MicroVision Inc (MVIS) 2015 Q2 法說會逐字稿

Welcome to the Second Quarter 2015 MicroVision Inc. Results Conference Call.

My name is [Lorraine] 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 Ms. Dawn Goetter. Ms. Goetter, you may begin.

Thank you Lorraine.

I'd like to welcome everyone to MicroVision's second quarter 2015 results conference call.

In addition to myself, participants on today's call include Alexander Tokman, President and Chief Executive Officer; and Stephen Holt, Chief Financial Officer.

The information in today's conference call may include forward-looking statements, including statements regarding benefits under existing contracts and the negotiation of future agreements; our competitive advantages; progress with prospective customers; projections of future operations and financial results; product development, applications and benefits; availability and supply of product and key components; market opportunities and growth in demand; plans to manage cash used in operations, as well as statements containing words like believe, goal, path, expects, plan, 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 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.

The agenda for today's call will be as follows, Alex will report on the operating results. Steve will then report the financial results. There will be a question-and-answer session, and then Alex will conclude the call with some final remarks.

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

Thank you, Dawn. Good morning, beautiful morning in Seattle here. Thank you for joining us today for an update on MicroVision's second quarter 2015 results.

I am very pleased to tell you that we had an outstanding second quarter while making tangible progress on our stated 2015 goals. Now remember significant year-over-year growth is probably the most visible goal for the year, so let's start with it.

There are two significant takeaways here. First, we reached $4 million in revenue in the second quarter, which is a significant increase, both year-over-year and sequentially. In fact, Q2 2015 revenue exceeds our total revenue for 2014.

Second mixed gross margin have significantly improved from a double digit negative number in the first quarter to a double digit positive number in the second quarter. One of the major contributing factors that led to the overall improvement was the increase in the product gross margin as we reduced scrap and improved operational efficiencies throughout second quarter.

We're pleased with this trend but we are not done yet. Our goal is to continue to improve operational efficiencies throughout the year. Steve will provide further financial details on these and other key metrics in a moment.

Let's transition to another important goal that is essential to our growth plans, which entails ramp in output and production capacity of our key components.

First, we increased the shipments of MicroVision specific components by approximately three times between the first and second quarter, which contributed to the increased revenue in the second quarter. And, we've made also progress on increasing the production capacity of key MicroVision components to be ready for the second half of this year.

Another important goal that has an impact on our growth this year is supporting Sony with their display module commercialization efforts. We had a nice win here as we recognized $1.5 million in revenue following the completion of a display module support services agreement with our strategic partner during the second quarter.

Going forward, we are continuing to support our strategic customers with their module go-to-market efforts, both commercially and technically.

Finally, we've made a solid progress on creating and facilitating new OEM and channel opportunities for our partners, for our engine partners. In the consumer electronics space, we continue to engage with multiple OEMs to facilitate their adoption of PicoP technology through display engines produced by our partners.

We're supporting a subset of these OEMs in a number of design-win and design-in activities. Although, we are not authorized at this time to disclose OEM names nor to comment on their products or launch date, we are really excited by the innovative way that people are integrating our technology into potential products.

Some of you may have recently seen a series of articles and videos on the Web describing the product from our main partner, highlighting its selling features. And needless to say, we are extremely pleased by these developments.

A quick update on our collaboration with the Fortune Global 500 Company we're supporting to develop a display engine for their innovative smartphone product. This effort is on track.

We produced all the necessary MicroVision development deliverables and are ready to support them with their commercialization efforts later this year. There were no material updates in the second quarter from the customers in the automotive and industrial segments as they continue their evaluation of systems that include our technology.

With this, I will now turn over to Steve for a recap of Q2 and first half financials.

Thank you, Alex. The numbers I am about to share are included in our press release and in the 8-K filed today. Both are available from the investor page of ourwebsite.

As we discussed during last quarter's earnings call, our goals for Q2 were to increase revenue and improve gross margin. And we're pleased to report that our revenue for the second quarter increased significantly over both the prior quarter and the year ago quarter.

Additionally, we made solid progress on improving our gross profit margins.

First, let's discuss revenue. For the quarter, revenue was $4 million. This is up over four times from Q1. The $4 million was comprised of approximately $2.2 million in product revenue, $300,000 in royalties and $1.5 million in contract revenue. Q2 product revenue, which is from the sale of components, increased nearly three times from $750,000 in Q1 to $2.2 million. This increase was due to shipping more components.

We're very happy that our product and royalty revenue combined increased to $2.5 million from $900,000 last quarter, as this reflects the shift in our mix to a product and royalty revenue stream from development and contract revenue. The contract revenue of $1.5 million relates to a contract we signed in Q4 of last year to support our customer as they prepare to launch their display engine. That contract was completed in June.

Additionally, I want to discuss royalty revenue. Royalty revenue includes the recognition over time of the $8 million license fee we received in Q1 and royalty on display engines that are sold by our customer.

There are time lags and fluctuations from the time that MicroVision ships components, those components are made into display engines, and then those engines are shipped to customers and reported to MicroVision as royalties.

I am highlighting this because I know there is great interest in royalty revenue, however in these early stages we expect there to be irregular patterns when it comes to royalty revenue.

Okay, let's go on to gross margin. I am happy to report that overall for the second quarter our gross margin was 29% which is in line with our goal to improve our gross margin from negative 16% that we reported in Q1. Product gross margin was 5% for the quarter, up from negative 40% in Q1, a 45% improvement. This improvement was driven by decreased scrap and increased manufacturing efficiencies. The combined gross margin on product and royalty revenue was 17% up from negative 16% in Q1. Contract gross margin also contributed to the improvement and the resulting overall gross margin of 29%.

While we are still early in production and there can be variability in product cost, we are encouraged with the improvement we saw in Q2 and we will continue to work on improving our product gross margin going forward.

Q2 operating expenses were $4 million compared to $3.8 million in operating expenses in Q2 of 2014. First half operating expenses were $7.8 million, down from $8.1 million in the same period last year. Our second quarter operating loss was $2.8 million which was lower than our Q2 2014 operating loss of $3.4 million.

First half operating loss was $6.7 million and compares to a loss of $6.5 million in the first half of last year.

Our second quarter 2015 net loss was $2.8 million or $0.06 per share compared to $3.4 million or $0.08 per share in the second quarter of 2014. Our year-to-date net loss was $6.7 million or $0.15 per share. Our 2014 first half net loss was $11.4 million or $0.29 per share.

Cash used in operating activities was $3.6 million in the second quarter and the first half cash flow from operations was a positive $1.5 million. This compares to $3.7 million used in the second quarter of last year and $6.7 million used in the first six months of last year.

Cash and cash equivalents on hand on June 30th were $15.1 million and included $1.8 million raised on our ATM facility and the proceeds of $900,000 from the exercise of warrants in the quarter.

Finally, backlog. Backlog at the end of the quarter was $15 million. The backlog is primarily comprised of component orders. We plan on fulfilling these orders into 2016. There is no material backlog for contract revenue.

That concludes the financial results. We will now open it up to questions.

Thank you. We will now begin the question-and-answer session.

(Operator Instructions).

And our first question comes from Mike Latimore from Northland Capital. Please go ahead.

Thanks a lot. Great quarter. Congratulations.

Thank you, Mike.

I guess on the, on your supply chain and manufacturing capacity, do you feel like you have the volume or the capacity in place today to support second half ramp or is there more work to be done there?

We are moving very close to same capacity for the second half, increased capacity for the second half. We feel pretty comfortable to be able to fulfill whatever we need to fulfill to our customers this year.

Great. And then you broke out royalty versus product in this quarter. And I know Steve you said that there will be some irregular patterns to royalties. Can you give us a sense of the rough mix royalty versus products over time though, maybe not on a quarterly basis but over time?

I think at this point we want to -- we are caution about reading too much into the royalty numbers and recognizing that there are going to be irregular patterns and that it's just going to take a few more quarters for the patterns to shake out. And so we are not really giving any additional guidance on that at this time.

Got it. And Alex you said you are excited by some of the innovative ways customers are using the module. I guess if you look to the next 12 months here, should we assume that the majority of orders are still going to be kind of tied to these wireless companions?

It's a great question Mike, I am pretty sure everybody on the phone would like to know this. I can tell you we continue to engage with multiple OEMs and introducing them to the benefits of our technology and introducing them to our engine suppliers.

The products are different varieties, you probably seen, most recently you seen the companion type products. But this is only one of the categories that I think you would expect to see moving forward in the next 12 months.

And then you mentioned the Fortune 500 project on track, you talked about commercial efforts later this year. Does that suggest that you could see an order that goes into backlog from the Company this year?

This is one of the industries we're excited about. We support them well so far, we believe that we're ready to support them with commercial efforts and we believe we would start, we are seeing some of these orders later this year.

Thank you. And our next question comes from Andrew Uerkwitz of Oppenheimer. Please go ahead.

I just have two quick ones, you finally -- feels like you're finally -- I guess you're really moving along here. In the last couple of years you've effectively been keeping a tight strap on operating expenses. As we start to see revenue expand, how should we also think about operating expenses?

We think that operating expenses are not going to increase dramatically. There'll be some increases as we move forward. But you know we're using contract manufacturers and trying to leverage our business with using those resources to help us grow the revenue line.

And then second question, have you guys done -- now that we're starting to see products in the markets and so forth how should we start to think about the market opportunities -have you guys started to size the different markets? And if so could you guys share how we should think about that? Thank you.

The market opportunity, so right now the primary focus has been on Pico Projection market. And as many of you know, our technology can enable and scale to additional markets beyond basic Pico Projection.

However, in next 12 months, we expect that most of the gain and most of the growth will come from Pico Projection market. And Andrew as Mike asked the same question, what type of products we may see coming forward.

Again companion is one of the categories that you see, but there is some variation, some really clever variation that we expect that our customers will start introducing in the next 12 months.

In terms of what is the market size, what is the potential, I think there's at least three-four marketing firms that give predictions, they are incorrect. I think we'll be able to judge and have a much better estimate of what it could be in the next six to nine months.

Thank you. And our next question comes from Henry James from the State of Michigan. Please go ahead.

I would like to ask about product gross margin, and whether you can give us any guidance on what they might sort of stabilize at going forward?

Henry, it's a good question. As Steve mentioned we made significant improvement from Q1 to Q2. We are not done by any means so we continue to work on operational efficiencies to drive it. Remember we always stated in the past that our target is to have mix margin in the steady state of 40% or greater.

40%....

Or greater mixed margins. So this is product and royalty.

And with respect to the shares that were sold at the market. How many shares were sold?

555,000.

And with respect -- we talked about these other products, the other innovative products that sort of aside from the companion product that might come to market here within the next 12 months. Are there things that have to happen from a technology standpoint for these products to come to market?

Are you're talking specifically MicroVision's technology or our customers' technology?

Either.

I think we're done. We completed everything that is necessary to support them. We don't - we cannot obviously speak for them, but we don't see any major show stoppers on their side in terms of technological innovations that need to happen.

Okay. But probably just sort of a ramping up possibly of components or other things they may need for these things to happen?

Our current plans to increase the output and increase capacity would support all the customers we have in the pipeline right now.

And currently how many green laser suppliers are there?

To us, there are at least four known laser suppliers that have commercial green lasers.

Thank you. And our next question comes from Mike Scott from Stephens. Please go ahead.

Yes, Alex, it's Mike. Congratulations on the quarter. As a long time shareholder and a representative for a bunch of shares, I am going to ask a question the analysts might not ask but if you forgive me, and I know my clients are asking.

One is in the intermediate term I know that Celluon and the unknown Sony have products out and I think Sony has indicated they might release in October, that's the rumor. Do you feel like -- I mean I know right now we are still kind of using the standalone device. Do you feel confident with Sony for instance or whatever we want to call them that they're going to integrate more than just that over time and this is kind of a first test out, maybe?

Well Mike, what we know today is the companion is just one of the categories that some of customers' customers, keep in mind our customer, our direct customers are engine manufacturers and sellers, but we're working with our customers' customers OEMs. We develop prototypes to educate them with all the new concepts and use cases that possibly can happen, so we see variations.

So we expect that companion would be one of the key categories but not unique. And one of the things that have changed over the past less than two years that it is very important for companion market, there is a wireless technology that has been become available commercially on the cell phones that allow you to wirelessly connect and transmit video from your cell phone to the device; it was not possible before.

That eliminating cables greatly facilitates the use case, so it can enhance the growth potential of the companion market.

Yes, and I've got one and very pleased with it by the way. And, but I just know that I think that as you -- and you actually used the word embedded for the first time in a long time today. I think that I guess the question I would ask is that this company, we have been together a long time and for a while -- I was an early believer and I think that my shareholders are too. I guess the question -- and this might be hard to answer but it may be easy. For a long time we knew we had the technology and we had a lot of challenges to overcome, at this point it appears as if we have the product or the technology people are going want to use for the future in a myriad of different ways.

So do you feel when you all sit down in a meeting that it's not a matter of if but when at this point? Because I know a lot of times maybe that wasn't an easy answer to give. But do you think that we're on track to really be a mainline entertainment -- or whatever it's used for -- mobile devices or whatever, or are we past the critical mass I guess is what I am saying is that being accepted you think?

There are several questions, so let me try to break them down. So let's look at before and after? By the way the demand has always been for what we had, the difference between let's say 2010, 2011 and today is that in 2010, 2011 we learned that Corning and Osram are not able to deliver green lasers but we did have demand, we did have interest, major customers who were interested in pulling this type of technology into products.

And today that barrier currently has been eliminated. So now we are not limited by something that could be produced, number one.

The second big change that happened over the past four years, three years is that mobility ecosystem completely fundamentally reinvented itself. What it means is that in 2010, 2011 there was one cell phone that was able to put out video.

So basically no matter how great a Pico Projection device you could generate only one cell phone allowed you to connect and stream it. Today all cell phones allow you to do this, not only all cell phones allow you to do this, most of them allow you to do this wirelessly.

So the fundamental change is, and look what happened to the market. Digital media is being consumed in huge amounts by consumers, so that further facilitates. So there's two major differences.

Number one, there is no perceived bottleneck of supply in terms of green laser which we had stumbled upon last time. Number two, the ecosystem has matured significantly to facilitate adoption of these type of technologies.

So we are obviously excited. And as you can imagine we are not going to market on our own, we are going with the group of partners and everything based on what we have seen to date we are happy with the progress and hopefully everyone will see their products.

Agree 100% about mobility. I think that's going to be the key to future and as an anecdote my son is 24 and he doesn't need a TV. I mean it's just amazing what they do. And so as we go forward I think the standalone is going to be a big device but integrated it within embedded too will be important to us and you feel good about that still happening over time?

There are a bunch of cases that we are excited about. There is a lot of -- recently at major shows like CES you see a lot of developments in the connected home, connected car and it's all about well how do you get information in a seamless form to project it on wall or ceiling or whatever.

So there are really cool use cases we see some of our customers are working on. At this point it's very difficult for us, we simply can't comment on their ...

Sure, sure.

-- launches of products because it would not be appropriate.

Thanks for your time, and appreciate the good job.

Thank you. And our next question comes from Kevin Dede from Rodman & Renshaw. Please go ahead.

I'm curious about a couple of things. You mentioned the 40% gross margin targeted. I was wondering if you might sort of fill out the financial model? And sort of where you think your revenues need to be in order to drive that target financial market to breakeven?

It's a great question Kevin. You have most of the information to do modeling because you know what our operating expenses approximately are. Steve just mentioned we don't expect to have significant increases. Knowing what our target gross margins are, so you can quickly estimate what that is.

So with that in mind Alex and the opportunity to work on this Fortune 500 account, can you talk to the headcount requirements? Honestly, it seems to me that you're going to have to hire more in order to meet the demand there, given that your operating expenses are flat.

I am just kind of wondering where your headcount is now and where you think it might be towards the end of the year.

We're about 70 plus or minus and we expect some incremental increases over the next 12 months, but nothing significant.

And backlog you mentioned was at $15 million at the end of the quarter. Do you have a number, comparable number for the end of the March quarter?

One second, we'll get that for you.

And how do you see that -- I know that you were expecting sort of an irregular flow of royalty. How do you see product orders flowing? Would that also be sort of an irregular fashion going forward, given --

So as you know we have a backlog of approximately $15 million, but Steve mentioned our goal is to fulfill this backlog through 2015 into 2016, so that's what we're focusing on right now, converting this backlog into revenue.

The March backlog was $18.7 million.

Thank you. And our next question comes from Tom Szulist, Private Investor. Please go ahead.

My question is, let's say this product is very successful. Sony is talking about using PS3s and PS4s, and all a sudden it becomes a high demand. How fast can you ramp?

What if all of a sudden you received a million unit order? Would that be possible for you? What kind of lead time would you need in order to be able to produce volumes of that magnitude?

It's a good question Tom. We have today, based on what we see over the next near future, we have pretty good hold on what we need to produce to enable Sony and others.

So we feel comfortable with this. If, for example, something happens and the demand increases by 2x or 3x, I think we'll be able to address it relatively quickly. If it's order of magnitude we would need more time so the lead times would change depending on whether it's -- we need to go 2x or we need to go 10x.

But we feel comfortable at this point in time we could address everything that's coming our way in the next 12 months.

To try to understand the scalability, if let's say it was a 10x order and you say it would take more time. What would that time comprise, would it be six months, would it be a year?

It would be less. So it would be less than a year.

But probably six months for that kind of a ramp to be able to hit you and satisfy it?

Obviously it varies, but six months is kind of a good place holder.

Looking forward, let's say there is a generation two, which has a brighter lumen factor. How different is it for you in your operations compared to what you're doing currently?

Can you repeat the question? Did you say if there is a higher brightness solution, how does it impact us?

Yes, in other words, how different is it for you and your ramp? Is it significantly different or is it just minor adjustments in your process?

Minor adjustments in our process--

We're seeing what we're seeing here in the United States. Are you seeing some plans for other markets around the world, China, India, the Japan and those markets? So can you comment if there is --

Answer is yes.

Tom Szulist Just an exciting time, I mean we've been following what you're doing for a long time and I appreciate your perseverance and tenacity to stick with it, so congratulations and thank you for your efforts.

Thank you. The credit goes to the MicroVision team here. There is a lot of -- we're small but we're very-very effective.

Great. Thank you Alex and the team.

Well, thanks.

Thank you. We have no further questions at this time. I would now turn the call over to Alex Tokman for closing remarks.

Let me just close it by saying we are very pleased with the results achieved by MicroVision team in the second quarter and we believe the momentum that generated during the quarter will carry us forward to what we expect to be a very promising year for the company, for the shareholders, for everyone involved.

The second quarterresulted in breakthrough revenue and significant improvement in key financial metrics.

We showed tangible progress on other goals we stated for the year including; first, facilitating adoption of our technology by customers of our customers; second, increased production output; and third, continued high quality support of our key strategic partner Sony.

We currently believe that solutions with MicroVision's PicoP technology are poised to enable true differentiated end user experiences that are not attainable from other pico projection devices.

As the new products built by others are reviewed by the press and by consumers, most of the exciting features that are raved in these reviews in fact are enabled by our technology.

And what about the ecosystem you may wonder. The content providers are stepping up to meet the growing consumer demand of watching videos on handsets.

Comcast, Verizon, HBO are just few of the names that are leading the charge to join Netflix and YouTube to deliver high quality streaming video entertainment to your mobile devices. According to the Arris 2015 Consumer Entertainment Index, almost 60% of respondents said that they watch TV away from home on mobile devices.

We are excited about the prospects in front of us and we expect to achieve significant year-over-year growth this year. And hopefully the achievements from this quarter are a strong indicator of that potential.

We are focused on making our customers successful by providing them with high quality components and assisting them with their go-to-market efforts, both commercially and technically. At the same time, we are looking to the future by continuing to innovate and identifying where to take our technology next.

What is truly exciting to us and me personally is that we created PicoP technology to be a platform solution, a solution that can scale to a variety of new high growth application areas beyond basic pico projection.

With this, now, on behalf of Steve and Dawn I would like to thank you again for joining us this morning and we will conclude this call.

Thank you. And thank you ladies and gentlemen. This concludes today's conference. Thank you for participating.