MicroVision Inc (MVIS) 2004 Q3 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the Microvision Third Quarter Financial Results Conference Call. My name is Caitlin, and I will be your coordinator today. At this time, all participants are in a listen-only mode. We will facilitate a question and answer session at the end of today’s conference. If at any time during the call you require assistance please press star, followed by zero, and a coordinator will be happy to assist you. As a reminder, this conference call is being recorded for replay purposes.

I would like to now turn the presentation to your host, Mr. Brian Hagler, Director of Investor Relations. Sir, please go ahead.

Thank you. I’d like to welcome everyone to Microvision’s Third 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 in demand, future product benefits and future operations, potential future benefits of our equity interest in Lumera, as well as statements containing words like "believes," "estimate," "expects," "anticipates," "targets," "plans," "will", "could", “would” and other similar expressions. These statements are not guarantees of future performance. Actual results could differ materially from the future results implied or expressed in the forward-looking statements.

Additional information concerning factors that could cause actual results to differ materially from those in the forward-looking statements are included in our most recent Annual Report on Form 10-K filed with the Securities & Exchange Commission, and item one under the heading, ‘risk factors relating to the Company’s business,’ and our other reports filed with the Commission from time to time.

Except as expressly required by the Federal Securities Laws we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, changes in circumstances or any other reason.

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

Good afternoon, everyone. Thanks for joining us this afternoon. I’d like to make a couple of comments before jumping into the release. If you don’t have a copy of the release, by the way, you should contact us at 425-415-6611, and you’ll reach [Gail Knoll] [ph], and you can ask her to accommodate you in that regard.

In our financial results press release that was issued a few minutes ago, we do report both our consolidated revenue, as well as revenue excluding Lumera. I’m going to focus principally on Microvision’s numbers only today since Q3 includes very little Lumera revenue.

Now, having said that, I do want to make some comments to clarify a few things because there is some complexity associated with this. And we certainly will be happy to take additional questions regarding Lumera consolidation or other issues relating to that in the q and a.

So, several things, important differences, and items of note relating to how we consolidate Lumera's operating results today versus previously. We no longer consolidate revenue at all going forward. We used to pick-up 100 percent of the Lumera revenue in the past, we will not do that going forward. During the third quarter we picked up only through the IPO, so several weeks at the front of the quarter, in July.

We also no longer consolidate balance sheet data, so we’re simply inserting what we now call a one-line summary of the operating results for Lumera. We also no longer back-out of Lumera’s losses the minority interest in the loss consolidation. So, we are now picking up our full ratable share of Lumera’s losses, which are 33 percent. In the past, that number has been more in the neighborhood of 11, 12 percent. And so that accounts for, if we look at the quarter just past, about 7 cents of our EPS loss is attributable to Lumera.

It is a non-cash item, that is also of note. So, the Lumera consolidation, losses from Lumera going forward, do not impact Microvision’s cash flow. We do make a point in the press release of describing the cash use in operations for this quarter and around the $7m level, versus the operating loss.

One last point on Lumera, when we indicated in the press release that we are carrying an $11.2m value for Lumera on our balance sheet, that is based on book value of the stock, not the market value of the stock. Just for clarification and information, Microvision owns 5.5m shares of Lumera. Based on today’s closing price of $7.72 that stock would be valued at roughly $42m. Another aspect of this $11.2m, we did not pick that up through the income statement but picked it up directly into the equity account.

So, I think those clarifications are important. The value and liquidity of Lumera, of our ownership interest in Lumera, we think can become an important piece of our financing strategy going forward. We’ll speak to that later, as well.

So, let’s move into the numbers. Revenue for the third quarter of 2004 was 2.6m, Microvision alone compared to 1.9m for the same period in 2003, and 2.1m for the third quarter compared to, and contract revenue compared to 1.8m for the same period last year. Product revenue for the current quarter was $572,000 compared to $42,000 last year, and was comprised of $224,000 from sales of Nomad display, and $340,000 from sales of the Flic bar code scanner.

For the nine months ended September 30th Microvision revenue was 7.4m compared to 9.2m for the same period last year. And the revenue for the nine months was down due to lower contract revenues partially offset by higher product revenue. And that was principally due, that negative impact was due to the delay of a virtual [cockpit] [ph] contract, as well as the delay in award, the protracted delay in award of the Kyowa Warrior Program, which we still expect to receive. That’s about a $2m contract that we believe is still pending. And I’ll speak to that in just a moment.

As of September 30th our backlog totaled 3.2m, of which 2.9m was for development contracts, $194,000 for Nomad, and $86,000 for the Flic Laser bar code scanner and accessories.

The Company reported a consolidated net loss available for common shareholders of 10.1m or 47 cents per share for the third quarter of 2004, compared to 6.9m or 39 cents per share in the same period in 2003. Third quarter of 2004 net loss includes inventory write-offs totaling 800,000 related to the Nomad and the Flic scanner, and in particular that relates to parts obsolescence. With respect to the Nomad we replaced a $400 scan engine with $100 part, and so we wrote-down some pre-existing inventory, but we ought to get a return on that investment going forward. It also includes increased production costs for starting up the production line for Nomad, which is going to include higher than normalized labor and less efficient use of labor. And we’re seeing those things trend in the correct direction at this point.

An increase in sales and marketing costs of approximately $1m relating to Nomad product launch. This was very much a part of our budget plan coming into 2004, which was to bring in our development costs somewhat, and increase sales and marketing costs that are now focused squarely on the go to market strategy and generating product revenue from Nomad and Flic. That piece has been largely successful. There’s been more or less a direct correlation of the reduction in research and product development budget versus the increase in sales and marketing budget, but we then had increases in manufacturing, as well. And some of those went over our budgeted numbers. We do see those coming back in line.

We also have a net loss attributable to Lumera of 1.6m. That’s along the lines that I discussed just a few minutes ago, that is a non-cash item, and again, we’ll take more questions relating to that later on, if you wish.

Cash used in operations for the quarter was 7.1m, so you can see that there’s a considerable difference between the loss available to common shareholders and the cash burn rate. We do see that number stabilizing, coming down as a result of increase in both contract and product revenue, and as I said, some of the onetime items or extraordinary items, including write downs, not repeating themselves going forward.

We ended the quarter with 8.8m in cash and cash equivalents, and we ended the quarter, as I said, with an investment in Lumera booked at 11.2m, representing the Company’s ownership interest in terms of its book value.

So, I think I’ve covered most of the other financial points that I wanted to, but let me just move through these again because I have them in sort of a bulleted form. We do have, the extraordinary items that I referred to, inventory write downs, parts obsolescence that I referred to with the scan engine in Nomad. We also had scrap costs, as one would expect, as we geared up, ramped and saw yields go up. Those are coming down. Our total defect per unit is looking very good right now and, in fact, even exceptional. And we had increased labor costs in manufacturing, the same thing as we climbed up the early part of this manufacturing process. Now, that should trend back down with increased labor efficiency and increased absorption into cost of goods as volume ramps. And, in fact, as we hand this off to a contract manufacturer, a lot of those fixed costs will come through as cost of goods going forward. The plan is to begin that process during the fourth quarter, during the current quarter of this year. And I think we’re on track for doing that.

I’d like to talk to you about, now that we’ve covered the numbers and, again, let’s certainly get questions to clarify further any of those issues. I’d like to talk to you further about the prognosis for the business going forward.

And for the sake of a reminder and for those of you who are new, I think it’s valuable to sort of frame that discussion. We’ve come very much to think of the business as having two distinct but highly synergistic components. And the first of those are manifesting our technology as finished goods products. Nomad display system and the Flic bar code scanner are examples of finished goods, something that comes in a box, can be purchased through a channel, and used by an end user.

The other category of product revenue for us will come in the form of OEM display and imaging solutions. That’s where we’re going to sell some sort of module or subassembly that could be integrated into an automobile, a digital camera, a laser printer, or what have you. And the examples of that include our work on the automotive head-up display, our work with Canon on electronic viewfinders, our work on laser printer engines sponsored by a major Asian partner, and work on a laser camera and a micro camera, which I’ll touch on as we go, as well.

So, I want to first speak to these OEM solutions because our focus as we go forward is on both of these areas. How do we drive business in both of these areas and achieve growth in both of these areas? And I’m going to speak about this both from a financial and a strategic point of view.

The, when we talk about these OEM solutions this relates directly to our contract revenue model. The contracts historically have been sponsored by the U.S. Department of Defense and major OEM customers. Some of them we talked about. BMW, BW Audi, Canon, et cetera. And the strategic objective here, of course, is not simply to generate revenue from contracts but to advance the technology towards a specific product solution, as I said a subsystem or component solution, and achieve a design win for volume production, and the related high growth revenue that can come from those things.

From a financial perspective, as I alluded to earlier, the first half of 2004 was weaker than expected and very lumpy because we did not get that $2m contract that I mentioned. That was delayed for a long time. And we saw some other items that didn’t recur in that timeframe.

We did mention on our last call that we wanted to turn that around and put that business back on track, and that we thought with our backlog of 4.9m at the time, and subsequent bookings that we expected that we would be able to do that, and we see the evidence of that. We are starting to turn this around in Q3, and we expect to see more of the same in Q4. So, the same kind of sequential increase quarter to quarter, is what we’re targeting. Backlog and new bookings prospects should support that. New bookings for this quarter and the first half of 2005 look very encouraging, and they would include that delayed Army contract that I referred to.

The strategic perspective here, though, is equally important, because while the financial results were disappointing in terms of our ability to book and bill against these contracts, billings were constrained by having resources tied up in the late stages of Nomad development. In other words, we’d anticipate it moving engineering and resources off of Nomad or earlier in the year than we were able to. That’s no longer an issue, so we have that back for us.

But the strategic perspective here against that disappointing background is very different. In fact, on the strategic front, moving, in other words, moving towards design wins, moving towards OEM products, the progress during this period has been very, very encouraging. And I would say that that is the case in every one of our existing OEM development areas.

So, by that let me enumerate these. We have our automotive head-up display work, principal sponsors have been BMW, Volkswagen, Audi. There is a large tier one automotive supplier out of Europe that has also been funding and supporting that work, and we have some significant milestones upcoming including another installation into a car. Don’t quote me on this, but I think we will have head-up displays in four demonstration vehicles during 2005, among at least two if not three OEMs. And I promise if anyone wants those, I’ll get you more exact numbers. But it’s going very, very well.

I also have made significant strides on our consumer electronics effort with Canon, and also independent of that once significant milestone during the quarter was the demonstration of a nine mega pixel display. When we reported it originally we erroneously reported it as 7.6m pixels, or it was actually a little bit better than that.

The real significance of that is this is the first time we’ve used an architecture which is scanning arrays of light sources, and it has very important implications with respect to scalability to very, very high resolution, very, very high luminous values. Those are going to be especially important in some of the consumer electronics areas, especially areas relating to online gaming products and entertainment applications of [wareable] [ph] displays. And we have some very exciting new product design areas there, as well. And Steve Wiley is going to speak to that in just a moment.

The third area was our work in laser print engine. It’s a very successful delivery. Achieved some very tough milestones. We anticipate follow-on contracts in this area. We also have done work over the past year in developing a laser camera, and more recently a laser micro camera. I won’t do a lot more than sort of introduce that in passing today, but what we’re talking about is a camera that has a diameter of about 3 millimeters and a resolution of about 1.2 mega pixels. That is a very compelling combination of features for a number of applications, including medical applications that we’ve worked with in the past. We think there is also strong potential for continued development activity leading to design wins in that domain, as well.

So, our objectives for this quarter and beyond with respect to the contract/OEM solutions business, financially we want to get that back on track with the increased bookings, more effective take-down of the backlog, and that’s going to come from both repeat and new customers, and the strategic emphasis here is going to be to convert to design wins. We see very good things on both of those fronts. Potentially even some up side surprises with the design wins. We’re very encouraged by some of the things that we see going on there.

So, to summarize here, in terms of what we see, in terms of prospective new bookings, I alluded on our last call the 6.4m in new Congressional appropriations for 2005, plus 2m, as I said, on that delayed or deferred contract. We also have a measure in the transportation bill that we think is a candidate for a Congressional mark, as well. So, our, the core of our DOD Government work is looking to be quite well funded for 2005.

On the commercial front the potential for both repeat business and new business is looking very good across the board, repeat business in particular. We also have a renewed and strong interest, as I said, in the new business category in our laser micro camera that could represent a significant opportunity leading to a design win there. And we will, I promise you, talk more about that as we get closer to the point. We are under contract now to do a systems definition piece of the equation which should be completed before the end of the year.

Well, I’m also going to ask Steve Willey now to talk on the subject of new prospects for contract bookings, OEM design wins, about some of the work he’s doing in Asia. He is phoning in from Japan now. And Steve, maybe you could talk about some of the new product categories and applications that we’re seeing in addition to your work on EVF.

I’ll certainly do that. Would be pleased to do that. And I will put a focus on the specific work we’re doing in Asia. I’ll also note that we have completed our deliverables to Canon as part of the most recent contracts, consistent with some of the new elements of the architecture that Rick had described.

So, I think I’ll touch on what we’re seeing in the marketplace, the sudden interest, if you will, and why we believe its happening. What we’re seeing is a real increase in tempo of market activity, both from the standpoint of number of companies that are approaching us, approaching Microvision directly, looking for solutions. And the quality of these companies, their size, their industry presence.

And what’s more, what we’re seeing is a shift from curiosity that certainly was prevalent in the early days to now companies that are approaching us with a clear definition of their needs and clear applications. And an interest over a diversity of applications across all three architectures. And as Rick mentioned, the viewfinder is one architecture or one application of the so-called embedded architecture that we have.

But there are three in total that we are bringing to consumer markets. The second is architecture display, consumer wareable displays with an emphasis on wareable, lightweight, low bulk, low power. And a third architecture for these consumer applications or consumer markets are display engines for large format television, very large format, 60, 70-inch diagonal so-called laser TV applications. So, in summary, we have a tremendous interest suddenly, and we have ongoing discussions with serious partners in all three, across all three categories of architecture.

So, why this sudden and serious interest? We think it’s fueled by a number of things. Certainly, there’s a growing awareness of Microvision in Asia, perhaps we can call it a critical mass of interest. And in large part I think that’s from the respect, from the work that we have done over the last couple of years, the important work that we have delivered to companies like Canon. So, we are viewed then as providing unique and powerful solution sets to display markets.

The second thing we’re seeing in the display industry is that there’s been a certain withdrawal as certain key competitors, competitors’ suppliers, particularly those with LCD or liquid crystal silicon solutions, Intel and Philips were the most recent. And at Microvision we predicted difficulties the competitors might have with these alternative solutions because they don't hold the key patents and, certainly, the patent portfolio that Microvision does. So, the focus is back on to Microvision bringing a robust IP portfolio to the marketplace.

The third thing, the reason perhaps for this sudden and serious interest are the enabling technologies that are driving the industry. For example, the aggressive rollout of telecom bandwidth which continues, the 3G, the Wi-Fi, Wi-Max, digital and satellite TV, the cellular handsets, et cetera. And that coupled with digital storage, new digital storage solutions, the iPOD like solutions for these new portable media devices, all this is reinforcing Microvision’s claim that the standard 2-inch miniature LCD display which is ubiquitous is absolutely a bottleneck, and that the consumer is looking for the functionality of a large laptop screen, but in a form factor of the cellular handset or an iPOD.

And I think that is driving significant interest in our micro display solution. We can’t give too much details on these discussions and these activities for obvious reasons, but I certainly can report the trends are very positive. Thanks.

Thanks, Steve. I think you touched on something very important there which, you know, it’s been our experience really in virtually every one of these categories, whether it’s with BMW and BW Audi on the Hud, or with Canon on the electronic viewfinder, or some of the parties that you’ve mentioned who are household names in consumer electronics in Korea and Japan, that they have in virtually every case concluded that they can achieve the requirements with their products using miniature LCD displays. And it’s typically some combination of performance, price, and package, obviously, that are going to drive those things.

So, this is a, you know, this is a difficult point to grasp, but it’s a very, very important point that we’re entering the market with these OEM solutions at a time when needs are being validated and the means to satisfy those needs, the historical means, the competitive means to satisfy those needs are being discarded and discounted in large measure. And I think Steve, that’s consistent with, you know, what you’ve heard from some of these new customers, as well.

Correct.

So, I think the point that Steve makes about the new media player, the iPOD type of media player is going to be very important in this context also.

In short, we’re very excited about the picture for contract revenue going forward. We think it improves sequentially in Q4. We think 2005 we could start to accumulate more of a backlog that’s going to allow us to smooth those numbers a little bit more.

One of the challenges you have in this, and I don’t want to digress too much into sort of financial analytics, but one of the challenges you have in smoothing revenue is we tend not to pursue lots of small contracts, we tend to pursue larger contracts. And so that’s where you get the lumpiness. It’s like building a slope out of large boulders instead of building a slope of gravel and sand, you’re going to get some of this lumpiness as the boulders come in and out of position. We think that’s strategically that is absolutely the right way to go in that what we’re getting is very serious sponsored investment of product development leading to design wins, again, which is the primary objective.

On the commercial product side our focus here is on ramping sales of the two finished goods products that we have available to us today, and of course, in following those products with other finished goods products. The two products are the Flic laser bar code scanner and the Nomad expert technician system.

And I’m going to refer to sort of a first phase in both cases that we think is solidly behind us, and I think again, this may be subtle but extremely important. We believe that in both cases the question of whether or not these are, in fact, marketable products or you know, whether there is a demand and a value premise for them, it is no longer a question. We believe emphatically that we have validated both the demand and the basic value premise for both products. And secondly, an important aspect that we’ve achieved in Q3, we started the quarter having a lot of trouble producing the Nomad display. In the last four weeks of the quarter overcame that. And now, have achieved sustainable and consistent production, and are hitting our quality metrics, as well.

So, again, I wanted just to emphasize we feel strongly that we’ve passed those milestones with both products. We think we know where the markets are, what the value premise is in each case, and now this really gets it to focus squarely on the blocking and tackling of going to market. Product awareness, channel development, and executing sales to achieve sequential growth in both categories.

In Flic, Q3 was very successful except it came below expectations, a little bit principally due to the delay of a single large order by Shell Canada. They have a convenience store rollout of the product in conjunction with Utilitran’s ordering and inventory management application. They delayed that rollout somewhat, that will come back, and but we’ve seen a similar kind of lumpiness here as we’ve gotten the first three quarters of Flic rollout under our belt, in that it was in these past three quarters what we’ve seen the sales comprised of is a small number of large orders.

I’m pleased to report that in Q4 the early signs are very good. One of which is that we had a strong October. Typically, our sales have come in late in the quarter, without much activity early in the quarter. We’ve moved 1,500 units in October.

Also, to this point of lumpiness that I talked about, our sales funnel today looks very different than it has in the past. It consists of a significantly larger number of customers, so we think we can look for both growth and smoothing as we go forward with respect to Flic revenue.

Another key event, and we think this is really important because it relates to this notion of where this product plays in the market, is a relationship that we created and announced very recently with Smead, the very well known office products company. And what I’m really pointing at here is that we believe that one of the products, one of the channels that Flic is extremely well suited for is the retail channel, go into Staples, or Office Depot, or OfficeMax, buy it off the shelf, and begin doing inventory management, warehousing, ordering file management, those kinds of things.

One of the key changes that has occurred in the market is migration to what we call the application software provider model of software, which is where I don’t, you know, I don’t go and necessarily buy a disk and install it in my computer, I simply go to a web site and there’s a canned application there that’s going to let me do these kinds of things. And that’s really how the Utrilitran model works, but that’s very, very important to the uptake of Flic, because it removes a barrier completely. These are highly intuitive, they’re easy for users to operate, and generate, and scan bar codes. And we think that’s very much the direction that Smead is headed in. The first product launch with Smead is simply to dramatically reduce the price of their existing Smead linked product. A next front in this in growing this channel for us is to use this to perform catalog ordering which is something [JumpTech] [ph] is doing today, and we see some significant prospects in our Q for 2005 relating to catalog ordering with other OEMs, as well.

But the product is extremely well suited to these channels. It’s all about simplicity and affordability. So, the application software provider model is a potentially powerful driver to make bar code scanning very broadly accessible to this base of the market which has historically been hard to reach. That’s an important change to grasp.

We are looking at some good growth in Q4 for the product, and through next year. Again, the dynamic here is multiple channels of distribution starting to catch hold, smoothing function by virtue of a growing customer base, and more repeat order activity, and filling in those gaps with larger numbers of smaller orders, as well.

As I mentioned with respect to Nomad, Q3 was constrained by production bottlenecks. We really only were able to achieve about the last two weeks of the quarter in terms of shipping product to customers because, it was about three weeks because we lose a week at the end of the quarter for revenue, for an acceptance period. But this is very much no longer an issue. We have been hitting our targeted production rates, quality is looking very good, and we think we’ll see that reflected in some of the fixed costs and variable cost numbers going forward, as well.

So, we began the rollout very much in earnest during September, and late September, and saw an immediate upturn in activity as a result of availability of these units. The ability to conduct demonstrations, the ability to install reference accounts, and achieve the associated media awareness and targeted telemarketing that goes with that allowed us to really move out with the product. And we’ve seen really encouraging things since then.

We are in terms of leading indicators we had set targets for lead generation and qualified them on request, and I’ll point you to some of the things that we mentioned in the press release here, we’ve seen an increase in sales activity across the board during the month of October, currently have over 400 dealers that have requested product demonstrations, most of that activity is very recent. To date, we’ve installed 102 Nomad units, and 23 dealerships in 18 States. Those include Honda, Volvo, Saab, Lexus, Ford, and General Motors dealerships. They also include, as I know it, at least one Chrysler Jeep dealership, which you don’t want to leave them off the list.

The reference account program has been very successful for us, we’ve seen a sharp and measurable increase in brand awareness, and in the generation of qualified leads, and prospects as a result of that. So, we’re now able to feed our sales channel with targeted leads pretty effectively.

Another thing that we note here is that Nomad was named a top 20 tool by Motor Magazine News. That is very much helping in the awareness aspect of this. Sales to date have been about 132 units, including 57 sold during that last part of the third quarter. We ended the quarter with 38 units in backlog, and during October had our best revenue month yet with the product.

We’ve also responded to a solicitation that came during October. We hope to close this by the end of October. I think we will close it soon. For a purchase of 37 Nomad units plus accessories for use by the Army Reserve and their Vehicle Maintenance Depots. This is potentially a very significant new market opening up. These military sales will tend to come in larger chunks like this, but there are a lot of opportunities, both within the National Guard Army Reserve, as well as other branches of the military. We completed a highly successful test and evaluation with the Air Force Maintenance crews in [Yakota] [ph], Japan, and have seen very recently very strong and growing interest in the U.S. military for maintenance. There’s a lot of attention focused on this. And actually, a fair amount of money designated for equipping maintainers with what are called e-tools, so there’s some broad categories of budget that are available to support the purchase of these kinds of things.

Initial sales that we’re making today with Nomad are direct, so where does the growth come from? It’s a combination of things. What’s been happening to date is we’ve got our four regional area reps, we’ll be adding a fifth, who are managing network, creating and managing networks of independent reps, and resellers. So, we need to see more activity from those independent reps. We’re starting to see that, but the dynamic there is that as they see us being successful, as they see customers embracing the product, they’re going to spend more of their time and energy selling the product and we’re seeing early signs of that. In fact, one of our largest prospective unit volume leads came to us through one of our independent reps. So, we’re seeing more of that activity, and we are targeting more of that.

We also have, are going to grow the footprint by adding more of those reps, and we’re going to add software and solutions providers to the mix as part of the distributions channel. So, in other words, that’s someone who is currently selling computer systems, software solutions, to automotive dealerships. A couple of the well known companies that specialize in that are ADP and Reynolds. And Reynolds, we’re looking at distribution agreements for both Canada and the U.S., but those are going to start kicking in and becoming part of the sales activity probably later in this quarter, and the first quarter of next year.

Other growth is going to come from repeat orders. We have several prospects for that, Andrew, you mentioned earlier, that you wanted to talk a little bit about that.

Well, where we’ve had the Nomad reference accounts the longest we’ve noticed a couple of things. First, there’s definitely power user groups within those dealerships that are developing. This has not gone unnoticed by the other members of the technical teams within those businesses. And they, too, are asking for the same kind of equipment, so these people that run these dealerships have come back and given us this positive feedback, affirming the use of Nomad, and begin the negotiating of additional orders.

So, I think that’s one of the best trends you can see is people are A, using it, not taking off their heads, they’re buying into the service productivity, it is apparently boosting productivity, we have numbers. I’m sure Tommy will talk a little bit about that. But, you know, that is really it, where you get the grassroots support and acceptance, and that is really where this product is going to take off. And that’s the whole point of going direct and growing these accounts.

So, how many customers are we looking at repeat orders from?

Well, Classic Chevrolet, of course, which we’ve had in the news approximately six of our key first installs are talking to us about -- in some cases fairly significant orders.

That’s great. And so, in one case that I know of, for example, we sold them a single unit about a month-and-a-half ago, and it looks like the second order would be five units, so that’s going to be something that’s going to drive growth.

The other thing that’s going to drive growth is simply sales productivity, and the key aspect there is to shorten sales cycle. Whereas, historically it may have taken two, three weeks, six weeks, or longer to get people interested in the Nomad sale because you were doing all the heavy lifting of saying. ‘what is this thing, and why, now, where are we going to use it?’

There’s a lot, the awareness, the referenced accounts are all contributing to shortening that. We’ve seen, I think, our shortest sales cycle is less than an hour. So, it’s real important, we are seeing people being able to make that purchase decision much, much faster just simply based on the product’s appearance of becoming an established production in the market. We have leading indicators that indicate where we think that’s going, and it looks very positive going forward, that we can continue that trend. So, all these things will start to work together.

Another thing that we’re very encouraged about, historically we’ve estimated that the average number of Nomads per dealer would be on the order of about two-and-a-half, and it looks like now we’ll move pretty quickly over three, and then to four or more, which is actually a significant increase in percentage terms.

And the reason for that is as we look at our sales funnel today, we’re seeing a number of prospects for larger initial orders. Historically, the initial order has been anywhere from one to five units as we look at, you know, October and September which is really what we’ve got to look at. We now have customers in the queue, multiple prospects in the 20 to 40 unit range, and one for as many as 75 units.

So, I guess what we’re getting at here is we’re really starting to see the early indications of the product establishing itself in the market, brand awareness I know is very high, we get that as a result of our telemarketing campaign. We inquire as to product familiarity and the numbers are running around 25 to 30 percent.

Well, you know, we’re still very much in the blocking and tackling phase on this, in terms of getting out and having to show it. But I agree with you, we just, as a matter of fact, yesterday, had a General Motors dealership that we had, a major one in the MidAtlantic area, who has 15 units installed, come back and suggest that they are going to have to have more units. So, I thought that was very encouraging.

Tom, you had a point you wanted to make?

Yeah, about awareness. We’re cold calling dealers all over the country, and we run around 25 or 35 percent yes’s when we ask them about whether they’ve heard of the Nomad. But we were also at a major trade show this week in Las Vegas, the Automotive Aftermarket Trade Show, and just anecdotally, the guys there are reporting, because they’re asking this question, as well, 80 percent of the people who come to the booth have heard of Nomad. So, the buzz is really getting out.

So, I think we’re moving to the point where the harvesting is going to become something that’s easier to do. We need to expand that footprint. We need to increase the level of sales activity, and begin to include some more efficient channels into that mix, as well.

In addition to the 37 Nomad unit station from the Army Reserve, and this is for Nomad as maintenance, I think most of you are familiar with the work we've done with the [striker] [ph] brigades in the past, we did get an order for 10 units that we are preparing to ship shortly here. We also received a pre-solicitation notice for two units plus an option for up to 250 units of the Nomad version for the striker brigade. This has an average selling price of on the order of $6,000 or so. So, there’s very meaningful potential here. That number correlates to a number that would equip about two-thirds, a half to two-thirds of a brigade’s full requirement, and so that’s probably the origin of that. Also, one of the, out of the 6.4m in ’05 appropriations that I mentioned, a $2m piece of that, a little over $2m, a $2.4m piece of that is associated with a project for the mounted warrior program which is something that sort of leverages it.

Another important aspect of this solicitation is, and you can read it, and I think we talk about it more in our press release, is that this was a sole source solicitation. The Army has determined that Microvision is the only source of this product that meets their requirements for day, night readability, and compatibility with their GPS moving map system. And we think that’s a very favorable indication, as well.

So, in addition to those potentials, we’re also seeing some migration into adjacent market segments, military maintenance, as I mentioned, is a huge market, you know, with over 700,000 military and civilian personnel involved in that area, that activity. Commercial aviation is an obvious choice, especially given the recent experience with the U.S. Air Force. We have some very powerful testimonial videos that we think are going to go a long way there in growing interest from the military.

We also have two major automotive OEMs looking very seriously at the product for the operation and maintenance of manufacturing machine tools, as well, so within automotive moving from the parts and service distribution channel into the manufacturing and maintenance of manufacturing equipment, those are some of the other adjacent markets.

[Inaudible] directly – Nomad is on the line right now.

Exactly. So, and of course, the other analogy there would be other users of high capacity machines and equipment. An example that we’ve talked about there includes semiconductor and consumer packaged goods companies that are, have an interest in Nomad.

And having said that, our primary focus in terms of building out the market for this quarter and next quarter is on the automotive market to dealerships, parts and service organizations.

So, in summary, and I apologize, we want to get to the q and a quickly here, so I’m going to move somewhat fast. The prospects for the contract business and OEM design wins, both the financial and the strategic aspects of that, are very good in the current quarter and through 2005, we do think we’ll see another sequential increase in Q4 to put this, as we said, back on track as to where we want it to be, in that sort of a $3m plus range is where we’d like to head back to here.

We also think the prospects for product business are very strong, with the primary focus now on channel development and increasing sales productivity, shrinking the sales cycle, targeting sequential increases for both products, and significant ramp in particular with respect to the Nomad through 2005.

So, by and large, we’re very, very encouraged. We think we’ve come through sort of the low point on Q2, have begun to get back on track with the contract business, have worked through production problems, are now building a channel, seeing early successes there, and we think the prospects going forward are excellent.

I do want to make one final comment on financing, we do believe that with the Lumera asset available to us and with its current significant market value that that does give us flexibility in options relating to financing that can reduce the overall cost of capital. We haven’t disclosed any specific plans in that regard, but there are some very desirable strategies that would allow us, we think, to leverage that asset and help to minimize further dilution going forward.

So, thanks. And I think we’re ready for questions.

[Caller instructions.]

Yeah, Operator…

Your first question, sir, comes from [Charles Parson] [ph], [Parson Asset Management] [ph].

Rick?

Yeah, hi, Charles. Sorry, we were having a little delay here with the questions.

That’s what it sounds like.

Yeah.

Rick, I guess I’ve been on this stock of yours for about seven years now, and I just see the accumulated debts that are continuing going up. And I’m just beginning to wonder when you’re going to reach critical mass, where if not being profitable on an ongoing basis that at least at some point we can stop going into the market for additional funding?

I know you just mentioned possibly using Lumera as a form of funding, but I guess what really did it for me to ask you this question was the last convertible preferred that’s got to be redeemed here. I mean, you know, stock holders are getting more and more diluted here, and I’m just wondering when the research and development stops and some real, real big product wins come through, and you know, these huge markets that you’ve always talked about really start producing?

Well, I think there’s been sort of endemic to this whole category of micro display. I was talking to a banker at one of the major Wall Street firms who had been pretty active in the category. And I think this is not unique to Microvision, and it’s certainly true of many of the companies building micro displays, with liquid crystal, and silicon, and things that have taken longer than people have thought with respect to, you know, both technology and market development. And that’s certainly the case in our case.

I think, well, what has kept us on course, Charles, in terms of maintaining our level of investment in the technology which is really sort of central to the question you ask, because it’s certainly one way to achieve profitability would be to say, ‘well, this isn’t happening as fast, let’s cut the rate at which we’re investing in R&D, turn profitable and bootstrap this.’

The reason we haven’t done that is that we have seen and, in particular, what we’ve seen is that these OEM opportunities have systematically become more and more realizable. So, while it’s true in the past, I think we’ve been able to talk generally about the potential for the technology, if you look, for example, I think we put some numbers in the press release about the projected growth for automotive [hud] [ph]. And this is just one that I’m grabbing today.

This is really a market that is just now emerging, but you’re looking at potentially going from 100 and 2,000 units in 2004 to over 4m units by 2010. And, you know, what we’re talking about in terms of an average selling price, just ballpark for a product, would probably be going from an early product at $500 down to a product at $200 at the time you’re getting those, you know, sort of millions of units kinds of volumes. They’re very, very significant businesses.

And so, I guess what I’m trying to suggest here is that if, you know, we had not seen those kinds of opportunities developing we would have, and had we not seen the, you know, the current sales growth, revenue growth developing either, we would have probably have taken a different approach, and you know, and tried to bring profitability closer in by reducing our investment in the technology. It’s only been by virtue of the fact that we’re having those kinds of successes, and we think those kinds of business opportunities are very, very real.

So, you know, what we’re always weighing here is, yes, the capital has a cost to it, but opportunity has a cost to it, as well. And I think that’s an important piece of the equation. To answer, you know, your question in another way, another key piece of this is on the finished goods product it’s really only been since the end of last year that we’ve had the Flic product available to us which is going to be a modest revenue generator for us this year. We think more significant next year. And it’s only really in the past two, three months that we’ve had the Nomad product available to us in a meaningful way.

So, you know, certainly some of those delays have been costly, but we now believe that we’re able to see with much greater clarity, I mean it’s night and day difference, what these product opportunities are, and the rate at which they can be ramped. And I mean there’s just, it’s a whole world of difference then a year or two ago when we, as I said, we’re talking about these opportunities in generalities.

With respect to the, you know, sort of reducing it further to the raw numbers, to breakeven at our current operating cost structure would require 14m, 15m a quarter in revenue. We have targeted that, you know, as a late 2005, early 2006 kind of thing. It obviously moved out with the delay in Nomad. We had originally been targeting it as late 2005. We think that’s very achievable.

The additional capital required to get there is, you know, going to be on the order of 20m, maybe 30m. We believe, though, that that cost of capital is going to come down as we see the top line ramp. So, if we’re right, and the top line starts to move back up sequentially over several quarters, driven by both contracts, but more importantly by product revenue with the Nomad, we think that’s going to contribute to reducing the cost of capital. We think that the Flic, the availability of the, excuse me, of the Lumera asset is going to contribute to a lower cost of capital, and I think those are all positives that speak to the question that you’re asking.

Okay. So, you’re – what would you say your burn rate is right now on an annualized basis?

Well, historically, it’s, you know, last couple of years, it’s been in this sort of 25m, 26m annually sort of basis. We think during 2005 as we ramp towards that $15m quarter, and if we’re successful growing the revenue sequentially that that ought to come down sequentially, and in particular, towards the latter part of the year.

So, you know, without being too specific about it, you know, could you get to a $20m rate next year? And then, have a couple of quarters of much smaller losses in front of you? Yeah, absolutely. I mean it really, obviously, depends upon the rate at which we’re achieving that sequential ramp. But, you know, I think that’s certainly a reasonable to safe assumption. It could be slightly lower, it could be slightly higher, although, if we’re successful it should be right around that area or lower.

Well, it would appear that you’ve got to do something, either something with Lumera or else go back to the well with somebody to raise more capital here.

Yes, certainly. And I think what Lumera does is it buys us flexibility, it also buys us flexibility with respect to the timing of that.

Right.

Because, you know, certainly right now while we don’t have a lot of capital on our balance sheet, I do have a 42m bankable asset. I don’t have to tell many of you financial professionals how those things can be collared and hedged to yield cash and maintain some or all of your up side, depending on what you want to pay for the cost of that capital. But I think on the whole it puts us in a much more desirable position than we’ve been in any time in the last three years.

You know, one of the challenges we had during the whole downturn post bubble downturn was with respect to, you know, what do you do on the balance sheet, do you go out and just, you know, try to get secure even though your equity capital is badly depressed in this environment? Or do you try to sort of work your way out of it a step at a time?

And we chose the latter path, and that’s largely been successful, which is not to say that the rounds haven’t been dilutive, but to say that they have, we have been successful in getting them done on less and less dilutive terms. And that continues to be our objective. And I think that Lumera now being a liquid asset changes that equation pretty dramatically.

Okay. Thank you.

Sure.

Your next question, sir, comes from Jim McIlree: of Unterberg Towbin.

Good afternoon. Hey, Rick, Brian. Well, two things here. First of all, on the yields of the Nomad, and let me ask that differently, what is your production capability on the Nomad right now? Either, you know, per month, per week, quarter? However you want to phrase it?

We’re holding it at about 50 units a week, but that’s not capacity. Capacity is about 150 units a week. So, we can scale pretty easily to three times what we’re producing at currently. That’s driven more by just what, you know, our inventory and purchasing strategy than it is by capacity.

Okay. And the yields on those? Is there a simple metric that you can use to articulate what the yields on those units are?

I think at finished goods it’s quite high. You do have yields of components and subsystems both coming in and through the process, so I have a difficult time parsing all of that out for you, but if you let me do a little more analysis I can certainly come back to you with that.

But unfinished goods, it’s high? And is it over 90 percent?

It is, yeah. It is. And, in fact, the quality metrics are very, very encouraging. The total defects per unit, that looks very, very good. And that, by the way, we kept track through the process, through the chain. From component all the way up to final assembly.

Okay.

Returns are low. So, in terms of, you know, defects in the field that’s come way, way down.

Right.

As well.

And I understand that, I understand what your strategy is relative to the revenue side, but I’m a little bit puzzled why you haven’t been more aggressive on lowering your cost structure given that the revenues have been sluggish over the past three quarters? You know, you’re doing like it looks like 9m in OpEx.

Right.

You know, and only 2.5m, 3m is on the top line, so it’s kind of puzzling why you haven’t been more aggressive on lowering costs?

Well, I think I touched on this a little bit earlier, one of the things that we wanted to do going into 2004 was at least maintain costs. We thought it made good sense to increase the investment in sales and marketing because we had products to push out the door. And we didn’t want to starve out the throttle here, you want to have thrust when you’re trying to get off the runway.

So, on the other hand, we didn’t want to just straight across the board increase our total operating expense, so we’ve taken, you know, with Nomad and Flic coming out of development and into production we ought to be able to reduce the engineering effort associated with those, and bring down our total research and product development costs, because you did have a bubble as you sort of went through the birthing process of these two products.

So, those two have cancelled each other out. The increase in OpEx, as I mentioned earlier, had to do with manufacturing, the increase, the actual increase was larger than the targeted increase, some of that is scrap, some of its inventory write-downs. Some of it is just inefficiency, labor inefficiency. Those things should trend back down.

In terms of the larger sense of, you know, and we’ve looked at this and have analyzed it, and I believe pretty firmly that we’re making the right decision in terms of value creation. The other option is you say, ‘Okay, well, that’s great, that you want to increase sales and marketing, but do you really need to be doing all of this research and development on this technology?’

And I will tell you, if we did not feel that we had a solution that honestly had the potential to be a strongly competitive if not the preferred solution in automotive huds, a strongly competitive if not the preferred solution in some of these large consumer markets, strongly competitive if not the preferred solution in terms of these micro camera markets, we would have done absolutely that.

But the customers are real, their investment level has been real, it shows signs of increasing. We’re making progress in moving those developments towards product form, so every one of those things has been what has encouraged us to stay the course in terms of investing in the current technology. If we weren’t having those successes we absolutely would say, ‘let’s back way off this.’ But if we weren’t seeing those markets develop and the technology merging, you know, converging with it we would absolute go a different route.

Okay. Thank you.

Thank you.

Your next question, sir, is from Alan Robinson of Delafield Hambrecht.

Hi, good afternoon. Rick, can you give us a little color on progress with the independent sales channel for Nomad? I remember you talked about this channel back in the first quarter. How are we getting on there? You know, what kind of staffing do we have there? And to what extent were they responsible for the 57 Nomads sold this quarter?

Well, I think I mentioned earlier, Alan, that most of the sales to date have really been direct, in other words, by our handful of regional managers. You know, the model that we’ve chosen here, there are pros and cons to this, because one of the things we’ve done by using independent reps is, obviously, not added a huge fixed cost component in terms of creating a distribution channel. So, that’s a big piece of the advantage. How do we gain a market presence and a footprint of a channel without creating a large fixed cost?

The down side to that is that we don’t own those resources, we don’t control their activity, so it’s really about motivating and incentivizing them to sell our product among the other products that they sell. I think, frankly, in the first part of the year we didn’t have anything meaningful for them to do because we couldn’t get the product out of production, so it’s really a moot point up until late September or October.

We did, obviously, spend that time putting them in place and recruiting them, but it’s been very recent that we’ve been able to see the transition from our direct sales force to those independent reps being more active. We’ve done ride-alongs recently. We are seeing an upturn in their activity. We think that continues and, obviously, that’s a key part of leveraging for more efficiency and sales productivity, is to leverage those feet on the street. In terms of raw numbers, there are 41 today.

42, actually.

42 today, and we have 13 in the queue that should take us to…

We should be able to sign, Alan, an additional, a couple of dozen before the end of the year. Also, we're looking at focusing on quality. We’ve got a very aggressive training campaign that [Tom Sanco] [ph] has helped put together. We’re capturing best practices. The reps are spending either, if not all of their time, 80 percent of their time in ride-alongs, and training directly, you know, doing by example for the reps. And that just takes time. You know, we’re in the blocking and tackling phase of this thing right now.

Okay. Good stuff. Also, I noticed from your Nomad sales dollar numbers and unit amounts, you’re keeping a pretty steady ASP there, certainly for the third quarter. However, for the backlog that you detailed it seems 194,000 for Nomad, 38 units. That implies a higher ASP. So, am I doing something wrong with the math there, or is there something different going on?

Yeah, there is. Thanks for bringing that up. You have 10 units to the striker brigade at $6,000.

Oh.

So, that’s what, $7,000, I’m sorry, I misspoke earlier on that. That’s what skews that up, and that’s obviously a positive for us. The units to the other branch of the military, the 37, will be at the more normalized ASP for the basic Nomad unit. One is for use in the striker vehicle, the other is for use in maintenance.

The striker vehicle will be a higher ASP.

Right.

It seems the 7K is, you know, a fair chunk higher than you’ve indicated in the past, is there significantly greater engineering elements in the military Nomads now?

No, the first thing, the 100 that were shipped Q4 of last year were $6,000. The new unit has a switching capability, so that rather than being limited to the GPS moving map display they can switch between multiple image sources, including some on vehicle sensors.

Okay, and that accounts for the extra price?

Yeah, exactly. So, that adds about $1,000.

It’s at their request.

That’s right.

They added that capability.

That was a capability that they requested, and we responded to.

All right.

But your point on average selling price is a good one. We’ve not seen a lot of pricing pressure. Where we do expect to see some pricing coming down is as we move from the direct to the indirect to some of these software and systems solutions, we’ll see increased volume but we’ll see some re-allowance for channel sales, as well. So, that’ll come down a little bit. But we haven’t seen pricing pressure in terms of the basic value proposition and the ROI. This, people are buying into the ROI for the product in the automotive environment.

Okay. And just to follow-up, could you give us an idea of the mix of Flic units in terms of, you know, tethered, untethered, kind of ASP levels for the Flics you sold this quarter. And just to finish up, oh, the difference between net income and operating cash flow. You’ve got 10m net loss, operating cash flow burn of 7m, where does the 3m difference come from?

We went through some of that earlier, but about 1.6m of that is Lumera, okay, because we no longer back out the minority interest piece, like we used to. The other of it is you have about $1.2m in increased operating costs, and some of that is – I don’t know if you heard my answer to Jim’s question, but some of that is extraordinary items including about half a million dollars in inventory write-downs. You have scrap materials, you have some production inefficiencies. You did have some targeted increases in manufacturing expense.

That’s all cash.

Those are all cash, right. So, what are the other non-cash items? Do you want to do that reconciliation, quickly?

The non-cash [inaudible], inventory.

Depreciation.

And depreciation are the – the big one was the Lumera.

Okay. Got you. And Flic mix during the quarter? And I apologize if you’ve covered this already, I was a little late to the call.

It was about 10 percent, but actually it’s going up. We’re finding that the product is finding its market which is basically connecting to handheld devices. And that’s probably going to be higher this quarter.

Yeah, in October it was about 30 percent, so it came up significantly.

Yeah, we think we have an opportunity to continue migrating the ASP on the Flic line higher through the cordless unit. We’re also planning the introduction of a unit with an expanded microprocessor capability in it, as well, but our target is to get up to $100 plus on the basic unit, and then have accessories also continue to account for some of that trend in the mix.

I think we’ve got time for one more question. I apologize, we went longer than we wanted to, and that is not the q and a’s fault, it was our presentation that was a bit long. But let’s take one more question. And thanks for attending.

Okay, sir. Your final question comes from [Jeffrey Neil] [ph] of Bear Stearns.

Good afternoon. A question, is balance sheet related, and perhaps simplistic, but I was trying to go through this. Could you explain the use of the cash raised from the financing? Did that include the payoff of the note payable that I think I saw listed in the June 30th statement of 2.3m?

No, the note payable was the Lumera obligation.

Okay.

The 2.3m[inaudible] financing was a Microvision obligation. So, the reason it’s no longer, you know, it’s not in the September balance sheet is the September balance sheet is a Microvision separate balance sheet after taking out any balances related to Lumera after the IPO. So, that liability is simply on Lumera’s balance sheet.

Okay. And then, with regards to the change in paid in capital, that would, Lumera issues would also impact that, as well, correct?

Actually, Lumera didn’t have an additional paid in capital account. They just had a common stock account. But yeah, if you want to look at the reconciliation you need to bring in the, about 14m of gain that Microvision, non-cash gain that Microvision realized on the IPO of Lumera, to establish our book value at our proportionate share of Lumera’s equity value after the IPO. So, that went directly to [APEC] [ph]. Then, we also had some beneficial conversion feature adjustments related to the preferred stock, which hit APEC.

Okay. Thank you.

I mean we can go through a reconciliation but those are the big items.

No, that works fine. Thanks.

That 93, and as I said the beneficial conversion feature is about over $1m.

Okay. That’s all I had. Thank you.

Thank you, Jeff.

Okay, Mr. Rutkowski, I’ll hand the call back to you, sir.

Well, thanks, everyone, for joining us today. I mean I think we had some very good questions here. And in particular, you know, I think the theme of, you know, why do we invest, why do we raise capital, to fund the business, why aren’t we doing something to reduce costs? The important question to understand the answer to. If, like I say, we see an expanding, and more legitimate, and more real scope of revenue opportunity today than we did a year, two years ago, with respect to both our finished goods activities and our contract OEM product development activities.

I think you’ll be able to see evidence of this very soon. As I mentioned, in terms of overall cash burn, the immediate progress we’re going to make there is on our contract line and greater contribution, you know, from products in this quarter and next. But I think you’ll also see if we can do something to achieve a significant OEM design win perhaps that’ll serve to validate the activities that we’re engaged in.

We think these are major market opportunities on the order of several $100m year, if we look out a couple of years. And we continue to evaluate those, be critical of those, but also to conclude that these are very real, and that our technology offers compelling advantages that are going to address unmet demand.

So, we’re very much looking forward to both of these things really coming together in 2005 in a way that we have not yet seen happen. And we’re working hard to deliver those kinds of outcomes to drive value for you. Thank you very much.

Ladies and gentlemen, that does conclude your conference for today. You may now disconnect.