MicroVision Inc (MVIS) 2010 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second quarter 2010 Microvision, Incorporated, earnings conference call. My name is Noelia, and I will be your coordinator for today's conference call. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes. I will now like to turn the presentation over to your host for today's call, Mr. Alexander Tokman, President and Chief Executive Officer. Please proceed.

This is Tiffany Bradford, Investor Relations Specialist. I would like to welcome everyone to Microvision's second quarter 2010 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 and supply of product and key components, business partnering expectations, market opportunities and growth and demand, as well as statements containing words like "believes," "estimates," "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 statements, whether as a result of new information, future events, changes in circumstances or any other reason.

As we have done in previous quarters, we asked for your suggestions for topics for today's call using our corporate blog, the Display Ground. We received a diverse collection of questions this quarter. As has been the case for the last several quarters, the most popular topics of investor inquiries were Green Laser volumes and forecasts. Other topics ranged from commercialization time lines for new products to our funding strategy. We expect that many of the questions received will be addressed through our prepared comments and question-and-answer session. And I will follow up on individual inquiries for any topics not addressed during the course of this conference call.

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

Thank you, Tiffany. Thank you, everyone for joining us this afternoon. Let me briefly walk you through the outline for today's call. First, I will provide an update on operations. We'll start with the manufacturing capacity and output. It will be followed by discussions of orders of sales. And I will close with a sneak preview of the future opportunities. After that, Jeff will walk you through the numbers. And we will conclude with a Q&A session.

So without further adieu, let me just start with a factory output update first. First of all, I am pleased to tell you that our ongoing investment into people and processes in Asia improving the capacity in output from the factory have resulted in a more stable flow of finished product in the second quarter, particularly during the last two months of the quarter. We continue to see more predictability and steady increase in the green laser supply. The ability of green lasers in 2010 at this point in time is consistent with our earlier estimates of approximately 5,000 per month in the second quarter, growing to approximately 10,000 units a month in the third quarter and between 10,000 and 15,000 units a month in the fourth quarter.

As the green laser supply is steadily improving, and improved already, when it reached sufficient capacity, we were able to vet the manufacturing line in Asia in the second quarter and baseline the product yield while identifying the opportunities for improving it moving forward. This ongoing focus paid dividends as the yield has steadily improved during each month of the quarter, which led to a much smoother conversion of raw materials into finished goods. The second quarter capacity and yield increases will become particularly important for us in the second half as we plan to deliver larger volumes of PicoP-based products to our customers to meet the strong demand.

Let me now shift the focus on to orders and our revenue. First, let me start with the backlog. Our backlog continued to grow from the first quarter to a record $20 million in the second quarter. We believe that this serves as a powerful indication of the strong demand for our products from both existing and new customers. The backlog is split approximately 60/40 between the orders for the engine and orders for the finished product. The embedded orders backlog consists of the original $.5 million order we received in the first quarter of this year and also now contains a full order for additional $3.4 million from the same customer in the second quarter.

Just to remind everyone who is not familiar with the situation, this particular OEM customer plans to embed our PicoP display engine into their high-end media player which is scheduled for release in the fourth quarter.

The revenue in the second quarter reached about $2.1 million. Most of it was derived primarily from product sales. It represents an increase over the last quarter product revenue as well as an increase year-over-year number which was primarily derived last year from the contract revenue.

With the increased laser and product output from the factory that we established in the second quarter, we have added new global distributors, increasing the count from two to 11 as of the end of second quarter. We created and are creating a number of marketing and sales tools to help our distribution partners to accelerate their sell-through cycles, since more than 90 percent of our 2010 revenue is expected to come from these distribution channels. As a result of the increased factory output, the new distribution partners that we have been ramping and continue to ramp, and the new marketing programs and tools, we expect that the revenue will grow from Q2 to Q3.

If you ask what has been the reaction from the users, so far, the reactions from end users and customers of SHOWWX have been very positive. And in addition, we've been receiving a lot of valuable input and information for the features to be incorporated in future product releases.

Jeff -- before we talk about innovation, I want to touch upon one additional subject which Jeff will cover in more detail shortly. But I would like to mention that during the quarter, our working capital cash requirements and inventory levels have increased. But there is a reason for it. We did it to better position us to fulfill the order backlog and meet the delivery schedules in the second half of the year.

Now let me spend a little time and talk about innovation. It is not a secret to anyone that Microvision's success is firmly rooted in our ability to both anticipate market needs before everyone else does and to productively innovate and deliver radically new solutions and applications to our customers. We have offered a glimpse of where the future lies, and where we are heading at the most recent Society of Information Display Conference when we introduced to the world a first handheld prototype of Pico projector that delivers high-definition resolution while exhibiting 50% brighter image. The 15-lumen HD-ready projector received a very enthusiastic response from our prospective customers because, for once, we achieved both feats, which is higher brightness and higher resolution, while still maintaining the same small size and low power, both of which I firmly believe attribute to our innovative team in Redmond as well as our award-winning technology.

Second importance of this development is that our partners and customers see a clear bridge from where the world is today and where it will be tomorrow. The HD content is coming to mobile devices, and we believe this positions us well as a preferred choice for premier customer focus projection solutions versus just anybody's "me too" product.

At this point, I would like to pause and pass the microphone to Jeff. And he will give you the update on financials.

Thank you, Al. I'll cover the financials today in three buckets. The first is revenue and backlog, then operating and net loss and then last, liquidity. With respect to the revenue and backlog for the quarter, revenue for the second quarter was $2.1 million compared to $987,000 last year and $2.8 million for the first half of the year compared to $1.9 million last year.

As Alex discussed, our revenue grew from the first quarter of 2010 and year over year as we shipped higher volumes of Pico-based products. Our backlog, as he mentioned, at the end of the quarter was $20.1 million compared to $854,000 a year ago. The backlog is composed almost exclusively of orders for the PicoP embedded engine and Pico projector. And most of these orders are scheduled for delivery over the next three quarters.

With respect to our operating and net income, our operating loss for the second quarter was $11.1 million, compared to $9.5 million a year ago and $20.6 million for the first half of 2010 compared to $18.6 million a year ago. The increased operating loss was due to lower gross margins during the quarter. As we have discussed, our goal has been to shift from low-volume development contract revenue to higher volume consumer products. And as most of you know, it's common and generally expected that initial volumes of new consumer products are sold below cost. Our fully burdened cost for the SHOWWX is higher than our revenue.

Our cost for product revenue in the second quarter includes both the cost of the products we sold in the quarter and a $1.1 million lower of cost for market adjustment for inventory on hand at the end of Q2. We expect the costs of our PicoP based products to decline as our yields improve and our production processes mature, and we move to higher volumes.

Our total operating costs are consistent with last year as we continue to tightly manage costs. Our net loss for the quarter was $1.1 million, or $0.12 per share, compared to $10.4 million, or $0.15 per share. And our loss for the first six months was $20.2 million, or $0.23 per share, compared to $19.3 million, or $0.28 per share.

On liquidity and our cash balances, the cash used -- our cash used in operations in the second quarter was $12.7 million. Of that total, $4.4 million was used for working capital, including increases in accounts receivable and inventory. As we discussed on our last call, and Al had discussed earlier, we have increased our inventory levels to prepare for significant increases in lead times for raw materials, especially in the semiconductor industry. We have planned these inventory increases to meet higher delivery schedules for Q3. And we expect that as our supply chain continues to mature, we will not need to maintain these levels of raw materials.

The increase in accounts receivable is attributed mainly to the concentration of product shipments during the last month of the second quarter. Our cash used in operating activities not relating to working capital remain consistent with prior quarters at about $8.2 million. Our net cash used in operating activities for the six months was $22.3 million compared to $16.3 million last year. And we ended the quarter with $22.2 million in cash, cash equivalents and investment securities.

With that, I think we're ready to open for questions.

(Operator Instructions) Your first question comes from the line of Yair Reiner from Oppenheimer.

Hi. This is actually Michael [Star] calling in for Yair. Thanks for taking my question. So your inventory writedown was around $1 million, or was it something closer to like $500,000?

The inventory writedown for the quarter was $1.1 million.

$1.1 million. Okay. So it seems like your gross margin is just a little under 0.0% then. Okay.

Excluding that, yes.

Okay. So it seems like your inventory writedown is going to be kind of significant, then, just as it was last quarter. I mean, do you think that's going to be an ongoing issue for the next few quarters as you guys aggressively cut prices? Or is there some kind of other issue driving that?

I think, as we discussed, as we continue to mature the supply chain, and our product costs come down, and our inventories levels come down, then those writedowns during a particular quarter should also trend out.

So that's probably a while away. Okay. I guess also I was wondering -- so it sounds like more than half your backlog is from one of your customers with that embedded product?

That's correct, with the embedded product.

So the $2 million in product sales you've sold this quarter were all just kind of spot orders then? I guess not spot orders. But do you know what I mean?

They were primarily orders that had been in backlog at the end of Q1. So as the backlog we reported last quarter, again, as we talked about last quarter, those orders have scheduled -- delivery schedules to them. And so the ones -- the revenue this quarter was primarily delivering against those scheduled orders from last quarter.

If you recall, Michael, we -- we really start increasing the capacity after the second green laser supplier came online in March. Until then, we basically had limited quantities of components, so we did not ship all of the units. Starting in second quarter, we started seeing predictability, better predictability in increasing green laser supply, which allowed us to baseline our own capacity in the factory. And that's when we started shipping product and positioning most of the customers for the second half of 2010.

Okay. Were you guys shipping all that you could make, or was there some more pushouts due to -- I mean, was there --

In the second quarter, you mean?

Yes.

In the second quarter, we were meeting -- again, we were meeting the delivery schedules that had been laid out by our customers. And the buildup in inventory that you're seeing and capacity will help us to meet those additional deliveries that we have scheduled for Q3.

Okay. I guess, looking into that one customer where you have a lot of your backlog in, I suppose a majority of that will come in the fourth quarter?

Well, as we talked about, their product release is scheduled for the second half of this year. Obviously, we'll be shipping product to them ahead of when they're going to release their product.

The simple answer, Michael, is we ship in the first portion at the end of Q3, majority in Q4 and then spillage into Q1.

Okay, great. Thank you. Okay. That makes sense. Okay. Thanks for taking my questions.

Your next question comes from the line of Christian Schwab from Craig-Hallum Capital Group.

Great. I jumped on the call a little bit late. I apologize. Can you break out the product sales mix between -- I know you guys gave it for your backlog. But can you -- in the most recent quarter, can you give the mix between sales, between engines and finished product?

It's simple, Christian. In Q2, it's all product sales.

Okay. That's what I thought.

And then Q3, we're going to start shipping, making the initial trench to the embedded customer at the end of third quarter.

Perfect. And then I know you guys said green laser production to you guys should be somewhere between 10,000 and 15,000 a month in Q4 of 2010. Do you guys have any visibility from your suppliers, what they think they'll be able to produce by the second half of '11?

Absolutely. There is many developments on the green laser front. If you're talking about the existing suppliers, the expectation is their output will increase for 2011. And in the second half, you've probably seen there is speculation and coverage that at least three other green laser suppliers will be online by the second half of 2011.

Right. So given the three other suppliers plus those two, what type of monthly production do you think could come about?

It's going to be dependent ultimately on the performance and price of these lasers. And at this point, it's too early to make a call what the ultimate performance will be. We need first to get the samples in our hands, evaluate them and give the feedback to the green laser manufacturers on their second generation or third generation product. And we will not be able to do this until probably early next year.

Perfect. All right. No other questions. Thank you.

Thank you.

Your next question comes from the line of Randy Hough from ProEquities.

Hey, guys. Thanks for taking my call. Alex, let me ask you something that's more qualitative than quantitative. You used a lot of nice adjectives in your press release today about large volumes and strong demand and customer satisfaction, very enthusiastic, the likes of that. Can you be a little more -- put a little more color on that, if you would, with the receiving side of the consumer's feedback on the Pico projectors that have gone out the door? If I'm guessing right here, and it is a guess, you shipped somewhere between 4,000 and 5,000 Pico projectors this quarter. Is that close?

When we typically talk about revenue, we don't specify the number in particular for competitive reasons because we don't want to give away our pricing strategy. And, therefore, I would like not to answer your question on how many units we shipped, but rather tell you that the current feedback we received from the field and return rates on the product we believe is below the industry averages, which makes us feel happy because this is our first product based on two new technologies. And we also get a lot of very valuable feedback on the new features that people would like to see in a future product release.

Okay. Are the -- is the feedback, Alex, to follow on that, that people would like to see, is it inhibiting purchasers today? For example, I would buy this product if only it had this feature or that feature?

There is -- if you ask which parameter stands out as the most requested, it would be increasing brightness. And we have a solid, strong road map in place to address this. And we are going to communicate to you guys the updates on this front in the near to mid future.

And then -- so you would -- you're not seeing anything that is causing you to feel, at least on the launch of the Pico projector, that it's not being as aggressively accepted in the marketplace as you might have projected?

It's all about time. Think about this, in Q1, we had so few green laser components. We couldn't even have enough to successfully vet the manufacturing line to understand how many we can produce if we had lasers. We finally had the second green laser manufacturer online by March, by end of March. We start vetting the line. We start understanding what exactly we can and can't produce. That -- only after this, we said, look, now we're ready to bring more distributors online because we don't want to overcommit and underdeliver. And that's exactly what we've done.

So we brought -- we increased number of distributors from two to 11 in one quarter. And now they just received, over the past month, two months, first unit. So they start their sell-through cycles, and they're still learning how to sell this product more effectively. We're creating some additional marketing and sales tools to help them to facilitate this cycle. And Q3 is going to be a very important benchmark for all of us because we're going to see now we have one -- at least one quarter of a predictable supply. Let's see what we can do in more effectively converging the backlog into sales so we can give you a better revenue program.

Okay. Great, Alex. Thank you. I'll go back in the queue.

Your next question comes from the line of Joe Dubrof from Morgan Stanley.

Thanks, guys. Alex, do you have the capacity to accept more orders besides your current backlog, should you get them in the second half of the year?

It's a very good question, Joe. I think we will have to work closely with our green laser suppliers to accept additional large orders, because today we're basically optimizing our backlog based on what we anticipate we're going to have in the form of components, specifically green lasers. So our manufacturing strategy is all around lasers. We invested just enough capacity into our manufacturing line that is based on what we anticipate in terms of the components. If we get a large order from a very respectable customer, we would sit down with our green laser suppliers and see what they can do to increase the volume if necessary. And then we can easily adjust our manufacturing line to increase the output if necessary. So it's all going to be dependent on the quality of the customer who will come in, and obviously response of our green laser partners to increase their capacity, if they can do it.

Do you have any -- what's your confidence level of your green laser manufacturing partners to increase capacity? What is Corning producing for you now? What's OSRAM producing for you now? Is your supply coming from one source predominantly?

Joe, without going into any specific detail and putting any of our partners on the spot, I just -- just use the guidance that I gave you earlier. We expect approximately 10,000 a month in the third quarter and between 10,000 and 15,000 in the fourth quarter. And again, could this number be better in the fourth quarter? Potentially, yes. But again, it's something that we have to sit down and assess with our green laser partners. And they need to confirm that they can do better than what we see today.

But there's been no slippage from your guidance in previous comments.

That's right. Right now, we feel comfortable about the guidance that was given in February.

Okay. And, Alex, when -- I guess two additional questions, when can you get the cost of these synthetic green lasers low enough to a point where you do get to positive margins? Why don't you go ahead and answer that one first.

Listen, this is great question. This is probably on everybody's mind. I firmly believe that if done properly, and I think one of the partners have the strategy in this regard, you can get a synthetic laser to competitive pricing where it could become an embedded solution, maybe not ten years from now, but for the next four, five years, absolutely.

Okay. And at what point are you finally -- do you see yourself finally not being restricted by any components and having a margin that makes you free from having to go back to any source for funding and that we're not sitting here talking about being restricted by components, and we're really building revenue unrestricted?

It's really -- it's not a secret for anyone. We're really tight at the hip with the progress that is expected from the green laser manufacturers. And we expect the good news that by the end of 2011, there should be a clear five people, five commercial entities, that produce green lasers, whether they're synthetic or direct. And within another six months, we expect there to be at least seven. I think competition is great for everybody. So until green laser is as cost effective as it has to be, we're focusing on higher margin opportunities, which is exactly what we're doing with our current OEM customer. We are not putting it inside a low-cost cell phone. We're putting it inside a high-end multimedia player which is going to drive premium pricing, which will allow us to compete still with expensive green lasers. So our strategy is to basically -- it's all about volume, Joe. So it's really, is it going to be a couple hundred thousand-unit business? Is it going to be a million-unit business? Is it going to be tens of millions-unit business? It's always going to be dependent how quickly the green laser can get to the right cost.

Okay. I'll jump back in queue. Thanks.

Your next question comes from the line of Larry [Sisen], private investor.

Hello, gentlemen. On your website, you talk some about the tie-up between Microvision and Intel for gaming. There was not a press release, or at least not one that I saw. Can you add more to the status of that and where it might lead?

Larry, just to give you a quick update, so what is the vision behind this effort? It is very simple. Intel is developing a new processor called Atom. They want to go well beyond the current laptop demographics. They want to extend the presence of this processor into mobile devices. And the gaming is a natural extension for mobile applications. So this is why Intel is interested in working with us, because we have what they believe the best gaming solution available for projection technologies. And we, right now, are in the process of not only creating a mindshare around this activity, but also baselining the business case to determine what is the right solution to go to market with and how we would do it. So we're in the process of doing this. As we get more information and ready to communicate any additional stuff, we will do that.

Thank you.

Your next question comes from the line of Mr. Liam [Disbard] from Morgan Stanley.

Afternoon, guys.

Good afternoon.

Could you talk about your return rate on the product of the SHOWWX? And also, are you thinking in general of any new products in the next near future or next year or two?

Could you repeat that? Sorry, there was a noise in the background. We did not hear you.

I was looking at the return rate on the product for quality. Have you -- what's the picture on that? And are you kind of thinking about any new innovative products in the next year or two?

Okay, so two questions. The first one, so the product return was, for us, surprisingly low because we anticipated -- we look at what is the typical benchmark for the new cell phones, media players. It appears to be it's in a high single-digit to low double-digit number, ours was. Out of the gate, we had about four, four and a half. And then we quickly identified the two biggest hitters on this return, and we addressed them, reducing it by half. So the return rates have been surprisingly good for the fact that this is our first product based on two new technologies.

In terms of the innovation, as I mentioned earlier, we don't want to communicate everything we do because our competition is listening to these calls. But what you need to know is that we're focusing on the future. The HD content is coming to handsets. It's coming to mobile devices. And we already understand this. We're working with customers. We understand what their road maps are. And this is why we introduce the [SAD], a prequel of the future. And the future is HD. It's a higher brightness HD projector that is handheld and still doesn't drain your battery in the first 15 minutes. And that's one of our focus areas. That's something we communicated. It's something we want to bring to market in 2011. There are other things, but we are not privy to discuss these at this point in time until we're ready.

Thank you very much.

Ladies and gentlemen, we have reached the end of our question-and-answer session. I would now like to hand the call over to Ms. Tiffany Bradford for closing remarks.

Thanks, everyone, for joining us today. I'd actually like to have Mr. Tokman conclude this call with his closing remarks. Alex?

Okay. What can I say? The second half priorities are very clear to us. It starts with sales execution, convert a healthy backlog into revenue. We are bringing more distributors online. We are implementing new marketing tools and programs to help our partners to shorten their sell-through cycle for our products. Also, we plan to do whatever is necessary to ensure that our OEM partner will be successful in launching their high-end media player with our PicoP projector in Q4.

There have been a lot of positive developments in the market. And we talked about green lasers. You've seen there is about five to seven players claiming they will be in the market by the end of 2011. All of this is great for everybody. For example, just to give you a sample of data, Report Buyer, which is the online destination for major industry sectors, has just added a new report. They forecast the green laser market size will reach about $0.5 billion in 2016. And that corresponds to approximately 45 million devices. So if you think about it, we have 100,000 devices or so in 2010. And by 2016, they project 45 million devices. So there is explosive growth on the part of the green laser technology, which is great for all of us. And we are basically going to piggyback on that growth.

We are halfway through a very exciting year for Microvision. And if you look at the first half, with indicators, we believe they are there, a record $20 million backlog and increased revenue, increased global presence through new distribution partners, increased supply of green laser and improved output from the factory, a large, healthy backlog on the first generation PicoP engine and an unthinkable HD-ready Pico projector prototype that, A, matches resolution of the content you're going to have on your mobile device, B, sits inside your dress shirt pocket, and C, guaranteed not to burn a hole in it while you're using it. So I'd say there is a lot to look forward to. I would like to thank you for joining us today and look forward to talking to you in three months.

Thank you for your participation in today's conference. This concludes your presentation, and you may now disconnect. Have a great day.