MicroVision Inc (MVIS) 2016 Q2 法說會逐字稿

Welcome to the Q2 2016 MicroVision Inc. Financial and Operating Results Call. My name is Richard and I'll be your operator for today's call.

At this time, all participants are in a listen-only mode. Later, we will conduct the question-and-answer session. Please note that this conference is being recorded.

I'll now turn the call over to Dawn Goetter, Director of Marketing Communications. You may begin.

Thank you. I'd like to welcome everyone to MicroVision's second quarter 2016 financial and operating 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 financial numbers presented on the call today by Steve are included in our press release and in an 8-K filed today; both are available from the investor page of our website.

The agenda for today's call will be as follows -- Alex will report on the operation 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, and thank you for joining us for the discussion of MicroVision's second quarter 2016 business results. We're pleased to report to you very positive second quarter results. Year-over-year revenue is up, combined product and royalty growth margin is up, and we've made forward strides in creating new, beyond-projection opportunities in 3D sensing and augmented reality. The results are in line with our 2016 stated goals -- first to significantly grow revenue between 40% and 70% while improving margin; and second, to invest in new emerging applications.

Let's examine the status on each. First, let's talk growth. Our year-over-year product and royalty revenue for the quarter was up 65%. Gross margin improved significantly as well to 38% in the second quarter. We consider this an important accomplishment. We expect that most of the revenue in 2016 will come from component sales and royalties to our two commercial customers. Our goal is to complete the delivery of the $5.3 million backlog this year, and we continue to actively assist Sony Sales and Marketing team in adding to and moving customers through the sales funnel,its sales funnel.

The funnel of opportunities includes a number of consumer electronic OEMs, including several established consumer electronic brands. We helped Sony to close an important deal in the second quarter. And based on the information available to us today, we believe that this major regional brand will likely launch its product later this year.

We're excited about the near-term growth prospects in the pico projection market, and we view it as an important base platform for MicroVision. At the same time, we understand that the long-term company's success is rooted in building on that base platform with continuous innovation and creation of diversified solutions that can enable additional emerging markets, which brings me to our second goal, investing into new emerging opportunities for 2017 and beyond.

What are they? The first area of interest for us is what we call interactive pico projection. Why is it at the top of our list? Simply put, people want and ask for it, and we believe we can enable it better than anyone else. Let me explain what we are doing.

We have explored interactivity with projected images for the past few years as the next logical step for pico projection. Early versions of this capability used a stylus or other reflective material. Now, we're developing solutions that enable a natural user interface with touch that mimics a familiar interaction with a touch screen on a smartphone or tablet, and gesture and movement similar to what you can do with products like Microsoft Kinect.

Of course, with our planned solution, the touch is virtual; no actual contact with the image or surface is required. Adding natural interactivity opens up a range of new applications beyond just watching projected content. From swiping or air-touching the images in slide shows to zooming in and out on detailed information to playing immersive games, where your movements are part of the action. These are just some of many capabilities PicoP scanning technology can enable in a device that fits in a pocket and can be used wherever you may be.

As we introduced this capability to OEMs, we have received positive feedback and requests to add natural interactivity to our pico projection technology, to increase the ease of use of the final application and improve the value proposition of products incorporating our technology. We believe our technology has inherent benefits to enable interactive mobile applications. Why? Because our light scanning system can both project and capture information from a single, compact engine that paints surfaces one pixel at a time. By adding a common infrared source and detector combination and new algorithms to our patented RGB display solution, a single engine could be created that enables both mobile projection and interactivity. We believe no other technology can do this as simply or as elegantly as ours; not DLP, not LCOS, not LCD.

Last year, we defined such a system on paper. We ran simulations and analyses, and demonstrated to ourselves and others that it would work as envisioned. This year, we started creating a detailed design and began investing into development of the long-lead, proprietary MicroVision components to unlock this new feature in engines created by our partners or us. We expect engines with this combined capability to be available for sampling starting in the second half of 2017.

Another important growth area for us is a standalone 3D sensing or LiDAR. For people who are new to this terminology, LiDAR is a sensing method that uses light in a form of a pulsed laser to measure ranges, surfaces, and volumes. Think of it as a detection system that works on the principle of radar but uses light from a laser as a source.

Many top consumer electronic companies are defining new products for 2018 and beyond that use LiDAR-like technologies. This field contains a broad range of applications falling into three categories -- first, near-field 3D sensing, this typically relates to gesture recognition; second, midfield 3D sensing, which typically encompasses 3D measurement, machine vision, and robot guidance; and third, far-field 3D sensing, which includes driver assistance systems, commonly known as ADAS, and autonomous vehicle applications. We believe our baseline capability in this area is superior to others. Important attributes such as ability to create a low-cost, portable solution; ability to work with multiple sensing methods; ability to offer high accuracy while maintaining low-persistence and lag are unique to our technology.

We believe the emergence of near-field 3D sensing applications, including the interactivity combined with pico projection, presents MicroVision with an opportunity for growth in the next couple of years. We also believe that mid- and far-field 3D sensing applications, such as ADAS and autonomous vehicles, present long-term growth opportunities for us.

We've garnered interest from some major consumer electronic OEMs based on what we have demonstrated with paper models of our superior capabilities in this area. In order to move to the next stage, we plan to create working prototypes, which could be validated and verified by our prospective partners for products starting as early as late 2017 and beyond. The investments we're making today in 3D sensing technology are necessary precursors for tapping into the growth opportunity we expect to see from this emerging market.

Finally, let's talk about augmented reality. Augmented reality has been the holy grail of all applications for at least two decades. Terminator, Minority Report, and Iron Man teased us for years about the possibilities. And finally today, this application could become a reality in a couple of years because major players such as Google, Microsoft and Facebook recognize the importance of putting all critical pieces in place to deliver a compelling experience for consumers. These critical pieces include availability of the right applications; availability of see-through content; availability of quality display technology; availability of quality sensing technology; seamless, easy-to-use user interface; robust industrial design, which means it has to be light and compact; interactivity with other devices. All of these pieces are essential to create a compelling solution.

MicroVision's scanning technology enables at least one of these important pieces, a display solution. Our scanning system could directly and safely paint images onto the retina while creating large field-of-view, high-definition, see-through images with extremely low latency and persistence. All of which are crucial attributes for such applications. We're in discussions with OEMs regarding our solution as a display candidate for AR applications to address growth opportunities in 2018 and beyond.

So, to recap second quarter, we delivered strong financial results this quarter based on our core pico projection application. We believe there are additional opportunities for growth in both AR and 3D sensing, and we plan to continue to develop our technology to take advantage of these opportunities.

Now, I will turn over to Steve for update on second quarter financials.

Thank you, Alex. Q2 was another good quarter for MicroVision, with our most significant accomplishment being the increase of gross margin to 38%. Second quarter revenue was $4.2 million, comprised of $3.5 million of product revenue and $609,000 of royalty revenue. This is up about 12% from Q1's revenue of $3.7 million.

Q2 of 2015 revenue was $4 million, which included $1.5 million of contract revenue. So if you compare our product and royalty revenue this quarter to the same period a year ago, product and royalty revenue is up about 65%. Backlog at the end of the quarter was $5.3 million, primarily related to Sony product orders. And we expect to fulfill these orders in 2016.

We are very pleased to report continued improvement in gross margin for the quarter. Both total gross margin and royalty gross margin were 38%, a significant improvement over last quarter's 30% gross margin. The improvement stems mostly from better manufacturing yields and lower costs for materials. Margin was also helped by the increase in royalty revenue. In Q2 2015, gross margin on product and royalty revenue was 17%.

Let's look at product margin alone; so just product margin excluding royalty. Product margin was 27% in the quarter, and that compares to 18% last quarter and 5% in Q2 of last year. As I mentioned earlier, the improvement is from better yields and lower costs from materials. The 38% gross margin is very close to our stated goal of 40% and we will continue to drive improvement in gross margin. However, we do want to remind everyone that there can be fluctuations.

Q2 operating expenses were $5.1 million, compared to $4.7 million in operating expenses in Q1. The $400,000 increase was driven by increased material purchases and increases in compensation and benefits. First half operating expenses were $9.7 million, and that compares to the first half of 2015 operating expenses of $7.8 million. The increase of $1.9 million comes from the following sources -- $300,000 is related to headcount additions in our operations team; $400,000 is related to non-cash compensation and patent annuities; and the most significant portion was from R&D, which is up about $2 million.

In the first half of 2015, around $500,000 of engineering effort was charged to a cost of contract revenue for a development contract with Sony. And that lowered the amount of R&D-related operating expenses. Also, $400,000 is due to an increase in materials and services related to new product and feature development and about $300,000 is due to rate increases and compensation and benefits, and two headcount additions.

Our second quarter 2016 net loss was $3.5 million or $0.07 per share in comparison to $3.6 million or $0.07 per share last quarter. The net loss in Q2 of 2015 was $2.8 million or $0.06 per share.

Cash used in operations was $4.1 million. Q1 cash used in operations was $3 million. The increase in cash used this quarter is primarily due to more of our shipments occurring toward the end of the quarter. As a result, we did not receive cash for those shipments before quarter end; thus, accounts receivable increased $1.1 million over Q1. In Q2 of 2015, cash used in operations was $3.6 million. Cash and equivalents on hand on June 30 were $7.2 million.

That concludes the financial results. We will now open the call for questions.

Thank you. We will now begin the question-and-answer session. (Operator Instructions)

Our first question on the line comes from Mr. Andrew Uerkwitz from Oppenheimer & Co. Please go ahead.

Hey, thanks, gentlemen, for taking my question. I actually have two here. The first one, Alex, if you could talk about an AR opportunity. Could you talk a little about the differentiation between your technology and what's currently being used?

Sure, Andrew. We believe we have -- we believe we have a display solution that offers merits that LCOS, DLP and other technologies do not possess. Specifically, one of the requirements for AR products is to have an ergonomic design with large field of view. And this is where a lot of technologies are struggling because if you want to get high-definition image with large field of view, the optical solution grows significantly and becomes a very bulky device. Because our element, essential element is the MEMS 1 millimeter silicon mirror, we don't need all this intermediate optics to basically redirect the image onto the retina. What this allows us to do, it allows us to create larger field-of-view images with a compact solution. So that's kind of the key advantage, including the high-def resolution.

Great, thank you. I appreciate that. And secondly, kind of more business related. You have a couple of big opportunities in front of you here. How do you manage the two, where to invest, when to invest, with who, and so forth?

Great question. So we have basically -- if you look at the applications that we described, so we have pico projection, then we have pico projection combined with 3D sensing, now we have 3D sensing standalone, we also have AR, and we also have HUD, which we didn't discuss yet.

Each one of these have different time to market opportunities based on when we see the products rolled out by major players. Again, we're going to be -- our goal is to become part of their product portfolios. And based on what we see, it looks like pico projection is the near-term opportunity. Then we see 3D sensing or near-field 3D sensing opportunities coming to market, combined with either pico projection or with other use cases.

Then we see augmented reality and head-up displays in this specific order. And it's all driven by the product development time lines for these specific areas.

Great. Thank you, guys. Appreciate it.

Thank you. Our next question on the line comes from Mr. Mike Latimore from Northland Capital. Please go ahead.

Great, thanks. Thanks a lot. I guess first, on this -- I think, Alex, you said it was a regional brand. Can you elaborate a little bit more on that when you add with Sony, what region, what type of product might they come out with, that sort of thing?

Mike, at this point, there is a label of major regional brand because to separate it from some of the global brands, this is a well-known, very large brand, but may not necessarily be recognized by North American population. So this is why we label it the way it is.

Got it, okay. And just in terms of -- when do you think you might see another order out of Sony, let's say? Would this type of win drive enough volume for another order? Or would Sony just view from their own kind of internal use for their own pico projector drive, another order this year? Do you think you'll see another order this year out of Sony?

You know, so far what's been proven is we have a great relationship and are working closely with Sony on many topics, business and technology topics, including discussions on follow on orders. We are optimistic that we will see something before the end of the year. And we look forward to giving an update in the future. What -- in addition, I can tell you that -- so as Steve mentioned, we expect to fulfill the backlog, the existing backlog this year, help Sony to cultivate their funnel to increase participation of more people, which we can help to bring in, as well as to help and usher, at times, when needed, to get people through the design inside.

Okay, that makes sense. Then on the operating expense, is the kind of $5.1 million a quarter, is that a good number to use going forward here?

Well, we see that they are going to -- operating expense are going to rise and fall over time, so there will be some fluctuations as I indicated. There's a fair amount of materials and some engineering services that we're purchasing right now. So that'll have some ebbs and flows.

Got it. And what was the stock-based comp in the quarter?

$374,000.

Okay. And it looks like royalty has been about 15% of revenue in kind of each quarter of this year. Is that kind of like good mix to think about going forward?

Yeah, you know, as we said before, there are time lags and fluctuations in that. And so, I guess I'd still say - I'd encourage you to be cautious about drawing hard conclusions about what the royalty rate is as a percentage of product revenue.

Got it. And I guess, as it relates to the augmented reality opportunity, would that come independent of your Sony relationship? Or would Sony also be an opportunity for that?

We -- Mike, we developing and we basically pusheing envelope on different features of our technology independent of the partners that we will be engaging in the future. So right now, we're developing itt for everybody. And even when Sony chooses to pursue it, we will update you.

Okay, thanks a lot.

Thank you. Our next question on the line comes from Mike Latimore from Rodman. Please go ahead.

Good morning, Alex, Dawn, and Steve. I wanted to thank you, Alex, for taking the time to lay out the product development and time line. I thought that was very helpful. So thanks for doing that. I just wanted to go back a little bit to Mike's question just on the order flow from Sony and your response, I guess, is to deliver to the backlog that you have. I'm just wondering -- I'm wondering how you see the way they think about it. I mean is that what you've relayed to us, pretty much, best as you can, you just expect them to continue to order from, or continue to run with the backlog that you have. Even though, I mean, what seems to me is you delivered a pretty sizable amount of that backlog this June quarter? So I'm just wondering if you could talk about a little bit more, more in-depth and maybe relate that to the overall guidance that you'd given us for the year.

Sure. Let me start with guidance. So we feel good about hitting the guidance. And we obviously want to do better, but we feel comfortable hitting the guidance at this point in time. A lot of it is dependent on delivering the existing backlog to Sony.

So far, as you can see, we've been steadily increasing volume and improving margin through improving operational efficiencies and basically better pricing. We expect to continue to provide our contribution to Sony's success. And at the same time, when we talk about purchase orders, purchase orders are function of basically products getting to the market, and Sony's customers start issuing purchase orders to them, which allows them to issue new orders to us.

As you can see, we're cultivating this funnel, but it's not totally predictable. We have ability, we and Sony team, we have ability to convince people to join the race, to invest into new product. But then it's all up to them how quickly they bring their products to market. And it varies from company to company for many different reasons that have nothing to do with any of the technological -- it's just business, normal business issues, normal friction between sales and marketing teams, and engineering teams, in different organizations to optimize the product configurations and get the right product to market.

So we are optimistic that the funnel is real and it is being developed. We are frustrated that we don't see more products in the market, but we believe more products to the market are coming. And we're working with Sony tightly on the next orders.

Okay, Alex. Thanks. I was curious to see if you've had any feedback on the Sharp RoBoHoN launch?

Yes. Sharp began selling RoBoHoN at the end of May. So it's been only two months, right, since they launched the product, and then a lot of promotion and media attention. We fulfilled the initial orders in Q1. Follow-on orders have been received and fulfillment is ongoing. And we have some still backlog in Q2.

Sharp appears to be marketing this product as a showcase of its innovative spirit. And for us -- it's worked for us because people need to start recognizing that what we produce is not just enabling the standalone pocketable pico projectors. There are many use cases for our technology, including mobile devices, mobile smart devices, that are not necessarily rectangular in shape. And we believe that Sharp's introduction of this product now allows people to see what they can do within their product roadmaps, and that's what's exciting to us.

So robotics, as you know, continues to be a rising phenomenon, specifically in Asia. And we look forward to see how market reacts to this innovative product.

Okay.

I don't know if you've seen some of the press clips, but Terry Gou, who is the CEO of Foxconn, is pretty high on this product.

Okay, so you -- I guess what you're saying is that you delivered the initial orders and you've already seen follow-on orders?

Yeah, we have a backlog of Sharp orders. It's, I think, 150,000 is what's in backlog.

Well, congrats on that. Any view to sort of a sales rate? Or do you think it's pretty much sort of initial fulfillment that satisfy that initial demand?

So, right now, we feel like this like an initial fulfillment. Obviously, we don't know what about their sales rate. This is something that Sharp needs to update their investors and customers. But, again, what we like about this specific proposition is that Sharp really invested into marketing and awareness, which is the key for this new category of product. And independent of what volume they will sell, we don't know. But what we do know is that people now start noticing this and start saying, hey, listen, if they can do this, why can't we do something similar to this that may have different use case? So that's the exciting piece.

Right. Okay. The pico projector combined with a cell phone in China, have you seen that launch? And any kind of feedback you can give us on that?

Since this is not our direct customer, it's Sony's direct customer, we don't have all that information. What we know is that this product has been introduced in China a month, or a month and a half, or two months ago. And we actually purchased it, and we were pretty impressed with the quality of the product. It actually looks solid. It has beautiful image quality. They incorporated -- they created actual software application to enable it using soft buttons rather than hard buttons. They've done a beautiful job. We hope that they are successful. And we hope that they will empower others to see that it can be done and replicated.

Yes, so, Alex, do you have any insight as sort of distribution that you think that product's getting in China? Is it in the Android operating system?

It's in the Android operating system. And China ecosystem is pretty complex and diverse, so we don't have the details for which channels they will be distributing it. What we know is they initially introduced it, starting with their website, and then as far as we know, [obviously], their goal could be engage with mobile operators, we don't know, but that would be the natural next step.

Right. Okay. Then the -- on the interactivity that -- I mean obviously you'll talk the September quarter, but what would you recommend that we look for just to sort of watch that aspect of your development from, I guess, from a press perspective? Where do you think -- I mean, clearly, there is that basic sort of table top stuff, but what do you think we will see in initial product rollout and development, given you suspect that we'd have something in the market, maybe, within 12 months or so; you said mid-2017, if I remember correctly.

Our goal -- what I said was our goal is to start simple in the market with this feature in the second half of 2017. And the reason is because, again, remember, there is a big step between having something proved conceptually and people believing that it's a good feature, and actually implementing it into real hardware and software component that you can actually provide to others. So we -- one of the reasons you see -- Steve mentioned, we slightly increased in the R&D development is because actually investing in the development, detail design and development of these long-lead proprietary components.

.

Okay. So fair enough to say that investment spikes up, but there'll still be some time before you think we'll see, I guess, sort of tangible proof of your progress?

Well, tangible proof can be validated by robot demonstrators and could come earlier than the actual product hits the market because you need these, because -- typically the way the cycle works, people don't wait until you have productized version of your system or your component to introduce their product. You actually engage them earlier with advanced demonstrators, so they start evaluating, providing you with a feedback and optimizing this specific application. So we anticipate to provide samples, demo samples and prototype samples, before second half of 2017. That's how we get to market, by getting feedback, before we actually finalize the solution and package it.

Okay, then, do you suspect that you might have a similar type of marketing splash at CES early next year that you did this year?

Listen, we're so much focused right now on delivering on our 2016 goals, hitting guidance, creating some exciting opportunities to discuss with you this year; CES 2017 is far away. We'll update as we get -- we obviously at this point in time, we're not going to comment about 2017, but what we will do, we'll provide you updates, hopefully exciting updates, for 2016.

Okay. Last question is for Steve. Now, it goes back to what Mike asked about and that's the $5.0 million expense rate. And you said that you'd expect it to sort of swell and shrink, I guess, a little here and there. But you made the point that you had two new hires, and that seems to me that that's going to add a consistent increase. And I'm wondering if you can give us sort of a baseline.

Yeah, yeah that was two hires in engineering over last year. Those hires actually happened in the last half of last year. So, in terms of operating expenses that you might view as more permanent or less fluctuating, like materials go up and down. We've added -- since December 31, we've added five people -- I'm sorry, six people; five of them in Operations, and one of them in IT. And of those six, two of them were replacements for headcount that we had previously. So, we're trying to keep headcount down. We think the investment in operations is paying off. We like the effect we're seeing on the margin and some of the things we're getting out of that. Those folks are helping us position us for some good results in the future.

So the R&D investment, then, Steve, that's not -- I mean to continue with that isn't necessarily a headcount requirement?

Right, right. Like I said, there's a little bit of headcount, but what we're seeing quite a bit of is materials and engineering services, fabricating parts, prototyping things, those are the things that we're doing now that are driving expense.

And then also remember there was about $0.5 million of engineering effort that was charged to cost of contract. So when you look back at the first half of last year, operating expenses are kind of on the low side because a fair amount of -- $500,000 worth of engineering resources were working on a Sony contract, and those costs ended up being classified to cost of goods sold.

Okay. Well, thank you very much, gentlemen, for all the additional color. Much appreciated.

Yes. You're welcome.

Okay.

Thank you. Our last question comes from Mr. [Tom Szulist], private investor. Please go ahead.

Great quarter. I appreciate all your efforts. Most of my questions were answered by the previous caller, but I did want to ask about, number one, the next-generation product that's coming out. Can you talk at all about lumens and size? Is it the same size as the existing? Is there additional need for heat sinks or anything that would increase the size?

So, the next generation -- so we have multi-generational platform that, as time progresses, spins out certain features that getting adopted by our customers or, in some cases, could be us. And so brightness is one of the key attributes that we're enhancing through. And, remember, we spoke last time. We believe that products with higher brightness will hit market as soon as this year. And we believe that because we developed certain enhancement features that will be incorporated by one of our partners, you know who that is, and we believe that the products with superior brightness from what exists today will be available as early as this year. It doesn't mean that we stop with whatever the brightness that they will launch their product. It means that it's just a step in the evolution of increasing brightness, pushing brightness to higher limits. The same refers to our other features we will look to optimize, including the size over time, power consumption over time, and the resolution.

Great. Rampability. You had a slight ramp from the prior quarter. It sounds like dividend is running very smooth. What is your rampability and what is your production limits that you see?

We feel comfortable that we put in place capacity and capability to enable our customers at this time, and we feel that, if there's an upside, we'll be able to handle it.

Excellent. When it comes to virtual reality, it appears as though what you're saying is that wearing a pair of glasses is probably going to be the system that makes sense because of the delivery of the signal to the eye. Does this mean that finally the technology that you started with is finally miniaturized and the market is ready for realizing what this technology can do? Are we finally at that point?

The inherent mechanism for delivering the image to the retina have not changed with our technology. What changed, we evolved and matured our technology by increasing resolution, reducing size, making it manufacturable. That is what has changed over time since we started investing in this area. And, again, remember, pico projection platform, from very beginning, from very beginning, intended to be a platform. We just happen to choose pico projection as the first market to pursue because it has less barriers than others because it depended on less ecosystem factors than others.

With augmented reality, the exciting part about augmented reality, we believe, right now it's the right time to engage that because if you look at what's available, not a single company has introduced a product that has shown success and there's a reason to it. Because no one has put all the right pieces together. Even the existing major brands that actually talk about some of the things that they're going to introduce this year, these are not products, these are glorified development kits that are needed to actually understand what the final product should have.

So we're excited. We're excited about this, we're excited about 3D sensing, and it's a natural build that we do starting with pico projection incorporating and extending into other areas to truly showcase the platform capability of what we have developed. Because our power is the fact that we can actually address multiple markets and not limited to a single specific market.

So when you look at some of the technology that some of these virtual reality companies are talking about using when they have prototypes and you look at that compared to the technology that you have, you're extremely comfortable with the platform that yours is able to deliver now that the market is developing and other technologies are in the limelight. Your technology is not out of the running is that you feel confident with? Is that correct?

We feel confident, and we've proven to ourselves and to others that through simulations and analysis that what we can do exceeds the capabilities of the current technologies. What we need to do next, as I mentioned earlier, there's so much paper you can have. In order to get into the next step with these players, you actually start creating something. And that's what we're investing this year. And, again, this is why you see -- some moderate increases in the OpEx is that we're staffing now the programs. Not only that would bring us revenue for the next two years, but we're also thinking about three years and beyond because if you want to be part of the proposition three years from now, you have to invest now.

Okay, great. Thanks for all your efforts, Alex. Appreciate it.

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

Again, thank you for joining us this morning. We're very pleased with the strong progress made in the second quarter. We followed up a breakthrough 2015 with a very strong second quarter. Product and royalty revenue is up over 65% year-over-year for the quarter. Gross margin reached 38% in the quarter. We're investing into future opportunities while being prudent with our cash management. We helped Sony to close a deal with a large regional brand, who we understand plans to launch its pico projection product later this year. We are advanced in our laser beam scanning technology platform to meet the requirements of emerging applications in 3D sensing and augmented reality. Our aim is to clearly showcase, as I just mentioned, the value of MicroVision's PicoP scanning technology and intellectual property for multiple markets and applications.

We are proud of these accomplishments but not satisfied with the status quo. We believe that the investments we're making today will fuel MicroVision's growth not just in the near term but for years to come.

With this, we'll conclude this call. And on behalf of Dawn and Steve, again, thank you for joining us this morning.

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