MicroVision Inc (MVIS) 2006 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q3 2006 MicrovisionGood earnings conference call. My name is Tony, and I will be your coordinator for today. (OPERATOR INSTRUCTIONS). I would now like to turn the call over to Mr. Jeff Wilson, Chief Financial Officer. Please proceed, sir.

Thank you. I would like to welcome everyone to Microvision's third-quarter 2006 financial results conference call. Participants on today's call include Alexander Tokman, President and Chief Executive Officer, and Todd McIntyre, Senior Vice President Global Strategic Marketing and Business Development. The information in today's conference call includes forward-looking statements, including statements regarding projections of future operations, product applications, development and production, future benefits of contractual arrangements, growth in demand, as well as statements containing words like believes, estimates, expects, anticipates, targets, plans, will, could, would and other similar expressions. These statements are not guarantees of future performance. Actual results could materially from the 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" related 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 obligations to publicly update or revise any forward-looking statements whether as a result of new information, future events, changes in circumstances or other reasons.

I would now like to turn the call over to Alexander Tokman. Alex?

Thank you, Jeff. Thank you, everyone, for joining us today. It is an exciting time to be at Microvision. We are completing some key milestones that the company has set over this year, and what is even better we are hitting them on all cylinders since the team has been formed at the end of the second quarter and we completed the formation of our Board.

There are five things that put a smile on my face these days. These include specifically the first one we made. We are making tremendous progress on the roadmap, on proliferating our technology and business roadmap related to Integrated Photonics Modules. As a result, we have developed several promising engineering designs that have the size of a small matchbox or smaller that could yield a solution to be embedded in a variety of handsets and other video output devices.

Secondly, we are receiving external validation from our partners. As you know, we have signed several strategic deals that accelerate consumer and automotive products to market. We are going to discuss these in a moment.

Number three, we're trying to do everything we can to maintain and increase the gap between us and the competition. As a result, we're entering into various strategic collaborations to maintain and increase technology gap. Fraunhofer is one of the examples.

Number four, we are streamlining the operations and managing our business to reduce costs continuously. Every week we look for opportunities in implementing solutions to use the operating costs while maintaining our primary focus of progress in the IPM roadmap that will lead to creation of new markets and new products.

Finally, number five, we actually start making our customers happy. This is a significant turnaround from last year and from the first half of this year because we made very visible improvements in our products, specifically the barcode scanner, and the testimonials we get today are 180 degrees apart from what we received last year.

With this, let me focus briefly on Q3 and year-to-date operating results. Our operating results for the third quarter and year-to-date include several milestones that will allow us to accelerate our roadmap and commercialization of high volume products based on the Company's IPM module. These milestones include several strategic new open contracts with world-leading partners that again contribute to our goal accelerating products to market. These contracts also have contributed to rebuilding our revenue backlog for fourth quarter and beyond.

Some of the more notable accomplishments include the following. We entered into agreement with a major global Tier 1 automotive supplier to develop commercial scanned-beam head-up display for automotive applications.

We also entered into joint development agreement with a large Asian consumer electronics manufacturer to develop a high-volume design for manufacturing of our proprietary IPM, which is essentially the tiny engine suitable for a variety of display applications. Potential applications, as you know, for this platform include cellphone embedded tiny projection displays, ultra-miniature accessory projection displays, as well as the personal color eyewear and the again automotive head-up displays.

We were also awarded on the $6 million contract by General Dynamics to develop and deliver a full-color daylight readable see-through helmet mounted display for the U.S. Army. The significant accomplishment of this effort also includes the fact that this effort serves a strategic need for us, and it is consistent with the development of IPM and personal color eyewear application.

On the product side, we released several connectivity bundles for Flic, which is our laser barcode scanner, to provide cost-effective solutions to the growing mobility market. The software products will allow users of Flic to capture barcode directly into a variety of business and consumer applications based on Windows Operating, Windows Mobile and BlackBerry operating systems.

Finally, we announced strategic development with Fraunhofer Institute for Photonic Microsystems. This augments our winning position in the MEMS space, and I believe it increases our GAAP versus the rest of the world.

With this, I'm going to stop, and I'm going to move onto financial results, and Jeff will present those.

Thanks, Alex. For the nine months ended September 30, 2006, we had revenue of $5.2 million compared to $12 million for the same period last year. And for the three months ended September 30, we had revenue of $823,000 compared to $3.3 million for the same period in 2005. In 2005, as you will recall, we earned about $4.9 million from the Ethicon contract, and we also had a onetime sale of about $1.2 million of Nomad systems to the US government as those items were not repeated this year. But we did end September 30 this year with a backlog of $6.8 million compared to $4.6 million last year.

On the operating loss standpoint, we had a loss for the nine months of $21.1 million compared to $18.3 million last year, and for the three months, we had $6.9 million compared to $6.5 million for the same period last year. The operating loss was obviously impacted by the lower revenue numbers, along with severance costs and the cost of adoption of FAS 123 this year.

The Company reported a loss available to common shareholders for the nine months ended September 30, 2006 of $18.6 million compared to $24.7 million for the same period last year and $7.7 million for the three months compared to $12.6 million for the same period last year. The big difference there from last year is we had the $7.2 million gain from the sale of Lumera stock during January of this year. We ended the quarter with $14.6 million in cash, cash equivalents and investment securities, and and then subsequent to the end of the quarter, we raised $1.9 million from the sale of 322,000 shares of Lumera common stock. We still own 1,750,000 shares of Lumera stock that have a market value of approximately $13.4 million as of today's close. Those shares are pledged as collateral for the Company's notes. They are scheduled to be retired in March of 2007.

With that, I think we are open -- we would like to open it up for questions.

(OPERATOR INSTRUCTIONS). Jeff Miller, JMG Capital.

Great news on the new OEM in Asia. I just had one question about the Lumera stock. It seems like there has been a skyrocketing in the price over the last couple of weeks. And just correct me if I'm wrong, is there $5 million outstanding on the notes that the Lumera stock is pledged as collateral to? And if so, with a closing price of almost 770 today, does it makes sense to maybe sell some of those shares now and lock in a pretty good price?

You are right. The face volume on the notes is $5.8 million. They are due in December and March -- December 15 and March 15 of next year. There is no provision for early payment of the note, and the shares are pledged as collateral, and right now we cannot sell them as long as they are pledged as collateral.

So there is a way you could actually go back to the noteholders and sell the stock and then put it in an escrow account?

We are in regular discussions with the noteholders, but right now there is no provision in the notes for that.

Okay. Thank you.

John Schneller, Knott Partners.

Congratulations on the CM announcement today. That is great news. I was wondering if you could I elaborate on what the nuts and bolts are of that agreement, and what does this specific contract manufacturer bring to the table? Is it that they now will lend the OEMs a level of confidence that you guys can produce high-capacity, high output, high-quality integrated photonics modules to be put in handsets?

That is a good question, John. You are right. That is one of the answers. Credibility is the second necessary component in addition to having (indiscernible) technology to create a new market, and this announcement gives us additional credibility and makes negotiations with OEM a lot easier because we have an arm behind us that has expertise in producing high-volume products and taking them to market.

Why this agreement has been announced in a third name, it has become a practice to establish competitive advantage, typically large businesses looking for specifically for exciting growth opportunities. They do not disclose their intention until they feel that sufficient progress has been made, and they are ready to communicate their strategy and go to market plans to their customers and shareholders. That is one of the reasons that we are doing it in a third name based on their request. We, however, attempt to balance this in our partner's interest with our need to keep you informed on our progress. We anticipate that as things progress, more communication and information will become available from our partners and ourselves.

Okay. Would it be fair to ask who will bear the brunt of the upfront capital costs, the tooling costs, manufacturing line, that kind of thing?

Even though we have not disclosed any details of the agreement, this agreement is structured such that we did not help in terms of reducing our investments, and this investment gets picked up by our manufacturing partner.

Okay. I will jump back in queue.

[Joel Otchomowitz], MDB Capital.

Alex and Jeff, it looks like there was a lot of progress being made. Can you hear me?

Yes, go ahead.

I have a number of questions, but Jeff, I wanted to ask you first off if the issue of the restricted stocks and the pledged collateral for the notes, does that prevent you from marketing the value to the current market price on the books?

We marked that through the unrealized -- it is on the unrealized gain in the book, but it does not show up on the income statement. It will be in the comprehensive income statement.

Okay. But it is not on the balance sheet obviously?

No. (multiple speakers). That is true, yes.

That was a small item. The issues that I'm more concerned about right now, Alex, excellent you're putting together the right structure for moving the company forward. Obviously the critical component here is not only this distribution and manufacturing of the footprint that you're working towards in the IPM, I guess my question most critically is, could you give us an update on the actual engineering designs and the progress of the team to perfect the new footprint? You say you have five designs which is encouraging. Are they in operational mode? When do you think you will be able to demonstrate the new form factors in actual color operations? Any thoughts there?

We have several promising designs, and one of the reasons we enter into strategic agreements with world-renowned CDMs is to ensure that the design meets not only our performance criteria but also the cost and reliability. The latter two components are not something that has been traditionally Microvision's core expertise, and that is the reason we are relying on partners to help us to get there faster.

And obviously this new partner well help in that regard. But technologically do you see any issues now as far as realizing the goal of providing an operational demo, a prototype of the new form factor?

Our progress has been steady and positive throughout the past few months, and all our efforts are focused on CES of next year, in January of next year. We expect through this development, through development with our laser manufacturing partner to produce Next Generation of integrated photonics module display engines that we can discuss and show and communicate to the world. So the important milestone will be January of this year where we expect to have a good showing at the Consumer Electronics Show.

Well, we will look forward to that. That sounds very exciting. Just a couple of other quick issues. Any other -- any color on your discussions with potential large mobile handset companies that might be interested in integrating the forthcoming IPM?

Yes, most of the top five world-leading manufacturers of cellphones are interested in what we have to offer, and we are in discussions with a large percentage of these players.

So it is probably reasonable to conclude that we may see some developments either prior to or maybe at CES or shortly thereafter with some of these discussions?

I don't want to provide any guidance on this. As you know, there is a lot of factors that we can't control that determine the ultimate date. But what I can tell you is we continue to work diligently, and we have very solid progress every week. As I mentioned to you, having to trust the technology is not sufficient to be successful in this world. You have to have credibility, and we had been building credibility all year.

The building blocks include a clear strategy, solid execution, a new team of solid financing strategy and now additional validation is the agreement with this large Asian CDM. So all the blocks are getting put in place, and we expect progress.

Well, it certainly seems you are attacking it on many different fronts, and so we will look forward to seeing continued progress, and I will get back into queue.

Thank you very much, gentlemen.

[Joe Debeaux], Morgan Stanley.

Good afternoon. It is my understanding that a lot of this new technology is dependent upon the green laser that you have contracted for development with an outside firm. Can you give us any idea on the progress that you guys are making towards the miniaturization of the green laser?

Since we signed the agreement with the laser manufacturer, we put together a cross-functional -- cross-business program team in place. We're monitoring progress on a weekly basis. So far, the progress is to all our targets, and we feel good about what we achieved so far, and the completion of this program is one of the enablers to have a successful CES.

So you are obviously expecting the completion of that program sometime between here and January?

Expecting completion between here and January.

That is the target. And one important caveat, and this is only one out of three green laser manufacturers who we have been actively working with.

Great. Thanks. Keep up the good work on the progress.

[William Despare], Smith Barney.

The question has been answered. Thank you.

[Gil Sasanik], Sterne Agee Financial Service.

Gentlemen, I wonder if you could comment on Ethicon Endo-Surgery? We have not heard anything about the project. Is it dead? Anything going on there?

We completed our deliverables, our technical and programmatic deliverables for Phase I of the Ethicon projects. We delivered the prototypes. Currently Ethicon is taking time to develop a business case and plug their go-to-market strategy before they come back to us and tell us what the next steps are.

[Art Nalian], Merrill Lynch.

Good afternoon, Alex, and congratulations on this news. Most of my questions were asked, and I appreciated your answers on them. Can you just detail out what we can expect going forward in terms of some future milestones you hope to be able to hit?

I'm going to try to answer this question without giving too much guidance. Our legal guy is looking at me right now. All I can tell you is you're going to see positive progress starting in the fourth quarter and going into 2007. Each of these milestones will be building blocks on our path to become hopefully a technology juggernaut in a few years, and each one of these milestones and each one of the announcements that you will hear will be very synergetic with our ultimate goal, and our ultimate goal is very simple. It is to accelerate our roadmap to commercial introduction of high-volume products, while maintaining and reducing our operating costs. Everything we are going to do is going to be focused on this objective, and everything you are going to hear from us going forward and you are going to hear some good news within this quarter and then first quarter of next year that would help to build the value of the Company and make all of you as excited as we are internally.

Excellent. Thank you very much.

Joe Debeaux.

My question has been answered. It pertained to the green laser.

[Larry Thisen].

Alex, I disagree with the previous questioners. I think the most important factor is money. To what extent -- especially with your burn rate, you have got a lot of overhead. You have only got $14 million in the bank, and you have raised some money from the sale of Lumera.

Let's assume for a moment that you felt that the outlook for Lumera was sufficiently good that you would not want to sell the stock. What about raising some more money with a) some of your partners, manufacturing partners, etc., etc. or b) with some legitimate, honest, non-scuzzbag financiers who might want to be interested in the product from the long-term?

Larry, tell us what you really think? Okay. It is a fair question. I can tell you that in the first half when we develop new business strategy and business plans, we also developed a new financing strategy that is consistent with the business strategy to ensure long-term success for the Company. As a result, we are continuously reviewing and assessing all available financing options. Some will include everything that you have just mentioned.

In terms of operating cash burn, we always are and we will be always concerned about the burn rate. And, as I mentioned to you earlier, we are continuously looking for opportunities and implementing solutions real-time, something that you have not -- cannot see yet, to reduce the operating costs while focusing again on our primary goal of our progress in IPM roadmap with the creation of new markets and products.

I just wanted to add one thing. On the last financing that we did, one of our goals was to bring in some high-quality institutional investors, and I think we have succeeded in doing that. So we have been bringing up the investor base.

I heard you, Alex, on reducing operating costs, but I did not hear you on telling me where you think you're going to get your next money? You know, you have got the sale of Lumera, which would sell -- I mean which would retire your debt, and that could be as early as March of 2007. But for continuing operations, I am most interested in what sort of sound, fundamental, interested investors you can get, that is people who care about the business and not about themselves, as much as has been the case in the past.

Larry, the whole premise of our strategy is to bring fundamental institutional investors to the table. That is why we are cleaning the balance sheet. This is why we're hitting on the milestones, and this is why we are building credibility. There is no other way to bring fundamental investors but to say what you're going to do and then to do it.

Okay. Well, I will trust that you will do that, even though you still have not told me who it is or what it is or how it is that you think you're going to get this money, other than to increase your credibility.

You just have to be patient and wait to see if good news comes.

John Schneller, Knott Partners.

Hopefully I'm in the category of legitimate institutional investors.

Certainly, John.

For the gentlemen who asked that question before. I have a question on the power consumption requirement of the IPM. I think the goal was to get to 1.5 watts, is that correct?

We consistently were given the message that 1.5 watts and below is what you need to be successful in the cellphone market.

And are you sort of -- in terms of where you need to be, I would assume sometime mid-07. Do you feel comfortable that you can get there, or are you already there?

John, we set these targets, and we executed upon these targets. Having a design that gives you the right level of performance but does not meet size, power and cost will be a failure, and this is one of the reasons we entered into agreement with the Consumer Electronics manufacturer, and we are going to continue on this path. You're going to see more positive announcements from us to ensure what we have next year is going to meet the more stringent requirements imposed on us by cellphone manufacturers.

Okay. In terms of the green laser, I would assume that the three companies that are sort of racing towards their goal, they can make it. Is the question there that they cannot get the costs down to effectively mass-market it?

They are concerned about three things -- price, power and cost. And based on the progress we have seen they have made, the size has been addressed. The power has been addressed. The cost obviously is going to be a function of the business case, and right now they are very excited about our specific business case because we recall that green lasers were initiated based on the pull from rear projection television laser industry. Now all three manufacturers realize that Microvision's application was in numbers the RPTV perspective market, and they are very excited about being part of our solution. So this gives them additional incentive to focus on smaller lower-power versions and more cost effective to be part of the cellphone.

Great. Thank you. And just one other comment on the financing front for the gentlemen if he is still on the phone, I would offer that the company and its management has been very generous with their time with a number of Wall Street institutions to make some time to get in front of them. So they are definitely talking to quality institutions.

(OPERATOR INSTRUCTIONS). Joel Otchomowitz, MDB Capital.

Alex, actually Jeff, just from a housecleaning perspective, obviously we're encouraged by SG&A expenses kind of declining a bit and R&D is obviously up a little bit. But considering the critical position that is playing right now in getting IPM out, I don't see a major problem there. But going forward, do you expect to see similar op expenses into the fourth quarter and/or growth or decline thereof?

And then secondly, of that $6.8 million backlog, it has been difficult to get a feeling for the basically the revenues that you post. Things have been very lumpy recently. Do you see -- is there any particular guidance there that you could give us or color as to how the topline dynamics are going to play out in the fourth quarter?

The second one first. Revenue in the fourth quarter we have given guidance for the year. So I think if you take a look at that with where we are at now, that gives you some feel for where we are thinking we're going to be for the fourth quarter.

On the expense front, one of the new nuances that we have is our research and development, our total pool of research and development expenses, those people work on both revenue projects and internally funded projects. (multiple speakers). So you almost have to take a cost of contract revenue and cost of research and development and add them together, and that is kind of our total R&D spend. And when you take a look at those two numbers together, I expect us to be fairly consistent over time, some lumpiness, but fairly consistent.

And then SG&A, I would not expect that cost certainly not to go up over the next several quarters.

Okay. Thanks very much.

Gentlemen, we have no more questions in queue. I now turn the call back over to Mr. Alexander Tokman for closing remarks.

Thank you. Again, this is a pretty exciting time to be here. I hope you are going to feel this as much as we do. The third quarter of this year stands in my opinion as one of the most important quarters to date in the history of the Company because we have crossed several fundamental barriers to our long-term success, and I believe the world is beginning to see the dividends of the turnaround strategy and hard work that the team put in place in the first half of this year.

The five things I was talking about, progressing on IPM roadmap, receiving external validation through the strategic contracts, maintaining the technology lead and increasing the gap, streamlining the operation and managing the business through reduced costs, and finally making our customers happy is what again puts a smile on my face. Soon it will put a smile on your face.

Winning is contagious, and what pleases me the most is that not only we're delivering on key milestones, but the manner in which we're doing that since the team and board were reformed at the end of Q2, we have been hitting on all cylinders. I can tell you honestly the third quarter is when we start hitting on all cylinders because this is the quarter -- the second quarter is when we completed the formation of the executive and senior management team, as well as the board.

I look forward -- everyone feels urgency and feels ownership, and that is the biggest difference. I look forward to providing more good news to you regarding our progress towards the ultimate goal of accelerating commercialization path through exciting high-volume products, and we will continually look for opportunities implementing solutions to reduce the operating costs. We think our goal is very clear, and what we are doing internally internally, there is a little lag between what you're going to see and what we have done internally, but expect to see a lot more good news coming out of Microvision.

Ladies and gentlemen, thank you for your attendance in today's conference. This concludes your presentation. You may now disconnect. Good day.