MicroVision Inc (MVIS) 2011 Q2 法說會逐字稿

Good day ladies and gentlemen, and welcome to the Second Quarter 2011 MicroVision Earnings Conference Call. My name is Carissa and I will 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's call, Ms. Tiffany Bradford of Investor Relations. Please proceed.

Thank you. Good morning everyone. I would like to welcome you to MicroVision's Second Quarter 2011 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 products and key components, business partnering expectations, market opportunities and growth in demand, as well as statements containing words like believes, estimate, expects, anticipates, target, planned, 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 expected 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 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 publicly update or revise any forward-looking statements whether as a result of new information, future events, changes in circumstances or any other reason.

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

Thank you, Tiffany. Everyone, thank you for joining us this morning. Outline for the call will be as usual. I will first give an update on the second-quarter business result. Jeff will then report the financial results and we will close together with the Q&A session.

I would like to focus your attention on four topics today. First, continued progress on the direct green high-definition engines that we are developing with Pioneer. Second, expansion of our distribution channels and the importance -- its importance to our future.

Third, we're going to talk about significantly reduced year-over-year operating cash burn. And last but not least, the recent breakthrough development in the head-up display area. Actually, given its significance, let me start with the automotive development.

Some of you have seen, some of you have not. But we have signed an agreement with a major automotive manufacturer to develop and in-vehicle head-up display that is based on the direct green high-definition PicoP display engine. We will be working closely with the automotive manufacturer and their preferred tier 1 supplier to develop advanced prototypes first to be installed in their test vehicles. This will be followed by a series of milestones that may result in introduction of the head-up display into a production vehicle.

The carmaker has identified the model of the targeted production vehicle and has planned the release in 2014.

Just if you look at the market, the auto HUD has been one of the three core application areas for us in the past few years. And I'm happy to say that we have started seeing a real pool for our technology from the automotive sector. It is primarily due to a confluence of three factors.

There is a true unmet need. There is the right technology that actually has been now validated in other sectors. And there is a higher confidence in supply.

Let me provide you a little bit more color on each one of these.

Unmet need, the saliency of the head-up display application is rapidly increasing. Think about navigation, collision avoidance, infotainment and your center of dashboard information. That is a lot of information to digest for the driver.

Safety becomes a concern. When you put all of this information in front of you on a windshield, you reduce the probability of accidents.

Let's move now to the right technology. Everybody knew that, on paper, our PicoP technology was one of the most well-suited technologies for these types of applications. But until it came with a commercial existence, very few knew whether it's commercialize-able.

Well, we proved that in 2010 by introducing our accessory product. And it matured sufficiently to warrant very serious consideration from everybody because they've seen us commercializing it somewhere else.

The final one is the supply. The supply -- primarily the supply performance and cost of green lasers, and these are far less risky than in the past. And it is primarily attributed it due to the advancements made in the direct green laser technology over the past nine months.

In general it feels like the automotive sector is rapidly moving from -- we're very interested, as in we're very interested in your technology for our [hard] products, to just let's do it. As in we now fully understand the unmet need. We've seen enough improvement in your ability to commercialize your technology in the consumer segment. And we feel more comfortable about the green laser supply to invest our own resources to make this feature possible.

The significance obviously is clear. This agreement represents the first of its kind for us as it offers a clear path towards commercialization inside a mass production car model that is targeted for introduction in 2014. And it also serves as a validation that people are excited about our technology, its inherent advantages and feel comfortable about that ecosystem around it is ready.

On the second, just to remind you, we're also collaborating with Pioneer Corporation on helping them to commercialize their own aftermarket head-up display based on our technology in 2012.

Since we're on the subject of Pioneer and direct green engine, let me just move to the next subject, which is the next generation high definition PicoP display engine that is based on direct green lasers.

In the second quarter we saw continuous advancement in the development. Pioneer and direct green laser providers are currently operating within their guidance timeframes, which places us on pace to have a commercial version of the next generation HD display engine available for others sometime in the first half of 2012. As such, we currently remain on track to start seeding the initial non-production samples to OEMs for evaluation and test sometime at the end of the year, with the expectation that some will adopt our technology and introduce then their own products within a 12- to 15-month timeline, whichever takes them to commercialize their own product.

The commercial availability of our HD PicoP display engine, as I mentioned, to other parties is still planned to begin in the first half of 2012. And Pioneer's aftermarket head-up display is expected to be the first product that will leverage that engine.

Now I want to shift your attention to the next topic, which is looking at existing products, what are we doing about broadening the ecosystem for our existing products.

We are using here a two-pronged approach. First we're looking to create high-value channels and go deep inside each one of them to promote our products in the ecosystems where there are customers who typically are either early adopters or have a need for these type of products.

Second, we're looking at introducing new products and features that will increase our addressable markets. So, let me start with the first one, going deep on the high-value ecosystems.

Many of you know in early June we have signed and announced a new distribution channel, Apple, in Europe, Middle East and Africa -- EMEA, where our products will be available for purchase in Apple online stores. The inventory and fulfillment for this activity will be handled by a company called Softline in the UK. We expect also to grow this list of preferred Apple distributors in the regions as we go through the year.

Second important milestone was that in early July we have also signed and announced a new distribution partner and channel in Japan. This is significant because SHOWWX is the first laser projector to be approved and sold into Japanese markets. We have a company called Synnex K.K., a Japanese distributor that will service Apple Japan to other customers and other customers in the region.

We're obviously very excited about entering and augmenting Japan's and Europe's sophisticated mobile device ecosystems. Both of these are expected to go live at the end of this month.

So, now, [here we are now] talking about Apple and this is very valuable ecosystem. But what about other devices? What about Blackberries? What about Android devices? What is going on there? How do you reach a larger number of mobility devices being on Apple?

The answer is through new products and features, but what exactly -- which features? To service devices other than Apple, you first must be able to connect and extract video from them. Simple task, what it appears to be, but not simple to implement.

Until 2011, there were very few smart phones that allowed video projection through an external device. So, simply said, you could not connect to any of these devices independently -- whether it is MicroVision or anybody else's technology.

We monitored the market evolution and recognized that there are actually three enablers for increasing the addressable market for our devices. These are two new standards. One is called HDMI, which stands for high definition multimedia interface. The second one is called MHL, which is an acronym for micro USB to HDMI connectivity. Both of these are crucial to get the digital information out of the smart phones and tablets into the external devices.

So, in the latter portion of 2010, the HDMI standard began gaining momentum in mobility products. It was not an instantaneous rise, as you can imagine. In fact, in late 2010 there was only a handful of phone models around the world with this type of HDMI connectivity, and only one or two in the United States. I think Motorola Droid X was the first cell phone with HDMI connectivity.

Also, if as we talk about MHL standard, in the late 2010 it became adopted by companies such as Nokia, Samsung, Toshiba and Sony. Notice the adoption started at the end of 2010 and the first cell phones based on this connectivity and technology are just arriving in the market today. We expect that these phones will proliferate in the second half of 2011 and into 2012.

The third indicator that was very important for all of us is that in January of 2011 at CES, Consumer Electronics Show, we saw an onslaught of new emerging product category, which is tablets. Again, the expectation is that tablets will replace laptops [in hands of] multimillion service and field service forces that today carry heavy laptops. All of this (inaudible) -- great news.

So as a result of all the above, we immediately kicked off a small development program to implement this important feature, specifically HDMI, on our new projectors. And six months later, which is early July, we introduced a new product, which is called SHOWWX plus HDMI that now offers a pure digital connectivity to a breadth of new tablets, smart phones and devices that offer HDMI video out.

This considerably opens the addressable market for us to include a new series of tablets, again, as I said, based on -- and the smart phones based on Apple, RIM, Android and Windows operating systems.

It is worth mentioning that although not every hardware manufacturer has been fully compliant with the HDMI standard to date, many new devices do allow video out to Pico projectors to enhance the road warrior's [view and experience]. We're obviously glad this is happening.

Before I get off the subject, one important milestone worth mentioning. We're very pleased to inform you that we delivered our first [tranche] of the PicoP display engines to Walsin Lihwa, who is our strategic partner from Taiwan. And they plan to introduce their own product called Panda that is based on our display engine in China in the second half of 2011. Currently Walsin is pre-marketing the product through some of their channel partners.

So, let me just recap this important section. The significance is really simple. We're positioned for the future by vertically expanding our distribution channel to reach globally within most valuable consumer ecosystems. We are proactively enhancing the product portfolio with new features to enrich user experience and increase the addressable markets for our product. We're generating initial wins for technology for the embedded applications.

That tells us the third subject.

Finally, before I pass the microphone to Jeff, I just want to say that we are pleased and that in the second quarter we have reduced the operating cash burn by 42% over last year. And this reduction is in line with our target of reducing the annual cash burn used in operations by approximately 40% for the full year.

Jeff will go next and provide you with more detail. Jeff?

Thank you Alex. This morning I would like to cover three areas -- revenue, our operating results and finally our cash position. Let's start with revenue.

For the second quarter of 2011, our revenue was $1.2 million compared to $2.1 million for the second quarter a year ago and $2.3 million for the first half of the year compared to $2.8 million a year ago.

Our product revenue in the second quarter increased modestly from the first quarter as we continued to broaden our distribution channels for the SHOWWX product line. And we recorded our initial deliveries of our PicoP engine to be embedded in Walsin Lihwa's Panda product. We continued to expect that revenue for the full year will be up slightly compared to 2010.

As of June 30, 2011 our backlog was $1.7 million.

Next, for our operating results, our operating loss was $9.3 million for the second quarter compared to $11.1 million for the second quarter year ago, and $18.3 million for the first half of the year compared to $20.6 million for the first half of 2010. The net loss was $9.2 million or $0.09 a share for the second quarter compared to $11.1 million or $0.12 a share for the second quarter a year ago.

For the first half of the year, the net loss was $18.2 million or $0.17 per share compared to $20.2 million or $0.23 per share for the first half of 2010.

Finally, moving to our cash position, for the first six months of 2011, our cash used in operations was $15.5 million compared to $22.3 million for the first six months of 2010. This represents a 30% decrease from a year ago. And for the second quarter, our cash used in operations of $7.4 million, a 42% reduction from the second quarter of last year.

We continue to expect that our cash used in operations for the full year will be approximately 40% lower than a year ago as a result of aggressive management of our cash operating expense and reducing our investment and working capital.

We ended the quarter with $9.3 million in cash and cash equivalents, which includes $2.4 million raised during the second quarter through our 2010 equity financing facility with Azimuth. During the quarter, we entered into a new equity financing facility with Azimuth. Under this new facility they have agreed to purchase up to $40 million, or 21 million shares, of common stock over the next two years.

This new facility gives us the ability to raise additional capital at a low cost of capital compared to other financing options. With that, we open the call for questions and answers.

(Operator Instructions) Richard Shannon, Northland Capital Markets.

I've got a few questions. I guess the first one is regarding the announcement about the major automotive manufacturer agreement here. I'm kind of curious. I know your press release said you guys are withholding the name of the OEM and the supplier, but kind of curious what is the geographical location of the OEM?

(laughter) Great question, can't tell you because this would easily give away who that is. (multiple speakers) We are simply not allowed to disclose the name right now.

Okay. Was this an agreement that was run through -- kind of driven through the OEM or the supplier? With the implication being, if it was from the supplier, does that mean there are potentially other OEMs that are taking a close look at this and potentially very interested in it?

There are actually two answers to your question. You know, in the past typically these type of activities (inaudible) [the interest] came from OEMs but the drive came from the Tier 1 suppliers. In this case the OEM actually is doing the driving. They identified, they are actively pursuing the application and basically they spearheaded this effort.

And after we decided to go forward, they picked their own preferred Tier 1 supplier to participate in this, for this specific thing. In other areas we obviously are in discussions with other Tier 1's and other OEMs around the globe. So it depends on the individual and each specific deal or activity. In this case, it was driven strictly by OEM and Tier 1 was handpicked.

Okay, great. Second question related to your new distribution strategy and work here. You talked about, both in the press release and today, about adding a couple of distributors both in EMEA and Japan. Have we seen the impact of these agreements in revenues at all? And if not, when should we start to expect that?

It is obviously a valid question. Understand that there is a four-step process to bring a channel on. It starts with the engagement and the next step is on boarding. Typically you identify what you want to do, how you're going to go, then you have go-to-market strategy preparation. And finally, active selling begins.

This process typically takes about six months. We obviously have gone through engagement, on-boarding, and go-to-market over the past six months [to get to] this point. So, as I mentioned to you, these channels go live at the end of this month.

All right, great. Next question, kind of talking about the progress in direct green lasers and the implications for partner introductions within products. I just wanted to understand the timeframes here, just to clarify.

I think, Alex, you had mentioned you're expecting your partners to introduce products roughly 12 to 15 months after receiving samples. Does that timeframe suggest we're going to see products on the market with your new PicoP engine on direct green lasers sometime in early 2013? Is that a roughly correct timeframe?

It's roughly correct timeframe. You obviously I have to allocate for their development times. So, if you look right now, Richard, we are still planning to seed the initial samples to OEMs at the end of this year. And the assumption is that a subset of them [will decide] to go forward and then [put] their own development efforts. So, yes, timing is right.

Okay. Fiscally in those OEMs, how rich or what percentage of those opportunities do you see being very highly sensitive power -- very sensitive to battery power -- smart phones, media players, etc.? What kind of penetration do you see of that specific market in the first rollout of products based on your -- (multiple speakers)

Our roadmap is -- we have a phased approach as we move from accessory (inaudible) products to the embedded application. We have intermediate steps that allow you to facilitate from the initial limitations of everybody else's technologies. But fundamentally, you are right.

The two biggest thresholds to get inside the smartphone are -- number one is cost. Number two is power. Everything we're doing right now with direct green laser suppliers and with Pioneer is focused to make sure we are addressing these two parameters well, to -- it will jumpstart the embedded market at the timelines that you just articulated. And obviously significantly increase it as the volume increases and it allows us to reduce the cost of the more expensive components.

Okay, great. I guess I will ask more question and jump out of the line here, guys. You announced I think just recently your HDMI-enabled accessory product. And you also referred to MHL as a technology.

I'm kind of curious to the extent of what you see the predominance of your volumes in the accessory market being driven by HDMI and other digital video outputs here in the relative near-term. Do you see those as kind of a slow ramp up? And do you have any sort of marketing or other programs in place to help tie in this connectivity with other devices in the market?

Absolutely. Again, very good question. For this type of market, you don't expect exponential growth. So it's going to be steady growth. What we are -- we actually have marketing programs right now with a variety of end-users, where we actually [leverage in] the new tablets.

As you can imagine, the tablets right now are [intended] or promoted by Apple and the other tablet manufacturers as the replacement solutions for the field forces. So we're actually working with several companies to develop vertical applications that combined new tablets, our Pico projection technology and some software application that is relevant to what they do to develop end solutions.

So, our goal is to create end solutions, not provide a piece of hardware that somebody has to figure out what to do with. We already know that with entertainment and gaming is one of the end solutions we're very good at. And we're focusing on this through Apple and others.

But for the enterprise customers, the HDMI we believe is going to be a big driver.

Okay, great. Thanks a lot guys.

[Joe DeRoth], Morgan Stanley.

Good morning guys. Can you address what kind of volumes and price points and perhaps margins you see in the HUD business as compared to the Pico projector business?

It is tough to tell at this point, Joe, because it is obviously is going to be determined by adoption. Everybody knows the size of the automotive industry. Right now, this specific manufacturer identified a specific model that they will introduce in 2014 -- that is a target for introducing in 2014.

So, except for budgetary guidances, we have not been given firm forecasts yet. But I think it is going to be -- by volume, it will always trail the consumer volume. But we expect that the margins will be a little better.

Typically, the consumer segment, the margins will probably be the lowest. You go to automotive, slightly higher. And obviously we're working on other verticals where the margins are higher. But the volumes may be less.

So we -- be beautiful part about this, we're using the same platform technology that is extendable to all these three separate markets. We don't have to do any heavy lifting to go from one sector to another. And there is some small customization that needs to be done to move from one area to another.

And that is how we are basically spreading our bets to go high volume consumer, lower margin; lower, slightly medium volume in automotive with higher-margin. And then we also, as I said, looking for verticals that offer high margin opportunities but the volumes [should] be less. So I would place automotive somewhere in the middle.

Talking about the direct green laser, you have [3 or 6] companies working on it. Will those losers be -- from each of the different companies, will they just be able to be dropped into your engine, no matter which laser it is? Or will you have to configure your engine for each laser?

This is probably one of the most exciting things for us. The anticipation is that at least physically they should be a drop-in, [functionally] to be determined.

And just to give you an example of the difference in synthetic and the direct. And synthetic green lasers, when Corning and [Azure] introduced their lasers in 2010, we had to build two separate engines. So basically we had one engine designer on each laser. It was obviously not an efficient way to go, but we had to do it to have a backup just in case.

The beautiful part about direct lasers, most of them are amendable to the standard packaging configurations so that physically it should be plug and play. Functionally, we don't know yet because as we start receiving samples, we test the performance of these lasers and we determine whether we need to modify our electronics to accommodate different performance characteristics. At this time it is too early to say, but by the end of the year we should know.

Obviously it is far less expensive to do this, because a lot of modifications will be done to using algorithms rather than we design in the hardware and forcing additional manufacturing SKU that is obviously not cost-effective. So, bottom line, direct green lasers offer a cleaner path to market with a single-engine than what synthetic greens do to us today.

Thank you.

Randy Hough, ProEquities.

Good morning fellows. Thanks for the excellent summary report, Alex and Jeff, earlier.

Let me take you back to the four-phase process of opening up different channels, and drill down a little bit deeper. Surely in that process you make some estimate along with your channel partners of what the volumes might be based on some market analysis [RE] demand. And that demand seems, from your comments with respect to the expansion and driving marketing campaigns for notebooks etc., to be quite large.

You have to be able to, it seems to me, make some sort of an estimate, so you can tell the manufacturing component of this process some estimate of the number of units that they would have to produce in order to meet the ramp. Could you give me, then, some clarification, Alex, on your near-term estimates for the initial, let's say six months of the channel being open? And what the larger projections might be for a year or two down the road?

For this year, it is simple. As we mentioned over the past couple of calls, or goal is to moderately increase revenue this year over the previous year. Because it is such a new market, and as we get through early adopters, [crossing the chasm], this is going to need to be [proven] with probably more robust devices. It is something that will be embedded or attached to the host devices.

Right now, it's a great question. It's the $64 question. And this is exactly what we are asking with each channel partner.

The answer is pretty much the same. They give us the lower and higher ranges on the volumes, from hundreds of tens of thousands. But then they say we have to go through the following process.

We have to do a pilot. We're going to grow at that in specific geographical regions in our flagship stores. We're going to get a sense of what the uptake is and we'll go through the next steps.

So, we don't have a concrete volume. We're given ranges and we're given basically process steps that they have to go through in order to firm up their estimates. Because, as I mentioned to you, the Apple channel we created over the past six months and it's going live at the end of this month, we are going to go through the learning experience over the next three months to see what exactly happens.

Maybe by the next call I will be able to give you a clearer answer them what I'm giving you right now.

Okay, fair enough. But could you give us a general statement on the potential market? I don't know if -- we're seeing more and more and more about auxiliary devices in the Pico projector class. And you let the mind wander and you can come up with some pretty big numbers.

You must have some sensitivity to potential demand, even at the low side, that you might be able to discuss with us. Is that not the case?

It is the case. If you look at the market projections by some of the companies PMA -- Pacific Media Associates or DisplaySearch, they typically -- their forecast, so far the curve is a correct curve. But it seems to be shifting to the right because some of ecosystems issues that we encounter.

For example, last year we had Pico projector, our first one, and TI had several vendors creating their Pico projectors (inaudible). The problem was, fundamentally there was only one device in the market that you could connect to, and it was an iPhone. You could not connect to Blackberry, you could not connect to Motorola phones, you could not connect to the Samsung phones or LG phones.

So you have this great product. It's a wow when you show it to somebody. But when somebody calls and says, how come it doesn't work with my Blackberry? Well, it's a RIM problem. RIM doesn't allow video out from their devices. And we can't do anything about this.

So, right now, as we have seen with new HDMI standards and with new smartphones and tablets that have it, we will actually -- for the first time we will see what an impact the ecosystem will have on sales of this product. Because there's not enough history, it is hard for me to speculate until we go through this (inaudible) cycle and actually establish (inaudible).

Okay, that's fair enough. Let's just hope we're more than pleasantly surprised when the numbers start coming in.

I'm with you.

Second, kind of general question, there has been discussions in the past about -- and in fact I have seen on your website where you have a job opportunity for, let's call it the executive position of a Product Development Officer. Can you give us any insight into where you are in that process and what the specific function of that officer would be?

The specific function of this person will be a combination of business development and strategic product marketing. Yes, we already have gone through a number of candidates, selected one, gave him an offer and should be on board within the next few weeks.

Okay, great. Good, and I was glad to see the reduction in the cash burn, what have you. I will get back in the queue and thanks for the update.

Thank you Randy.

And there are no further questions. At this time, I would like to turn the call back over to Mr. Alex Tokman for closing remarks.

I would like to close this call with two takeaways. First we're making -- I hope you have seen this. We're making visible progress on the strategic items while carefully managing near-term tactical deliverables.

The next-generation direct green PicoP platform is maturing. We expanded our distribution presence inside a valuable Apple channel in Europe and Japan. We reduced the operating cash burn by greater than 40% from year over year, and our goal is to continue this positive trend into the next quarter.

The second take away is the strategic stuff. Pioneer, Walsin, now the major carmaker, are planning to incorporate our disruptive technology inside their products. It's obviously very exciting for us. And we're not done.

We're working to expand [our release to] go-to-market partners as we move forward. And we're looking forward to updating you on the exciting developments as we go through the year.

With this, I would like to thank you for joining us today. And both Jeff and I look forward to providing you with more positive news as we progress through the year. Thank you.

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