MicroVision Inc (MVIS) 2005 Q1 法說會逐字稿

Good day ladies and gentlemen, and welcome to the First Quarter 2005 Financial Results Conference Call. My name is Anne , and I'll be your coordinator for today. At this time, all participants are in listen-only mode. We will be facilitating a question and answer session towards the end of today's conference. [OPERATOR INSTRUCTIONS]. I would now like to turn the presentation over to your host for today's conference Mr. Brian Heagler, Director of Investor Relations. Please proceed Sir.

Thank you. I'd like to welcome everyone to Microvision's first quarter 2005 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, 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 and Exchange Commission under the heading risk factors relating to the Company's business, and our other reports filed with the commission from time to time. Except those 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.

Thank you, and thanks everyone for joining us this afternoon. We're going to try to keep the call to an hour in length including the Q&A. So, let me jump right into the numbers and then talk a little bit about operating strategy going forward here. We're pleased to report both a very solid quarter for the first quarter, continuing strong outlook for Q2. Q1 revenue of 4 million was a tiny bit under the expectation that we had earlier of 4.2 million, principally due to moderately lower product sales in the quarter. Some of that is actually a function of delivery schedules and timing late in the quarter. And we also had a $100,000 contract award that was delayed, and that was actually associated with a sub-contract to Raytheon. So we do expect to see those dollars captured in the future. This indeed a very strong comparison both sequentially and over the year earlier. Q1 revenue was an increase of 20 percent over the prior quarter. I will clarify it in our headline here the parenthetical Microvision only. We switched mid-year last year to a different method of consolidation for Lumera, after Lumera's public offering. So, the Q1 comparison contain Lumera revenue, the Q4 numbers do not contain Lumera and that's why we make the point. This we believe is more than apples-to-apples comparison. So, Microvision only last year reported 2.7 million in the first quarter and that's as compared to 4 million for the first quarter of this year. We are providing guidance for the second quarter in the range of $4.8 million to $5 million or a 20 percent to 25 percent increase over the first quarter. That will be a record quarter for the company. When we mention a record first quarter here we do mean it's a record first quarter of $4 million. Second quarter, if we achieve our target here 4.8 to 5 will be a record quarter for the company.

Contract revenue was 3.4 million in the first quarter compared to 2 million, again Microvision only for the same period last year. In the first quarter we announced new contract bookings of more than 7.6 million including our largest development contract ever, first phase at $6.6 million contract with Ethicon Endo Surgery. I'll talk a little bit more about that contract later in the call. For those of you who are not familiar, there is an ongoing piece of that, which would be an additional 5.5 million if we continue the contract. Product revenue for the first quarter was 600,000 compared to $675,000 last year in the same quarter. Product revenue in the first quarter of 2005 was comprised of 208,000 from sales of Nomad system and 393,000 from the sales of Flic barcode scanner system. And I'll talk a little bit about those product sales and focus on our strategy for ramping sales in next several quarters. Backlog at the end of the March quarter was $5 million, 4.7 of that was development contracts and 302,000 for Nomad systems and Flic scanners. So, we actually booked about 100 Nomad units during the quarter, but as I mentioned, delivery schedules in terms will cause a number of those sales to be recognized in Q2. We did announce earlier today an award by General Dynamics C4 Systems over $1.2 million contract to supply 165 Nomad ND2500 systems. In our guidance of $4.8 million to $5 million, we're assuming the delivery and acceptance of 50 of those systems. They're actually -- the contract calls for the delivery in two stages, 50 and 115. The reason for that assumption is that the delivery schedule on the second batch to 115 is late June, and therefore there is a very strong chance that acceptance would in fact be early in the third quarter as opposed to second quarter. So, in the 4.8 to 5 million, we are assuming the shipment delivery and acceptance of 50 of those units, and they price it around $7,000.

Company reported a consolidated net loss available for common shareholders of 7.2 million or 33 cents a share for the first quarter of '05 compared to 6.7 million or 31 cents per share in the same period in 2004. That includes inventory writeoffs of 443,000 or 2 cents a share related to improvements and cost reduction initiatives associated with the Nomad and Flic scanner. So, we are still seeing some scrap and some discontinued parts inventory associated with both product improvements and cost reductions. And we actually have a pretty aggressive cost reduction plan for Nomad this year, which I think is going quite well. First quarter net loss also includes $622,000 or 3 cents a share non-cash item. Those are expenses relating to the recent $10 million preferred stock and $10 million convertible exchangeable notes and embedded derivative features. We can entertain questions about that accounting later on in the call, but that is a non-cash charge. Net loss attributable to Lumera for the period was $944,000 or 4 cents a share this year versus $299,000 or a penny a share for the first quarter of 2004. So, that should equip you to reconcile the 33 and the 31 cent comparison. We ended the quarter with 6.3 million in cash, cash equivalents, and investment securities. And cash used for operations was $5 million compared to 7.5 million for the same period last year. We did have a significant cash infusion from the Ethicon contract where some upfront payments were involved with that contract during the quarter. And I had mentioned in our last quarter that we would see a lower than usual cash usage during the first quarter and indeed that's what we are reporting here today. I'll save the discussion on margins really for the Q&A except to point out that the full absorption method again, as we described last quarter in our year-end call, has us reporting a negative margin for product sales, that's because we are absorbing a fixed manufacturing overhead up into cost of goods. At some point, that becomes fully absorbed as well. You'll see that there is an offset in terms of reduction in operating expenses of $800,000 as well. So, that's an allocation from operating expense up to cost of goods.

So, with that I think I'll turn from the press release and you are certainly welcome to read the rest of that and the statements that we make there, I'm going to try and capture a lot of the substance, but put a little bit more strategic framework about it and structure my comments to focus in the 2 main areas of revenue generation for the Company, and also from the contract development perspective of product development as well, and what we see is future revenue opportunities. So, with respect to product sales, as we've said in the last -- I think probably 2 calls that we've talked with you, our primary focus really continues to be on channel development and partnering for both products. We had a highly visible instance of this very recently. With Microsoft at their Global Automotive Summit, and we are fortunate enough to capture the attention of Bill Gates, who made some nice comments. But we are partnering with that automotive group and it's essentially a marketing partnership. This is very often the case, Microsoft will want to promote the use of their software to deliver the same kinds of productivity, ROI-driven benefits that Nomad is dealing with. So, in fact, at the conference, we reported on a particular Nomad case study, and we would expect to do more of that with them. With respect to Nomad channel development, there are really 3 key aspects to that, I think, goes really beyond channel development. In the stricter sense of channel development, we are really talking about the physical footprint and the sales presence. The number of bodies and the regional exposure to the product. As we have said before, our expectation is that we will leverage the model here by partnering with channel partners, who are systems and solutions providers, and are today in the market selling to the customers that we are targeting, initially in the automotive service and dealership market, as well as in manufacturing applications which are emerging more. The second category would be marketing support. Again, that's the nature of the Microsoft relationship. We do have a couple of instances where we will expect to launch co-marketing efforts with other vendors as well. And in particular, this sort of merges into the third area of new applications, where we have 2 opportunities that have been identified to connect to instruments or tools that are already in use in the dealerships. Ideally, you are driving to something that has a large installed base and then a highly and a readily discernible return on investment associated with it. As we look at this from those perspectives of the 3 objectives here, physical presence in the channel, co-marketing support, new applications, beachhead applications. I think we see a very, very encouraging picture.

We would expect probably the most significant impact from this to begin in Q3 as these relationship start to get more ramped up. We are continuing to focus on a key channel deal in the auto service segment, that is still pending. There are others in the pipeline in terms of the actual physical distribution. I think in terms of systems integrators, we have had a major Japanese systems integrator. I believe it's about $2.5 billion revenue company that has completed a test marketing phase with the Nomad very successfully, and we would expect to enter into an agreement with them very likely this summer. That really dovetail us very well with our approach to the broader segment of factory automation and plant maintenance. We do have 2 trials in Germany that are yielding very, very positive results and these are with major global manufacturing companies, and we believe there is business later in this year, early business from them and that the broader opportunity is significant. Again, our strategy going into these markets, in this case, we are partnered with a very small entrepreneurial integrator who is doing a fantastic job of developing reference applications for your manufacturing environment. We are getting interest from much larger systems integrators who essentially see this as an opportunity to provide value added to their customers. So, we think this model is showing a lots of signs of working. We think we can continue even outside of automotive to work with companies like Microsoft to increase visibility for the product and the applications and, in fact, the ROI arguments associated with it. I mentioned we have a new application that we are targeting that will -- this is aimed at automotive service. It extends beyond the dealership and into the aftermarket, by that I mean serious automotive centers, BF Goodrich Stores, things of that nature where that are not automotive dealerships, but are still in the maintenance business. We are going to be addressing a very large installed base of equipments that the Nomad can connect to, and right now I believe the expectation for that launch would be early-to-mid June.

Microsoft Week is holding their Mobile Embedded Developers Conference; they've merged the mobile and embedded conference into one. And I believe that Nomad maybe referenced there in another keynote address. I do not believe that will be by Mr. Gates this time, but probably by another Senior Executive at the company. And again, the intent here is a much broader audience of systems integrators developing applications. Those will include very large systems integrators, as well as smaller organizations as well. Flic will be actually working with its development partners at the show also, and we get some very positive things to say about that also. With respect to Nomad, moving on from the commercial and our focus on automotive service and manufacturing plant maintenance, we've had some very good success, and we believe the prospects are good for even greater success going forward in the defense domain. The first indications of this, of course, are our work with General Dynamics, who is the prime contractor on the Mounted Warrior, Air Warrior and Land Warrior program. Our announcement earlier today, General Dynamics made a release last week about their award of $2.7 million. We made an announcement this morning that they had contracted us 4 million too. We do expect an additional development contract as well. The idea this is what -- if you remember -- if you looked at General Dynamics' release, they referred to their process of spiral development. The idea of spiral development is that we deliver something, and then in parallel we continue to improve that and, in fact, we use user feedback in order to incorporate some of those improvements and we have some known improvements as well. In this case, the real focus of the development will be on formal qualification of the product. And so that we can get what's called an NSN number, a National Stocking Number in lines, future acquisitions, and makes this more of a catalog type of product that is authorized for government purchase. So, that's a very positive development.

The Nomad 2500, the ND2500 is itself a good example of spiral development. The product that we shipped to the Stryker Brigade little over a year ago was something called the ND1000. The ND2500 is about half the weight, 20 percent smaller, features a longer cable, increased luminance, and automatic brightness control feature, and a number of other product enhancements. So, at this point, we are focusing more on packaging and former qualification of the product. We think we've got a terrific product. The troops in Iraq, we think, are very excited to get this in their hands. So, we are going to try and deliver to them just as soon as we can. We have had a recent delivery on our virtual cockpit program, while we are on the topic Mounted Warrior, Air Warrior, and so on. The virtual cockpit program is actually contracted through the same program office that runs Mounted Warrior and Air Warrior. It is called the PM Soldier Warrior, and these are separate program elements within that office. The current Helmet-Mounted Display that we are delivering which is a full color, high luminance display for helicopter pilots with a rack mountable control module will be demonstrated next week in Orlando in the Air Warrior booth at the Army Aviation Association's trade show. And so, we think that this convergence between Mounted Warrior and Air Warrior looks very promising from our perspective. In addition to a development contract associated with further development in Mounted Warrior, we are expecting two other contracts relating to the virtual cockpit development. In the aggregate, the three contracts will total in excess of 5 million. And we will book probably most of that during the current quarter or early in the next quarter. So, that is very encouraging to us as well. We've begun a very good dialogue with General Dynamics. We are really enjoying collaborating with them, and I think we are at the point where we're looking at product road maps and even defining systems concepts that are enabled by the Nomad and other products within the battle management systems that General Dynamics C4 works. So that is an exciting new partnership emerging that we think could have very interesting possibilities for us.

With respect to the second phase of product sales having to do with our Flic bar code scanners, as we said before we expect the first half of the year to be pretty much steady as she goes. So for Q2, look for numbers very much along the lines of the first quarter. Our new partners, we believe will start to have an effect in the second half. Again, this is our heavy focus at the moment, the bulk of sales on this last quarter were accounted for by 16 independent software vendors and resellers in the US and Europe. So our focus will be on growing that number and adding also to the tops as well for -- by the top-tier we replace these resellers in the middle-tier. In terms of volume, top-tier would be a reseller that can do thousands of units annually or more. So we want to fill out that portion of our channel as well and we have got very good start on that. One of the significant areas is mobile devices. We announced in the last quarter, compatibility with a Blackberry. And as you, I am sure know there is a very, very large installed base of those systems. They're increasingly widely used for field force of all kind, both sales and service forces, and so data capture, it turns out has become a significant initiative for a number of the mobile players. One of the -- there are two real key advantages that Flic enjoys in that context, one of which is the basic features of the product, which have to do with simplicity and affordability, it is a one button solution. It is very friendly from an ergonomic perspective and it is also very, very affordable relative to other products in the market. And we have really over and over had customers seek the product out more recently. These are some of the partners that -- as we say we think will tick in, in the second half for exactly those reasons.

The other thing that people find very attractive, and I think we are going to really get some good traction out of the conference next week as the consequence of this is that, our software developers kit has improved dramatically to the point where it is really unique in the industry. The application development environment for Flic allows people to get up and running with applications in days, and in a difficult case may be weeks, but it supports very rapid application development. And that increasingly is a unique feature set that we can play to. So, again, the product we think steady for the second quarter, and then some really interesting opportunities emerging through the second half of this year and on through next year with some of the OEM and channel partners that we're talking about, they are really significant volume potentials available to the product. The last area that I would like to focus on is contract bookings and billings, and the product development pipeline. Just to again frame the business strategically, we really think of it as having two broad components. I would have talked about the Nomad expert systems and the various Nomad display configurations or finished goods products. The activity that we are engaged in with the BMW and VW, Audi, and in Ethicon, and increasingly other partners are what we'd call OEM solutions. And that's where our contract revenue derives from.

The real point of this of course is deriving a product pipeline, and in fact one of the key metrics that we use to validate business and measure success is the idea of R&D productivity. What we mean by that is, as we are investing R&D dollars, are we seeing promising new products moving through and into the pipeline at a reasonable rate. And I'd say, I think this has been a really outstanding success for us for the last year plus, and we are very excited about what we are seeing. I would recommend to any of you that are within reasonable distance of Boston, we will be at the Society for Information Display show on the 22nd through the 27th of this month, and you will get to see an array of products there including the virtual cockpit helmet, of course the Nomad, but also the automotive head-up display, as well as some new prototype efforts. What I am really driving at here is what we are -- we are finding the amount of leverage, and having built, designed, refined, and improved the Nomad and branched off into some military applications of it, that our ability to integrate other systems and applications is improving all the time. We also -- the other piece of this in addition to continual technical success is a measure of R&D productivity. Of course the ultimate measure of R&D productivity is the business opportunity that is enjoyed by a product, and especially that is finally measured ones we execute and capitalized on it. But the precursor to that it is the development of business cases. So, the contract model for us has been to contract, to turn technology into products systematically, and during that process to work with world leaders in various product categories. Then we would certainly tell you that Ethicon, and Canon, and BMW, and Audi, and others are in parallel with the development, refine and understand the business model and build it into our product roadmap. We are feeling very, very good about that. From a bookings perspective we would -- based on this technical success and the validity of these business cases, expect new commercial bookings with respect to the automotive HUD and laser printer activities, we've actually seen an increase to our laser printer contract this year. The Ethicon contract was bumped up slightly as well. The next stage of that contract as we mentioned would be an additional $5.5 million to take us from prototype to production. That would occur after an evaluation period, and the time that we would actually book that would be late this year or early next. That assumes of course a successful evaluation period. That project is going quite well and we're really excited about the potential product that could emerge from that.

So, again this notion of R&D productivity is one where we want to look at the investment that we're making in research and development and ensure that that maps to future product opportunity that has reasonable scale to it. We're looking at some very exciting businesses. I've used the automotive head-up display as perhaps one of the most clear cut examples of this in part because we're able to rely on numbers published by third-party sources and don't have to disclose any confidential information in this context. But the opportunity for automotive HUD is a 4 million unit a year market by 2010, and as I've mentioned, we think we're entering that market at a very opportune time. Unit volume for 2004 was about 100,000 pieces. Companies are still making technology driven product choices. Our product has really significant discriminators in terms of package size and performance. This is another area that Bill Gates touched on in his comments. Microsoft's automotive initiative really has two prongs to it, one of which is things like vehicle maintenance and manufacturing, and the other, which is in-vehicle systems as you can imagine for both entertainment and information purposes. So, we are working with perspective development commercialization partners, in addition to BMW and Audi, we should be entering into a contract with a third OEM automaker, a very significant one. We also would want to let you know that the development partners that we are engaged with, who are also sponsoring -- co-sponsoring the work with these OEMs are among the world's largest automotive suppliers.

Though as we've mentioned before, the next steps in this domain as with the laser printer and consumer electronics would be to structure deals much like the deal that we did with Ethicon where these become our OEM partners for going to market. And we do think we've got some tremendous advantages with respect to these product categories. In the laser printer domain, we've had about $0.5 million added to that contract this year, continued to achieve technical milestones and work with the customer and we're optimistic that we'll see additional work towards product commercialization later in the year. We don't have as good visibility on those timelines. This is more of a black box handoff situation where we are handing off an engine and so we don't have -- we haven't yet been given real visibility into product timelines. Our customer there is one of the largest printer manufacturers in the world. In consumer electronics the focus continues to be on both electronic viewfinder and more recently our wide field of view system. I don't want to either over or under emphasize the importance of this. It is, we think a technological breakthrough that probably can't be achieved by other means. And what we mean by that is simply when people have tried to make a very wide field of view displayed as in a wearable configuration. What we mean by wide field of view is simply having the appearance of a very, very large screen. So we're talking about a -- potentially a 80 or 100 inch diagonal screen. They run into the laws of optics and end up using very complex, bulky, and expensive lenses to accomplish this. Our design eliminates that and reduces this to a system of two very simple lenses. It has complexity in other areas, but the performance cost package potential of it absolutely leapfrogs anything that's been achieved in the market. It's important to know here that if you look at the market from this perspective, if you went out there and said `what's been happening with wide field of view, head mounted displays over the last 10 years?`, the short answer is, `very little`. Because essentially you're up against this optical constraint that is not going to be overcome.

So, as I said, I want to make sure the import is understood in terms of how significant and unique this breakthrough is, how meaningful that can be in the context of entertainment systems, electronic gaming, things of that nature, where you would want to have this compact and affordable wide field of view. But also important to understand that this is a new system architecture, and that we're not talking about a product that would be introduced to the market. In short order, we are talking about something that could be quite disruptive in some very, very large markets. On electronic viewfinder, we are principally focused on production partners for the LAV parts of the system and have begun a dialog with certain companies in Asia to advance that. And again our discriminators they have to do with both constant performance we are achieving; color, quality, resolution, color saturation that is really in our view unmatched in the industry. So, on the contract bookings product pipeline front, the picture is very, very good. I think from a bookings and billing standpoint, we want to look at those military contracts as I said in this quarter and next quarter, and then later in the year a series of commercial contracts. Obviously our effort will be to convert our automotive Head Up Display activity and potentially our work in consumer electronics into larger more comprehensive fields like the one that we structured with Ethicon, and we think the prospects are very good. I would tell you just in terms of our observations that the general awareness of our system both in the commercial, in the military domain it has gone way up.

Just in the last few months, we have been contacted twice recently to bid on military contracts with significant defense contractors in addition to the work that we are doing with General Dynamics and those are opportunities that are coming to us, and as well of course is the more recent visibility and we hope more upcoming visibility with Microsoft and others. Key focus here in this quarter will be to complete our distribution deal phasing, automotive service and maintenance. We are very excited about this. We think the category is very large. Someone recently said to me, you know, I'm a believer in the restaurant there. I said what's that, they said we can tell. The first night if a restaurant is going to real well. And I said, well -- I said I think I can tell you we've got a great restaurant, it just doesn't seat many people at the moment, but the reviews for the food are outstanding. So, we are in expansion mode with our channel partners trying to now take that shaft and put them in a kitchen with a lot more tables. And I think we are going to see -- if we can basically duplicate what we are doing on a small scale of a small direct force and multiply that, that we think is going to help us ramp significantly, and as I said I think this beachhead application, the co-marketing, the visibility that we get with Microsoft; Microsoft, we would want to really focus in terms of automotive maintenance on both the OEMs and the large enterprise accounts. There's an interesting piece that came out in the last 2 days, through discussing the recent operating results of the enterprise auto dealers. And by that, we mean United Auto Group, AutoNation, Sonic, Lithia, the big consolidated companies that own 200 and 300 dealerships. And the real emphasis of this article was that -- it's all about service and maintenance profits. It's all about fixed ops. They cited increasing inventory and increasing interest rates as putting pressure on sale -- automotive sales, which are really only about 6 percent of profits anyway. So, more focus than ever on the fixed operations aspect of the business, and I think you'll see that our partnership and partnerships in the marketing domain, our partnership in the distribution domain will help us squarely address some of those customers, both large and small. Andrew, anything that you want to add in the way of color with respect to automotive service. I know you are doing some work with trucks. I know you have the trials ongoing in Germany to doing a --

Well, only to say that our focus in the last 2 to 3 months has been to really perfect the application focus within the dealerships. We found that it's a result that we are getting when we go in and partner with both the OEMs and consolidators and even dealer groups, and we bring applications that can be recognized quickly and understood by the various buying constituents within those organizations as being significant to impact their quest for profits and for turning cars quicker. That's why we are having the most success. So, your mention of the beachhead applications, I think, is somewhat understated, but I think appropriate, but I think you'll see some real progress in this quarter as we seek to team with some of those companies that have actually found value in Microvision's offering to help sell their products.

We will be able, as I said, I think in a few weeks time to report more about this. There is a product we have -- not our product -- coming out as we understand in early-to-mid June that I think will be quite exciting and be a real catalyst for us in the marketplace. So, again, looking forward to a very strong, in fact, record second quarter. In that 4.8 to 5 million, we are assuming only 50 of the 165 Nomad ND2500 units, and I think that being the case, we are ready to open for questions and try to end our call in the time frame that we promised.

[OPERATOR INSTRUCTION] Jim McIlree, CE Unterberg, Towbin.

Rick, can you help me with the June quarter numbers? I am trying to get to the 4.8 to 5, let's call it 5 million just for fun. Are we talking about a million in products, and may be 4 million in contract?

We would probably be in excess of a million in products, and under 4 million in contracts.

On the product side, it sounds like -- if I am doing the math correctly, the Nomad to GD is somewhere around 350K.

Right.

And Flic, you know just flat line, it's probably 400. Is the rest coming from -- the rest of that will be coming from commercial Nomad, correct?

That would be correct.

And is that assuming that there is an uptick in the deliveries?

Well, if you looked at our backlog, you know to get -- if you took your numbers, right, you've had 350 and 400, that's 750. So, to get north of a million you need 300,000. I think the backlog for end of the quarter was about in excess of 50 units. So, call that half of that 300,000 coming into the quarter, so that is not a -- it is not a tall order to hit that number. It's not assuming a lot at all. We do expect to see some uptick, not clear; we are being a little bit conservative about the timing of this distribution agreement. I think there will be some orders coming out of that, but again given where we are in the quarter, and given that little bit of a sales cycle there, we are not assuming a whole lot just yet.

And to hit the less then 4 million in contract revenues for the quarter, do you need to book anymore contracts, or is that all booked and kind of slated for either delivery or milestones during the quarter?

There is a small amount that would need to be booked. And that's -- I mean on the order of 100,000 to 200,000 or $300,000 or so. That is a small portion of a larger contract. So, we are handicapping the time line on that.

And then the 3 contracts that you said aggregate $5 million -- for the 3 programs that you say aggregate $5 million, but that would be something for a second half delivery?

Yes, the deliverables on all of those would be second half. The contracts, there is a scenario in which all of those booked in the current quarter. And there is, you know, a couple of different scenarios in which, you know about half -- there is 3 contracts. One is about 800,000, the other is just under 3 million, and the other is, you know, probably in the neighborhood of a million and a half to 2 million. And they were likely booked in that order starting in the current quarter. And in the best-case scenario, you book off 3 of them in the current quarter.

And the Nomad that you will be delivering to GD this quarter, does anything need to be done to modify the product as it exists, or is this something that's the design accept and all you have to do is -- well, not all. So, what you would have to do is manufacture after current design, or do you have to redesign something?

We are working on a quick release cable as an improvement to the product. There is an existing release system; we are not happy with it. It is not clear that that would prevent delivery acceptance of the system. But everything else we are good to go. They are coming off the line and looking good, and actually the optics on the systems are really superb. It's got a great looking image quality. We think it's the best system we have ever built in its class in terms of its performance.

Already, great. Thank you very much.

[OPERATOR INSTRUCTIONS]. Randy , Lion's Share Financial.

Congratulations on continuing to move the ball forward at a dramatic pace. My question Rick is concerning the Nomad Expert Technician with respect to reference accounts and that whole method of channel distribution. You've been in that enterprise or that strategy for a number of quarters now, and you do have users of majors, automobile service centers using your product. Can you talk to us a little bit about how that is going and what the reaction has been from the users that have had the product for six months to a year now?

Sure. That was my bad attempt to the metaphor early in my reference. My restaurant metaphor saying people really like the food, we just haven't been able to serve many of them with the modest infrastructure that we have. For newcomers, the product really got into the market in August and September of last year. We had production delays through this summer, and so we're really unable to even get sample quantities or set reference accounts until late in the year, really fourth quarter was the first full quarter. So, we are now really two quarters into that, and our emphasis shifted very quickly once we started to see strong interest in leveraging the distribution model along the lines that I've described with partners who have established sales infrastructure selling into that domain. You asked the right question though, because the key to being able to build on what we have done and wrap it up is, you know, does it work and do people like it. And I will go back to statements that I made on our last call, which is we are feeling very strongly that we have validated the fundamental product premise both in terms of value and in terms of usability and user acceptance. Like anything new, you are going to have an early adopter bell curve. The good news is that those bell curves enter a pretty steep portion once you get past the early adopter piece of the equation. I will tell you that our partner is a very significant company and they have conducted very rigorous due diligence talking to both our customers and their own. And I suppose that is perhaps the best -- these are people that have been in this automotive service business, many of them for 20 plus years in selling software systems and solutions into that domain. So, I think that is perhaps the best second hand evidence that I can give you of the fact that, yes these reference accounts are, in fact, meeting our objectives and serving that purpose and we've got some very, very satisfied customers, some of whom are even jealous. I think one of the ways in which we are really going to be able to leverage Microsoft, Randy, is increasing the visibility of those reference accounts and also simply attaching, you know, a seal of approval -- a good housekeeping seal of approval to those business case results in those case studies. They will be working with us to publish case studies both on paper and in video form and also to create new reference opportunities. In the case of Microsoft, I think, we will straddle both the service domain and, of course, inside the automotive enterprise in the manufacturing world, and they will probably be different distribution partnerships that will help us address that domain. But the short answer to your question is, no, we've got something to really leverage off of here in terms of product performance, usability, and general return on investment criteria. I think as we put those pieces in place to leverage Microsoft to help us build and grow that awareness, leverage our pending distribution partner to expand our physical presence in the channel and add new applications that are the ones that are easy to get and connect to a large installed base of systems. All of those 3 things are really important catalysts in gaining traction.

Eugene , Investor.

I just wanted to quickly ask about the announcement of the order from Audi, intended order from Honda Motor Company to buy approximately, about 3,700 or so Nomads. Can you progress on that front?

We were working with a group at Honda that was attempting internally to position the product as a required tool. And they publicized that -- the required tool if you know that's space, which frankly at the time we did not terribly well. It's a bit of a rare bird, someone the other day compared it to the President's veto power, it's something that exist, it's very powerful, but it's not used often because it's involved in the expenditure of lot of political capital. In essence, you thank your dealers, you have to buy and use this thing. It's a bit of complex during this particular case because there has been some internal change at Honda with respect to the required tools program and their organization who is staffing at just position, but also our product happen to come on the heals of a required tool that had not been a particular success for them. So, they have had expended political capital and their account was running a bit thin at the time. So, what has happened really is that that has morphed into a very different kind of approach to the dealerships, it's a recommended tool, Honda has provided assistance in terms of integrating with their systems. I know more recently, in fact, we have been working closely with them to integrate with their diagnostic system. This is an example of one other things that I referred to earlier when you might have a large installed base and you are going in and coupling to an existing system, they are in a mode where they have actually just discontinued one diagnostic system, and are moving forward with a new one. And I don't have brand-new information other than that, in other words a meeting in Tokyo in the last week or so. So, we have --if you had been sort of following the Company since that time, I think we talked about revamping our strategy going to the market at first directly and then using -- leveraging this back into a distribution model of the type that we have been describing, and that's really the way we are addressing the market today. We think -- and I think I've mentioned on a call the most recent one or the one before that we did see OEM activity coming into the equation, but we thought that that would be farther out in the product ramp. So, maybe that is next year Ford has, for example, a program called the Ford Access program that they are getting ready to roll out in the next year or two. GM has a similar kind of program. So, we are really focused on approaching the market in a very different way now, and have been probably for the last certainly 2 or 3 quarters that we have been in the market.

Could you also, Rick, quickly recap the status on the progress with respect to Canon and the miniature display that supposed to be built into the digital cameras. Lot of expectation built into how the miniaturization aspect of Microvision's display and the capability it -- potential capability it has for commercialization on gaming devices, etc. So, could you specifically to the development of Canon with respect to time frames there too?

Again, I think I'll refer back to comments we made very recently. Now that we are in with Canon specifically is that their work that was sponsored by them was sponsored through essentially an R&D group. The hand off is then to a product group who starts dealing with exactly the questions you are talking about time lines, specific models, how this integrates with their product strategy and road map. Earlier in the call, today I alluded to the fact that our emphasis here had been on really finding a manufacturing partner in particular with respect to the edge-emitting LED for that particular architecture. If you remember, we reported during this last year 2004, at one point that we had demonstrated a 9-megapixel display. That was a parallel path in our work with Canon that got us headed in this direction of an alternative architecture. So, there are really 2 systems -- 3 really systems architectures that address a range of consumer electronics opportunities. With respect to the viewfinder, miniaturization is not so much the issue. We are very comfortable in terms of being able to achieve package constraints with the edge-emitting LED design. The challenge there really now is one of our manufacturing and supply nature. We have really started to push forward into this multi-line scanning, very high resolution, very wide field of view, in part because there is new interest coming from other sponsors in other categories that are as large or even larger than digital camera viewfinders. So, consumer electronics strategy is alive and well. We are in mode right now with Canon that I think is analogous to where we are in the laser printer that we don't have yet visibility from them in terms of their particular product strategy. Having said that, the manufactures that we are talking to, the emphasis there would be -- basically to be to create an almost a catalog part. So, that can advance independent of Canon's particular design requirements or any other camera manufacturer's particular requirements, but it will necessitate their supply and this Company is a very, very large company that does a lot of business in this domain. It would necessitate their supply of the edge-emitting LEDs. I don't know if Steve has joined us or not, we were trying to get Steve Willey on the call, he is traveling, but Steve --

Rick, I am here.

Is there anything I left out of that?

No, I think you touched the high point. I think you said it well, with regards to that first platform the edge-emitting platform. We are very pleased and partners that have sponsored that work are very pleased with the performance. We are focused now with suppliers, with a view towards commercialization. It is a solution for view finding, it's also a great solution for the emerging -- some of the emerging multimedia -- portable multimedia applications based on headsets and media players. So, viewfinder per se becomes a part of a much larger application portfolio, but our efforts are certainly on the commercialization aspects at this point.

Do you see that though as a precursor to any other opportunities with respect to gaming devices or portable display devices? Is an opportunity in the digital camera sphere or may be a portable phone sphere?

From a standpoint, precursor -- the viewfinder application that we have discussed is not a precursor to the other applications that you have just described. Going back a couple of years ago, when we looked out to the market, we saw that viewfinder applications was perhaps the first stepping point because it was a substitute solution for existing camcorders and digital still camera viewfinders, and we still believe that. What's happened in the last year literally have been a platter of new media players. The iPod like media players, their audio at this point, but for the most part they are making transitions from audio to still to video. So, this is a strong belief in the industry that a need for hyperportable, highly miniaturized virtual display is around the corner. Couple of years ago, we felt that it was 3 to 5 years out and we selected EVF, that's something we could move into more quickly. Now, it's a bit of a horse race. EVF is still available to us, but now we have these other applications, some of which are -- the volumes would be staggering. Unfortunately as Rick mentioned, its all one platform -- everything we are doing is entirely generic from a standpoint of our efforts and the effort of our suppliers.

I think an important point that is -- may be not emerging here is when we refer to edge-emitting LEDs, the multi-line systems would use conventional surface-emitting LEDs or near conventional surface emitting LEDs. So, that is a -- when we talk about the notion of the precursor, I think it is important that these would be regarded at some point as parallel pass rather than sequential. So, yes, the EVF system, edge-emitting LED system could be used in these kinds applications, but there is a multi-line array system and, in fact, with its new architecture that would be absolutely unique for -- you mentioned gaming as an example. In a gaming environment, one of the things one might look for is a very, very emersive very wide field of view sort of experience and possibly been stereoscopic 3D. So, those are features that are very hard to come by, because of the optical constraints that I described earlier. In any case, Eugene, we would love to continue the conversation with you, we do have one more questioner in the queue. And we want see if we can stay close to our schedule, but please contact us if you have further questions.

Joe , Morgan Stanley.

Let me take you back to the Nomad for a minute. Are you seeing when you move from one generation to next, are you seeing any progress on cost reduction as far as components, design, you know in just general manufacturing of the product?

When you're referring to one generation to the next --

Let's say from the ND, would you say the 100 or 1000 (Multiple Speakers).

So you're talking about the military Nomad?

Sure, or the commercial.

Yes, now in the commercial, we really haven't made what I would characterize as a revision. There have been some part substitutions that have resulted in cost reduction, probably the one that comes to mind most easily is moving from the vacuum scanner to the free air scanner, and that was a several hundred dollar reduction in the bill materials. There are some other schedules, but they are more marginal than incremental in that nature. With respect to the transition from ND1000 to ND2500, yes, there was a huge reduction in cost, and that was a generational change, and then as I said it was also accompanied by a reduction in package size and weight as well as some performance improvements, and reliability improvements.

Jeff Neil, Bear Stearns & Co.

Two questions if I can. The first question is, I think approximately two conference calls ago you made a statement to the effect that you estimated that the Company would need somewhere between $20 million and $30 million of additional capital to reach a sustainable position. You've raised 10 million since that point in time. Has your view changed in any way in that regard?

No, not significantly. You know, I think in the same context we were probably asked about our break even numbers. We require about $14 million to $15 million a quarter in revenue to achieve cash flow profitability. That's an aggressive ramp from where we are, but we are seeing good progress in that direction. So I think that goal is attainable in a pretty reasonable time, and of course we would correlate that with -- as we move towards that crossover point our cash requirements would decline systematically to the extent that we are successful, ramping sequentially in that way. Fact that is still a good back the envelope number that we are certainly working with.

Okay. Second question relates to the this transformation from largely R&D activities to product development sales, manufacturing etcetera. Do you have additional needs there form a police standpoint at the senior management level, or is the senior management level adequate or sufficient to handle this transformation?

Actually we are going to -- why don't you see the reaction around the table as I answer this question. We can -- there is always room to improve, and as with the team we've done that systematically. We have seen a lot of change in sales and market organization, which is -- it's fairly common, but I don't think the model has changed so much. One of the areas you are going to probably see us really focus on is -- I think we are going to be able to really leverage into other channels pretty quickly here. So, you are going to see us focus on sort of business development marketing types that can go out and create those relationships with those systems integrators. I think from an operating perspective, you could see some additions to the team that will add to or -- bench depth if you will. You know, one of the key aspects of this Company is there is lots of opportunity here, but that also makes for a fairly complex operating environment that demands a lot of discipline and we do a reasonable job of that, but we can always do better, and it is all really about cycle time. So, the faster we can sign a General Dynamics, and a Microsoft and cycle that back into new relationships of the kind that we have pending, and bring on new OEM partners, the faster we grow the business. Everything moves faster, and that's with respect to, you know, not just your manufacturing process, but also your sales and marketing functions, business development functions as well. So, I certainly think you will see some development, I don't think from a budgetary standpoint you are not talking about major impact in terms of growth. And then in the budget categories I'll refer you back to again, comments that we made on our last call, which is going through this period is -- we went through in sort of the '03, '04 time frame, we have really got a very, very significant push. On product development, we were able -- as we came off of that and ended off into production to start to lean out the engineering organization a little bit. The other reason for that also is that the technology is itself starting to be more leveragable. So, it takes less input to go further in advance to that kind of thing. And we are able to then sort of reallocate resources over to the sales, marketing, business development side of the business. So I think it is just sort of back process ongoing would be the direction I'd point in for the answer to that question.

And there are no further questions at this time. I would like to turn the conference back over to Mr. Rick Rutkowski for closing remarks.

Thanks everyone for joining us today. Again coming after a very solid first quarter, second quarter looking very strong to us. Third quarter we think will benefit from some significant new relationships that we will put in place during the current quarter. And we continue to be very, very excited. Our partnerships with General Dynamics and merging relationships with Microsoft and others are really key to the strategy. But again, I think this notion I planned to see today of R&D productivity and what we are seeing happening in our product development pipeline is equally exciting and encouraging. And the two sort of broad metrics to look at there are the nature of the technological advancements themselves and the milestones that we are getting there as well as the business case that corresponds to those things. Thanks again for joining us and we look forward to speaking with you next time. Thank you.

Ladies and gentlemen, thank you so much for your participation in today's conference. This does conclude the presentation. You may now disconnect. Have a great day.