MicroVision Inc (MVIS) 2008 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Second Quarter 2008 Microvision Incorporated Earnings Conference Call. My name is Chanel, and I will 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 this conference. (OPERATOR INSTRUCTIONS). I would now like to turn the presentation over to you host for today's conference, Ms. Tiffany Bradford, Investor Relations Specialist. Please proceed.

Thank you, Chanel. I'd like to welcome everyone to Microvision's Second Quarter 2008 Financial Results Conference Call. In addition to myself, participants on today's call include Alexander Tokman, President and Chief Executive Officer; and Jeff Wilson, Chief Financial Officer.

The information in today's conference call may include forward-looking statements, including statements regarding projections of future operation, product development, introduction, applications and benefits, business partnering expectations, market opportunities and growth and demand, as well as statements containing words like "believes", "estimate", "expects", "anticipate", "target", "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 statement.

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 as expressly required by the federal securities laws, we undertake no obligation to publically 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. Alex?

Thank you, Tiffany. Thank you, everyone, for joining us this afternoon. The outline of today's session is as follows. I will provide operating results, and Jeff will come in and provide detail on the financial results for the quarter ending for the first half. I will come back and give you strategic outlook, and we'll wrap it up with questions.

So let me begin with the operating results. Although our second quarter was quiet by external IS standards we've made very important progress in all four key areas. Specifically, these are customers, technology and supply chain, and liquidity.

Let me begin with the customer update. We believe that market interest in PicoP remains strong. During the second quarter we received several letters of intent from customers for the PicoP accessory product for 2009 release. We expect to commence the extended field trials with our OEM partners very soon to solicit broader feedback for the final accessory product requirement.

It is our belief that successful completion of these extended trials that will span for the remainder of this year and early portion of 2009 and will include both collection of consumer feedback as well as the internal testing on the part of our customers will lead to firmer purchase commitments. During this time we will be working with our OEM partners to determine their ultimate timing for the accessory product launch. However, we expect to be in a position to launch the accessory product in the first half of 2009 and support volume production in the second half of 2009.

Let's move on to technology and supply chain. During second quarter we made several important advancements on our core technology. As you all know, the new wide-angle MEMS scanner is an integral part of our PicoP display engine that we targeted to serve several different market segments. The requirements for this scanner are driven by very stringent requirements by the cell phone market. The new scanner is required to provide reduced power consumption with similar or less reform factor and be robust at the same time to shock and drop there as compared to earlier Microvision designs.

In late 2006 we began the definition and design of the first MEMS device specifically focused on addressing the needs of the mobile projection display market. This new device was expected to challenge the existing technology limits and required significant innovation in MEMS scanner and package design on the part of our development team. We exhibited the first prototype of this new scanner about a year ago at the Society of Information Display.

We are pleased to say that in the last quarter we began internal testing of its key attributes. First, let me talk about power consumption. The power consumption of the latest version of the MEMS scanner has been reduced by approximately 75% over the previous version initially shown about a year ago.

What is the significant of this reduction? Let me give you the big picture. The cell phone manufacturers told us that the target spec for the overall power consumption for the embedded pico projector which includes MEMS scanner, light sources, ASIC optics and other components should not exceed 1.5 watts. Before the 75% reduction that were measured recently, MEMS power contribution was about 25% of the total allocated budget. To date, it's approximately 7%.

Second, we implemented internal testing and completed internal testing of the wide-angle MEMS scanner for shock and drop survivability. These results show that the -- our MEMS scanning mirror exceeds the shock and drop test requirements consistent with mobile handset industry standards. We're not done yet. There are more reliability tests in progress, but the structure reliability milestones is a good validation that we are moving in the right direction.

On the ASICs front, we progressed with our efforts on further miniaturization and power reduction of the key ASIC subsystem necessary for the accessory and [embedded] product.

Finally, let me close and briefly talk about liquidity. As you know, subsequent to the end of the quarter we raised $26 million, about $24.2 million net from the sale of common stock and warrants from high-quality investors. The primary goal was to strengthen our balance sheet and give us ability to commercialize the accessory product. Jeff will amplify more on this subject during the financial update. We believe that this additional cash could support our overall operating requirements until late 2009 to initial launch in volume production of the PicoP base accessory product.

On the other positive milestone, in June we joined Russell 2000, which all of you know are widely used by investment managers and institutional investors as benchmarks for investment strategies.

At this point, I'm going to pass the phone to Jeff, and he'll provide you with financial results.

Thank you, Alex. As Alex mentioned, in July we completed the financing of $26 million. In connection with that we issued $11.2 million shares of common stock and warrants to purchase $6.7 million shares.

A little bit about the warrants. The warrants have a strike price of $3.60 per share. They can be called by the Company one year after they were issued if the average market price of the stock exceeds $7.20 a share for 20 trading days. If the warrants are called by the Company, the Company would receive an additional $24 million in cash. In addition, we expect to list the warrants on NASDAQ.

Just going through the financials for the Company for the six months, during the first six months the Company had a revenue of $4.2 million compared to $4.9 million for the same period in 2007, and $1.6 million in the second quarter spread to $2.7 million the second quarter of last year.

As of the end of the quarter we had a backlog of $670,000 compared to $7.7 million last year. The decrease in the backlog is primarily attributable to the completion of government and commercial development contracts in 2007 and early 2008. The decline in contract revenue backlog is also part of the Company's conversion from a technology development company to a products company. We are entering the final stages of productization, and there are fewer opportunities now to enter in to development contracts as our customers are more focused on product introduction.

As we've stated in the past, our goal is to bring high-volume price to market while minimizing our cash burned. And working toward this goal may require us to forego certain short-term revenue opportunities that are not consistent with our overall product roadmap.

We reported an operating loss for the first six months of 2008 of $16.4 million compared to $12.3 million in 2007, and $9.3 million for the second quarter of 2008 compared to $6.3 million in the same quarter last year. The higher loss is primarily attributable to low revenue, an increased development cost, an increased headcount and strategic sourcing and business development.

Our net loss for the first six months of 2008 was $14.3 million compared to $9 million in 2007, and $9.3 million for the second quarter of 2008 compared to $2.2 million in 2007. Remember that in the six months and the quarter of 2007 those results included the gains from the sale of our investment in Lumera Corporation were approximately $6 million. Excluding this gain, the adjusted net loss for the first six months of 2007 was $15 million and $8.1 million for the second quarter.

The net loss per share was $0.25 per share for the first six months of 2008 and $0.16 per share for the second quarter of this year, compared to $0.21 and $0.05 respectively for the same periods in 2007.

Excluding the gain on Lumera, the adjusted net loss was $0.35 per share for the first six months and $0.19 for the second quarter of 2007.

The net cash used in operations for the first six months was $14.9 million compared to $11.5 million for the same period in 2007. And our cash burn from operations for the second quarter was approximately $9.6 million which reflects both the higher loss and some one-time payments for our MEMS development partner and employee benefits for 2007 that were approximately $1.8 million.

We ended the quarter with $20.7 million in cash, cash equivalents and investment securities. To that we added approximately $24.2 million from the proceeds of the common stock and warrants.

Alex?

Thanks, Jeff. Now, before we move to the question section, I would like to give everyone an outlook for the next couple of years of what to expect from us and a commercialization strategy that we defined in 2006. As you know, since 2006 after we declined and implemented -- and announced PicoP commercialization strategy, we identified specific milestones on the annual basis that would lead us to the ultimate goal.

During the same time, we've been very predictable in the successful execution of the external communication operational milestones, which included defining and implementing the new business and technology roadmap that will support this new strategy; refocusing business on the vital few market opportunities where the customer pool was the strongest; reorganizing the Company around the new business model, continuing maturing our product development skills that are absolutely necessary to be a viable product company; and simplifying capitalization structure and eliminating debt.

As we progress toward the development and commercialization milestones and get closer to the product introduction, the specific time in a product launch will be determined not only by our ability to be ready but also by final commercialization of key components by our strategic supply chain partners as well as by established commercial product launch windows of our customers.

With respect to the key components, most of our strategic suppliers continue to meet original product development timelines. Some have experienced longer development and commercialization cycle than we originally anticipated. This is not unusual for bringing new technologies to market.

The good news is that in the instances where the progress has been delayed, these companies have invested millions of dollars and continue to communicate their commitment to bring their critical component to market because of the large market opportunity.

In addition, as you all know, we have been pursuing dual supply chain capabilities in several key areas and consequently we remain optimistic about getting PicoP display engine into the market in 2009.

Based on what we know to date about critical components availability and consumer electronic sale cycle, the outlooks looks as follows, so we're going to go through each segment and provide some color on what and when, starting with accessory and embedded consumer PicoP segments.

All of you are well aware that we need red, blue and green to generate a full-color projector. Red and blue lasers sources have been successfully commercialized and adopted in various industries in the past, while green laser technology is currently being commercialized. The green laser development has experienced a longer development cycle than originally anticipated. Based on the ongoing discussion with our partners, we believe that we will be in a position to introduce initial quantities of the accessory PicoP in the first half of 2009 and move to higher volumes in the second half of 2009.

Based on all of our communications with prospective customers, we anticipate that an embedded PicoP product will be commercialized approximately 12 months following the introduction of the accessories.

Moving on to the automotive PicoP segment, to date, we have provided vehicle display samples to all three of our Tier I automotive integrators early in the year. To date they're marketing the example to their OEM customers. Typical automobile design cycle that leads to the end product take approximately three years.

Also, the automotive industry, as you know, is currently reacting to the changes in the global economy and rising energy prices. This could potentially result in industry reprioritization of key programs, focusing more on improved mileage and reducing emissions versus implementation of safety features such as embedded [HUD].

In response to the global economic changes and three-year automotive design cycles, we have been placing more and more attention on the aftermarket HUD opportunities because commercialization timelines are shorter. In support of this effort we have developed and demonstrated already a proof-of-concept, aftermarket head-up display that could be installed on existing vehicles. We are marketing this concept to segments where safety need is greatest with a target product introduction for 2010.

Finally, let me conclude with the eyewear PicoP segments. It is crystal clear to us that in order to create a successful eyewear solution for consumers, fashion and ergonomic factor are just as important, if not more important, than image quality performance of product.

In addition to the progress we've made on the PicoP display engine, which is expected to be an integral part of Microvision's eyewear solution, we made important progress in creating a lightweight, thin optical design that could be incorporated into fashionable eyewear.

The market pull factors for our wearable display products are the same as they are for pico projectors; the proliferation of broadband mobile devices and content, which is constrained by tiny display that minimizes usability and enjoyment of mobile media. We expect the demand for wearable displays to increase over the next few years, and we are targeting to meet this demand with a wearable display product about a year after the embedded PicoP solution, which is 2010.

In summary, I've laid out our incremental growth strategy that is based on a core PicoP platform, accessory first in 2009, followed by the embedded solution a year later, immediately followed by the aftermarket head-up display solution, fashionable eyewear, and finally, embedded head-up applications.

At this point I would like to pause, and we can open the Q&A session.

(OPERATOR INSTRUCTIONS). We will pause for a moment to compile a list of questions. And your first question comes from the line of Darice Liu of Maxim Group. Please proceed.

Good afternoon, guys. In the press release you mention some LOIs from several companies for the PicoP accessory product for '09 release. Can you give us some color on who these are from? Are they from current customers, new customers and what type of quantity are we talking about?

Darice, good question. At this point we would not provide any more color. The only thing I can tell you very clearly is that our goal is to move down LOIs and to get firmer purchasing commitments from the same customers and then additional customers through the [planning] that I just described earlier to commence the external trials, CO trials starting in September and continue throughout the year with a culmination in the final product testing within the customers' shop to confirm the reliability as well as the core performance of the product will be consistent with their expectation.

Anything else?

Well, I guess -- so is it safe to assume though that most of the LOIs that you received are actually from current customers?

To date, as you know, we only announced -- there is only one customer that was on consumer side was announced. Even though we have a list of customers -- a core group of customers we have been working consistently with over the past year for the accessories as well as the embedded PicoP application, only one has been acknowledged. And the letters of intent that we received to date include some new customers and some old customers.

All right. Let's move on to your timeline. So the accessory product timeline is now about six months behind schedule and the embedded product is about a year behind earlier expectation. What gives you confidence in this current timeline?

And in the prior conference call you said part of the issue regarding the timeline was green laser supply. Can you give us an update on what's going on with availability for that product?

It is true there is (inaudible). I think there are three questions. It is true that until recently we publicly guided to -- had stated the [stretch] goal for accessory was end of the year, December of 2008. Again, it was explicitly stated with a stretch goal because we're dependent on component availability. As we've gone through the year we warned that the quantity and availability of some of these critical components would be eliminated, which will push our launch into 2009 for accessory.

In terms of the embedded, most customers that we're in discussions want accessory immediately followed by the embedded product. They typically decide to launch accessory with smaller numbers to test the market and then immediately follow up with the larger quantity in embedded solution. So the embedded timeline is actually tied, in some ways, to the accessory, and this is why when accessory product was moved into the first half, the embedded trailed, of course.

Finally, confidence about green laser supply. The good news is that our partners, who we are continuously in discussion with and monitoring on the progress and issues resolution, are very confident and excited about this market opportunity. Enormous amount of investments have been placed in success of the green laser program at several of the institutions. And they all are driven by the large market opportunity that is in front of us.

Other than that, I can tell you that the will and desire is there, and it's all up to resolving some of the issues that are typically found when you transfer technology from in-house to your CM partners. And everything we've seen to date shows that there is a strong commitment on everybody's part to solve the issues and enable the green laser quantities for 2009.

All right. So let me just clarify two points. One, so green laser, that component constraint is what's holding back your timeline. Is that what you're saying?

Typically when you develop and commercialize a product you have a series of issues, but you have some of them are more critical than others. And green laser is an integral part of the integrated photonics module, which is an integral part of the pico projector, which is an integral part of the accessories. So you need to have all the components in order to complete critical task to determine what is the final configuration of your product.

So the answer is yes. I guess the second point is I'm a little bit confused when you say that most customers want the accessory product first and then the embedded product second. So guys like Motorola who really don't have an accessory product, wouldn't they want the embedded product first? And does (inaudible) mean that there won't be a Motorola product until 2010?

I don't want to single out anyone in particular, but what I can tell you in nine out of ten cases, whether it's cell manufacturer or whether it's a consumer electronic OEM which has a larger portfolio of products which may include cell phones as well as other devices, everyone first is interested in accessories and immediately followed by embedded.

Again, I think the desire is driven by the risk profile that they expect to incur when they're going directly to embedded without proving something with the accessories. But again, it's not unanimous. There are incidences where the specific customer is interested in the embedded solution first.

Okay. Thank you, guys.

(OPERATOR INSTRUCTIONS). Your next question comes from the line of Joe Dubroth of Morgan Stanley.

Hi. Good afternoon, guys.

Good afternoon.

Can you give us any color on the latest round of financing that you did? Based on the filing it appears that you have Highland Capital Partners, but there's also Highland Credit Fund and then James Dondero listed individually for it looks like maybe 3% of the shares. Can you tell us how these shares are held? Is it held by Highland Capital themselves or individually by Dondero or by Highland's Credit Strategies Fund.

Yeah, Joe, this is Jeff. I think the short answer is we're not privy to exactly where Highland is holding those shares. As you said, Highland is a very large investment fund. They have lots of different funds, so we don't know exactly which fund is holding those shares. But as you can tell from the filings, Highland was, by mathematics, the largest investor in the financing.

Right. And then as far as your timeline is concerned in going forward and letting us know, I mean, obviously you guys don't make it a practice of -- maybe you couldn't -- of announcing LOIs, which is fine by me, but at what point do you -- if your timeline going forward stays in place, when will you be able to let us know some additional information about LOIs turning into hard contracts? How far ahead of the game will your customers let you announce that?

Joe, this is a good question. Notice we haven't issued any separate press releases regarding letters of intent because we don't intend to do this. This update is simply to summarize that there is a strong interest from the existing customers and it's been supported by the letters of intent which they don't have to sign if they have no interest at all.

And in terms of the conversion of LOIs into firmer purchasing commitments, again, I come back to what I said earlier. It starts with the further validation of the device externally and internally by our [pulling] customers. In terms of the planning, we expect to commence the extended field trials with OEM companies in September. At this point we're going to provide them with units to obtain a broader feedback from their customers for the final accessory product requirement. That's the first step.

The second step, units also will be provided in the second half of the year to our OEM customers to complete their own reliability testing, the normal part of the product acceptance by OEMs from their suppliers. This process is going to continue from September until potentially as late as early 2009, the first couple of months of 2009. And during -- throughout this process it is our intention that we start converting some of these LOIs into firmer purchasing commitments.

When exactly this will happen it's difficult to pinpoint because the validation cycles for each customer are different. Some take fewer time to get all the answers. Some take longer time, and it's really difficult for us to predict and speak on their behalf when they can make this decision. But logically it's going to happen between when we make the initial units available and they increase the quantity. So they not only can solicit the consumer feedback but also do some structure testing internally to convince themselves that we have a reliable product.

Well, if you're planning on providing them somewhat quantity in September for their field trials, does this mean you have a little more confidence from this point going forward that you'll actually have quantity available of the green laser?

We have confidence we're going to have quantities available to do the necessary validation, but the launch -- the preproduction and production quantities will be available in 2009.

Okay. Thank you.

And your next question comes from the line of Richard Woodall of Financial Security Management.

Yes, this is actually John Orlando from Financial Security Management. Many of my questions have already been answered, but I have a generic question. We're trying to better understand who owns the existing shares that are outstanding? We currently see that (technical difficulty).

John?

It sounded like he was going to ask a question about who owns the shares, and obviously we can't make any comments past what's in the public filings. So the people who own large shares, they're filed with the SEC, and those are the only comments we'd make about who owns the shares.

John, is there a follow-up question?

Pardon the interruption. This is the operator. The call was dropped, sir.

Okay.

Well, that concludes our Q&A. We'll turn it over to Alex now for a closing comment.

Thanks, Tiffany. What can I say? We remain confident about our commercialization of PicoP despite the delays in some of the supply chain components. We're still very excited about the opportunity to fundamentally change the way people view and share information with their friends, family, colleagues and customers.

We continue to pursue 2008 priorities in the second half of the year, which includes continued maturation and validation of the PicoP technology; some of the examples you've seen today; completion in announcements of the executed supply chain agreement with the product assemblers and integrators that will enable this go-to market strategy; and finally, securing OEM commitments for the accessory and the embedded products.

You understand hopefully the timeline. We believe we have a very credible plan, and now everybody have to execute. You understand that opportunities is amazing, and this is why we believe that our supply chain partners will address whatever issues remain and we can launch the first product in 2009.

I'm looking forward to talking to you three months from now. Have a great rest of the day. Thank you for joining us.

Ladies and gentlemen, thank you for your participation. This concludes the presentation. You may now disconnect. Have an excellent week.