MicroVision Inc (MVIS) 2012 Q2 法說會逐字稿

Welcome to the Q2 2012 MicroVision Incorporated conference call. My name is Paulette, and I will be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note that this conference is being recorded.

I will now turn the call over to Jeff Wilson, Chief Financial Officer. Please go ahead.

Thank you. I'd like to welcome everyone to MicroVision's second-quarter 2012 financial and operating results conference call. In addition to myself, participants on today's call include Alexander Tokman, President and Chief Executive Officer.

The information in today's call may include forward-looking statements, including statements regarding projections of future operations and financial results, product development applications and benefits, availability and supply of product and key components, business partnering expectations, market opportunities and growth in demand, as well as statements containing words like believes, estimate, expects, anticipates, target, plans, will, could and 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 and Exchange Commission under the heading risk factors relating to 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.

The agenda for today's call will be as follows. Alex will first give a business update. Then I will report on the financial results. There will be a question-and-answer session, and then Alex will conclude with some final remarks. I would now like to turn the call over to Alexander Tokman. Alex.

Thank you, Jeff. Thanks, everyone, for joining us this morning. In Q2, we accomplished several strategic milestones that we believe should significantly strengthen our fundamentals and provide platform for future growth. These include receiving a purchase order totaling $5.8 million from Pioneer for the launch of Pioneer's new HUD system. It is called Cyber Navi.

We strengthened the balance sheet by raising just under $15 million from two equity offerings. And finally, we completed a business realignment and restructuring around Image by PicoP licensing business model that is expected to yield approximately 50% reduction in operating cash requirements, starting second half of this year.

The business update portion that I am about to cover focuses on Pioneer, new business opportunities and touches on operations. Obviously Jeff, will provide more information as well as financials.

I would like to begin Pioneer portion of this call with two wonderful news. First of all, Pioneer has begun shipments of its Cyber Navi HUD system in July, as was originally planned. And second, we just received in July a follow-on order of $1.4 million for the key components of the PicoP Gen2 display technology in support of this launch. This brings the total current order from Pioneer to approximately $5.8 million, because recall that earlier in the second quarter, we received and announced a purchase order of $4.4 million for the key components of the PicoP Gen2 display engine.

A couple notable points surrounding this activity with Pioneer. First, let's talk about Pioneer's related activities. Pioneer has conducted a pre-market study to assess the interest in this new revolutionary product, and majority of the people polled and looked indicated that they like the features and functions and were very impressed. So this is good news for us, at least as far as pre-market information goes.

Second, the HUD system, which is again called Cyber Navi, is prominently displayed on the first pages of Pioneer's 2012 audio and visual navigation products catalog, which means that they are putting a lot of sales and marketing effort to ensure that this new revolutionary technology is acknowledged and marketed.

Finally, NTT DOCOMO is a part of Pioneer's go-to-market strategy, offering wireless services and information to the system. As many of you know, large mobile operators are main drivers and beneficiaries of mobile device adoption, and they are continually looking for new services that increase subscription rates and average revenue per user. And NTT DOCOMO happens to be the largest mobile operator in Japan.

As far as MicroVision is concerned, there are several firsts for us here as well. Pioneer's HUD system is the first OEM product that is based on PicoP Gen2 display technology that is built around direct green laser. Also, it is the first offering that is branded and marketed and distributed under the Image by PicoP ingredient brand licensing model. We began component deliveries in late Q2 and expect to see increasing delivery volumes and revenue over the next six to nine months.

To cap this section a lot but not with this launch is consistent with our guidance and goal to commercially introduce the PicoP Gen2 display technology starting mid-2012.

Now let me shift focus and look at what is happening with the new opportunities. Recall that in late February, we began shipping PicoP Gen2 display engine design samples to prospective customers, which include original equipment manufacturers as well as original design manufacturers. We shipped them for the purpose for them to start evaluation phases. Since then, we have delivered design samples to over a dozen of companies in the consumer and automotive sectors, and we have been closely monitoring their evaluation progress.

The feedback that we received so far has been positive and many prospective customers have been pleased to find that our technology delivers an unmatched HD resolution 25-lumen brightness and new applications, all while drawing much lower power than the competitive offerings, and all of it is contained in a very tiny package.

We are currently engaged in business discussions with several of these companies to assess the potential business models for working together with obvious goal to secure commitments to design products based upon our technology.

But we are not done. We continue to receive new orders for our PicoP evaluation kits in the second quarter, therefore increasing the opportunity space for future products and applications.

Most of the customers, as we mentioned earlier, we are targeting are major vertically-integrated OEMs who fit well into the licensing and royalty business model plans that we have and who offer an obvious benefit because they can accelerate market adoption by offering products through their vast distribution channels at a lower overall cost.

Before jumping to operations, I would be remiss not to mention something about green lasers. The good news that at least one direct green laser manufacturer is offering the commercial-grade direct green laser, as evident from Pioneer's product launch. More are expected to come to market soon.

I don't know if some of you have seen, but recently, Sony has announced that they've partnered with Sumitomo to introduce their own direct green laser. Obviously, by Sony entering into this game, it gives a lot of credibility to the space and puts pressure on other direct green laser manufacturers to produce efficient product. All of this is good for all of us.

Next, let's move to operations. I'll just be brief here. In Q2, we raised almost $15 million through two equity offerings and restructured the business to significantly reduce the operating cash requirements starting the second half of this year. Jeff has more on this subject, as well as an update on the rest of the financials. Jeff.

Thank you, Alex. I would like to start with an update on our recent actions to align our operating and personnel costs to our ingredient brand strategy. As you will recall, we previously announced that we were taking steps to lower cash requirements going forward, as we have planned for our OEM partners to assume a greater portion of the PicoP display engine technology integration. In addition, we took steps to further reduce our product development, sales, marketing and administrative expenses. And finally, we have reduced our personnel costs to align to our strategy.

During the second quarter, we paid out approximately $350,000 in restructuring and other costs associated with personnel reductions. We have completed the planned actions and continue to expect the reduction in working capital, operating expenses and personnel costs should result in an approximately 50% reduction in our cash used in operations in the second half of 2012 compared to the first half of 2012.

With that background, I would like to cover three additional areas -- revenue, our operating results, and finally, our cash position as of the end of the quarter. Our revenue for the second quarter increased slightly to $1.3 million compared to $1.2 million for the second quarter last year. And for the first six months of 2012, our revenue increased 33% to $3 million compared to $2.3 million during the same period last year.

Our revenue for the second quarter was comprised of sales of our SHOWWX product, test stations used for producing the PicoP Gen2 display engine and initial component sales for the PicoP Gen2 display engine. We plan to continue to sell our existing inventory of SHOWWX products through the next quarter as we increase deliveries of the PicoP Gen2 engine components.

Our backlog at the end of the quarter was $5.4 million. This does not include the additional $1.4 million follow-on order from Pioneer we received in July.

Next, for our operating results. Our operating loss for the second quarter was $5 million compared to $9.3 million for the second quarter last year and $14.8 million for the first half of 2012 compared to $18.3 million for the first half of 2011. Our net loss for the second quarter was $5 million or $0.26 per share compared to $9.2 million or $0.69 a share for the second quarter last year and $14.8 million or $0.82 a share for the first half of 2012 compared to $18.2 million or $1.39 per share for the first half of 2011.

The loss for the second quarter of 2012 includes a $1.4 million reduction in cost of product revenue as a result of renegotiating component pricing with one of our Gen1 component suppliers.

Finally, moving to our cash position. For the first half of 2012, we reduced our cash used in operations to $13 million from $15.5 million for the first half of 2011. The cash used in operations in the first half of 2012 includes the $350,000 paid in restructuring and related costs discussed earlier. During the second quarter, we raised $14.6 million net of issuance costs through two equity offerings, and we expect our quarter-end cash balance of $14.8 million will fund our operations for at least 12 months from now.

With that, I would like to open the call for questions.

(Operator Instructions) Ryan MacDonald, Northland Securities.

This is Ryan MacDonald on for Mike Latimore. Just a couple questions. So in terms of -- outside of Pioneer, are there any other OEMs that you might expect in the second half of this year or the start of 2013?

Good question, Ryan. As we mentioned, that we were transitioning to the Image by PicoP ingredient brand licensing model, supplying samples to right now more than a dozen of OEMs. Some of them already completed evaluations, and we are engaged in business discussions on the business models moving forward.

How long each negotiation is going to be obviously dependent on type of business model is selected, and there is no finite time, other than think of it as a normal or gaussian distribution with three-sigma values between six to 18 months.

Okay. And then what is your view on gross margin for the second half of this year in terms of level?

Right now, as you can see, most of the volume is coming from Pioneer. Good news is that the gross margin is positive and it is double-digit. But at this point, we are not free to disclose this information because it is confidential to the agreement between Pioneer and MicroVision. As we start generating more customers and average the margin, we will be able to disclose this so you can see.

Okay. Are there any opportunities to monetize your noncore patents?

There is always an opportunity to monetize non-core IP, and we will be looking and exploring all opportunities on the table, yes.

Okay. Got you. Just the last one, in terms of -- do you see any upfront payments for the second half of the year (inaudible)?

This is part of the licensing and royalty agreements that are pursuing. We hope to basically strike deals that have that element. But obviously, it is going to be deal-to-deal dependent -- and but it is a goal, yes, to get upfront licensing fees for some of these deals going forward.

All right. Thank you very much.

Randy Hough, ProEquities.

Good morning, guys. Thanks for taking my question. Alex, to follow on the question of the previous speaker, what are the gating issues that remain in signing a deal with these -- one or more of these additional OEMs that you speak of? For example, we had talked before about convincing production levels for, say, Pioneer that would show another potential partner, that in fact the green laser suppliers can provide volumes. I wouldn't think conversely that any of these new potential relationships are going to sign on unless they see volumes of reliable yields and reliable operation of these green lasers over time. Could you talk about that a little bit?

Absolutely, Randy. The good news is that the green laser doesn't appear to be as a showstopper as it was before, because think about this. Under the Image by PicoP license and business model, we are not doing negotiations between laser suppliers. OEMs do it on their own. If they don't feel comfortable, they will not go forward.

Pioneer felt comfortable enough with one of the green laser suppliers that they announced commercial launch and they are pursuing it. And Japanese companies have turned to be more conservative than optimistic, so if they feel comfortable, that means we should all feel good about this.

So some of the issues that establish timing, remember, Mike just asked the question how long the deals will take. It is so dependent on deal-by-deal cases, and it is primarily driven by several factors. One is what type of business models that prospective customers want to take, what type of transactions, what royalties, what licenses, what component sales, what else is included? And that is one area.

The second one is the amortization and/or pressure by a specific customer. If they are pressured to introduce a product sooner, they would be more willing to negotiate faster. If they have some flexibility on time, they are going to take their time to negotiate best terms.

So again, think of it as normal or gaussian distribution. From the time we ship evaluation samples and when somebody is happy enough, when they (inaudible) and they accept the performance, they like what they see, they say all right, let's talk about business now. That time is -- think of it as a normal distribution with three-sigma values between six to 18 months, which means somewhere around 12 months.

Okay. And the time that the clock stopped -- started on that -- excuse me, I guess would be maybe the April timeframe, is when you started putting these kits out to folks to evaluate.

Remember, we start shipping the original ones at the end of February. And remember, at that time, when we had a call three months ago, we said typically evaluation phases for them are taking anywhere between one to six months. So if you look at end of February, so now we have March, April, May, June, July. We've gone through four or five months now. Right?

Some of these people, believe it or not are still evaluating it, so they have not came back to us with the let's go to the next step. Some of them did complete the evaluation, they like what they see, and with those, we already started negotiations. And those started some of them a few months back, some of them just recently. So within the past two, three months we started getting some of these people coming back to us, saying, look, we've seen enough from technical side, let's talk business now.

Okay, so it is mixed.

Yes, it is totally mixed. There is no specific timeline for everybody. Everybody -- every one is different. Some regions are more efficient at this, some regions less. But again, it is also driven by the internal business goals within each organization. So some people who are behind and trying to catch up are more aggressive. Some people who are already leading the space, they may be not as aggressive and take their time.

Okay. We've seen in the last several months, Alex, since the natural green lasers became more in the realm of possibility as far as volumes, some pretty significant and interesting applications of the technology. The Web provides us with YouTube videos of applications that are truly remarkable.

So with that kind of background -- and remarkable and varied beyond what I would have expected initially. So with that background, is there anything shaping up in the field, in the industry for consumer electronic applications that have surprised you to the positive side? Or could you comment on whether the breadth of applications seems to be increasing beyond what you might have imagined a couple years ago?

Absolutely, Randy. What we have observed -- this is not just recently, but this is over the past several years -- is that people want something broader than just displaying information. And this is one of the main reasons we start investing a couple years ago into new value-add applications, such as interactive display, 3-D and zoom morph, some of the features that will be added on top of our Pico Projection engine to enhance end-user experience.

And what we are recognizing right now as a validation point is that some of these OEMs are really excited even more about our features and applications, more so than just the base technology. So this is all good for us and we believe that interaction -- using your fingers to interact with information projected on the wall should be just as common as it is with using your fingers on your cell phone, as most people do today.

Wow. And how about the -- last question, to follow on with that, how about the eyeglass application, where the visuals are brought and represented on the lens of glasses?

Remember, eyewear was always part of the top three focus areas for us -- Pico projection, head-up display, eyewear. Keep in mind that with the business model that we have been pursuing for the past six years, which is Image by PicoP, we would never provide the end solution as an eyewear, but we would provide all the salient components to create this solution. And what that is is you need a display -- tiny display engine to enable eyewear solution, and we believe we have the best display engine for that solution.

We also have invested to develop optical methods and solutions in combination with our engine. So this is what we are offering to others. And I agree with you. The eyewear, based on what Google, Microsoft, gaming companies are investing right now, they believe eyewear is going to be big.

Everybody always believed that eyewear would be the coolest product ever. The fundamental issue in the past has been that it is a very complex solution to put together, because it requires not only something that looks and feels natural and cool, not something that looks like it weighs 500 pounds and you have to carry on your forehead; but also content has to be adjusted to this type of application. So with Google being involved, with Microsoft being involved, the content is being adjusted and it facilitates adoption of this specific use model.

Joel Achramowicz, Merriman Capital.

Good morning, guys. I got on a little bit late. Could you -- did you talk at all about the state of the supply chain for direct green laser in terms of the improvements in multiple sourcing and this kind of thing?

Yes, Joel. To catch up, I will repeat again. Right now, at least one direct green licensed manufacturer is offering commercial-grade direct green laser, and this is evident by Pioneer's product launch. Also, more are expected to come to market soon.

And recently we had a new entry. Sony has announced that they have partnered with Sumitomo to introduce their own direct green laser. So we just had Sony entering into this game, and having someone like Sony, with the capability and the pull within the Sony internal product groups, it is a very good indicator for everyone involved. We are ecstatic about the fact that Sony is entering this thing.

Which leads me to the question about Pioneer. We've talked about that before. Are they -- I mean, they obviously have this focus in heads-up display for the automotive sector. Are they working on other product areas? Are they considering looking at other consumer products, such as perhaps handsets or working with other players in that regard?

It is hard for us to disclose their roadmaps and their business plans because, as you know, we are under nondisclosure agreements. All I can tell you is that their first priority is to launch aftermarket head-up display product and make it successful in Japan. Later, they want to extend it globally, and they have larger appetite for other products. But at this point in time, not privy to disclose that.

I understand. I'm kind of excited -- I wanted to get your thoughts -- I guess there is a handset, a smartphone or some kind of a phone that Samsung has released. I don't know which engine -- I don't think they are using your engine. I think it is called the Samsung Beam. But it's one of the first handsets I've seen -- I think it just went on the market this week, actually. But how do you feel -- that is certainly good for the market, right?

It's great for the market. You are absolutely right. Samsung released limited quantities of the Beam phone that has the, I believe, TIs, let's say TI, 10 lumens on an engine that offers one fourth of 720p -- one fourth of our resolution, basically. We are glad that Samsung is doing it, because it gives credibility to the market. They just introduced it, I believe, in England, and some other countries. I think all of this is great. We are actually happy about this.

I have personal experience with this cell phone. Recently, at the Society of Information Display Conference in Boston, when I finished my speech, one of the Samsung guys came and showed it to me, before they even launched it. And he put it out and started projecting the image, adjusting focus. So the image looked pretty good, but it was small. Because it is not bright enough, so it was small.

At the same time, I had -- we developed one of the prototypes using Samsung Note with our projection technology. So I took it out of my pocket and projected the image side by side with him. And my image, our image was about five times bigger and brighter than -- and no focus adjustments -- than what Samsung Beam was. And I remember there were several people around us, looking around, and they look at Samsung guy, and they say, listen, how come you do not put their technology inside?

The point is that we have -- we believe we have something special. And obviously, it was not ready, because the Samsung phone they introduced today was designed into probably a year and a half ago, which at the time we did not have direct green laser. Now the situation is changing, and we believe this is going to improve our ability to get some design wins.

Certainly, it is evidence now that -- Samsung knows about you.

Yes, they do know. Of course they do know.

Okay. That's good to know. One final question I have is -- we've got another half to go. Obviously, this is a critical period for you. How should we measure your operating model for the next -- what would you like to accomplish in the next six months?

One of our first -- our main priority right now is support Pioneer's product launch, because this is the first product that we designed on the Image by PicoP model. It requires a lot of support on our side to make sure Pioneer is successful, and we've been doing this.

At the same time, we're working on the new business developments. And with the restructuring that we've done, we expect to reduce cash requirements by approximately 50%, so it gives us longer run time, runway. And during this time, we expect to generate some additional partnerships, and hopefully solidify our position, so people can see that now that we addressed one of the major bottlenecks, which was the green laser, we can start generating positive wins.

We have very strong fundamentals right now, if you look at the balance sheet, if you look at the burn reduction that we've done. I would say revenue from Pioneer would be the increase in revenue for right now. And working on the new deals that potentially could include upfront licensing fees, that is our goal for the next six to nine months.

You had mentioned, I think, eight or 12 -- you are working with at least those -- some amount of players. Some of these are big household names, right? Can we assume that?

As we migrate -- as we transition to Image by PicoP model, most of the people we are targeting right now are major vertically-integrated Tier 1 OEMs or ODMs.

Great. Well, good luck. [Return] progress next month, so I have the months ahead.

Thanks, Joel. And listen, just for the operator, it is Joel Achramowicz.

Thanks, Alex.

Jeff Harvey, Janney Montgomery Scott.

Good morning. A couple of things. Are you not going to sell the SHOWWX anymore?

We will continue to sell the SHOWWX, our existing inventories of SHOWWX product, which at the current run rates we think we will have through the end of Q3, maybe the first part of Q4. But we are not producing any more. That product was built on the synthetic green laser platform, so we won't be -- we won't be manufacturing any more units of that.

I think the thing that I guess I had expected by now is at least an announcement of another partnership. And I'm just wondering, can you talk about -- can you give us some indication of how many potential new customers are evaluating your PicoP in the second quarter versus the first quarter?

In the first quarter, there was none, because remember we just began shipping at the end of February. So if you look, March is the only month that some of the people -- earlier people used to receive the samples. So most of the people have done evaluation in the second quarter.

And as we mentioned, we ship to at least a dozen of prospective customers between March and end of June. And some of these already completed the evaluation phases and we engaged in the business discussions.

Mike Scott, Stephens.

I'm going to follow on Joel's question just a little bit, to the extent that -- and that is encouraging to hear about Samsung. I wasn't aware that they had put a projector in their phone. And you mentioned, I guess, it had a quarter of the resolution of our projector. And we were early, I guess, to be involved in that.

And I guess what I'm asking is that the Pioneer deal is well known -- I guess it is going to be a while taking off as far as aftermarket -- maybe, maybe not, as far as a serious revenue driver. And now that we've decided to get more on the licensing situation, it appears to me that there is quite a bit of time lag between that OEM taking that to look at it and actually adopting it and putting it in the product and selling it.

The question I guess is that with where the Company sits now and the cash position, say, 12 months out, other than continue to dilute the stock, what would be the end game as far as seeing a deal that we could actually realize enough of revenue on the licensing model to build the cash flow of the Company, and is that a possibility?

As I mentioned, Mike, again, reiterate -- evaluation phases take between -- typically between one and six months, and we started in late February. Subset of the customers, prospective customers, who receive the evaluation phases have completed analysis, have provided us with feedback and said that they are comfortable with what they've seen. Now, with subset of these dozen customers, we are in negotiations on business models.

Now, each negotiation differs, depending on what type of business model a prospective customer wants to pursue. As I mentioned to you, industry standards and our experience shows that to get a definitive deal done, it takes anywhere between -- it is a normal distribution with three sigma values as quickly as six months, as long as 18 months.

Now, what is going to happen for each individual deals? We cannot predict. All we can tell you that it would fall into the distribution. Our goal, as I mentioned, is not only to figure out how to provide components, but also to see if we can negotiate upfront licensing fees, which would serve as revenue in the intermediate term until the product is in the market and we can gain royalty and sale of the components.

Do you feel like -- and of course, I don't need specifics -- but do you feel like that at this point, with the supply of green lasers apparently not being a problem, that this product is ready to go in a high-end consumer product device? And do you feel like we have a chance of achieving that goal over the next, say, 12 months?

Our goal is definitely to get agreement -- our agreements done with some of the major OEMs and ODMs to put the technology inside their products, absolutely. That is our goal for the next 12 months.

I will now turn the call back over to Alexander Tokman for closing remarks.

All right, a quick recap of what we just covered. Pioneer product commercialization is on track, and consequently, the commercialization of our PicoP Gen2 display technology built around direct green laser is on track as well. I think the $5.8 million in purchase orders serve as a strong validation of this progress.

We are seeing the new samples enter the market in order to create new business opportunities. The feedback so far has been positive. And we already entered into business discussions with several prospective customers to assess the business models going forward.

We are progressing our PicoP features roadmap to enhance the appeal of our solution. Understand that when people sign up for licensing and royalty models, they don't just look at what we have today. They want to know what we are going to have tomorrow. So it is important that we continue to mature the road map, because they are signing up for longer term, not just for one (inaudible) of our technology.

We implemented measures to reduce the operating cash requirements by approximately 50% starting second half of this year, and raised almost $15 million to provide operating capital for at least 12 months' runway from today.

All of the summary points I just described are essential elements of the Image by PicoP licensing business model, the model that was articulated earlier this year.

Bottom line, we are hitting on all critical milestones articulated earlier in the year, and by continuing to move the business forward, we believe that it makes us an attractive investment opportunity for longer-term-minded investors around the world.

At this point, I would like to thank you on behalf of Jeff, myself, for joining us and we will talk to you soon.

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.