MicroVision Inc (MVIS) 2005 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth quarter 2005 Microvision earnings conference call. My name is Colby and I will be your coordinator for today. At this time all participants are in listen-only mode. We will be conducting a question-and-answer session towards the end of this conference. [OPERATOR INSTRUCTIONS]. As a reminder this conference is being recorded for replay purposes. I would now like to turn the call over to your host for today's presentation, Mr. Brian Heagler with Investor Relations. Please proceed, sir.

Thank you. I would like to welcome everyone to Microvision's 2005 financial results conference call. Participants on today's call are Alexander Tokman, President and Chief Executive Officer; Steve Willey, President, Marketing and Sales for Asia; Todd McIntyre, Senior Vice President, Global Strategic Marketing and Business Development; Ian Brown, Vice President of Sales and Marketing; and Jeff Wilson, Vice President of Finance and Acting Chief Financial Officer.

The information in today's conference call includes forward-looking statements regarding projections of future revenues, margins, and unit sales; expense reductions and operating results; benefits of realignment and restructuring; plans for product application, 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; plans to raise additional capital, as well as statements containing words like "believe," "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 to express those forward-looking statements. Additional information concerning factors that could cause our 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 Factor 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 any information, future events, change of circumstances, or any other reason. I would now like to turn the call over to Alexander Tokman.

Good afternoon, ladies and gentlemen. And thank you for joining us today. The outline of this call is breaking down into three sections, we'll give you an executive summary of financial performance for the full year of 2005 for the Q4 '05, then we will focus on [inaudible] and give you [inaudible] and provide you with some updates on the developments related to our new turnaround strategy and operating climate we communicated in February of '06. Finally, we will spend some time and give you updates on the liquidity and the finance status and our next steps in this area, and then we'll open for questions.

Let's begin with financial. Revenues for the full year '05 were at 14.7 million, which represents a 29% increase over 11.7 million that we reported in 2004. This increase is primarily driven by good execution of several contract revenue developments, as well as increased product sales. Our mix of revenue is 76 to 24 in favor of contract revenue. And the product revenue between Nomad and Flic are spread at about 1.8 million for Nomad and 1.6 for Flic. Most of the revenue came from the United States and as we mentioned a month ago, one of the strategic focus areas for us here is to open up the unit outside of the U.S. The operating loss for the year was reduced by 20% to 27.3 million. This is the reduction of 34 million reported in 2004. If we compare apples-to-apples and exclude the fact of consolidated Lumera in 2004 the operating loss implement is at about 10%, which primarily is driven by increased revenue. The net loss to common shareholders has been reduced by almost 10% to 30 million or $1.35 per share. This versus the previous reported numbers for 2004 of 33.5 million and $1.56 per share. The [inaudible] this year was the backlog of 3.4 million.

Just to focus briefly on fourth quarter. For the fourth quarter we reported revenues of 2.7 million, which represents a decrease of 18% for the revenue reported same quarter in 2004. The primary reason being some of the perspective revenue from the [inaudible] contract have shifted from Q4 in the first half of 2006 driven by two factors. One, we hit some typical difficulties which we have been successful in resulting with the customer; and secondly, due to the move -- our move from Bothell to the Redmond facility in January/February of this year, we basically gave away certain activities due to movements of the [inaudible] labs and other equipment in the two facilities. The operating loss for the quarter, however, was increased by 0.9% to 9 million. This compares to 7 million reported for 2004. The primary reasons being we write-off Nomad's inventory and one other thing, as well as accrued from funding for the [technical difficulty] basically up. The net loss to the common shareholders was reduced, however, by 32% to 5.6 million or $0.23 per share. This is from 2004 where we reported a $8.2 million loss or equivalent [technical difficulty] -- Operator?

Yes, sir.

We just got cut off.

The lines are still open.

Okay. All right, to summarize the highlights from 2005, number one, it ended two years [inaudible] in revenue and delivered essentially a 25% growth over 2004. We developed a very solid pipeline for Flic products in the second half of last year, which originally resulted in significant growth in the fourth quarter of last year of Flic product sales and we expect the same trend to continue in the first quarter of this year. We had very strong commercial for our revenue pipe -- performance space fueled by the Ethicon Endo-Surgery contract. We also communicated that we sold 165 units of military Nomads to the Government, and at very attractive prices which were high margin yields for us in 2005. We also delivered key government programs. While we delivered on the key government programs, we developed technology to pull the leverage across all of our commercial products. We also made some demonstratable progress powered, accelerated, and development of the other PAD product, and we'll discuss this shortly. We'll give you an update on what our latest developments are in this specific area. At [Novalux] this year we also have developed and successfully demonstrated in early January, the first war [chem] demonstration prototype of the Personal Projection Display, we call it pico-projector. It drew a lot of interest from the large Asia electronic manufacturers and we initiated a dialogue with several manufacturers on the next steps in this very exciting opportunity for us and for consumers. Finally, at the end of last year we defined new business road map and technology strategy, and developed an organizational blueprint to begin the Company turnaround in 2006.

In summary, we're pleased with the Company's performance on the revenue side, specifically as we reversed a two-year slide in trend. However, the types of contract and sales activities that we pursued in 2005 were not fully sustainable for the long-term growth, and consequently, we have defined and fine-tuned business and organizational strategy late last year to build a foundation for longer term sustained growth. These initiatives have been communicated and consist of five elements growing products and revenues into 2006; focus on vital few OEM activities and deliver on some of the strategic agreements; reducing the operating loss or burn rate by 30%; focusing on quality -- on improving products' quality and customer satisfaction; and finally, on improving overall organizational effectiveness at every level. Next I will just give you some recent highlights on some of these activities to keep you updated on our progress.

I'll start with product growth. And as I mentioned, the emphasis that was placed in the second half of last year has yielded a very strong pipeline of opportunities for Flic Bar Code Scanner product sales. We had a record fourth quarter and we expect another record first quarter to be announced very shortly. We completed our first phase of product quality improvements that targeted, specifically, on improving the reliability of the product, as well as reducing cost of unquality. With Nomad, as mentioned earlier, we conducted an in-depth evaluation of true market viability for this product in its current configuration. And we're focusing on four specific applications: inspection, troubleshooting, diagnostics, and situational awareness. These applications stems various markets including transportation, specifically automotive and tracking; industrial, which is the manufacturing phase; and healthcare.

One of the major shifts in our focus for this year is essentially to develop our own blueprint for Microvision in site, which we call Integrated Photonics Module. Integrated Photonics Module, you can think of it as an engine that consists of several modular elements, such as, MEMS scanner, MEMS electronics, light sources, light source drivers, video electronics, system controllers. It's a combination of all the necessary element to develop an engine that could be plugged in or embedded into various products ranging from consumer space to automotive space to military space to industrial space. We're in the process of defining this module embedded architecture and the goal is basically our vision is very, very simple but very bold. We want to be part of every high definition display and imaging product sold in the future. And what we're doing right now we are mobilizing all the resources and focusing it on developing this module architecture to make us more agile and responsive to market changes and fluctuations in terms of which application is going to hit the market first. Today, we don't have this flexibility and the IPM is going to give us an ability to respond to strategic partners faster and allow us to bring products to market sooner.

In terms of these two -- two of the first products that will take benefit from the Integrated Photonics Modules are the automotive HUD display and the pico-projector. And currently we are advancing discussion with potential tier-one integrators on the other HUD side and large electronic manufacturers on the pico-projection side and defining collection requirements, defining product specifications, and proliferating discussions, establishing what timelines, what do we need to do first, second, and third to get product to market. As you may aware, to take product from a conceptual drawing to a full production takes time. We're trying to be very smart at the onset and definition of these products to ensure that we understand all the critical requirements, so when we develop this engine it will be scalable to multiple products.

We have completed the realignment and restructuring of the Company. In the process we reduced the overall work force by approximately 10%. However, the biggest reduction is expected in the SG&A, where we expect to reduce the cost by one-forth or 25% versus 2005, and as I communicated earlier we have reduced the number of executive positions by 30% through a reduction and consolidation. We have been bringing on board new organizational leadership. We hired Ian Brown out of GE, who will driving synergies across our new sales and marketing organization. He will strengthen our customer focus and help us to position us for growth in new market segments. As you also know we created a very important strategic marketing organization, which is headed by our former Head of Business Development, Todd McIntyre. The primary focus of this organization is platform strategy, global platform strategy, to ensure that we have synergy and commonality among all of the developments within the business and that we are not basically repeating the efforts of -- as we're targeting different products in different customer segments. We also placed a lot more stronger focus on Asia, which represents a very exciting opportunity. And as you know, Steve Willey, is responsible for growing our business in Asia. As a part of this change, we also started making changes at the Board level. Together with the Board, we have initiated a process of better aligning the skills and experience of the directors to the business and operating objectives of the Company. The first step in this was the addition of Marc Onetto from Solectron. Marc brings extensive knowledge and leadership and experience in several areas, including operation supply chain management and quality. And this is one of the skills we desperately need, the guidance we need, as we develop in these high-volume products and taking them into the market.

Let's focus now briefly on the financing and liquidity. We have -- as of December 31, 2005, we had $6.9 million in cash and cash equivalents. Early February we announced that we raised additional 10.3 million from the sale of a portion of our Lumera stockholdings. And to date, we actually disclosed that an independent registered public accountant firm has included a going concern qualification to their opinion on the December 31, 2005 consolidated financial statements. Specifically, because the Company requires additional cash to fund its -- to fund our operations through December 31st of 2006. Obviously, needless to say, we would have preferred not to have a qualified audit opinion on our financial results from 2005, but fundamentally, there is no change on the viability of our business. We expect to raise additional funds over the next few months, and our projections indicate to date that we need about $8 million to sustain through the end of the year. However, we made a choice not to pursue a complicated short-term financing at this point simply for the purposes of avoiding the qualified opinion. Instead, we have chosen to pursue a strategy that is more fundamental in its nature, that is predicated by focusing on fundamental investors, simpler structures, and less frequent raises. We have recently engaged an investment banker to assist us with this strategy.

In summary, I can say there is a lot of change happening in Microvision. We're changing our business strategy. We're changing how we're executing. We're putting together operating mechanisms in place. We're reorganizing internally and externally. And essentially, we're giving Microvision a new identity. All of us are very excited about the pace of change and the path we're on to grow this company to ensure that we're on the path for the long-term sustained growth and profitability. At this point, I'm going to stop and open up to questions.

[OPERATOR INSTRUCTIONS]. Your first question comes from the line of James McIlree with Unterberg, Towbin. Please proceed.

Thanks and good evening. Can you help me understand the need for $8 million through the end of the year? If your burn is -- give or take 25 million reducing it by 30% should put the burn at -- give or take somewhere around 17 million, which is what you have for cash. So why would you need 8 million?

In the burn rate that -- I'm sorry this is Jeff Wilson. In that -- that would be the operating burn number, then below that we have the debt service cost. So you're right, the difference between the cash that we have and the cash we need is basically the debt service cost.

Oh, okay. So that's the 8 million of the notes payable?

Approximately, yes.

Okay, great. And what kind of revenue levels do you need in order to hit the operating burn that you're looking for?

We need single-digit improvements over the 14.7 that we reported for 2005.

So the single-digit growth rate improvements?

Yes.

Okay.

We [technical difficulty]. Could you -- maybe we better make sure about the question. Could you repeat the question, Jim? Are you asking how much cash -- how much revenue we need to break even?

No. No.

[multiple speakers]. No, how much revenue do you need --.

No, you have an operating cash burn estimate out there of somewhere around, let's call it 17 million.

Jim, the assumption is just like I said, the assumption is what our single-digit growth over the 2005.

Okay. It just --.

It assumes a level of improvement in contribution margin on products.

Yes, it seems like it has to be a big level because if the work force reduction is about 10%, then maybe you're knocking off 3 million, maybe? So [multiple speakers] there has to be a huge improvement in contribution margins in order to get that type of improvement inside the cash costs. [multiple speakers].

There are several types of cost, Jim. There is -- you're absolutely right. There's C&B, compensation and benefit cost, but there's also material costs that you haven't included and the part of our best based cost reduction opportunities we implemented for 2006. A combination of C&B, material cost reduction, product margin improvements, that all three of these components will constitute 30% burn rates reduction estimates as we're predicting for this year.

Right. Okay and how much unrestricted Lumera stock do you guys own now?

It's just right around 300,000 shares.

Okay. And I'm sorry, just one other thing. Are there any other liabilities that are due in 2006? Any conversions of preferred or dividends on the preferred or any sort of severance payments, something like that we need to be concerned about?

I think if you look at the "K" you'll see the obligations in there. There's interest on the notes and interest on the preferred or dividends on the preferred, and then the regular note payments. The preferred stock isn't due until '07.

Okay. What about severance payments, are those going to be substantial?

There's nothing unusually large in the severance payments associated with the work force reduction.

Okay, great. Thank you.

Your next question comes from the line of Jonathan Auerbach with Auerbach. Please proceed.

Yes, who's the investment banker that you've retained for the restructure organizing --?

Can you speak up please?

Who is the new investment banker that you retained to assist in the new financings?

I would love to answer your questions, but at this time we're not privy to disclose this information.

Thank you.

At this time, there are no further questions in the queue, so I will now turn the call over to management for closing remarks.

Ladies and gentlemen, I just want to summarize by saying this is going to be --.

Pardon the interruption. Please pardon the interruption we have further questions that have just appeared in the queue. Your next question comes from the line of Mark Plunkett with Atlas. Please proceed.

A question: what's current cash balance as of today? Can you share that?

No. We normally don't disclose the current cash balance. Though you can take a look and see that the normal cash burn that we've been having, and again, we had between the two financings we've raised 16 million essentially this year. So our normal burn rate is in the $2 million-month range.

Okay. And then in terms of -- was there a payment due yesterday?

Yes.

And what was that amount?

It's approximately $2 million.

Okay. All right, thanks.

[OPERATOR INSTRUCTIONS]. Your next question comes from the line of Art Doglione with Merrill Lynch. Please proceed.

Good afternoon, gentlemen. During the initial comments that Mr. Tokman had prepared, you may or may not be aware, but at least on my end, I experienced a great deal of a wavering sound so I could only make out about every third word. I'm wondering for the benefit of others that might have had that problem, if you could simply just update perhaps the developments that you expect for the HUD, as well as for the pico-projector and then the endoscope?

Okay, let's start with endoscope. We have -- as you know we have -- in the process of completing the initial phase of development of several prototypes of endoscope for Ethicon. The original completion was scheduled to be done at the end of last year. As I mentioned, due to some technical difficulties that we already found circumvent and solutions to and the move from one facility into another we delayed a completion and revenue recognition for this effort until second quarter of 2006. At that point, Ethicon will take the output of our work and will conduct evaluations, several months of evaluations to determine the next steps. Todd, do you want to add something?

No, Alec, except that we -- just to say that we are in close communication with the customer and have very good interaction regarding the delivery schedule and the plans for the evaluation of the devices that we're supplying to them following their delivery.

In regards to the second question, and I'll move on to automotive HUD, we made visible progress last year in developing several working prototypes that were used and evaluated by tier-ones and automotive OEMs. As a result of evaluation and as a result of some progress on the development of the light sources by several reputable companies the raise is on, we are right now in active dialogue with at least four large tier-one system integrators.

And as I mentioned, we discussed and we collected the requirements and defiant product specification to move us forward. Each of the tier-one has different time lines for product development. We want to understand what their internal time lines are and what their strengths and weaknesses are. And we're essentially in the process of determining who are the strategic partners we're going to take auto HUD to market with. We expect -- the goal that we communicated in February is to sign at least one strategic agreement with tier-one automotive manufacturer to basically put together an effort to develop first a prototype; second, a detailed design; and thirdly, a product that we can take to market within the next three years or so.

In terms of pico-projection, this is a relatively new effort. As I mentioned, we built first of a kind demonstration prototype that was showcased at the consumer electronics show in Las Vegas in early January. The response was very, very promising. We have large Asian electronics manufactures who all are interested in our technology and we're in dialogue with several players. Steve, do you want to add something? Okay, did I answer your question?

I think you did. Would the HUD or the endoscope probably be the nearest commercial opportunity?

I would say if you just look at every one of these opportunities objectively, and I would say pico-projector and auto HUD have the highest probability of being first-to-market.

Okay. And then finally on the HUD, am I correct in understanding that your platform technology would be licensable or saleable to a number of different distributors who would then perhaps represent a number of different automotive manufacturers?

This is Todd speaking. I'd like to answer that question for you. Our strategy is to partner with tier-one supplier to the industry. Tier-ones are the group that supply directly to the OEMs, the car manufacturers, for integration of those devices into their car models. So the strategy is to partner with one or more tier-one suppliers worldwide to address the needs of the market worldwide.

Okay, and what would you anticipate that -- I realize that that market is growing as more and more levels of automobile in terms of pricing and trim levels are including things like that, but what would you estimate that market to be?

The automotive market?

The automotive HUD market.

The automotive HUD market, oh. Obviously, it's going to be determined by the adoption. Instead of giving you absolute figures, our projection is that first early adopters through the high-end European and Asian manufacturers they're going to first put this on their upscale model, and within a few years we expect this to be a mandatory feature on every vehicle.

Okay.

So to get --.

Yes, we have some independent research from display search that estimates the market to be in the several million units; this is the total addressable market. By 2012 it's in the several million unit kinds of quantities.

Okay, so these are large markets?

These are large markets.

Okay. And finally, congratulations on your new board recruit. That certainly is an endorsement of the belief that the management team is going to get the job done here. Can we anticipate -- if I'm not mistaken there are three additional board seats that are vacant. Can we assume that the types of talent that you will bring in will sort of round out the experience necessary for the Company? And if that's the case, what types of experience are you going to be looking for in the seat?

Good question. First of all, the simple answer is, yes, absolutely. We took an objective look, what is the necessary skill mix we need to add to the Board to help us to move faster? And what we identified, specifically, four critical skills. One was the strong operations and supply chain knowledge, specifically pertaining to the products that we are focusing on consumer, healthcare, industrial. This is where Marc comes in.

Second, we want somebody on board who has very broad and deep new of technology. And not just technology, but experience and knowledge on how to take different technologies and convert them into products. We're looking for someone with similar skill.

Number three, we want somebody with strong business marketing background in the area of growing technology companies.

And finally, we want somebody with strong financial knowledge, not necessarily corporate finance, but more so of investment banking and provide us additional guidance and future financing that we'll do following when we're going to execute this year.

Terrific. Thank you very much for your time.

Okay.

Your next question comes from the line of Ben Avig, Private Investor. Please proceed.

Hi, Alec, I just wanted to ask you about the 12-month contract we signed last May. I think it was with General Dynamics, about the full-color wearable Nomad for military, and just how that's coming along, and whether that full-color version in Nomad could be leverageable across the commercial sector as well? Thanks very much.

Good question, Ben. Yes, we have been on track in executing and actually delivering the color version of Nomad to the Government. I believe we're going to complete delivery within the next three months; three, four months. And the images are simply amazing. Anybody who looks at them will completely be blessed. As a continuation one of the new projects that spin-off this development is government, as well as industrial consumer customers. They want smaller form factor. So what we hope and then to get some funding from the Government this year to focus on reducing the form factor by shrinking the electronics and specifically developing a video ASIC, which allows us basically to compress greatly the form factor of the electronics and to make it easier to use.

In terms of leveraging the technology to consumer products, absolutely. Everything right now we developed from Government funding and delivering to the Government is leverageable to consumer commercial and the healthcare applications. The question at this moment becomes the cost because as you can imagine government cost structures are different than consumer mind frame and one of our goals, this is part of the reorganization, we basically are reorganizing to stop being a scientific workshop and becoming more of a product development house where cost and quality, just as important in the product definition as it is performance. And this is what we're focusing on this year.

That's great. Thank you.

All right.

Your next question comes from the line of William Despard with Smith Barney. Please proceed.

And I also had trouble hearing the first part. Could you just kind of repeat some of your information on Flic and how you see them in the momentum building and going forward the rest of the year?

Okay. A fair question. At beginning of last year our sales and marketing organization have done an outstanding job developing our new sales channels and solid pipeline for 2006. We actually took advantage within the fourth quarter 2004, specifically, we're focusing on four primary markets. There's the traditional automatic identification and data culture, AIDC market; there's a small business household segment; mobility segment, so basically people on the move who need instant access to the information and transmitting the information to someone else; and healthcare.

And what we've done over the past couple of months we've developed a very detail strategy on how to attack each one of those segments. Some of the critical attributes are related to reliability, specifically in healthcare space, as well as AIDC space. Some of the attributes that will allow us to grow in markets are the software tools, specifically connectivity tools to allow our Flic scanner to connect to various platforms from Windows to -- and various operating systems, whether you have PDA, BlackBerry or a Window-based -- Window-C based cell phone. As a result, we reported a 70% increase in the fourth quarter in the growth of Flic scanner sales. In the first quarter, we haven't disclosed this number yet, but we expect to have a record quarter reported very shortly in a number of Flic units sold from January to March.

We're also taking a very serious look on how to improve, further improve quality and cost position of this specific product because realize we're a much smaller player in this space where symbol dominates the bar code space, and our goal is not to compete against symbol. As a result, our market is the value market and not mid tier or high-end market where symbol primarily competes. And our differentiation results from attractive pricing to simplicity and that ease of use. What we're doing a lot more this year focusing on quality and customer support, which we haven't done over the course of last year. A combination of all these developments, we expect to double the output of Flic market -- Flic scanner sales in 2006.

So we're looking for longer term sequential growth in that product?

Longer term is going to be determined by some additional applications. We're also in the process of defining the longer term strategy for this segment. Essentially, when we discuss and need to develop a means for sustained long-term growth one of the elements is to help predictable cash flow. Predictable cash flow comes from a product that has upside potential, that has growth, market that is growing, and has enough room for us to gain market share within the existing space. We believe that Flic or equivalent bar code scanner offers us this capability and the goal is to proliferate growth with -- by adding more resources to this important effort, specifically this year.

Well, thank you. And one more question. Basing on the financing, is your ultimate goal to raise enough funds for well over 12 months or a year and a half instead of every quarter trying to raise money?

That's correct. The strategy we're focusing on, again, our goal is to balance the needs of the Company with the cost of capital and the impact it has on the shareholders. As a result, we want to focus on simple structures. We want to have larger raises and do it less frequently and to make it more consistent with what we're trying to do over the next several years.

Thank you very much.

This now concludes the Q&A session. I will now return the call to management for closing remarks.

I understand there were some technical difficulties at the beginning of the call and we apologize for this. Please do not hesitate to call us to get any information that you may have missed.

In conclusion, I just want to thank the team that is sitting around the table. We've been through a lot over the past couple months. There's a lot of change, positive change going on in the magnitude and the rate of change at which we're changing things. But we're still keeping our eye on the ball and still committed to deliver what we say we're going to deliver in 2006. On this remark, I would like to close this call.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.