back to Nomad. One of the things that really surprised me was I was really encouraged by the initial feedback you were getting about the Nomad with the Striker division that was in Iraq, and I can't for the life of me figure out why wouldn't the government come back and-- I mean, given the hundred or $200b they're spending there, I mean, this is not even tip money for one meal for them. I'm like, why is it so hard for them to place an order for Nomads for their Strikers?

It's a very legitimate question, although-- let me see if I can give you-- it had a lot to do with a couple of things. One is, when you're dealing with the kind of situation that we are in Iraq, obviously you're doing triage on what those tip monies are going to. I mean, you've obviously seen on the news that there was a shortage of bulletproof vests and parents buying bulletproof vests for their sons and daughters in harm's way. So, clearly, that would seem like the same thing. "Gee, why can't the Army afford a few bulletproof vests?" The reality is that it's very expensive to equip military and fight a war, and the things that tend to get prioritized, especially in a tactical situation like this, are not the higher tech kinds of things. They're beans and bullets, as the saying goes.

And I think, Jonathan, if I were to put you on the phone with either Colonel Brown or General Reimer, you'd get quite excited about what the intermediate and longer-term prospects for this are. General Reimer in particular articulates a very compelling vision of where Nomad can go. I want to be clear about this: he's on our Board of Directors, but [Denny] took a long time and a very careful look and really wanted to see how soldiers in the field responded to this thing before he got out there and started advocating this.

So, I wouldn't read too much into the fact that they're not able to find money in the very short-term. They're not able to find money for a lot of things that a lot of people want to do, and yes, it seems ironic and confusing and just plain silly to those of us on the outside as taxpayers saying, "Gosh, they're spending hundreds of billions of dollars. How can they be shy a few million?" But that really is-- you just have a lot of competing resource requirements. The fact that we're in there at all on these vehicles-and I'm not trying to suggest that we wouldn't like to do more, but that's actually a very, very big deal, and the way that we got into this and the level of support-- and I mentioned Colonel Brown's name. He's the brigade commander. Again, I think you'd get a real warm feeling about how they perceive the need and the utility, but there's lots of things that they can't easily get today that they want to have.

Like I said, the issue for us as investors is how you get these paid pilots, whether it's military or commercial, into foundation orders.

Right. Well-- again, I think in the automotive space, I think we ought to maybe off-line have a conversation about this notion of a foundation order because I think what I was trying to clarify there is that, other than the case where you might have Honda aggregating orders a few hundred at a time-- and those numbers could get bigger as we get further into this thing-- we've never thought that it was likely that-- because again, where these things are ultimately destined to is automotive dealerships. There are very few companies that own dealerships, with the exception of groups like Auto Nation who have consolidated two or 300 dealerships, that would have a need to buy thousands of units at a time.

Have you disclosed exactly how many you have sold to Honda-- to the dealers?

We haven't broken out Honda in particular just yet. I mean, I can go through those with you. I just went through and kind of listed the various dealerships that we have out there. Some number of those are Honda dealers. What we've really been doing with respect to Honda-- and Honda has asked us to do this-- is waiting for their formalized marketing program, which should kick off within the next couple of weeks, to run in parallel with their people. They've created promotional materials internally that are really quite compelling and quite powerful to drive this. They've conducted the survey. And again, I guess maybe it's important to sort of correct this notion of a paid pilot. It wasn't an instance where we went with Honda and did a paid pilot that was then meant to lead to a larger foundation order. The work that we did was with them in their laboratory facility with which they then sort of helped us establish, and worked with us to establish, the product specifications and the business case for use of the product.

There was at some point-- and we talked about this, and I don't think we played the expectations of it-- one of the outcomes was that they would require the tool, and there you would see a larger order because it would be mandated that the dealers purchase this out of their account, and Honda actually has money on account from those dealers and can debit it for that kind of purpose. But, we have been saying for some time now that we did not expect that to be the case, and that, rather, we achieved the status of a-- not a required tool but a recommended tool, and that we would then go out and co-market and aggregate orders with Honda. So, I think it's early-- it's not early from the perspective of that-- yes, we've been at this, but the reason the tipping point has been pushed off is because production has been pushed off, and I'm-- I want-- in fact, I don't believe it has anything to do with the dogs eating the dog food or their--.

Has Honda designated this as a recommended tool?

Yes, they have.

Yes, they have. That we reported on our last call, and I think we mentioned again in the press release today.

One of the things I think would-- one that can be helpful to all investors--.

--And Jonathan, if you would get some comfort from talking to those folks over there at Honda, we can arrange that.

OK. Well, one of the things that would be helpful I think to all the investors would be if you could kind of track, since it is a recommended tools, whatever the number is, say you sold X amount, even if it was, like, five or two, even if it just showed some kind of positive traction that, as a result of being a recommended tool that you were selling more, that would be helpful to people to know.

Sure, OK. Well again, the-- we've sold some to Honda dealers, but that's before this recommended tool promotional marketing rollout has occurred. That's just getting started. So, we'll be able to, I think on our next call, speak to that point about what effect the recommended tool and the three-month promotion have had in terms of securing deals with Honda. But, again, let's get offline and talk more with you about this. I think Andrew and Tom can also give you some real color on what they're seeing not just at Honda, but at [inaudible] dealerships. Some of these reference accounts I really think are going to serve the purpose that you're talking about, because, in many cases, we're talking about a group that may be the fifth largest GM dealer in the country, highly visible folks out there, and we think that's going to be meaningful obviously not just to investors, but the whole point is that people want to know, "Gee, who's using this thing out there?" So, we're really targeting those accounts, and I think you're going to be very pleased to see the level of visibility that is associated with this.

Well, we certainly hope so, and like I said, by you disclosing it to all your investors, public or-- release that you're selling X amount and just showing some positive traction, that would be some kind of data point that we could grab onto and give us some hope.

I think it's a good suggestion, and one we'll pay attention to.

OK. Well, thank you so much.

Take care.

You have a follow-up question from Alan Robinson.

Just a bookkeeping question for Richard. Could you give me an idea of the operating cash use during the quarter? And if you have the figure, what your current cash and securities balance is as of today rather than as of the end of the quarter.

The cash burn-- the total burn for the company was 10.6m. Eight and a half of that was Microvision, [inaudible] the total burn. We don't disclose cash balances between quarters, Alan.

OK. And--.

--Was 6m at the end of the--.

--Yes. And of the operating cash use there, or rather the cash burn you refer to, was any element of that the capital expenditures?

Yes. On a consolidated basis for the six months, we've spent 600,000 on cap-ex.

OK, thank you.

Ladies and gentlemen, that concludes your question and answer session. I'd now like to turn the call back over to Rick Rutkowski for final closing comments.

Thanks very much for joining us again today. Apologize, we ran about 15 minutes over this afternoon. We do try to keep these to an hour. We're happy to answer questions in more detail from folks who want to contact us offline. Brian Heagler is our Director of Investor Relations.

But again, I think importantly, we believe the backlog is going to allow us with-- especially with new contract bookings coming into play, to put the contract business back on a satisfactory footing. We believe there is every indication that we can begin to ramp Nomad sales more successfully this quarter, and also get Flic going. We're really very encouraged by what we see is the market outlook for both of those products. I think in terms of additional catalysts, again, I would look to some of the potential for meaningful partnerships in the OEM product domain, which includes consumer electronics, automotive head-up display. I think you'll see a follow-on contract there potentially soon. We should be speaking to you more about many of these developments in the very near future. And as I said, I think Lumera will be able to talk more about its plans and prospects following the conclusion of its quiet period on the 16th of August.

Thanks so much, and appreciate your being with us today and throughout these interesting times. Take care.

Ladies and gentlemen, thank you for your participation. This concludes your conference call. You may now disconnect.