MicroVision Inc (MVIS) 2009 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q4 2009 Microvision Inc. earnings conference call. My name is Keith, and I'll be your operator for today. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Tiffany Bradford, Investor Relations Specialist. Please proceed, ma'am.

Thank you. I'd like to welcome everyone to Microvision's fourth quarter and year ended 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, applications and benefits, availability of supply of products and key components, business partnering expectations, market opportunities and growth and demand, as well as statements containing words like believe, estimate, expect, anticipate, target, plan, will, could, would and other similar expressions. These statements are not guarantees of future performance, and 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 at the Securities Exchange Commission under the heading Risk Factors related onto 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 statements whether as results of new information, future events, changes in circumstances or any other reason.

As we've done in previous quarters, we asked for your suggestions for topics for today's call using our corporate blog as display ground. The most popular topics were timing of US availability of the SHOWWX Laser Pico projector, an update on green laser supply, product volume forecasts and an update on completion of the embedded electronic chips. 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 now would like to turn the call over to Alexander Tokman.

Thank you, Tiffany. Welcome, everyone. What a ride it has been to date. We are proud to announce US launch, and I will talk more about that during 2010 priorities and goals discussion. Let me just start with the recap for 2009.

I can't start anywhere else but thanks to the unequaled determination of my Microvision colleagues, the substantial progress has been made in 2009 that brought us closer than ever to our vision of transitioning from a technology company to a products company, despite the unexpected difficulties with the supply chain. Microvision team has accomplished a number of notable firsts in 2009, culminating in late September of last year, when we shipped our first consumer product, the world's first laser pico projector called SHOWW X to three customers in Europe and Asia. The full achievement of our objective, however, was hindered by unexpected supply chain delays, particularly in lower than expected availability of green lasers which is a, as you know, a key component of our PicoP display engine. Our green laser supply has been and continues to be unpredictable and as a result of this unpredictability and low availability, it limited our ramp in 2009. However, we see positive signs that will turn this trend in 2010. Despite the green laser supply challenges, the team has accomplished a great deal.

Some of the most notable winds related to the SHOWWX product release include the following. We completed the reliability and quality testing and received Apple's made for IPOD certification last year. We received, as I mentioned, the first purchase orders from three consumer electronic customers, a large southeast Asian distribution partner, and OEM and then European distributor, which distributed for one of the world's leading mobile operators. We launched the product in limited quantities in Asia and Europe and these regions we selected primarily for two reasons. One, longer term strategic growth opportunity and second, stronger pricing than we see in US last year. Soon, after the initial shipments in December, I'm happy to reiterate that we received follow-on orders from two out of those three initial customers.

Overall, the market awareness for the Pico Projectors category grew tremendously in 2009, and many believe that we offer a unique value proposition for this emerging market. Our proprietary PicoP display engine delivers an immersive user experience, produces DVD-like WVGA resolution images that are uniformly bright, they are vivid colors and always in focus. As a result of these differentiators, SHOWWX has won several top industry awards in early 2010, including CES Innovation Award for design and engineering. We also won a popular Last Gadgets Standing at CES and finally, just most recently, we won Best in Show and selected as one of the best products at MAC World by the editors of the trade show.

Beyond launching our first product, there were other important accomplishments in '09. First of all, we launched PicoP evaluation kits. These are the development tools to allow OEMs interested in embedding our technology into their products to assess visibility of their own solutions. We also received several government contracts totaling about $1.75 million supporting the development of the high resolution demonstrators, as well as the eyewear. We secured our first strategic investor when Walsin Lihwa invested $15 million. As many of you know, they are our strategic supply partner and an integral part of our go to market strategy for PicoP based products. We also raised about $33 million in cash in the fourth quarter to strengthen the balance sheet to support -- in support of our 2010 objectives.

Last but not least, we were publicly recognized as a top innovator among global electronic companies for the second year in a row by two prestigious organizations, IEEE and the Patent Board. The IEEE has picked us as one of the top 20 intellectual property portfolios. We moved from number 20 to number 17 in the world, and Patent Board just recently published in the Wall Street Journal their selection, and we were selected as the top 50 IP portfolios in the world. We moved from 43 last year to 38 this year. At this point, I would like to pause and let Jeff give you updates on the financials for '09, and we'll come back to 2010 priorities.

Thank you Alex. For the year ended December 31, 2009, we reported revenue of $3.8 million compared to $6.6 million for 2008 and $971,000 for the fourth quarter compared to $1.5 million for the fourth quarter of 2008. The decrease in revenue is primarily attributable to lower backlog at the beginning of 2009, which was a result of the Company's strategy to focus most of our resources on commercializing PicoP products. We ended 2009 with a backlog of $3.9 million compared to $1.2 million last year.

The backlog at the end of 2009 is comprised mostly of orders with the accessory projectors. We reported an operating loss for 2009 of $39.2 million compared to $35.5 million in 2008 and $11.3 million for the fourth quarter compared to $10.2 million in the fourth quarter of 2008. The increase in net loss for both the quarter and the full year was due to higher operating costs attributable to the SHOWWX and lower revenue in 2009. We reported a net loss of $39.5 million, or $0.54 per share of 2009 compared to $32.6 million, or $0.53 per share for 2008. For the fourth quarter of 2009, the net loss was $8.7 million, or $0.11 per share compared to $9.9 million, or $0.15 per share for the fourth quarter of 2008. Net cash used in operating activities was $31.7 million for 2009 compared to $31.2 million in 2008. We ended the year with $45.7 million in cash, cash equivalents and investment securities. Alex?

Thank you, Jeff. Let's switch to 2010 priorities and focus. The goals for 2010, although challenging, were relatively straightforward. Number one goal, of course, is to grow accessory product revenue to obviously substantial higher levels than we've done in history of Microvision before. Complete first generation PicoP embedded engine design and start supplying modules to OEMs for the embedded applications. Number three, we always must continue to innovate and develop new applications that highlight the competitive advantages of our technology. The final goal is to strengthen the operating infrastructure and organization as we approach in the next level in the growth of our Company. Let me elaborate on each one of these goals separately. I'll start with growing revenue in 2010.

Everybody at Microvision is excited about this year. Why is everyone excited? Because we have a consumer electronics product to sell. The first positive signs are already here. First, as many of you know, to date, we had a single source for green lasers, which came from our teammates at Corning. And recently, I'm happy to announce we completed the validation and qualification of the SHOWWX product based on the new available commercial green laser built by OSRAM Semiconductors. That has given us two commercial sources for this critical component. The second sign on the heels of this development, we announce the launch of our product in the United States. Finally, at the end of last year, as I mentioned earlier, we received several full on orders from two out of three customers from last year and with recent additions, we had a total purchase commitment north of 40,000 units.

Looking beyond the initial science, our product revenue overall for 2010 will be dependent obviously on four primary factors. Market acceptance of the new product category, value and differentiation from the competitors, the green laser supply availability, predictability and costs and obviously, the rest of the supply. The first market, I don't think anyone will argue that PicoP projection category is getting rapid momentum. The unmet need is there, the consumers and OEMs want this, and competition is everywhere. Prospective customers want to see our solution in their hands in much greater volumes than we are able to produce today.

Some of you know, some of you don't, we feel that we are differentiated from any other solutions because our product is more suitable for mobile use than anyone else's. It's very simple. It's intuitive, and it showcases any content in its full glory. You have focus free operation, simply plug and play capabilities, vivid colors, uniformly bright images and high resolution. All of this which should greatly enhance the user experience everywhere.

Let's talk about the second factor, which is the -- the third factor, which is the green laser supply and cost. It is no secret that in 2009, the green laser development and manufacturing did not go as where we were guided by our suppliers, which resulted in delayed delivery of this critical component to us in time to complete our first product validation and qualification. Despite the green laser setbacks, we still were able to complete the critical reliability and quality test by end of September and begin the initial shipments to few select customers. This was all possible, and again, I can't stress this any more, by ingenuity and unbelievable results on the part of my Microvision teammates. People spent 24/7 to make this happen.

Our green laser supply, again, even though it's been unpredictable and the quantity of green lasers we received from October until to date have been less than planned. Now you may say disappointing and as a result today, we have built several thousand units. This number was primarily limited by the supply, as I mentioned earlier. Sometimes in the fourth quarter, we averaged about 500 lasers a month. This increased in the first quarter for the first two months, January and February, to a 1,000, and we believe that this trend will continue throughout the year.

Reason to be optimistic are several. First, we have two sources of green laser supply right now. Second, more time is given to both of our green laser suppliers to work and improve their yields and throughput. I know that many of you heard there has been some public communications by both companies that both Corning and OSRAM have public indicated combined availability of hundreds of thousands of green lasers in 2010. We do expect that the hundreds of thousands of units run rate will be attainable, but it will start in the second half of this year, not in the first. Based on what we know today, the green laser capacity is expected to gradually increase from 1,000 units a month today to about 5,000 in second quarter to about 10,000 in the third quarter and 10,000 to 15,000 in the fourth quarterer. I understand obviously that these numbers reflect green laser supply.

So the question many of you probably are thinking, why should we believe this time? Well, it is all about maturation. When new technology is introduced, the critical issues that limited production capacity yields are always found, without exception. And all green laser manufacturers we believe now have more time to assess and address their specific bottlenecks to improve the throughput and yield. Another very important development for us in 2010 is the cost reduction of the green laser. We believe that both suppliers have the strategy to reduce the green laser cost, and we are counting on them to execute their cost reduction roadmap to allow us to increase the number of distribution channels for our award winning PicoP technology. In anticipation of higher green laser volumes, we are spending money to increase our production capacity at other suppliers as well.

Goal number two is proliferation of the first generation PicoP display engine. Again, the goal is simple. Embedded applications demand miniaturization. And in February, we received the final AC components defined by us and developed by our strategic partners, STMicro and Toshiba, these ASICS should allow us to complete the miniaturization of the first generation PicoP engine to be consistent with the embedded form factor and power requirements. We are in the final stages of the design verification and testing and expect to complete these tests and start shipping the early samples to our select customers in the near future. The objectives for this development, as you know, is twofold.

First, to commence the development programs with OEMs, second, to facilitate the ecosystem of developers who will be creating interesting and exciting applications that are only possible with our unique technology. Last year we supplied PicoP evaluation kits to prospective customers for evaluation of embedded apps, and feedback was very, very positive. But most wanted a small form factor, low power engine. This is exactly what we are planning to introduce to them this year, very shortly. The goal number three is also important for the long-term prosperity and survival of Microvision is to continue to innovate and maintain the technological edge over the competition. What does this mean? It means we need to continue to focus on reducing size, reducing power, increasing resolution, increasing brightness and improving overall image quality of our engine.

Cost is also going to be one of the critical factors for us to attain access to very high market opportunity -- very large market opportunity, I'd say. Second, we want to create differentiating features and applications to maintain uniqueness and drive premium in the future. You have seen some of the glimpse of this last year when we talked about the gaming application. We have several others in the pipeline that we are evaluating and developing and so far, we have been getting good feedback.

The final item, the final goal for us in 2010, something that we need to address to keep up with anticipated growth, and this involves strengthening our operating infrastructure and enhancing the organization to be able to address multiple and new areas that we have not had a chance to do in the past. We are evolving as a business and as a result, you have to continue to improve in these areas. I'm happy to announce that we have already taken some initial steps towards this goal by implementing a new business system at Microvision and by adding several quality individuals in the area of operations, business development, sales and marketing and technology.

I'm going to start with, first I'm pleased to announce addition of Mr. Joe O'Sullivan as a Vice President of Global Operations. A couple -- a quick bio on George, George is a seasoned professional. He spent 25 plus years building and running the operations for large and small businesses in the high-tech industry and specifically, consumer electronics sector. His tenure included Apple and InFocus. The first 15 years of his career, Joe spent honing his extensive supply and operation skills at Apple as VP of Operations, where he developed international procurement organization strategy and Apple's outsourcing strategy. He also built world class operations for Apple in Asia and then reengineer supply management organization in Europe. When Joe left Apple, he applied those considerable skills at InFocus where as the VP of Operations initially and later, as a Chief Operating Officer, he helped to streamline and optimize the operation and back office functions and reduce both product cost and OpEx, which helped the company to reduce operating costs.

Second, I'm pleased to introduce to you Mike Fritz as a new Vice President of Global Sales Marketing and Business Development. The Global Sales Marketing and Business Development organization will be combined this time under a single roof, and Mike will be responsible for the new combined organization. Mike comes from GE. He spent 22 year at GE where he consistently performed well in a variety of diverse leadership roles growing different business and his building most of the operation's functions. Mike's diverse strategic marketing new business development and technology development experience includes P&L management for several GE businesses where he was responsible for the overall strategy and execution of the business including product commercialization, marketing sales for effectibility and quality.

Prior to his P&L management days, he has built considerable cross functional skills by effectively leading every critical function in the operations that includes strategic and product marketing, mergers and acquisitions, business integration, and he also ran international operations in technology service and quality. We are glad to have both of these high quality individuals on board, but we are not done. Most recently, we have further enhanced our sales and technology team by bringing several very seasoned professionals from the consumer electronic handset and wireless industry to facilitate a business strategy for embedded application with OEM and build strong distribution channels outside of US. At this point, I would like to pause, and we can open this for Q&A.

(Operator Instructions). First question comes from the line of Yair Reiner with Oppenheimer. Please proceed.

Hi, this is Michaels calling in for Yair. Can you hear me?

Yes.

Great, so just to confirm, you said you are quoting supply numbers, 5,000 per month in 2Q, is that correct?

Michael, today we see the increase based on today's focus and guidance, from green laser and manufacturers, we see increase from 1,000 units a month in the first quarter to about 5,000 in the second quarter per month, to about 10,000 in the third quarter and 10,000 to 15,000 per month in the fourth quarter.

Okay. And just typically, how many weeks of green laser do you usually keep on hand? Or do you just kind of ship it out as you get it?

Well, it typically -- I don't understand the question. How much inventory do we get up front? Can you repeat the question?

Yes. How much -- how do you like to -- how much inventory do you like to keep on hand in terms of, do you like to keep a couple of weeks, or do you just --

We like to minimize it as much as possible. But as of the green laser supply becomes more predictable,our goal is to minimize the inventory cycle, obviously, to improve the overall position. At this point in time, we purchase certain things in advance to allow us the only time to build and convert these lasers into units.

Got it, got it. Just some details, detail questions. Can you provide any kind of visibility or outlook on operating expenses? There is a bit of an uptick this quarter, and I was wondering how that might look for the next few quarters?

I think there was a -- this is Jeff. There was a bit of an uptick in the Q4. We expect overall that operating expenses will be pretty consistent between 2009 and 2010.

Okay. And same for contract revenue, I suppose? Or is that more volatile?

It's a little bit more volatile. It depends on the timing, obviously, of when we get different NRE contracts. And we'll make an announcement as of this weekend.

Okay. And my final question, kind of a broad open-ended question. So after you are shipping out your accessory products, and you start to get your embedded product out, I was wondering if there is any particular end market that you'll be prioritizing, based on use Ks or total pricing.

Our goal is initially, when you have something that, at least what we see today is in in demand in higher demand that we are able to produce we'll be selective about the channels to optimize margin as much as possible. But our goal as the green laser and then overall supply becomes more predictable within small area, we will extend it to a higher, larger distribution channel than potentially, initially we would be avoiding to maximize margin.

Right. I guess I'm just kind of wondering, maybe you might have more success targeting the P&D market or the digital video camera market, rather than the handset market? Or if you are just kind of agnostic and you're just kind of feeling things out right now.

The device is agnostic to the application. So we are looking for distributors and OEMs who would be providing it to their customers who are using a multitude of devices ranging from the Apple products to laptops to other devices. So we are not really selective in this point in time. Our primary goal is to make sure that we pick the channel that has highest possible margin in this point in time.

Okay. Thanks very much.

(Operator Instructions) Your next question comes from the line of Chris Schwab, please proceed.

Great, thank you. Hey Alex, when with will you be able to get enough revenue or enough green lasers to start measuring in the hundreds of thousands? What is your we have guess at this time?

It's hard to tell at this time, Christian. I don't know to give guidances right now because as I mentioned, we are comfortable with the market growth expectations and some -- and differentiation we have. But until we have a (inaudible) month and predictable supply of green lasers, it's too early to say. I don't want to give any guidance right now, because it would be either if it doesn't happen, it would be disappointing and if it does happen ahead of time, it would be viewed as -- So I would like to reserve the answer for the future, if possible, at this point in time.

No problem. Thank you. No other questions.

Your next question comes from the line of [Felipe Letcheter] with Rock Advisors. Please proceed.

My answer was already -- my question was already answered, just congratulations to Alex and all the team.

Thank you.

We are compiling a list again. Please hold one moment. Your next question comes from the line of John Matthews. Please proceed.

Hi, thanks for taking my question. Can you comment on the status of other green laser suppliers in addition to Corning like OSRAM or others?

Absolutely. First of all, I'm sorry if I wasn't clear. But one of the reasons we feel confident about launching it in the US and anticipated demand associated with launching in the US is because we just completed validation and testing of the product based on the second commercial green laser coming from OSRAM. So that is one of the reasons we are doing it. In terms of both Corning and OSRAM, we know that both companies are very bullish and excited on this market opportunity because both of them already publicly communicated working on the second generation green lasers, which opened the gates, the larger volumes and reduced cost for both them and us. They are at several companies in Asia and in Europe that are working on their own green lasers. And based on what we know today, we believe that by second half of 2011, there may be five or six or seven new players with green laser solutions that we can utilize for our go to market.

And those second generation lasers you are referring to, are those direct emitting as opposed to frequency doubled?

Yes, it's a mix. Some of them are direct emitting and some of them are frequency doubled. The good news even about the frequency doubled lasers that would be greatly simplified and cost reduced for the second generation introduction.

Okay. And so when would you expect direct emitting green lasers to be available to you? Is there any kind of forecast about that?

There are -- different companies are guiding to different time lines. Right now, if you just average all the inputs, it looks like second half of 2011 where we expect to see the direct green laser solutions in the market.

Okay. And what about KD laser? Is their green laser that they've spoken about, is that suitable for your projector?

I believe we will look in the past, but we did not see it as a viable solution for near term or midterm introduction.

Was that because of the power efficiency, or --

There were a variety of factors, including those.

Okay, thank you very much.

Your next question comes from the line of Mike Scott with Stephens, Inc. Please proceed.

Yes guys, thanks a lot. Good quarter. The question I would have, obviously we want as many green lasers as possible. The question I have is based on your projections of supply and cash burn. What are your projections for your capital as far as being able to sustain operation with the current capital you have? Or possibly another equity or preferably debt situation where you know you'll be where you need to be when the supply actually ramps in. Thanks for your time, guys. Good job.

Thanks, this is Jeff. As we talked about, we ended the year with $45 million in cash and equivalents. We are very comfortable with that sufficient for 2010 going into 2011. We have talked about evaluate our cash requirements as we go forward and look at the opportunities to raise cash opportunistically from there.

Alright, I would now like to turn the call back over to Mr. Alex Tokman for concluding remarks.

What can I say? We are excited about today, it's a big day for all of us, I think, for people who patiently waited for employees, for shareholders, and we thank you for your patience. Product ramp and revenue growth are our main goals for this year. And I'm happy to say that we see positive indicators that are leading us to believe that this is going to be a different year in terms of the growth -- expected growth. If you look at having second source supply for critical component is one of the big keys.

Second, you see repeated orders from existing customers, which is an indication that they had pretty good experience with the first orders. And we are building a commitment funnel right now, and we have already in excess of 40,000 units.Keep in mind, we have to be very balanced and not over commit and under deliver. So right now, we are looking at every possible initiative across the globe, with the filter. Because we need to make sure that when we accept somebody else's order, that we can deliver. So we are very careful to accept only what we believe we can deliver. But we expect that the demand will continue to be high and anticipate to see some additional positive news from us in the near and mid future. I think that's all for now. Thank you for joining us, and I'm looking forward to speaking to all of you within the next few months. Thank you.

Ladies and gentlemen, that concludes today's conference. Thank you for participating, you may now disconnect. Have a great day.