MicroVision Inc (MVIS) 2006 Q2 法說會逐字稿

Good day ladies and gentlemen, and welcome to the Second Quarter 2006 Microvision Incorporated Earnings Conference Call. My name is Eric and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will be facilitating the question-and-answer session towards the end of the conference. [OPERATOR INSTRUCTIONS]. As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to our host for today's call, Mr. Jeff Wilson, Chief Financial Officer. Please proceed, sir.

Thank you. I would like to welcome everyone to Microvision's second quarter 2006 financial results conference call. Participants on today's call are Alexander Tokman, President and Chief Executive Officer; Todd McIntyre, Senior Vice President, Global Strategic Marketing and Business Development; Ian Brown, Vice President, Sales and Marketing; Steve Willey, President, Asia Sales and Marketing; and Sid Madhavan, Vice President, Research and Product Development.

The information in today's conference call includes forward-looking statements regarding projections of future revenues, margins and 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 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" or 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 Alexander Tokman.

Good afternoon everyone. Thanks for joining us. And we are glad to have you on the call. We're going to break this session into five subsections. We will start with financials, and Jeff will give you up-to-date financials for Q2 and first half of the year. And then the remaining four sessions, I will focus on outlining, giving you updates on our new business strategy focused around IPM and on the execution around this strategy. Then we'll move into discussions on the product update, specifically what's happening with Flic and Nomad. We'll then jump on to organizational and Board updates and finish with looking forward to the second half, what we expect in the second half. And finally, obviously we will finish with Q&A where you have a chance to ask any questions you want. Jeff?

Thanks, Alec. For the first six-month -- for the six months ended June 30, 2006, Microvision earned revenue of $4.4 million compared to 8.7 million for the first half of 2005 and 1.9 million for the three months ended June 30, 2006 compared to 4.7 for the same period of 2005. The decline in year-to-date and quarterly revenue versus last year was primarily due to the lower cost commercial contract revenue. The Company earned $4.5 million during the first six months of 2005 from work performed on our contract with Ethicon compared to only 663,000 during the first six months of 2006.

Product revenue from the sales of Flic bar code scanners increased by 41 and 55% for the three and six months, respectively, over the same periods last year. As of June 30, 2006 our backlog totaled $1.5 million compared to 6.8 million the same time last year.

We had year-to-date operating loss of $14.4 million compared to $11.4 million for the same period in 2005 and an operating loss of 7.8 million for the second quarter of 2006 compared to 5.8 million in the same period last year. The operating loss for the three and six months ended June 30, 2006 includes $552,000 and $650,000 respectively of severance costs and $565,000 and $982,000 respectively of non-cash compensation costs associated with the adoption of FAS 123R that were not included -- not incurred in 2005.

We also had a net loss available for common shareholders for the six months ended June 30, 2006 of 10.8 million or $0.40 per share compared to 12.1 million or $0.57 per share for the same period in 2005 and 11.2 million or $0.38 per share for the three months ended June 30, 2006 compared to 5 million or $0.23 per share for the same period in 2005. The net loss available for common shareholders for the three and six months ended June 30, 2006 includes a one-time 3.1 million charge associated with the conversion of the Company's preferred stock in May 2006.

The Company ended the quarter with $22.1 million in cash, cash equivalents and investment securities and raised an additional $1.7 million immediately after the quarter from the exercise of the overallotment on the recent financing.

Now I would like to turn the call back over to Alec to discuss our operating results for the first half of the year.

Thank you, Jeff. Let me start by saying that the first half of this year was characterized as a period of tremendous change on the organization and business as we know it, and I am very encouraged by what we have accomplished in the first half despite all of the monumental change that had been implemented within the organization starting from implementing new strategy, putting together a new executive team, reconstituting the Board of Directors moving to a new location and implementing new processes, not previously available at Microvision.

Our report card for the first half of the year is slow and despite some revenue challenges we have met most of the objectives that were articulated in February of this year.

Let me start with financing. As you know, we have completed the largest financing transaction in the Company history in June raising $27 million despite a difficult capital market and this amount should give us a [running room] to focus on the execution of the new strategy rather than being distracted from quarter-to-quarter cash needs.

In terms of financial, one of the important aspects to what Jeff has just presented, it's important for you to understand that we actually hit our first half operating loss targets through rigorous management of the expenses despite lower than planned first half revenue.

Our strategy on -- revolved around Integrated Photonics Module, many of you know, we defined and rolled out this new business and technology strategy and it's based on the new embedded scanning engine, we call it Integrated Photonics Module or IPM. Specifically, what we have done so far, we allocated a large percentage of critical engineering resources to accelerate heads-up display and embedded miniature projection display program that are essential at the core, at the center of high volume product development and commercialization strategy. As a direct result of this investment, we have developed several new IPM designs that could substantially reduce the form factor and power consumption requirements that are critical to success factors for consumer applications.

We entered into a development and funding agreement with a third party laser OEM, who -- with primary objective to assert a greater control in the development of the improved green solid-state lasers that would be tailored to our embedded modules targeting consumer applications.

We also secured a 900K Air Force contract and began the definition and design effort for a color eyewear application.

On the product side, we made significant products -- significant gains on revitalizing the Flic product line. Recall in February, I told you that we had a nice business case for this product, but we lacked quality and capacity. So, what we have done so far, we increased Flic revenue for first half by about 55% over the same period last year. We have added enhanced connectivity and software tools to enable a very important to us mobility segment that we are going to target in the second half of the year. We also took some strides in improving cost effectiveness of this product by reducing Flic quality related cost by 15%, mostly resulting from improved product and transactional quality and we have done some serious assessment of our transactional capabilities and implemented operating mechanisms focused on Lean initiatives. Basically Lean implies simplification which should improve in transactional quality and in our case we are currently executing on several projects that will cut Flic order-to-fulfillment cycle from 40 days to about 8 days which represents significant gains.

On the Nomad product side, again in February we -- I have articulated to you that in the mid-year we are going to make a decision on the long-term future of Nomad as a product. We have completed a detailed marketing assessment on the viability of the Nomad product line and have concluded that although there is a demand for see-through display -- heads-up display applications in several market segments, the current product's ergonomics and cost structure are inhibitive to the existing segment's growth and acceptance in the commercial segment. As a result we have taken steps in recent weeks to dramatically reduce our expenditures for Nomad as a product in its current configuration.

From this market assessment that we conducted in the first half of the year, we are establishing the requirements for the next generation IPM-enabled color eyewear product. Our existing installed base of Nomad customers will continue to receive support and service as necessary on timely basis.

Now let me jump into organizational and Board updates. As you have -- if you followed us, you are obviously aware we executed restructuring and reorganization of the Company. We also reconstituted our Board of Directors. We added three new members with extensive experience in the areas that we desperately need that would be very synergetic with our strategic roadmap with IPM. Specifically, skills we were looking for are strong supply chain and operations experience, broad technology development experience and the finance experience, and we've brought three members onboard, Marc Onetto, Jeanette Horan and Brian Turner.

On the organizational side, we completed the restructuring of the Company. As communicated earlier, we realigned marketing, sales, R&D, and supply chain organizations, while targeting reduction of SG&A by about 25%, and we cut the executive team size by 30%. We hired most recently a new Vice President for Research and Development to expedite the rollout of our product development discipline. And overall, in the first half of this year, we essentially assembled a brand new executive team. New members, including, new CEO, myself; new CFO in Jeff; new VP of Marketing & Sales in Ian Brown; new VP of Strategic Marketing in Todd McIntyre; our new Head of Asia in Steve Willey; and again new Vice President of R&D, Sid Madhavan.

We also added a very important and critical role in Head of HR and Wayne Evans who joined us in the beginning of this year, has made a tremendous impact in our organization already in very -- in relatively short time, rolling out new initiatives.

We also provided incentives to all employees by reallocating a large share of salary, bonus, and option pools to employees below the VP level. As you know, we also reset employee stock options.

We completed the rollout of new evaluation and goal setting process for all employees that will focus and predicated on accountability and performance. And finally, we moved to new location in Redmond, so we changed address at the beginning of the year with minimal disruption to operations.

Looking to second half, I am very excited about second half. You know, a lot of significant changes have been implemented in the first half, to give us a run-rate to execute finally in the second half. Looking forward, Flic is expected to have a good second half. Our target is still to twist hit 2X growth on Flic product line.

On government NRE, our government business strategy is expected to come to full fruition in Q3. On commercial NRE side, the first half of 2006 was focused heavily on developing a new sustainable commercial contract revenue funnel that is consistent with our new IPM strategy that we implemented earlier this year. These efforts are expected to yield development agreements during the second half of '06 that will lead to commercialization of high volume HUD and Pico Projector applications, and that's the goal.

In terms of the burn rate, Jeff has mentioned some of the numbers associated with the first half operating losses. We're still targeting achieving our goal of reducing the burn rate, but the 30% we communicated at the beginning of the year, it's largely dependent on achieving the revenue goal and maintaining aggressive cost management. We continue and will continue an aggressive cost management of sales, marketing and administrative expenses and expect to reduce these by the end of the year, as promised, by 25%.

In terms of the trade-offs between strategy and then burn rate, our two primary goals, as you know, are reducing burn rate and accelerate IPM products roadmap. We will make trade-offs that, if we have to and when time comes, we will make trade-offs that provide the opportunity -- any opportunity to accelerate our time-to-market on high volume products. We are going to pursue it very heavily and aggressively.

As an example of this trade-off was the recently announced agreement with the third party laser OEM, who is basically going to fund an effort to accelerate the development of a solid state laser.

With this I am going to stop for a second and open for questions-and-answers.

+++ q&a

[OPERATOR INSTRUCTIONS]. Your first question comes from the line of John Schneller with Knott Partners. Please proceed.

Hi, Alec and everyone on the call. Just one or two questions, so could I -- and I apologize if I missed it, but what was the total cash burn for the quarter and the six-month period?

One moment, we are looking at the number.

While you are digging through that, I will ask my second question. Alec, you expressed some excitement over the potential upside in the commercial contract area for the second half of the year. What sort of visibility do you have on the pipeline and what are the chances that there is a significant ramp in that regard, if you had to sort of handicap, whether you can actually ramp that revenue stream or some of that might slip into '07?

That's a good question, John. We have several factors that are playing in our hands. There's three things that we have today. We have a strong market pool for both pico projections and automotive [hand] applications. And as the result, we have not just an interest from the outside [players], typically Tier 1 integrators and third party OEMs, we have a strong desire to bring these products to market as soon as possible. This desire is obviously on our side, so we have two typical barriers that you need to overcome in order to bring something. Where we are right now, we are in a process of negotiation, with several of the Tier 1 integrators and OEMs, on determining what exactly and how exactly the path to commercialization will look like and that is why development of these agreements takes time because it is not what in the past we have signed quick agreements on selling prototype. This is not a product strategy we are pursuing right now. We are targeting specifically [days] developing efforts that should lead to commercialization of high-volume products. As a result, once you start looking several years ahead, and you need to outline all the important milestones who is going to do what -- who is going to basically carry the costs for various development and manufacturing activities and -- we are essentially in good position to have good announcement in the third -- we are targeting the third quarter of this year to basically to kick-off. It was the first major effort, and we are on track in our expectations and estimations and the devil is in details and we are closing on these details rapidly.

Okay.

John, back to your question on the cash; for the first 6 months, the cash flow was $15.2 million -- the cash used in operations. And it's pretty close to the same as Q1. So, it's about 17.5 million for Q2.

17.5 million burn for Q2?

Yes -- 7.5, sorry 7.5 -- half of it.

Yeah I was going to say wow, that's a little bit larger than I thought. Okay. Let me reach for my nitro glycerin. So, okay -- and then in terms of your heads-up display effort with Tier 1 and other suppliers, was there anything you could comment on there?

Like I said, John, we are in the detailed development stages with several Tier-1 integrators and the goal still as it was in February in the third quarter is to have first major announcement and commencement of the execution on this hot topic.

Great. Okay, I appreciate your time. Thank you.

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

Good afternoon, gentlemen. Can you add any color to -- it looks like despite the fact that you had shown reducing your overall costs, the SG&A looks like it increased and I am sure there is something more to that and then also can you talk about the notes outstanding and what your plans are concerning those notes?

Sure on the SG&A costs, there is two components. There is the severance costs that's in there and the FAS 123 non-cash compensation costs that are new this year. Whenever you adjust for those two costs -- I have that number right here. We are actually down about $1 million in the first half of the year and we are expecting to be down further in the second half of the year. We are actually down $0.5 million in the first half.

On the cash cost or the non-cash? Or you are talking total?

Talking in total.

Okay. And then on the notes?

On the notes, we have made the first two payments this year in cash. The next payment is through the middle of September and we have a little while before we have to decide how we will make that payment. It will depend on our cash projections and the market at that time.

What is the amount of the payment due?

The total payment due is -- I do have that number. It's the March, the September payment combined are $3 million -- 3.1 million.

3.1 and again when is that due?

September -- middle of September.

Okay. And then any other -- any other visibility regarding any -- I am kind of looking for some stakes in the ground that would show things that we can begin to start to forecast revenue off of pico projector or any other kinds of contracts or anything that we might be able to look for in the third quarter?

Well again, with -- you know, once the agreement is established with an OEM or Tier 1 integrator, it is going to have [some] contract value. As I mentioned to you, we have several developments in progress. And they have different, slightly different targets, different goals and different contract values, so it is difficult to say at this point what exactly that's going to be. But the goal is to kick-off and commence at least one of these efforts within this quarter.

Within this quarter?

Yes.

Okay. Thank you.

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

Hi, gentlemen. I noticed a kind of a new thing that cropped up, you talked about aero in the HUD. Could you comment on what kind of interest you are seeing there and kind of elaborate on that a little more?

Sure. We obviously are looking for opportunities that have largest product between the volume and the margin. And aero HUD, we evaluated business case on aero HUD and we were pleasantly surprised by the margins that you could gain by entering into this specific market space. We have a strong interest for one of the prime integrator in developing aero HUD, and we're in the process of negotiation and establishing goals and objectives and deliver [both] for such efforts. Once this is completed, we're going to make internal evaluation, and decide whether it's worth pursuing or not.

From the market standpoint, it's a smaller market obviously than automotive HUD. However, there is underserved space specifically for the small business jets that do not have this capability. And it's synergetic with our automotive HUD development activity. So, we are considering it seriously and we are basically flushing out the detail of what is the investment on our part that it will take to bring this product to market.

So, it sounds like going back to the general interest in OEM contract for this quarter and next, are they going to be along the lines of the developmental type that we did with Ethicon. Is that what your goal is?

The goal is -- see this is actually excellent question. The goal is similar to what Ethicon offers, the amount of contract could be different, because the amount of contract is dependent on the -- not just on the OEM and/or Tier 1, it depends on the country of origin where the OEM is located because there are different practices on investing into earlier development efforts depending whether you are in Korea, Japan or United States. So the value may be different but the objective is the same. Most of the contracts we are going to develop we obviously target and our goal is to get to commercialization, but most of these contracts would be structured in phased development efforts where we have to go through a specific development milestones before we move into the next milestone. And typical milestones are -- typical milestones are broken down into two large groups. There is a development contract followed by productization contract that leads to commercialization. So, as we develop in this with Tier 1 integrators with OEM for the embedded projection displays with aero HUD, we are structuring and forcing our prospective partners to think commercialization rather than just one time prototype delivery and stuff.

So, in looking at these contracts, would you say that the one with the HUD and pico and maybe the aero, are they pretty much in advanced stages of discussions?

We would call in -- it's very difficult to qualify this. I would say yes they are in advanced stages. And one of the things everybody has to remember, there is a trade-off between A priority investment someone does when they develop with us and the amount of exclusivity and we are navigating in very tricky waters. Our job is basically not to limit our market to specific OEM or specific regions around the world. Our goal is to have a full global introduction not limited by regions or by exclusivity agreements. So within this environment we are trying to optimize what is the right ratio of exclusivity versus upfront contract revenue versus the eventual product sales. And that's where we are balancing a lot more carefully than potentially we have done in the past because we have to look at all three sides of this equation and determine what's the optimal overall scenario, does this make sense?

Yes. Now, one more question and then I'll let you go. The important ingredient, of course, is the green laser, could you reiterate a little more on how much control and is this now just an engineering project instead of science and there is just stages that you are going to have goals and actually accomplish this?

The goal of this recent development agreement that we initiated with the third party OEM is basically optimize solid state green laser for consumer application. Today's green lasers have been essentially targeted for rear projection television industry which has 90% synergy with what we need. However, the form factor and power constraints are not as eminent in rear projection television industry as it is for the cell phone embedded applications. So, this effort was designed with the goal to optimize the solid state green laser in terms of the form factor and power consumption.

Has there been a lot of progress in this field in the last six months in this technology?

There has been tremendous progress, I will let, Todd, to add a little more, but there has been tremendous progress over the past year and we are very happy with the progress, except we decided not to sit on the sidelines and wait for it to happen, we decided to take more active control out there.

So you're very encouraged on the fact that we can make progress in this area?

Yes.

Okay. Thank you.

[OPERATOR INSTRUCTIONS]. Next question comes from the line of [Ben Everge]. Please proceed.

Hey Alec and everybody. I just wanted to basically follow-up on Bill's question about the green laser. In terms of the kind of timelines and oversight that you guys have in terms of getting the prototype device and evaluating that, are we still on track for product introduction in 2008 based on the availability of this component?

We are improving our chances by actively getting engaged in the definition and development of this. So it's consistent with all the requirements -- keep in mind, you know, we are navigating in a rapidly changing marketplace. Motorola, just recently announced their earnings and they completely -- they grew more than any other handset providers, based on their new model, RAZR model, which basically predicated by having the thinnest phone around. That set specific requirements on any embedded engine that will go inside the cell phone and as we learn in this in acquiring this information, we react into it rather than waiting on the sideline for something to happen naturally. So, what we are basically doing right now, we develop, as I mentioned earlier, several very interesting and promising concepts, design concepts, designs of IPM, that would yield a very, very small form factor, that would allow you to place inside a handset such as Motorola cell phone. So, this is just an example, as requirements evolve, we are proactively addressing and reacting to them. Todd, do you want to say anything?

I would just add that we are making a great effort to put a supply chain in place that includes multiple suppliers and we are encouraged that there will be multiple suppliers of the green laser component and that sort of goes along with what Alec said that we are trying to take our destiny in our own hands to ensure that we are well positioned to be a supplier to our partners for these high-volume applications.

That's great. Thank you.

Your next question comes from the line of [Ron Sparks]. Please proceed, sir.

Good afternoon.

Good afternoon.

I am wondering what products are -- how far off is any commercial product as far as having all the tools you need to make it and market it?

Great. You are talking about today's commercial product or tomorrow's?

Any commercial product. I know Flic is -- you are selling some Flics, you are putting HUD on hold. If you -- excuse me, the Nomad on hold and you are waiting on a green laser that works well, isn't expensive enough for you?

No. We are actually -- since this is one of the changes that we've been pursuing starting this year. We are not waiting for contracts. We are not waiting for external funding. We know where we want to go, so we are investing heavily internally. [All of them are] putting necessary resources in place, on accelerating IPM development that will lead -- it will be essentially an engine and several configuration that will enable HUD, aero HUD, auto HUD, embedded projection display, potential accessory projection displays and color eyewear applications. So we are not waiting for anything. We're actually proceeding -- we are waiting to get development agreements in place, but it doesn't slow us down on our own development side and we basically are improving our position going forward.

So the technical work that needs to be done to be able to build these machines is done?

It has been progressing and we made tremendous strides and basically improving our focus. Last year, we were spread along 30 different projects. In the first half of this year, we basically tried to wrap all the legacy activities and commitments that we made last year to focus on the vital few opportunities that get us to market first. Most of them, except for Flic are based on the IPM engine.

Well, thank you.

Okay.

Ladies and gentlemen, we are showing no more questions at this time. I would like to turn the call over to Mr. Jeff Wilson.

Well, thank you everyone for joining us for the call.

We are looking forward speaking to you in three months. We expect to have progress versus to-date, and hopefully giving you some good news coming forward. Thank you.

This concludes our presentation. Thank you for your participation in today's call. You may now disconnect and have a good day.