MicroVision Inc (MVIS) 2017 Q2 法說會逐字稿

Welcome to the Second Quarter 2017 MicroVision, Inc. Financial and Operating Results Conference Call. My name is Sylvia, and I will 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 Dawn Goetter. Dawn, you may begin.

Thank you, Sylvia. I'd like to welcome everyone to MicroVision's Second Quarter 2017 Financial and Operating Results Conference Call. In addition to me, 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 of prospective customers; projections of future operations and financial results; product development, applications and benefits; availability and supply of products and key components; market opportunities and growth in demand; plans to manage cash used in operations; as well as statements containing words like believes, goals, paths, expects, plans, 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 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.

And now I'd 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 second quarter 2017 business results.

We've made significant progress in the past 3 months executing our engine plans while creating a new home-run opportunity that could significantly improve our growth trajectory over the next 3 years.

First, in April, we signed a $24 million contract with a top technology company for a high-resolution display application, which included a $10 million upfront payment that we received in the second quarter. Second, we delivered initial commercial units of the small form factor display engine to Ragentek, a Chinese smartphone maker, at the end of June and began production shipments in July. Third, we just announced the first shipment of development kit of the interactive display engine to select customers for application development and evaluation. The timing of the shipment is consistent with the schedule we discussed on the last call.

Let's start with the $24 million contract we signed in April. As we discussed on the last earnings call, the April development agreement with a leading technology company is to develop a high-resolution laser beam scanning display and future production of MicroVision-specific components for the display system. The contract includes 2 elements: $14 million in development fees for work that is expected to span 21 months, and a $10 million upfront payment that is expected to be applied to future component sales.

On the development portion, once the development portion is completed, we expect to be providing a new generation MEMS, ASICS and firmware for the high-resolution display system. This could add significant product revenue for us starting in 2019. The technology company plans to produce a high-resolution display engine to be incorporated inside its end product. The development work against this contract began in the second quarter, and we recognized some revenue already. We also received the $10 million upfront payment, as I mentioned earlier, as well as additional $4 million in payments for the early milestones.

We're very excited about this opportunity because it encompasses 3 critical to success factors. First, it's a major technology company with a clear go-to-market plan. Second, the product they are targeting addresses a large market opportunity. And finally, the product would be based on a differentiated platform technology from us.

Let's segue to the engine programs update next, starting with the small form factor display engine. We made an initial shipment of this ultra-miniature display engine to Ragentek at the end of the second quarter, and we followed with the first production shipments in July. Ragentek, who makes smartphones for China, India, Brazil and other countries, placed a $6.7 million order with us in March for a customized display engine to be embedded inside its VOGA flagship smartphone. The VOGA V smartphone was revealed by Ragentek on June 28 at Mobile World Congress Asia and received positive reaction from Chinese media outlets for its sleek look and innovative features. During second quarter, we made progress with several other customers on opportunities around this display engine and anticipate new orders in the next few months.

Our engine portfolio includes 2 additional scanning engines: one for the interactive display and the other for 3D LiDAR sensing applications. And speaking about the interactive display engine, we were very pleased to announce yesterday that the first samples of the interactive display engine were shipped to select customers as planned. These initial development kit samples can be used by our prospective customers to evaluate the technology but, more importantly, to start developing software applications for their specific products. Think of the possibilities. This engine is expected to offer features and functionality that could be invaluable to the emerging Internet of Things, IoT, smart home connected products. The benefits include one-stop shop display and sensing solution, multiple 3D sensing modes, multi-surface operation capability and ease of use. It's a lot. Let me explain each.

Starting with the integrated display and sensing solution. What it means is that 3D time of flight sensing and projection functions are combined in a single integrated package. This is an important attribute for OEMs and ODMs as it provides one-stop shop solution for their products.

Another attractive feature is the ability to operate in the multiple 3D sensing modes. What this means is that our 3D point cloud can be converted into touch events, air gesture events and other events to suit multiple interactive applications. This could be a valued feature for the end user as they are not locked into a tabletop mode only, as exhibited by most devices today.

The third unique benefit is what we term a multi-surface display and 3D sensing capability, where both projected display and 3D time of flight sensor can fully function when directed at a tabletop, at a wall, at a ceiling without any additional calibration or focus adjustment. Again, this could be a valuable feature for the end user who wants to move their smart home connected devices from room to room.

The final benefit of this system is its ease of use. Translation, it works on any surface, flat, curved, wet, dry, et cetera. When foreign objects enter the field of view, they won?t interrupt the operation of the system, as is with other solutions today. Imagine a scenario where someone is preparing a dinner in the kitchen. They use their IoT smart device to display a recipe, and they want to virtually page through the summary. If the tabletop surface upon which the image is being projected is uneven or it's wet or contains food crumbs, our time of flight system fully functions and responds to user's gestures, which is not true for most other technologies. The interactive display engine is unique because it outputs both visible images and 3D point cloud, necessary to enable the interactive display application. There is an additional step required here developing software that interprets the 3D point cloud generated by our interactive engine to recognize touch, gesture and other specific events for products. We're targeting customers who are enthusiastic about such products and who have the skills to do such development work.

Finally, a brief update on the third engine. We continue the development of the LiDAR 3D sensing-only engine, with the goal of having initial samples in the first half of next year.

Overall, we continue to believe that the demand for these engines could result in revenue ranging from $30 million to $60 million over 12 to 18 months, starting Q3 of this year.

Let's now move to NRE activities other than the April contract. In the past 3 months, we continued to work on 2 additional development contracts. One is for augmented reality and the other is for automated driver assistance system or ADAS. We expect to complete work on both of these development contracts this year.

At this point, I will pass the baton to Steve to review financials.

Thank you, Alex. A couple of highlights for the quarter. We increased revenue 83% over Q1, led by the revenue we recognized on the development agreement we signed in April. Additionally, we improved our cash position through the receipt of $14 million related to the April development agreement and through $6.8 million in financing activities.

Now for some details. Second quarter revenue was $1.5 million, comprised of $1.1 million of contract revenue and $346,000 of royalty revenue. $761,000 of the contract revenue is related to the April development agreement. The balance of the contract revenue is comprised of other development contracts and orders for prototypes and samples. Our total revenue of $1.5 million is $661,000 or 83% higher than the $792,000 in revenue we recorded in Q1, mostly due to the revenue on the April development agreement.

Also in the quarter, we made the initial shipment of our small form factor display engine. The acceptance period had not expired by June 30, and so we did not recognize revenue on those units.

In Q2 of last year, we had $4.2 million of revenue, with most of that coming from product shipments.

Gross profit for the quarter was $508,000, up from $254,000 last quarter. The increase is mostly due to the April development agreement. In Q2 of last year, we had gross profit of $1.6 million. That gross profit came primarily from product revenue and royalties.

The gross margin percentage for Q2 was 35% and compares to 32% last quarter and 38% in Q2 of last year.

Q2 operating expenses were $6 million, which was nearly flat compared to $5.9 million in Q1. Q2 operating expenses were $947,000 higher than the operating expenses in Q2 of last year, mainly due to spending on ASICS and product design work and increases in labor and benefits cost.

Our second quarter 2017 net loss was $5.5 million or $0.08 per share and compares to $5.6 million or $0.08 per share in Q1. The net loss in Q2 of 2016 was $3.5 million or $0.07 per share.

Now for operating cash flow. This quarter, the receipt of the $10 million upfront payment and $4 million of milestone payments on the April development agreement resulted in positive cash flow from operating activities. So cash provided by operating activities was $4.6 million and compares to cash usage of $6.7 million in Q1. In Q2 of 2016, we had operating cash usage of $4.1 million.

Let me discuss the accounting for the April development agreement. Recall that the agreement provides for $14 million in development fees, paid after certain milestones are met, and it provides for a $10 million upfront payment. During the quarter, we made the determination of the revenue accounting for the agreement. For the $14 million in development fees, we expect to recognize them under the percentage of completion method over the life of the contract. And, in fact, we did recognize $761,000 as contract revenue in Q2. Note that while we received $4 million in milestone payments, we only recognized $761,000 as revenue in Q2. The balance of about $3.2 million is recorded on the balance sheet as a current liability and is included in the line title Billings on Uncompleted Contracts. The $10 million upfront payment is considered contingent revenue and is reflected on the balance sheet as an Other Current Liability. The $10 million upfront payment will stay on the balance sheet as an Other Current Liability until future events determine its ultimate disposition. We expect that it will ultimately be a prepayment for products that the customer could order from us in the future.

So cash and cash equivalents on hand at June 30 were $17.7 million, and this includes, obviously, the $10 million upfront payment and $6.8 million from financing activities, most of that from an ATM that we used in the quarter.

Backlog at the end of the quarter was $21.5 million, $6.7 million related to our first engine order and $14.8 million for contract revenue, most of which is related to that April development agreement.

Q2 noncash compensation was $393,000, and depreciation and amortization was $116,000.

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

(Operator Instructions) And our first question comes from Glenn Mattson from Ladenburg Thalmann.

So, first, curious about -- Alex, I believe you mentioned that in 2Q, you had several other customers for the first engine that were highly interested, and then you anticipated new orders in the next few months. A, can you talk about what gives you so much confidence that you expect orders? And, b, maybe just kind of some background about how these customers kind of came about. Was it from seeing the first phone that's out there? Or was it other activity that you've been doing?

Glenn, these are primarily the customers we started working with early this year. We -- they received -- they're one of the first recipients of our samples of the small display engine, and they've been developing products throughout the year. So we feel like they're getting closer to the point where they complete the development cycle and ready to discuss commercial terms with them. So that's what gives us -- gives me and gives us confidence that in the next few months, we should see some additional orders. In terms of applications, they're targeting anything that -- from embedded to accessories and the recent launch by Ragentek in China. I believe once they start shipping it to their customers and end users, we start using that device as a reference to show others what could be done. So we're excited about this. This engine has been working very well. The phone received very, very positive feedback from not just the media but, most importantly, prospective users. So we feel confident about it.

Great. And then on the Ragentek, you said, I think, in the past that you expect most of that $6.7 million order to ship this year. Is that still -- what do you...

That's still our expectation, yes.

Great. On the interactive display, congratulations again on getting the product out on time, can you give us a sense for how long the process is between the release you had yesterday until designing and contracts could be awarded? And that just kind of what is your time frame -- what your thought process is on time frame there.

It's so customer -- customer-dependent. It depends -- it's really driven by 2 factors: when they make decision to go forward with it; and second, how long will it take them to get the product out to market. Because there's such a huge discrepancy -- there's so much variance around this. Let us get the samples out, let us get some initial feedback, and we provide more color potentially on the next call. At this point in time, we just ship the initial samples. It's so premature to comment because we don't have a lot of information.

Okay. That's fair. And then on the $24 million, curious -- it kind of just came into play recently and already received the first milestone payment. Can you talk about what was achieved so early in the process? I guess, it bodes well for the long-term confidence in actually getting the -- completing the program and getting the product to market.

Right, right. I think the thing to keep in mind is that the payments are not necessarily tied to the value of the progress that we made, and so you have to keep that in mind. But we're pleased with where we are on the contract.

And the rest of the $3.2 million, would that come in as kind of ratably over the course of the year? Is that how you see that?

Well, yes, we're using the percentage of completion method. So as we progress along on the contract, parts of that $3.2 million, it's on the balance sheet, which starts to be recognized as revenue. Yes.

Our following question comes from Henry James from State of Michigan.

The first thing I'd like to talk about a little bit is the customer, Ragentek. And I don't know if there's any additional information you can give us about sort of their marketing plan, whether they plan to try to market the product beyond China. I know you mentioned that they generally sell phones in India, Brazil and other countries as well. And perhaps if there's any information on what carriers they might be working with.

Absolutely. Henry, so, first of all, Ragentek is a midsize smartphone maker that has quite a presence according to what we know in China, Brazil and some other countries. They've been known as -- to have top 5, top 10 selling smartphones in those markets. One of the things we like about them, first, and this is why we -- this project has been an accelerated path for us, they've done a significant study of demographics they want to target. They did a very compelling and competitive analysis. How would they price this device? What would it offer? How would they charge premium for the features that they embedded inside? And because of this, we've seen -- we wish that some of the U.S. companies and other large companies done this level of marketing preparation as they've done. So that was very impressive. In terms of their initial rollout, based on what we know, they start -- they made very small initial shipments in July, and they start putting more phones in the market in August, primarily in China, to start with. And basically, what we know, it's through 2 markets. One is going to be through mobile operator. We can't name it because Ragentek will have to disclose it on their own. And the other one through their version of Amazon. So once the product hits these -- China through several channels, they have expansion plans. They have not articulated to us specifics about this, but what we know is that the markets we described previously are their target markets first.

So I know they placed this initial order of $6.7 million, but as they roll out to other markets and, I guess, really, just depending on the success of the product itself, this could perhaps be much more significant than that order?

We hope so. We hope so. We're excited about this. We just need to allow them some time in the second half of this year to get these phones in the hands of consumers first before they can comment on any reorder opportunity. But at the beginning, the start has been exceptional. The -- what they've done at the Mobile World Congress in Shanghai, there was a major rollout. They had a lot of media coverage. And the participation and, most importantly, again, people who touched this phone and saw it, they were impressed. We'll see. Hopefully, all translates in a lot of sales for them and for us.

Okay. And then I just wanted to ask about the relationship with STMicroelectronics, how -- generally, how is that going. And I know when you first announced that joint marketing, but it also spoke to perhaps joint product road map down the road. And I was just wondering, how is that going?

It's continuing very well. On 3 fronts. So first, ST is helping us to open a lot of doors into places where it's difficult for us to get on our own, and we go as a team, that's number one. Number two, they continue to manufacture key components for our engines today. And number three, we are actually developing a road map together for next breakthrough solutions, which we can't comment at this time.

The following question comes from Kevin Dede from Rodman & Renshaw Capital Group.

You talked about 2 development deals that you won in the second quarter outside of the $24 million one. I was wondering if you could just expand on those a little bit. I think part of the question in my mind is, not only specifically what you're working on, but it seems to me that one of the biggest problems you're faced with is just how to allocate all the work that you have now, because it seems to be falling pretty hard. I know it's a good problem to have, but I was just hoping you could give us some comfort that you're going to be able to meet all the deadlines that you're kind of faced with now.

No, no, it is a good question, Kevin. Listen, this is a good problem to have. We're growing. We're excited. We've got some new fresh faces here, some really strong technical people who, helping us to get us to the next level. Fundamentally, about 80% of our resources today are focused on what we are trying to extract in the next 2 years. So this will be the display, interactive display engine, and, obviously, some of the investment into this 3D sensing only for industrial applications. But we also invest in small percentage into looking further out how do we extend our industrial applications engine to the automotive to provide solution when people would need in the next 5 years. To be part of the product proposition, in 2021, we need to put small investment at this point in time because we want to be part of consideration for design ins at the early stages. So again, 80%, 85% is on the revenue that we expect to extract over the next 2 years, and another 15% of investment is applied to longer-term opportunities. That's how we're spending it today.

Okay. Could you peel the onion back maybe a little bit on the development work that you're doing outside the $24 million big deal that you won in April? And -- yes.

So the 2 NRE contracts that we had, in addition to the April one, are on track. We really want to close in this year sooner rather than later, and we're looking forward to see what's going to come out of this. Once we deliver our portion, the customer has -- needs some time to evaluate, determine what's next. And we're optimistic that something may come up as well.

Okay. Can you give us a little feeling for how you evaluate to accept a project?

There's no specific criteria. We basically -- both contracts were the feasibility studies. So we developed proof-of-concept system. They go, test drive it. They combine it with their thesis. They look at the overall system, how it performs. And once they've done it, then they do their own internal planning, like all the major companies do. And if this program gets the next level of funding, we hope to be part of it. If it doesn't, we won't, but we don't know at this time.

Okay, fair enough. Can you talk a little bit about the software development requirement for the 3D sensing? I mean, you made a clear point that you need a strong partner there. And I'm wondering, if you're to do development work with 1 particular strong partner, how are you able to secure enough for that IP to incorporate it with your own engine design and perhaps market it to other potential customers?

This is actually a very important question. The interactive display engine is different in some ways from just the display engine, because not only it outputs the image data, that you can actually see visible images, but also, it provides 3D point cloud. 3D point cloud is not a gesture, it's basically a collection of the data that our system collects that needs then to be converted to features that are specific to various products. The reason we decided to move this portion out of the product, because we try to reduce the cost and the power consumption of what we provide, because there will be redundancy. If we're at that piece on our engine side, the engine will be prohibitively high cost and consume too much power for mobile application. So what we decided, let's do this because most of the devices that we are trying to target or we're targeting today already have media processor, already have processing power, why not put it there? But because of this, you now need to develop this interface that takes our 3D point cloud data and converts it to application-specific software. What we decided to do first, we're focusing on vital few people who have the enthusiasm about these products and have the skills, but we also are trying to develop with a third party, a third-party solution that could be provided later to people who don't want to invest into their own software application development. So we [pursue and evolve], starting with the few key customers first. And once we have more samples available, we're going to start targeting and developing third-party solutions that will be done by somebody else but will be provided in conjunction with our engine to OEMs and ODMs.

Okay. I appreciate that. Now, Steve, you mentioned one development deal that you weren't able to recognize revenue on. And I kind of -- I apologize, it was -- just couldn't keep up with you. Could you try to go over that a little bit?

Yes, sorry for the speed. It was simply that we did make some shipments of product to Ragentek on our new engine, but we didn't recognize revenue on that. That's the revenue we didn't recognize. So the shipments went out, but the acceptance period hadn't expired. And so we don't recognize revenue until the acceptance periods expired on product shipments.

Okay. Do you suppose that, that happened nearer term or how should we think about that?

Well, it's just a few days.

Given that's a (inaudible) in the market.

It's just a few days for them to have acceptance, but we ship right near the end of the quarter. So...

Okay, okay, okay. Got it. Yes, got it, got it, got it. Okay. I appreciate and understand the range of guidance that you reiterated regarding your engine development plan. I was wondering if you could potentially make it a little more granular vis-?-vis the current quarter and the fourth quarter just so we have a better understanding on what the P&L look like nearer term.

Well, Kevin, at this point, we're going to stick with what we stated publicly. But you can take the -- we just got $6.7 million contract -- purchase order we expect to deliver in the second half. That's our current plans. Plus, Steve mentioned that we started recognizing against this large April development contract, so expect revenue coming from this source. Plus, we're working on new purchase orders, and we're still receiving royalty from Sony. So combination of all those 4 -- all those factors, we believe the second half is going to be much bigger than the first half on this.

Okay, fair enough. Any feedback from Sharp on the RoBo phone or Sony sell-through?

No updates from Sharp. They've been entangled -- I mean, Foxconn acquired them, as you know, or invested heavily, and they're doing -- reengineering every processes. They're redoing all the decisions. So once all the dust settles, we'll understand more what's going on with Sharp and Foxconn. But on the Sony's question, we're ready to support them any time they ask us. We -- today, we're still recognizing -- receiving royalty from them as they sell their engines. We don't expect any new orders in any foreseeable future, but we never counted on this as a part of our growth for this year. So if something comes up, it will be great upside. But if it doesn't, we're okay.

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

Look, we accomplished a lot in the past 3 months. First, we completed several milestones on the $24 million contract with a top technology company. We began recognizing revenue and received $14 million in payments during last quarter. We believe that the product, this top technology company, is developing could become a home run in 3 years.

Second, I was fortunate to be invited by Ragentek to attend their unveiling of their very sexy VOGA smartphone, equipped with our PicoP technology. [It was priced was to see firsthand the positive reactions from the media covering this event and, more importantly, the positive reactions from the prospective users who saw this elegant phone in action. We hope that their product becomes a huge success in China first, in other countries later. And I would encourage others to follow Ragentek suite.

Finally, we announced the first shipment of development kits of the interactive display engine to select customers to start applications through open process. The timing is consistent with the schedule we shared with you during the last call. This offering is unique in many ways because it merges the display and 3D time of flight sensing functions in 1 package and unleashes multiple applications and use cases for the emerging market opportunities in the IoT space, Internet of Things, starting with the smart home connected devices.

We're very excited about MicroVision's future. We're executing on all our current priorities, and we developed a strategic road map that addresses emerging market opportunities such as IoT and autonomous vehicles, which offer a tremendous, longer-term growth potential for our laser scanning technology.

At this point in time, on behalf of Steve, Dawn, I would like to thank you for your continued support, and 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.