MicroVision Inc (MVIS) 2008 Q3 法說會逐字稿

Good day and welcome, ladies and gentlemen, to the Third Quarter 2008 Microvision Earnings Conference Call. My name is Audrey and I will be your conference coordinator for today. At this time, all participants are in a listen-only mode. We will be facilitating a question and answer session towards the end of today's conference. (Operator Instructions).

As a reminder, ladies and gentlemen, this conference is being recorded for replay purposes. I would now like to turn the call over to you host for today's call, Ms. Tiffany Bradford, Investor Relations Specialist. Ms. Bradford, you may proceed.

Thank you. I'd like to welcome everyone to Microvision's Third Quarter 2008 Financial and Operating 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 including 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. Our outline will be similar to the past calls. I will give you operating results followed by Jeff who will take you through the financial results and we end with Q&A. So let me begin.

Despite the economic meltdown, the third quarter was very good to us as far as executing on operating milestones. We had several important goals related to customer commitments, supply chain maturation and product development advancement. We also raised cash in a very difficult environment.

I will amplify on each one of these items shortly but let's step back for a moment and look at the direction of this exciting new market segment. Despite the gloomy economy, the indications we get form the external market data, our direct user studies and the strong OEM pool, the mobile projection market is ready for some serious explosion in 2009. Despite a slowdown in the overall handset market growth, the smart cell phone segment is expected to grow rapidly and according to Yankee Group, there will be over 780 million cell phones -- smart cell phone users by 2012. If you combine this with the fact that global mobile TV market is expected to top 17 billion in less than five years and the fact that some carriers are already rolling out features and infrastructure for mobile devices to enhance the video download to handset, the price looks very, very attractive. In fact, in today's WallStreet Journal, some of you may have read any one who owns a Sprint Mobile cell phone could get National Football League game on Thursday and watch it on their handset.

So why projectors inside mobile devices then? All of this is based on a very simple thesis, is that the viewing experience and enjoyment from the existing mobile devices could be greatly enhanced if you enlarge the video screen size from 3 inches to 60 inches to view and share the extensive library of pictures, videos, that you have today on your iPhone or personal media player. Not surprisingly, everybody sees this opportunity and there's a lot of players pursuing it.

I believe that we will be able to fulfill our mission because of two key ingredients -- disruptive technology and the team of bright, driven people here at Microvision. The technological advantages are all and well-stated in the past, you know these are the small size of our engine, high brightness, DVD-quality resolution, wide color gamut and focus-free operation. And that is exactly what we have been consistently communicated to by our prospective customers and partners. So how are we addressing this need? We took a systemic approach with our go-to-market strategy, which is based on continuous innovation and improvement and is rooted is phased product introductions. As you know, we are targeting introductions of our first product, PicoP accessory in the first half of 2009 followed by volume production in the second half of 2009. The embedded application, we are targeting to be a period in the market within 9-12 month after the accessory followed by after market head up display, sometime in the second half of 2010, followed by the iWear in 2011. The important part of this strategy is that all of these products will be based on a core platform that we're building today. So now, let us circle back and look at the third quarter accomplishments and map them for the previously communicated targets for launching the accessory of product which is at the forefront of what we are doing today.

The areas I wanted to focus you on are customers, technology development and supply chain. So let us start with customers' progress. As you know, consistent with our guidance, we began shipments of the enhanced PicoP prototypes to several partners in mid-September, these units include important advancements in several critical areas including the next generation Green Lasers which are built on the same platform that is expected to be used on the commercial lasers. A smaller PicoP display engine which projects a brighter image and several important image quality enhancements.

To date, several large handset makers -- several consumer electronic companies and several mobile operators received these units for evaluation. The evaluation, as you know, is in the early stages and is expected to continue over the next several months. We plan to use to feedback we received form these evaluations to finalize the accessory PicoP projector design which is targeted for the late 2008.

The final configuration product basing on the input will be powered by fully integrated ASIC electronics which will be substantially smaller and lower power.These units then would be provided to similar customers and some additional customers in the first quarter of 2009. Our plan remains the same. The goal is upon the completion of the acceptance testing, we expect that some of the analyzed letter of intent we have today will be converted in firmer purchasing commitments.

Area number two is product development and there are two pieces to product development -- the technology advancements and the supply chain maturation. So for the people who are new to the story, let me explain and here is a brief overview what PicoP is. There are four main parts to our PicoP projection engine. The optomechanical module that houses lens, optics and lasers, MEMS scanner, lasers, and finally ASIC electronics. So I'm going to walk now one by one and explain what type of improvement and advancement we have done during the third quarter.

Let us start with the optomechanical module. We hit a very significant supply chain milestone here. As you know, we announced the strategic supply chain agreement with Asia Optical who is a leading manufacturer of electro-optical components and we gave Asia Optical the ability not only to manufacture the optomechanical engine but also manufacture the final product, our Gen 1 product.

We selected Asia Optical because of its extensive experience in designing and manufacturing multiple high precision optical and electronic components and also for their full vertical integration capabilities, expertise for a variety of consumer products including digital cameras and business projectors. The Asia Optical list of customers and partners is very, very impressive and it includes the likes of Fuji, Olympus, Kodak, Toshiba, GE, Hitachi, BenQ, and others. And this milestone, you will realize is directly related to our maturing the supply chain growth.

Let us move now to MEMS, the second component. As you know, MEMS is at the heart of the PicoP display engine. What we've done during the third quarter on MEMS, we have validated one of the important reliability milestones. One of the key indicators for product reliability is a shock and drop susceptibility of products which is typically dependent on the drop and shock susceptibility of the components that comprise this product.

And because MEMS is one of the components of PicoP, it is important that it withstand the shock that is consistent with the consumer use models. We have externally validated this key shock resistance reliability requirements and the test have shown that our scanning mirror exceeds twice the shock performance requirements necessary to be used in consumer devices.

This testing was validated externally and was conducted by a very reputable body which was the Fraunhofer Institute for Photonic Microsystems, a recognized leader in research in MEMS and other subsystems. Why this is important? You ask yourself. Well, ask yourself this question, how many times have I dropped my cell phone. Again, this is a very important milestone for us because it shows that not only we are able to put something in the lab, we are able to produce something that could withstand some major, major use.

Let us move to lasers now. As you know red and blue lasers are commercially available today, we also know that green lasers are being developed. So let me start with saying that first and foremost, we still see a strong commitment by the two large green laser suppliers to deliver commercial quantities of green lasers in 2009. We believe that the issues that were driving some of the delays in the delivery of green lasers to us in the first half of this year are being resolved. As an indication of this progress, we have received the increased quantities of green laser which have been successfully integrated into the latest prototypes which allows to ship the evaluation unit in mid-September. We expect that the volume for these green lasers arriving to continue to increase.

Now let us move to ASIC. ASIC represent essentially our command and control center that essentially orchestrate and coordinate all main parts within the PicoProjector is controlled though electronics. Over the past two years, we have reduced the electronic size from something that looks like a large desktop computer in 2006 to something that starts looking like a large laptop computer in 2007 to the size of the iPod which is what you've seen with the show demonstrator to finally to a size of a quarter in 2009. The last step is only possible through a full conversion of our electronic component into ASIC chips. So why is this important? Because these ASIC chips contain the secret sauce that Microvision has been developing over the years.

ASIC Electronics for the accessory projectors are expected to be completed and fully integrated into the final product configuration in the late fourth quarter of this year. After we complete this exercise, we expect the units that we will start showing to the customers in the first portion of 2009 will be 25% smaller and will have reduced power, therefore allowing them to operate on a single battery for 2 hours without the need of recharging.

Now let us shift back and summarize what we have done in operating cash. As you know, in the beginning of the third quarter, we raised the $26 million. $24 million net in operating cash and we've done this during challenging market conditions. Based upon our operating plan, we believe that we have capitalized for the launch of the accessory product and into volume production.

At this point, I'm going to pause and let Jeff give you a highlight of the financial results and we'll come back with Q&A.

Thank you, Alex.

For the nine-month ended September 30, 2008, Microvision deferred revenue of $5.1 million compared to $7.5 million in 2007 and for the third quarter, we have revenue base of $94,000 compared to $2.6 million a year ago.

As of September 30, we had a backlog of $647,000 compared to $5.7 million last year. The decrease in the backlog from last year is due to the completion of government commercial contracts during the late 2007 and early 2008.

We also reported operating loss for the nine months of $25.3 million compared to $18.8 million last year and for the third quarter, it was $9 million compared to $6.5 million last year. The increase in the loss was primarily attributable to lower revenue for the quarter and the increased development cost associated with the planned product introduction of the accessory projector and other PicoP enabled products.

We reported a net loss of $22.7 million for the first nine-months of 2008 compared to $13.8 million for the same period in 2007 and $8.4 million for the third quarter of 2008 compared to $4.7 million a year ago. The net loss for both periods in 2007 included a gain on our sales of our investment in Numara of $6.4 million for the nine-months and $434,000 for the three months respectively.

Excluding this gain, the adjusted net loss for the nine months and quarter of last year would have been $20.2 million and $5.2 million respectively. Our net loss per share was $0.38 for the first nine months of 2008 compared to $0.29 in 2007 and $0.13 for the third quarter of 2008 compared to $0.08 last year. Excluding the gain on Numara, in 2007, $0.13 and $0.01 respectfully for the nine months and the quarter, the adjusted net loss per share was $0.42 and $0.09 for the nine months and three months respectively.

The net cash use I operating activities to the first nine months of 2008 was $22.3 million compared to $16.6 million for the same period on 2007 and as Alex mentioned, with the financing that we did in Q3, we entered the quarter with $37.2 million in cash, cash equivalents and investment securities.

We'd like to go ahead and start the Q&A now.

Thank you. (Operator Instructions). And our first question will come from the line of Christian Schwab with Craig-Hallum. Please proceed.

Hey, thank you.

A couple of quick questions, guys. I know you mentioned it briefly in your prepared comments, but I'm just wondering if you could just possibly elaborate on your confidence that there is no risk to the commitment of Corning, in particular to mass-produced green lasers?

Christian, a good question. It is one everybody's mind. There is risk in everything in life. We just feel comfortable with the fact that Corning and Osram see the value and opportunity of this market and there is a strong commitment to get commercial quantities to market in 2009. We haven't seen anything different that tell us that it would not happen.

Okay. So you've had recent dialogue with them and even though the recent things have been difficult for them, they suggest the --

Christian, we are in weekly contact with both companies.

Perfect.

And then second -- if everything continues on track and congratulations on being on track so far, for the commercialization of the accessory projector and then the launch of the PicoP within mobile phones, can you just kind of walk us through how revenues just generically could ramp over the next few years?

Sure. Let's start with accessory, again, let us restate what the target is. The target is to commercially introduce accessory in first half -- latter portion of the first half of 2009 and move to larger volumes in the second half of 2009.

At the same time, as we introduce accessory, there will be work that would be continued from 9 to 12 months to actually integrate the engines inside mobile devices. So if you just use simple math, then we expect, right now, our expectation is that embedded product would be in the market sometime in the middle of 2010 as an initial introduction to high volume introduction in the second half of 2010.

Right. And then can you just categorize what that revenue opportunity -- could you give us --

Let us use a simple example, if we are able to secure a single cell phone manufacturer that decided to put it in a single smart phone model, high end smart phone model, typically these are sold in quantities anywhere from 1 million to 5 million a year and let us take the low end of that spectrum, 1 million units. If you look at transfer price which is somewhere around $100, that kind of gives you the basis for the stand alone business right there. Obviously, if there is two cell phone manufacturers that would like to do the same, you multiply it times the number of people interested. Our intent is to work with more than one cell phone manufacturer to achieve these goals.

Great. Thank you, guys.

(Operator Instructions). Our next question will come from the line of Josh Baribeau with Canaccord Adams. Please proceed.

Hi, Alex. Hi, Jeff. Just a couple of questions. Can you go into a little bit more detail on what the derivate gain was on the income statement this quarter?

Sure. We have some warrants that was associated with some previous financing that we reported to our liability method each quarter, we have to mark those warrants to market.

With the decline in the stock price due to the market fallout during the third quarter, the value of those warrants has declined and the decline in the values is -- it is counterintuitive, the decline in the value of the warrant results in a gain on the income statement. So it is a non-cash, nonoperational gain.

Okay. And you had mentioned the ASICs a bit in your prepared comments, could you just give us a little bit more color upon when that process will be completed and roughly how much that will cost?

The process would be completed over the next -- again, we've got different levels of ASICs coming in for both the accessory an the embedded but they will be done over the next three months and then again, more in the next 6 to 9 months.

And the standard cost on an ASIC is in the -- it's actually come down a little bit in recent years but it is in the $600,000 to $1 million range to turn it ASIC.

And Josh, just to elaborate what Jeff have correctly stated. We have two types of ASICs, we start with the accessory ASIC and then we move to the embedded ASICs, these are two sets of chips that we developed and the different being we can get accessory ASICs earlier so we can get to market earlier and then embedded come in later, they are smaller and lower power and will replace them as we move to the embedded solution.

Okay Great. I'll pass it on. Thanks.

Our next question will come from the line of Joe Dubroth representing Morgan Stanley. Please proceed.

Hi, Alex. Hi, Jeff.

Hi, Joe.

I have not been able to see the new Pico Projector versus the one you've shown in Las Vegas earlier in the year, is there any analogy you can give to us who have not been able to see what's the difference in quality picture is?

Absolutely, Joe. There are two primary differences between the old model that you have seen earlier and what we are shipping right now. First, the current projectors are brighter, uniformly brighter so we now are able to consistently produce something that is 10 lumen display plus or minus 1 which is pretty tight spec if you look competitors, they typically close to 20% to the target so we are much tighter in this regard. We did not have this before.

The second improvement is the image looks a lot sharper and cleaner. We implemented several enhancements to improve image quality and presentation and for the first time, on our projector, you can read text that is 10-point font. We were never able to product this before.

I noticed that on some of the -- like the Newsweek article that I've seen, I can actually read the text, that was a big difference.

Did you say 10-point font?

Yes.

Okay. I've got a couple of questions if you don't mind. And the green laser that is going into the new demo, is that a new green laser? If it is the same, have they overcome the hurdles that you guys were experiencing in developing -- being able to mass produce that product?

Fair question. The green laser that is in the current units is based on the same platform that one of the green laser suppliers will take into commercialization. Prior to this, we were using basically lasers built by hand inside the R&D lab. So this is a big, big milestone for the green laser manufacturers.

And no reason to believe that they cannot mass produce it and that no worries about transfer of technology or anything like that?

There are always risks, Joe, but I think a little emphasis has been placed and because the market opportunity is pretty large, both players really want to be successful and I think they are doing everything possible to ensure that there are commercial samples available in 2009 to allow us to introduce successfully.

Okay. And last question and I know this is going to be difficult for you to answer but that's what we do. When and what is it going to take to get either -- for the accessory device or for the embedded version, for somebody to go ahead and finally step up, commit and give you guys an order?

It is basically the process that I outlined earlier, let me just repeat this again. It is a series of trials. We started in mid September, we shipped an extended number of units to start doing -- user, end user trials and get basically internal validation. Once we get this feedback, by the end of the year, we are going to incorporate this feedback and produce next generation unit that will be of the same form factor and power as the final product.

We then ship a larger quantity of those units in the first quarter of 2009 and the customers will use these units not only for end-user trial but also for -- to start acceptance testing to determine whether they can withstand the temperature test, life test, upon completion of that, we expect to start receiving POs, and firmer customer purchase orders.

So as long as you start receiving positive feedback in Q4 from your customers?

It is Q4 and Q1, Joe.

Okay. And then the process continues, and your goal is to have orders first half of '09 ready for larger production by Christmas of '09?

Yes, that is our goal.

Okay. Thank you, guys.

(Operator Instructions). Our next question will come from the line of [Art Zeiglon] with Alpha Fiduciary. Please proceed.

Hi, Alex. My question largely has actually been answered but if you wouldn't mind, it's been a while since I think I have seen anything with regard to -- here's what we think we can in '09, '10 and 2011, we can do in terms of revenue. Do you have any kind of a model like that that you could go over or is there something that management has endorsed, that somebody else has put out.

You know, Art, you are asking a very good question. I think everybody should be interested in this and best recommendation is to take a look at the model done by independent analysts, Christian did an initiation report on us and he has some projections, you can look at Jed Dorsheimer as well as Darice Liu.

These are the three key analysts that are covering us right now and they all have models developed based on the thesis that we presented and they used. So this is -- I would recommend to be a first place I would go to get this information.

Can you put a link on your website to any of that information for -- obviously, for those of us that are institutional, we can get that information but a lot of people probably can't.

Good question. See, we cannot endorse anyone so we can just redirect every one to these people and you can get it directly from them. It is easily and readily available.

Okay. Thank you.

(Operator Instructions). And there are no more questions inside the queue, I would now like to turn it over to Mr. Alexander Tokman. Mr. Tokman, please.

Thank you. What can I say? Our technology supply chain and customer strategy are coming together nicely, partnering with Asia Optical reliability programs on MEMS, completion of ASICs, customer unit evaluation and raising over $24 million in operating cash during challenging market conditions all are evidence of steady execution of the operating plan that we communicated.

Going forward, it is all about execution by us, by our supply chain partners and by our OEM partners. Our goal is to be first to market with the right product. What do I mean by the right product? It is a projector that will allow you to watch a full-featured video without running out of battery in less than an hour.

It is a product that has bright enough, that could be used in most indoor lighting conditions. It is the product that produces a screen size that is equivalent to your television size, and not your small laptop screen. And finally, it is a projector that is always in focus and it doesn't require continuous thumbwheel adjustments.

That's what we are trying to do.

Lastly, before we check out, I would like to invite all of you to visit us at CES in January in Vegas two months from now so that you can first hand see the innovations that are being brought to life by our amazing Microvision team. And you have a chance to speak directly to some of the people who are making all of your and our dreams, come to reality.

Thank you for joining us and looking forward to speaking to you next quarter.

Ladies and gentlemen, this does conclude your presentation. At this time, you may all disconnect and enjoy the rest of your day.