MicroVision Inc (MVIS) 2016 Q3 法說會逐字稿

Welcome to the Q3 2016 MicroVision Inc. Financial and Operating Results Conference Call. My name is Richard, and I'll be your operator for today's call. (Operator Instructions) Please note that this conference is being recorded.

I will now turn the call over to Ms. Dawn Goetter, Director of Marketing Communications. Ms. Goetter, you may begin.

Thank you. I'd like to welcome everyone to MicroVision's Third 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 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 the 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. Thank you for joining us for a discussion of MicroVision's third quarter 2016 business results. Today, we have lots of exciting news to discuss with you. First, strong third quarter and nine months financial results. Second, we're announcing a new line of laser beam scanning or you're going to hear it as LBS engines we will be launching starting early next year. And third, new strategic contracts we signed recently with world-leading technology companies, one for Advanced Driver Assistance Systems, also known as ADAS, used in autonomous vehicles; and the other for augmented reality applications.

Let's begin with the Q3 financial recap. We expect to hit the upper half of our revenue guidance and close 2016 somewhere around 60% higher than the year prior. Steve will provide more details and granularity.

Year-over-year revenue for the third quarter is up 67%, and year-to-date is up to -- by 61%. After a solid revenue growth in 2016, we plan to add to it in 2017 by launching our own line of LBS engines.

Let me tell you more about it. As we help Sony to build a funnel of OEM customers for their engine over the past year, we identified customer demand for features and markets that Sony solution and road map do not address to date. Specifically, gesture recognition, an ability to interact with projected information, and applications requiring a smaller engine size. So we acted quickly and began investing in 2016 into the development of new LBS engines to address the specific market needs.

First, a small form factor high-definition display engine for applications where size and flexibility of product design are important. Second, an interactive touch engine that integrates display and 3D sensing functions to allow the user to interact with projected images. And finally, the third, a midrange LiDAR, which stands for light -- essentially LiDAR is laser or light radar, 3D-sensing-only engine for industrial products and robotics.

As of today, we are working with a new high-volume manufacturing partner to produce these engines for us, one who makes well-known products for major electronics brands.

We expect to launch these new engines as follows. Our first engine has been already designed, and samples are being built this month to be available to customers for sampling next month. This engine is targeted for production in early Q2 of 2017. Our second engine features interactive touch. Samples of this product should be available in Q2 2017 and should be ready for production in Q3 of 2017. Samples of third engine for mid-range LiDAR application should be available in the second half of 2017, and it should be ready for production in the first half of 2018. We are creating demonstrators based on our three new offerings and plan to showcase them at CES in January.

We expect the revenue from the new engines to significantly add to the revenue from component sales and the royalties from our existing customers. In fact, we anticipate that sales of new engines could contribute between $30 million to $60 million within the first 12 to 18 months following the availability of the first mass production units.

The potential benefits of offering LBS engines are compelling. First, these engines will target new attractive consumer and industrial market segments, such as interactive pico projection and 3D sensing LiDAR that are sought out by OEMs. Second, we make it easy for those OEMs who want to make products with MicroVision's technology without the long lead times and investments related to making their own engines. Third, we are creating a near-term new revenue source from multiple customers in addition to Sony and Sharp. Fourth and final benefit is that we are heavily leveraging MicroVision's LBS platform among these engines by sharing prior and current investments into extensive long-lead components such as MEMS and ASICS.

So you could see there are many benefits from doing this and we are excited about this. Of course, we will continue to support our existing customers and vertically integrated OEMs and ODMs who may prefer to license our technology and build engines with MicroVision's components.

With that, let me now discuss status with Sony's customers. We believe Sony is very committed to this market, and we continue to assist their sales and marketing team in adding OEM customers to their sales funnel.

One of Sony's product business units recently launched a refresh of the original MPCL1 product, which has been a best-selling pico projector on Amazon. Other new smart projector products we previously discussed, such as ViewSmart and Celluon's PicoBit are appearing in the market. However, several new OEM products using Sony's engine that were expected to enter the market in 2016 have been slower to launch than originally expected, including a major regional brand we discussed last quarter.

These product launch delays by OEMs relate to a variety of product readiness and business issues between Sony and its customers. We're disappointed, obviously, that it has taken them longer than anticipated, but we remain enthusiastic about our near-term growth prospects from the Sony engine. And we view Sony, obviously, as an important customer and very close partner.

As we look to expand our customer relationships and extend our technology to applications beyond pico projection, we're very excited to announce that we have signed two agreements in the autonomous vehicle and augmented reality spaces with world-leading technology companies. Under one of these contracts, we will deliver a proof-of-concept prototype of our 3D sensing solution for Advanced Driver Assistance Systems for autonomous vehicle. Under the second contract, we will deliver a proof-of-concept prototype display for augmented reality application. The combined volume of these contracts is nearly $1 million, and both are expected to be completed in 2017. But, this is important but, the real revenue opportunity lies in the potential to be designed into the future products in two markets that have the opportunity for very high growth.

If the deliverables of the first phases are successful, these relationships could result in additional agreements that could lead to more near-term revenue and to our technology being in these customers' products. We are looking forward to moving ahead with the plans and programs I just outlined for you, and we believe the actions we're taking will create significant value for all of you.

Before moving on to the financial results, I also want to address some misinformation and opinions circulating out there. Questions have been raised very recently and incorrect assertions were made over what products we're targeting for embedded projectors, our IP protection and laser safety of our devices or technology.

Let me clarify those points. Regarding our strategy for what products are being targeted for engines with our technology, an embedded smartphone is certainly high on that list, no questions about it. The Qualper phone out of China that we have discussed on previous calls is a perfect example of how a display engine with our technology can be integrated into a smartphone. No one has a smartphone with no MicroVision laser projection technology available today. We believe ours is the only technology with the product that is available for sale at this time.

That leads us to the second point of IP protection for LBS systems, and whether companies that have made announcements of engines and other products using LBS technology are infringing on our patents. At this time, we are not aware of any products being sold using LBS engines other than those licensed by MicroVision. Various announcements made by companies of their intention to sell products or showing concept devices and other promotional activities are not activities that trigger IP discussions.

To date, two major consumer electronic companies, Sony and Sharp, have publicly recognized the benefit of our technology and the value and validity of our IP by entering into licensing agreements with us. We're confident in our IP position for LBS systems, and we'll vigorously enforce our rights if and when it becomes necessary.

A final point that we've been getting a lot of inquiries about is laser safety. In particular, on selling products with Sony engine in Europe. Using laser safety to combat LBS technology is an old tactic from our competition. The standards are very clear, and we believe selling products with Sony LBS engine in Europe is permissible under current standards as long as the guidelines on marketing to children are observed and the products are properly labeled. We hope that this removes any confusion that may have been created by recent misinformation, and hopefully, it removes any ambiguity that exists today.

Now let me hand it over to Steve for financial update.

Thank you, Alex. We had some nice results in the quarter. We increased revenue 67% over Q3 of last year, and in the third quarter, we recognized $3.6 million of product revenue, which set a new high for the company. Third quarter total revenue was $4 million compared to -- comprised of $3.6 million of product revenue, $331,000 of royalty revenue and $52,000 of contract revenue. Last quarter, revenue was $4.2 million, consisting of $3.5 million in product revenue and $600,000 of royalty revenue. So in Q3, we recognized about $100,000 more product revenue, the royalty revenue decreased about $300,000. This decrease in royalty revenue is due to fewer display engines being shipped by Sony versus the prior quarter.

The decrease in royalty revenue also had an impact on gross margin. Our gross margin in Q3 was 30%, down eight points from last quarter. Of the 8% decrease in gross -- of the 8% decrease in gross margin, 4% was due to the royalty revenue reduction, 3% was due to scrap and scrap materials at a secondary supplier we were developing, and 1% was due to a shift in product mix. We shipped more MEMS and fewer ASICS in the quarter, and ASICS today have a higher margin than MEMS. I do want to make it clear that the actual cost for MicroVision to produce the MEMS decreased on a per-unit basis in Q3 from Q2, and we are pleased that we continue to make strides to reduce the cost on the product that generates the vast majority of our revenue today.

Backlog at the end of the quarter was $2.3 million, $1.4 million related to Sony product orders and $931,000 related to the development agreements that Alex mentioned. On the backlog, the lower royalty revenue indicates that there was less sell-through of Sony display engines in the quarter. The result is that Sony has adequate inventory of MicroVision MEMS today, and therefore, they have not yet placed a follow-on order for MEMS. While a follow-on order can happen at any time, we think that it is unlikely we'll see a follow-on order in the fourth quarter. This means that in Q4, we will ship all remaining Sony orders. Given lead times for product orders, if we don't see a new Sony order for MEMS in the fourth quarter, there will likely be very little Sony product revenue in the first quarter. This could result in revenue in Q1 2017 as low as a few hundred thousand. However, due to the launch of the engine business and other potential customer interest, we believe that Q1 revenue will be much higher.

We expect to end the year with total revenue of $14.5 million to $15 million, which represents the upper half of the revenue guidance we gave for this year. It's still too early for us to give specific revenue guidance for 2017, but we do want to communicate that we believe 2017 will be a year of significant revenue growth. As Alex mentioned earlier, MicroVision anticipates that demand for our engines could result in revenues ranging from $30 million to $60 million in the 12 to 18 months following the availability of the first production units. We should also mention that we believe our gross margin on the new LBS business should initially be in the low to mid-20% range, with our goal to improve it over time. We still expect to target 40% on the MEMS and royalty portion of the business.

Moving on to other Q3 results. Q3 operating expenses were $5.3 million compared to $5.1 million in operating expenses in Q2 and $4.1 million in Q3 of last year. The increase is mostly due to an increase in purchased engineering services and increases in salary and benefits costs.

Headcount has increased in 2016, that's for the three quarters of the year. Headcount has increased by a total of 11 people, six in operations, two in engineering and three in SG&A, two of whom were replacements for people who left the company in the later part of 2015.

Our third quarter 2016 net loss was $4.1 million or $0.08 per share compared to a loss of $3.5 million or $0.07 per share last quarter. The net loss in Q3 of 2015 was $3.5 million or $0.07 per share.

Cash used in operations was $3.8 million. Q2 cash used in operations was $4.1 million. The decrease in cash usage this quarter is primarily due to less cash used in working capital during the quarter with most of the change in accounts receivable. In Q3 of 2015, cash used in operations was $3.6 million.

And finally, cash and equivalents on hand on September 30 were $5.8 million.

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

(Operator Instructions) And our first question on the line comes from Mr. Mike Latimore from Northland Securities.

This is Nick Altmann on for Mike. Thanks for taking my questions here. Can you guys just talk a little bit more about the visibility that you have for 2017? And then I guess specifically, do you guys think the LBS engines will be the majority of revenue in 2017?

These are good questions. What we discussed today, we're comfortable with. Basically, we believe we're going to have two primary sources of revenue, the one is coming from Sony, the other one is coming from the new line of LBS engines.

As Steve said, we're not giving 2017 guidance yet because we're going to finish 2016, but we expect the next year to be a year of significant growth, and we expect -- when we communicate in early 2017 what we're going to do specifically for '17, we may provide additional information.

Okay. Thanks. And then you guys talked about you've hired -- or headcount has gone up by 11 year-to-date. Can we expect an increase in headcount going forward to support the new initiatives that you guys laid out?

Yes, we see a few more headcount mostly as we finish building out the sales -- the sales team for the engine business. And maybe, one or two more in operations, but not too much more. We're pretty much getting near the end.

Majority of increases that Steve described that were included in the 11 are applied to the new LBS engine line since the beginning of the year.

Okay. Thanks. And then I guess last question. Do you guys have production contracts in place to support the revenue guidance? Or will that follow the completion of the services contract?

We basically -- we have -- remember, we mentioned we enlisted -- we engaged with high-volume manufacturing partner who is today delivering millions of products to consumer electronic brands, and we are right now in engine development phases with them. So we expect to have capacity to support the $30 million to $60 million growth we expect in the first 12 to 18 months of introduction.

Our next question on the line comes from Mr. Kevin Dede from Rodman. Please go ahead.

Thanks for all the detail. Obviously, lots going on. So I was hoping we might be able to just kind of review it again to make sure I have it straight. The two big contracts, right, that you feel will -- could end up driving that $30 million to $60 million, is -- are -- am I right in understanding that those are the two development contracts that you announced with this release? Or --

Yes. Kevin, we announced several things. We announced that we're creating and launching new line of engines that we expect to contribute to our top line between $30 million to $60 million from the first 12 to 18 months of introduction, that's number one. Second, we also announced today that we signed two strategic development agreements with leading technology companies, one for augmented reality and the other one is for autonomous vehicles applications.

When we're talking about the significant revenue growth in 2017, majority of that revenue we expect to come from new engines and Sony. However, we expect the contracts that we're signing -- we have signed and we hope to be continued for the next phases to contribute some. But majority of the revenue will come from products, our products being engines and components we sell to our customers, Sony and Sharp.

Okay, that helps, Alex. So on -- just to review the timing again, the three engines are the smaller form factor, the interactive engine and the LiDAR engine. Now just to make sure I understand the timing correctly, you'll need all three of those out and then take the next 12 to 18 months beyond the release of the third one, right, which you're not really thinking happens until the end of 2017. Is that a fair way to look at it?

No, Kevin. When we say 12 to 18 months since first mass production, we're talking about since the first engine comes to market, which right now, we're targeting Q2, early Q2.

Okay. All right. So that --

So the time line starts -- time line for 12 to 18 months starts from the launch of the first engine, not the all three engine have to be in the market.

Okay. All right. Well, I apologize, Alex, I didn't -- that didn't saturate through very clearly.

It's okay.

So I'm glad we got that clarified. Congrats on -- congrats on all of that. But I guess what I'm still a little shaky is that the time from the signing of the contract for the development of the AR and the ADAS deals and the time that you expect those products to get to market still seems pretty long. So can you help me understand what's going on through that deal?

Absolutely, absolutely. So we enter into Phase 1s with each one of these companies. Our goal is to deliver the proof-of-concept prototypes that they need to test drive, evaluate, and ensure that we can meet their requirements. If that phase is successful, this could result into extended development efforts with a much higher NREs that would lead to commercialization and us being inside their products.

We're in the first phase. First phases will be delivered next year. They're going to evaluate, they're going to come back to us and tell us, yay or nay. And if it's yay, it could be much more significant development contract leading to commercialization of our technology inside their products past 2017. It's not going to be 2017 product revenue, but it could be 2017 NRE revenue.

Okay, that's fair. Then the development of the other three engines, right, the small form factor, the LiDAR one and the -- apologies, the interactive -- yes, the interactive engine. Now those three, you'll get to market on your own without --

Correct. On our own with high-volume manufacturing partner who has done it for other major brands. So we feel comfortable that we have someone who can produce high-volume engines with high-quality consistent with our and customers' expectations.

Okay. So that -- is that agreement in place?

This agreement is being negotiated the specific details, but the work already has begun. The joint development work has begun already.

Right, okay. And I understand the smaller form factor is very, very close. Do you think we'll be able to see that in product at CES?

We're going to show three demonstration products. One is based on the small form factor engine. The other one is based on this interactive touch solution. And finally, we're going to show another demonstrator showcasing the midrange LiDAR capabilities. And so actually, yes, we intend to display this and show it to customers and discuss opportunities at CES.

Okay. So the midrange LiDAR is not what you'd use in ADAS? Or you use a longer range?

ADAS requires longer range, but the base -- the fundamental system is the same, it requires optimization. So the ADAS application requires something to go to further out ranges and it requires some enhancements that need to be made. The midrange LiDAR system is very close to the interactive pico projection system, and therefore, we can use the same platform and create two separate applications, one for consumers to help interactivity, the other one is for ranging and sensing objects if you need autonomous operation for robots and industrial vehicles or other devices.

Okay. Do you have a good feeling for the actual product in the use of the three LBS engines that you're developing, i.e., number one, the smaller form factor? I'm just thinking about what they'll look like in the end market?

Remember, remember, remember why we're doing it. We're doing it because for the past year and a half, we've been helping Sony's sales and marketing team create demand for Sony's engine. That's where we spend most of our efforts. What we realized throughout this effort that we have to dismiss a group of customers who needed it either smaller engine or wanted interactivity or industrial customers who wanted just 3D sensing-only feature and did not want a display.

So we -- obviously, we compiled this information. We still -- actually, we're helping Sony to add customers to their funnel, but we also realized there's a huge unmet opportunity, a list of customers who want other things than what Sony can offer today, so that's why we decided to introduce these products.

Good. Okay. Last question for me before I hop back in the queue. Can you just discuss some of the details behind the Lincoln Park deal and how you have access to that capital and how we should expect to see it flow?

Yes, the Lincoln Park deal allows us to sell 150,000 shares every other day to them at a discount to the market price. And it's whenever we choose to do it, so it's -- at our choice. And the stock price needs to be above $1 for us to be able to do that. And the amount that Lincoln Park has committed to buy at this point is an additional $15 million.

Right. So that's 15 million in what gross capital for you? Is that the way to look -- not 15 million shares?

That's right, $15 million worth.

Yes. Okay. So what happens or how do you think about it should the stock price drop below $1, Steve?

Sorry, you cut out there, Kevin. Sorry.

I'm sorry, I'm sorry. Last -- this is really the last question for me. How will you negotiate operations and cash use should your stock price fall below $1?

Well, we're always continuing evaluating what our options are for raising funds. And if it becomes necessary for us to raise funds, we're confident we'll be able to find them. And so that's what we can say about that.

Our next question on the line comes from Mr. [Henry James] from State of Michigan. Please go ahead.

The first thing that I would like to talk about is sort of this -- sort of the ongoing products. Some of the products, I guess, that were expected to be released but have been delayed. I know we've had a refresh of one product, and I was wondering if you could just speak to the potential for sort of improvement in the base technology of these new products that we see? So I'm particularly interested in increases in lumens. Is that something that you think is still something we should look for? And if you could maybe just speak to your sort of confidence in the ability of the technology to sort of increase sort of lumens per watt.

Absolutely, Kevin -- Henry, one of the things -- so two questions, I think. The product launch delays you mentioned and then what do we do to increase the brightness. Let's start with this. There is no specific pattern. Some of these delays has been pushed from Q4 into first half of the customers. Sony's customers, they are developing products based on Sony's engine. There's no specific pattern and there's typically three types of conditions happened causing these delays. And again, one is OEM who develops the product in the middle of cycle determines that they want to add additional features that have nothing to do with Sony's display engine. And they decided to take a little extra time to add these features and therefore, that time line gets pushed. That's one condition we see.

The second condition is, there's a group of customers who are prominent headliners of Sony's current funnel. They decide to add a feature that impacts Sony's engine. So they come to Sony and say, "Hey, listen, we want to add, let's say, tabletop projection feature, can you do it?" Sony said, "Yes, we can do it, but it's going to take us this time to add this." So that caused -- that's a cause of another delay. And obviously, the third cause is commercial negotiations between Sony and their customers on the specific terms, delivery, commercial terms, etc.

So we see these three reasons as the primary causes for some of the shift that we described. But we're still enthusiastic and see some of the major brands that's part of Sony's funnel that intend to launch their products in the first half of 2017, but they delayed their launches for the three reasons I described. So that's one.

The second question was I think what -- can we improve brightness. The answer is absolutely. We already actually have done this. And remember, we provided all the necessary tools for Sony to increase the brightness on their engine. We are not responsible nor are we controlling the timing of introduction of when the brighter engine becomes available, but we know that we provided all the necessary tools for them to be successful and introduce engines with higher brightness.

Our road map, as you can imagine, also contains the same feature. Our goal is to continue to improve brightness while reducing the power and reducing the size. And we're pretty confident we can achieve all three and do it better than most.

Okay. So with respect to your engine that you're going to release, the small form factor engine, I think it says high-definition display. Are we -- is that going to be consistent with the current high definition? Are we moving to, perhaps, 1080p in terms of high definition?

It would be consistent with the current display.

Okay, okay. And so this would just be perhaps a smaller form factor than what is currently available from Sony?

Correct. Remember, the first engine was the small form factor. So we encounter that the group of customers that we had to dismiss over the past year and a half is because their products require something a little bit smaller than what Sony solution offers today. So we are going after this group of customers with this first engine.

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

We had a strong third quarter results, and I'm very pleased to have detailed our plans for new line of LBS engines planned for 2017 and our progress on strategic development contracts for advanced applications that collectively will contribute to near-term, midterm and longer-term MicroVision's growth. For the near term, we have shown a strong and predictable execution with greater than 60% year-over-year revenue growth for the quarter and year-to-date. In fact, we're expecting to hit the upper half of our revenue guidance for '16. And moreover, we expect significant revenue growth in 2017, which would amount to a third year in a row of significant revenue growth for the company. For the near to midterm, we plan to introduce a diverse lineup of LBS engines in 2017 starting in early Q2 to empower products where interacting with the information is just as important as viewing it. And we expect revenue between $30 million to $60 million within the first 12 to 18 months of engine's commercial availability.

For the longer term, we're advancing our laser beam scanning technology to meet the requirements of emerging applications, such as autonomous vehicles and augmented reality. We have development underway with two world-leading technology companies for these applications, and we are optimistic that our deliverables will delight them and offer additional opportunities.

So predictable execution today, us hitting the upper half of the guidance, combined with compelling near to midterm growth strategy around the new engine lines added to the existing Sony and Sharp revenue, combined with important strategic wins for high-growth opportunities in augmented reality and autonomous vehicle spaces, hopefully give you comfort that we are on our way.

Before I wrap -- before we wrap this call, I, on behalf of all of my MicroVision teammates, want to thank you for your continued support and your patience, and want you to know that this small team in Redmond is working diligently on your behalf to make all our dreams a reality. 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.