MicroVision Inc (MVIS) 2009 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first quarter 2009 Microvision, Inc. earnings conference call. My name is Erica and I will be your 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 this conference. (Operator Instructions).

I would now turn the presentation over to your host for today's call, Ms. Tiffany Bradford, Investor Relations Specialist. Please proceed.

Thank you, Erica. I'd like to welcome everyone to Microvision's first quarter end 2009 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 operations, product development, introduction, applications and benefits, business partner and expectations, market opportunities and growth in demand, as well as statements containing words like believe, estimate, expects, anticipates, 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 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 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 publicly update or revise any forward-looking statement whether as a result of new information, future events, changes in circumstances, or any other reason.

As we did last quarter, we solicited your suggestions for topics for today's call using our corporate blog, the Displayground. The top five topics suggested were in no particular order -- additional detail on the recently-announced supply agreement with Corning for green lasers; the activities that must be completed prior to the launch of our accessory pico projector product; the status of customer agreements; an update on opportunities for our embedded application; and finally more detail on the planned accessory product launch. We have addressed some of these in today's press release and we will also be discussing each of these topics during today's call.

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

Thank you, Tiffany, and thank, you, everyone, for joining us. Two months ago, I spoke to you about our key priorities for '09. These include launching the PicoP accessory product by midyear; developing embedded opportunities that would translate into products in 2010; and implementing measures to conserve cash through programs and operating expenses reductions. We have made notable progress in all three areas, although the effect and impact from the cost-reduction activities that we implemented in the early first quarter will not be felt until Q2 and beyond.

Let me just focus for a second on go-to-market. Two out of the three of the above-mentioned objectives depend on the commercial availability of a tiny component that is required by our PicoP engine that emits certain green light. Well, Corning's recent announcement and acknowledgement of the progress that they've made with their high quality G1000 lasers and the recently-announced signing of a supply agreement with us represents a major milestone, not only for our go-to-market strategy for accessory and embedded Pico projectors, but it is also a major milestone that we believe for the Pico projection market in general as the lasers have several inherent advantages over LEDs for projection display applications. We expect that Corning will continue to ship us with the preproduction samples in the next few months for our ongoing product qualification test and soon after to begin supply the initial production quantities to support our summer product launch.

And we are making also a nice progress on the commercialization front -- other commercialization fronts, specifically we've added several new enhancements into the production version of the accessory product to improve its ease of use. Our contract manufacturing partner for PicoP display engine and the accessory product, namely Asia Optical, continues to mature its manufacturing processes in tune in anticipation of the commercial introduction. We continue to see strong interest from potential customers for our accessory projector and the majority of these customers are really interested in developing embedded products based on our technology. The green laser progress and the acknowledgement by Corning should go a long way in helping us to firm up the quantity and delivery and timing with our OEM, prospective OEM customers and distribution partners within the next few months.

In January, we also made commercially-available PicoP evaluation kit as a part of our strategy to increase the embedded product opportunities. As you know, there are limitless applications, which could take advantage of our unique offering. So we decided to put the power into the user hands. These units have been designed to help prospective customers to develop their own novel products based on our core technology. We have - we are experiencing a high demand for these units and we sold a number of these in Q1.

So what's left to do before we can launch the product, our first PicoP-based product? Over the next few months or so, we and our strategic supply chain partners concurrently will be conducting qualification tests on component, product, and processes. These qualification tests include reliability, life, and other quality testing. And this process represents the final prerequisite to launching the product in the summer. The data that we will gather over the next few months will be provided on the ongoing basis to our prospective OEM partners to solidify their purchasing commitments.

We planned also to complete the evaluation of the ecosystems and channels for the Microvision direct product launch and select few of them to start the commercialization.

One subject that I want to - don't want to forget about is what happened externally in validation of our strategy and our intellectual property. Three years ago, we defined and created a PicoP platform and modified our IP strategy to make it more directed to already enhance the significant IP portfolio. It appears to be that the dividends are now coming in.

Last year for the first time, Microvision was recognized by IEEE, which is a very prestigious technical organization, as one of the top 20 electronic companies worldwide based on the patent pipeline power. This year, we moved three spots to number 17. Microvision was also ranked number 2 in the number of citations by other patents, which is a key metric to measure the strength and value of a given IP portfolio. This top 20 list is very exclusive and it contains all well known innovations giants in consumer electronic industry. So we are proud to make this list.

Now coming back for a moment to the third goal, which is conserving cash and expending cash, before Jeff presents the financials, I want to remind you that earlier this year, we have implemented a number of cost reduction efforts, including consolidation of internal development program, reduction of planned expenditures, delaying funding of longer-term development programs, and a workforce reduction. We expect to see the effect of these restructuring measures in the second quarter of this year and beyond.

Jeff?

Thank you, Alec.

For the first three months of 2009, we reported revenue of $951,000 compared to $1.5 million in the fourth quarter of 2008 and $2.6 million in the first quarter of 2008. As of March 31, we had a backlog of $617,000 compared to $1.2 million at the end of 2008 and $1.8 million at March 31, 2008.

The decrease in revenue is primarily attributable to lower backlog at the beginning of 2009, which is a result of the Company's strategy to focus most of its resources on commercializing PicoP products and decreased purchasing volume as a result of global economic conditions.

In accordance, a loss from - an operating loss for the first quarter of 2009 $9.1 million compared to the $10.2 million in the fourth quarter of 2008 and $7.1 million for the first quarter of 2008.

The year-over-year increase is primarily attributable to lower revenue in 2009 and increased headcount and other research and development costs associated with our preparation for commercial introduction of our PicoP accessory products.

As previously discussed, we took a number of steps during the first quarter to reduce our operating expenses and cash usage. These steps included a reduction in headcount and streamlining and delaying programs that are not directly related to the accessory product launch or embedded programs. As Alec mentioned, we expect to see additional impact from these reductions in the second quarter of 2009 and beyond.

We also reported a net loss of $8.9 million or $0.13 per share in the first quarter of 2009 compared to $9.9 million or $0.15 a share in the fourth quarter of last year and $5 million or $0.09 per share for the first quarter of 2008. Our net cash used in operating activities for the first quarter was $8.8 million compared to $8.9 million in the fourth quarter of 2008 and $5.3 million for the first quarter of 2008.

We ended the quarter with $19.1 million in cash and cash equivalents and investment securities.

Alec?

I think at this point, we can open for questions.

(Operator Instructions). Our first question comes from the line of Christian Schwab with Craig-Hallum. Please proceed.

Great. Hey guys. Can you give us an update on how you expect the revenue ramp to look over the next - of the accessory product over the next couple of years?

Christian, this is a more complex question because the revenue obviously will depend upon the number of units and the volume we're going to have in 2009. And what we can tell you today and everyone else is based on the data and the information we have currently, we expect to be a supplier rather than demand limited for the second half of the year. So the question then becomes how many units can we produce during this time period? We will have a much better precision on the throughput and yield after we complete the product component qualification testing over the next few months. And this - as I mentioned earlier, this qualification process includes reliability, life, and other quality tests, which will allow us to gather the feedback from all of the key supply chain partners, understand what are realistic yields and throughput, and have a better estimate of what the volume would be and therefore resulting revenue. The revenue question becomes even more complex when you consider that we're going to go through a variety of channels with different ASPs, which will depend on who we're going to sell this to, through which channels they will sell to their customers, and whether it's going to be direct or through OEMs.

So, again, we are working on all of these answers and questions and we expect to have more clarity upon completion of the qualification tests.

What are your customers telling you that they need the costs on the module to get to in order to ramp to significant volume?

If you're talking - are you specifically referring to embedded applications or accessories?

Well, accessories.

Well, for the accessories, keep in mind, the first accessory product is produced - essentially it's owned by us. We are not manufacturing it, but we negotiating the pricing directly with distributors, OEMs, as well as considering direct strategy.

And depending on the region and the channel, the prices we're seeing could range from as low as $300 to as high as $600. And, again, all of this will be firmed up once we know the full quantity of units we can produce in the remainder of the year and then determine how much we're going to allocate to direct strategy versus a indirect strategy.

And what type of volume in - would you have to get to when you guys look at it to get - to be able to buy blue lasers at a really low price, get green lasers down to a low price? What type of volumes do you need to be producing in the accessory or nearing the accessory product to have a cost-optimized solution ready for the embedded market?

I think this is a great question, Christian. We have the same question to all of our laser suppliers. And we believe - with everything we know today, we believe that the prices will become - we'll have cost-effective light sourcing solutions with the introduction of the first embedded application.

Okay. All right, thank you.

Our next question comes from the line of Jed Dorcheimer with Canaccord Adams. Please proceed.

Hi, thanks. Congrats on getting the green laser, Alex. First question, is that using a crystal (inaudible)?

Yes. Yes, Jed. Correct.

And so is there any limitations in terms of form factor? Clearly it doesn't impact the accessory, but would there be any limitations in terms of form factor affecting the embedded product? Do you need to - or can you go-to-market with that particular green laser?

Well, listen, listen, everything we know today, our engine, which contains the current G1000, is around 5 cubic centimeters, which is the smallest engine on the market. If you look at comparable TI engine, it's 2.5 times larger. Could it get better in the future? Absolutely. But right now, we have - we feel we have the smallest and the thinnest form factor that would be considered very applicable for all embedded applications.

All right. And then same question I guess in terms of power. What can you get your power down to using a doubled green laser?

That's also a very good question. We - power is one of the major considerations, specifically when you talk about embedded applications. And we have a very detailed power reduction roadmap that we believe will lead us to the target given to us by the cell phone manufacturers, which is expected to be real, to become real once we receive the final generation 2 ASICs, which are designed specifically for embedded applications because they reduce power and reduce the form factor of the overall solutions.

All right. Thank you.

Our next question comes from the line of Joe Dubroth from Morgan Stanley. Please proceed.

Hey Alec. How are you?

Hey Joe.

You mentioned some enhancements to the current standalone product, well, over the past few months I guess. You care to share those with us?

There are several, some of it related to the core functionality, image quality, that is one area of improvement. The second area, we received - recall when mid September of last year we started distributing the initial units to get customer feedback on usability, ergonomics, ease of use, et cetera. We receive a lot of useful feedback on ease of use, specifically when you attach our product to a variety of different components, such as laptops, et cetera. You want to have a device that automatically establishes what device that it is connected to, what resolutions can be displayed and it automatically corrects it without user have to go and change all of these settings. So we implemented these features upon receiving the initial feedback from the customers. And everybody told us this is a really, really needed attribute to make it a truly easy-to-use device.

And you said that has been implemented?

Yes, that will be implemented for product launch.

Gotcha. Now, Alec, do you have any idea from your potential OEMs and customers, have they given you a number as far as green laser light source availability, where they will finally be willing to commit as a customer?

Are you asking what is the minimal volume necessary for them to commit?

Yes.

Right now, there are several people on our list, which includes handset manufacturers, mobile operators, and some of the consumer electronic players. We are, again, close to negotiating the volumes for the initial introductions for them. We need to decide, we need to determine how many of them can we really enabled initially and provide the final commitments from our side to solely define a firm purchase agreement.

Thank you.

(Operator Instructions). Our next question comes from the line of Randy Howe with [Pro Capital Equity]. Please proceed.

Yes, thank you. Alex, good to hear you report. Hope you're doing well. I missed - I'm sorry, I'm first - missed the first six or seven minutes, so I might be redundant here, but my question is roll the tape back six or nine months and we were looking for perhaps relationships in the first quarter of this calendar year with OEMs for the auxiliary product. And then we - there - Jeff introduced the idea of alternative channels where you would be branding and what have you, either alone or with others. But could you - if you haven't answered this or even if you have, I missed it, are you still looking for or when can we expect to see OEM relationships for the auxiliary product for production in '09?

Randy, good question. Today, so we are pursuing a - what we call a hybrid distribution channel strategy where we will take a portion of units and they will go to OEM customers and a portion will go Microvision direct, whether it's through our web site or through international distributor that will be distributed under our name. And in terms of the OEM commitments, I think you probably missed that piece. We have as I communicated earlier to you on a previous call, we have several letters of intent, LOIs, in place. And to convert these LOIs into firmer agreements requires us completing the qualification tests on the product and each individual component for them to have more confidence that we have a product that's close to production. We intend to do this over the next several months as we're completing these tests and as well as our supply chain partners confirm and refining their yields and throughput.

All right, good, good, then I did miss it. Thank you. That fills in that gap. Now I know you always run the risk when like I'm about to ask you are posed on a conference call like this, but you must have amongst yourselves based on what you know today, the data points that you have available to you, especially in probably even more clarity after the announcement from Corning yesterday, what volumes you might be looking to produce in general terms in calendar year 2010? Is it premature to share those numbers or some kind of range of numbers with us today?

The range is so wide, so rather than giving you a wide range that has basically a lot of uncertainty in it, we'd like to give you a tighter guidance as soon as we complete the qualification test and better have - and have a better understanding of the throughput and yield at our suppliers.

Okay. Yes, that's reasonable. Okay, well, I'll look forward to hearing that sooner rather than later. Thank you, Alex.

Thank you, Randy.

Our next question comes from the line of Larry Sisson, private investor. Please proceed.

Alex, any word on financing? And is there any --

Do you know something we don't? No, listen --

(Inaudible- multiple speakers).

-- I'll let Jeff to answer this and after I'll chime in later.

Okay, let me finish my question. It doesn't take a very long pencil to figure out the fact that you're going to have to raise some money. So therefore, my question has to do with what stage you are in now and is there any chance that the source of this financing could be a strategic partner?

So we ended the quarter as we talked about with $19 million in cash. We continue to look at all options for raising additional capital, including strategic investors.

No, there's nothing more to add than what Jeff has said. This is all accurate.

But you have no comments about your position in any of these avenues?

Well, we - you've been watching us over the past couple of years. You know we've been always proactive about these type of issues. And we intend to be proactive at this time as well.

Thank you.

Our next question comes from the line of Tom Lardner, private investor. Please proceed.

Hi Alex and Jeff.

Hey. Hi Tom.

Just want to clarify my understanding of what's going to take place. In the next let's say two months, which would be the middle of August, you'll be completing a number of tests in conjunction with your suppliers, which would mean at least as far as you can tell right now, come mid August, those issues, whatever they are, will be resolved.

Was this a question or a statement?

No, it's a question. Is that an accurate description of --

That is very close, Tom. The qualification testing is the last prerequisite before you commercialize any product. You have to go and essentially qualify not only your every component, key component that is inside your product, which done typically by component suppliers, but also qualify the product to ensure that with all of its final components, you can put it through a heat chamber and change humidity and temperature to assess how it performs over a variety of extreme conditions. At the same time - so this is what we are intending on doing over the next several months. At the same time, each one of our supply chain partners are assessing their process capability on the manufacturing line to determine what throughput and what yields they can expect before we launch the product. All of this, again, is essential part of every product introduction. And we're no different and that's exactly what we're planning on doing over the next several months.

Fair enough, Alex. I understand. And then as a follow-up, as I understand the negotiation with the customers, in order to supply their minimum requirements, it's necessary to know your production capacity. And from what you just said, let's just say sometime at the end of August, your hope is to know what your production capacity is. Is that correct?

Well, we would hope to get this information earlier in the summer.

Okay.

And then because the goal is basically to - as we continue through this testing process, our confidence should increase over time and we will provide this updated information on an ongoing basis to our customers to make the final decision on quantity and availability.

Okay. And then the - so the last follow-up to that, those - this series of ideas would be - is it then your hope that you'll be in final negotiations with your customers on those issues in September?

We plan to get to that point in the summer, Tom. That's our plan, current plan.

Okay. Thanks. It was great. Glad to hear about Corning. Thanks Alex.

Thank you. We are very proud of our Corning colleagues. They've done tremendous work.

Our next question comes from the line of Michael Mays, private investor. Please proceed.

Good afternoon, gentlemen, and, again, congratulations on Corning. I know we've all been waiting to hear some exciting news there and we were very happy to hear that.

I have just three basic quick questions for you if I may. One concerns our current state of the reduction of power consumption on the basic PicoP light engine. Can you add a little color to where we're at at the - I believe the goal was 1.5 watts.

Well, let me start with the relevance of this. So first of all, first and most important, when we did the analysis, when we did the analysis and collected the feedback from the end users, what is important in the product, specifically starting with accessory because that's the first product we're going to introduce, one of the most important attributes was operating life, how long will it last before the battery dies? And what we found out was that 1.5 hours has to be the limit. You have to hit 1.5 hours for it to be a viable product so you can watch a movie. Obviously the great the life, the better. Our first product, accessory product, is starting to have at least 1.5 hours operating life. And we have a series of quick follow-on efforts that would increase this beyond 1.5 hours within a year.

Oh, great. Well, that's exciting news.

I was at CES this last go around and I held the PicoP or the SHOW WX in my hand and I thought it was a fabulous product. But I've always wondered why we, you, that Microvision hasn't sort of -- and I pardon if I'm sounding casual here -- sort of slapped together other forms of prototypes such as maybe a generic prototype embedded cell phone, a laptop computer, and take those to demonstrate at the various events that you folks attend?

Michael, it's a great question. We are actually doing this. Unfortunately for a variety of confidentiality reasons, we are not able to show these things in public.

Oh, okay. And any military projects in progress or on the immediate horizon?

We have made - this is one of the areas that we have been consistently predictive. We have made a little progress from - and delivered on all of the contracts that we signed last year. We expect extensions this year on some of them. And you may hear some good news coming in the near future.

Oh, very good.

One final short question -- aside from the green laser issue and the power consumption issue, which we've covered, are there any other fundamental technological hurdles that are directly standing between where we're at now and a final product on the market that we haven't overcome yet that are sort of still in the development stages?

Today, as we stand here today with all of the information available, we feel comfortable about summer launch.

Very good.

Obviously we haven't completed all of the necessary qualification testing, but I - as we stand here today, we feel comfortable about launching it in the summer.

Excellent. Thank you so much for all your work.

Thank you.

There are no further questions at this time. I will now turn the call back over to Mr. Tokman for closing comments.

Thank you. Well, what can I say? It's amazing how far we have come. If you think about it, it's amazing just to think that less than three years ago PicoP was just a paper concept that we drew on a napkin. Pico was not a word used in the English language when applied to projectors and there was no sighting of green lasers other than a concept on a lab bench. Today we are getting very close to the commercialization of our first PicoP-based accessory product. The market is still in its infancy. And we're on the fringe of tapping into an impressive opportunity. Our technology progress and advantages are being recognized by prospective customers. The supply chain is getting more mature as consumers become more accustomed to accessing information through mobile devices such as smartphones, media players, and smaller computers. All of these are the reasons to be optimistic about the future and hopefully we will provide you with updates next time we speak.

Thank you.

Thank you for your participation in today's conference. This concludes the presentation. Everyone have a great day.