Kopin Corporation
Q4 2007 Earnings Call Transcript

Published: 28 Mar 2008

[Operator:]

Greetings ladies and gentlemen, good day and welcome to Kopin Corporation’s fourth quarter and full year 2007 financial results conference call. Today’s call is being recorded for telephone and Internet replay. You may access and archive version of the call on Kopin’s website at www.Kopin.com. With us today from the company are Chairman and Chief Executive Officer Dr. John C. C. Fan and Chief Financial Officer, Mr. Richard Sneider. For opening remarks I would now like to turn the call over to Mr. Sneider. Please go ahead sir.

[Richard A. Sneider:]

Good afternoon everyone and thank you for joining us. I’ll begin today’s call by taking you through our Q4 and full year financial results and providing our revenue outlook for 2008. John will then discuss the operational highlights from our CyberDisplay and III-V businesses and we will review our business strategy. Then, we’ll be happy to take your questions. Before we begin let me remind everyone that during today’s call taking place on Thursday, March 27, 2008 we will be making forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. These statements are based on the company’s current expectations, projects, beliefs and estimates and are subject to a number of risks and uncertainties. Potential risks include but are not limited to demand for our CyberDisplay and III-V product, market conditions, foreign currency exchange rate, the availability of raw materials and other factors described in our most recent annual report on Form 10K, most recently quarterly report on Form 10Q and other documents on file with the Securities & Exchange Commission. The company undertakes no obligation to update these forward-looking statements made during today’s call. Turning to our financial results, total revenue for the fourth quarter 2007 increased 62% year-over-year to $28.9 million driven by sales increases of nearly $8 million in our CyberDisplay product line and $3 million in our III-V business. For the full year revenues increased approximately 38% to a record $98.1 million exceeding our guidance of $90 to $95 million that we provided on our Q3 preliminary results conference call. On a segment bases Kopin and US and Kowon our South Korean subsidiary account for $92.6 and $5.5 million of 2007 revenue respectively as compared to $65 and $6 million for 2006. In terms of our product line in Q4 07 CyberDisplay revenue was $16.7 million up approximately 88% year-over-year while III-V revenue increased approximately 36% to $12.2 million. For the year CyberDisplay revenue increased 100% to $54.6 million while III-V remained essentially flat at $43.6 million. Looking at CyberDisplay by product type, our sales of display products for consumer electronic applications increased more than $20 million to $29.3 million for the full year 2007. Sales for military applications increased $4.5 million to $15.8 million and sales for eyewear applications improved $3 million to $6.3 million. Our 10% customers for the year were Skywork Solutions at approximately 26% and SANYO Electric Company at 16%. Please note that we also sell to Advanced Wireless Semiconductor Company or AWSC which is a fab used by Skywork. If we assumed everything we sold to AWSC went to Skywork our sales to Skywork would have been 31% of total revenue. I also mentioned SANYO Electric, SANYO performs assembly for Fujii, Olympus and Kodak so our technical sale is to SANYO but our display is ending up in cameras branded by these other companies. The gross margin for Q4 07 was approximately 20% down as compared to 25.2% in the fourth quarter 2006. For the full year gross margin is approximately 16.5% down from 25.2% in 2006. The decrease in gross margin primarily resulted from normal declines in ASP for certain products and the significant change in sales mix resulting from the rapid increase of our share of digital still camera view finder market and this is something John will address later on during the call. Research & development expenses were $3.3 million or 11.4% of revenue in the fourth quarter. This compares with $2.1 million or approximately 12% of revenue in Q4 2006. For the year R&D expense was 11.9% of total revenue compared with 14.4% for 2006. The decrease in R&D expense as a percentage of revenue reflects levering an increase in R&D expense over a higher R&D revenue amount. We expect R&D expense to be approximately 8 to 12% of revenue in 2008. The percent decline again reflects basically a flat expense over a higher revenue estimate. Selling, general and administrative expense in Q4 2007 were $4.3 million or 14.9% of revenue compared with $7.6 million or 42.3% of revenue in the fourth quarter of 2006. For the year SG&A expenses were approximately $18 million or 18.3% of revenue versus $19.3 million or 27.2% of revenue for the full year 2006. SG&A for 2007 and 2006 included $1.8 million and $3.7 million respectively in professional fees and expenses associated with the independent review of Kopan’s stock option granting practices. The entire $3.7 million in 2006 was recorded in the fourth quarter. We would expect SG&A to be in the range of 12 to 15% of revenues for 2008 excluding any additional costs incurred in the outstanding litigation associated with the derivative losses. Net income for the fourth quarter of 2007 was approximately $285,000 or breakeven per diluted share based on 67.5 million weighted average diluted common shares outstanding. This compares with a net loss of $2.9 million or $0.04 per share based on 67.4 million weighted average common shares outstanding in Q4 2006. For the 12 months ended December 29, 2007 the net loss was $6.6 million or $0.10 per share based on 67.5 million weighted average shares outstanding. This compares with a net loss of $2.1 million or $0.03 per share based on 68.1 million weighted average shares outstanding for the full 2006. Noting again that the results of 2007 and 2006 include $1.8 and $3.7 million respectively in expenses associated with the independent review of our stock options. 2006 also included a $1.2 million gain from the sale of 200,000 shares of Micrel stock. Looking at the bottom line by operating segment in 2007 Kopin US reported a net loss of $7.8 million while Kowon reported a net income of $1.2 million. Cash and marketable securities as of December 29, 2007 totaled $93.3 million compared with $105.4 million at the end of 2006. The decrease in cash resulted primarily from the increase in investment and working capital of $5.2 million to support anticipated growth and capital expenditures of $7.6 million. We have no long term debt outstanding. Accounts receivable increased to $15.2 million as of December 29, 2007 from $12 million at December 30, 2006. Inventory year end was $16.7 million versus $11.8 million at December 30, 2006. The primary reason for the increase in working capital reflects the growth of the business in 2007 and the anticipated growth in 2008. Although accounts receivables increased DSO or days sales outstanding actually decreased to approximately 38 days at the end of 2007 compared with 59 days for the comparable period in 2006. Depreciation and amortization was approximately $3.5 million for 2007 compared with $2.6 for 2006. For 2008 we expect cap ex to be between $5 and $9 million. Turning to our guidance, taking into consideration the current business environment and economic conditions in our markets, we expect the full 2008 year revenues to be in the range of $105 to $115 million. With that, I will turn the call over to John.

[John C. C. Fan Ph.D.:]

Good afternoon everyone and thank you for joining us for our Q4 conference call. By now I’m sure that everyone is aware that earlier this month we concluded our stock option review. This was a very lengthy process not only for the company but more importantly for our shareholders and I wanted to thank you for your patience, confidence and support for the last 16 months. Suffice to say we are pleased to have this issue behind us and we’re happy to move forward. Since this is our first conference call in 2008 we will spend a little bit more time to describe our business and our strategy. Let me begin our operation review with a brief discussion of our three year investment plan that we started in 2006. During the last two years we have taken steps to advance our technology leadership and further the [inaudible] in the marketplace. We have accomplished this by specifically expanding our III-V manufacturing capability and capacity with the installation of three of the world’s most advanced OMCVD reactors. The uniformity and consistency of the six inch III-V wafers we’re producing with these machines are outstanding. In addition, we’ve increased our display capability and capacity with the installation of a new eight inch CyberDisplays line that has already enabled us to achieve a major technological breakthrough, our new strengthen SVGA display. I will have more to say on this in a moment. Next month, we will complete the construction of a new 2,800 square foot clean room equipped with some very specialized instruments in Taunton for the high level assembly of military related display products that Rich had mentioned earlier. In 2008 we will continue our aggressive process and product development but our three year capital investing program is now substantially complete. As we said in this afternoon’s new release we are confident that these initiatives will help us to drive margin enhancement, increase our capacity, our capability, our quality and further diversify and expand our customer base and position the company for long term growth. Now, let me turn to our business segments beginning with CyberDisplay which grew 100% in 2007 to record revenues. We saw strong growth segments across all of our customer segments, in consumer electronics, in military as well as the video eyewear. I will first to discuss our Thermal Weapon Sight II with the US Army. For those of you who may not be familiar with this program TWS II it is a family of advanced thermal weapon sights. They improve combat effectiveness under virtually any battlefield conditions including dust, sand, fog or smoke. It is important to remember that Kopin is the only qualified government supplier of display for TWS II. The program which is lead by DRS Technology and BAE Systems involve the production of up to 70,000 units. As a reminder, Kopin is also the winner of TWS I which had a production run of about 30,000 units. Kopin is also the display provider for the next generation of this program called TWS Bridge. TWS Bridge is a five year contract to produce about 150,000 advanced light, medium and heavy weapon sights. Production on TWS Bridge is scheduled to start late this year. The TWS Bridge will feature Kopin’s newest military display, the CyberDisplay 640M LVR which we introduced late last November. This cap display is specifically designed to operate at temperatures as low as -40 centigrade with nearly instant on capability without the need of an external heater. By dramatically reducing display power consumption we believe this new display will also be applicable for a broad range of military applications. Our CyberDisplay is also a key in the enhanced night vision goggle or ENVG which is being developed for the army by ITT Industries. The helmet mounted ENVG is the first system to combine imagine intensifier with infrared technology. Early production of ENVG is already underway with full production expected to begin in the second half of this year. TWS II and ENVG have our strategy from [inaudible] display business. Kopin has a special singular focus, it is the soldiers. Both TWS II and ENVG are [inaudible] by the Army’s programming executive officer soldier, PEO soldier. The goal of this PEO solider program is to develop the best equipment for our men and women in combat and deploy that equipment in to the field as quickly as possible. PEO solider stands as the vanguard on the Army’s [inaudible] technology innovation and we’re pleased to play a significant role in this transformation. A moment ago I mentioned about a new 2,800 square foot clean room that will open in this April at Taunton for high level assembly of military eyepieces. These eyepieces combine the electronics, display and optics in a complete solution that provides our military customer with requisite cleanliness and turnkey units. Now, let’s turn to the discuss of commercial display assembly. Display revenue from digital still camera applications increased almost nine times in 2007 from 2006 driven by a growing share of digital still camera view finder market. During the year leading OEMs including Olympus, Fujii Films and Kodak selected the Kopin CyberDisplay to [inaudible] 230K electronic view finders for their new high zoon models. Allow me to describe the situation a bit about our digital still camera business. In 2006 we move away from our camcorder business and late in 2006 we introduced two view finder models one fixed focus and the other variable focus. We were pleasantly surprised by the rapid adoption and huge demand of our new models. The rapid ramp of production in the first half of 2007 has strained our production systems, decreased on operation efficiencies but we successfully satisfied our customers’ demand. In 2007 we’ve adjusted our product mix and shift away from the lower margin fixed focus view finder model to higher margin variable focus model. In fact, we’ve effectively stopped taking orders on our fixed focus model. Regardless, we continue to expect healthy business in the digital still camera business this year and our relationship with key digital camera manufacturers will be invaluable for us as we develop higher margin models for new advanced cameras. We are optimistic about our ability to pursue new markets as well as to expand our margins. A principal reason is our successful breakthrough of our new strength SVGA display which we revealed earlier this year. As the LCD industries smallest color SVGA display the new display has a 45% smaller area and consumes 30% less power than other commercially available SVGA display. The pixels in the shrink display are now a thousand times smaller than those used in the current LCD TV and this will permit mobile device to display high resolution display images with unsurpassed color and clarity. The development of the shrink SVGA was made possible only because of the investment we made to establish the new eight inch line. We demonstrated the new displays during January’s Consumer Electronics Show in Las Vegas and the response on the market is very positive indeed. We’d like to emphasis the new eight inch line should enable us to not only achieve higher capacity but also to improve yield and performance. Now, let’s turn our discussion to the growing opportunity for our display in the video eyewear market. Eyewear featuring Kopin display is already available through a variety of outlets from retail stores to catalog to airport kiosks to iPod vending machines. Customers and retailers see better products manufactured by companies such as Myvue and Visx have been very positive. In response to accelerating popularity of mobile video devices a number of overseas companies are also integrating Kopin displays into a range of new eyewear designs which combine function and style. The near term successful opportunity will be dependent on a number of factors not the least of which is the overall economy. However, we still anticipate further growth of video eyewear market segment this year. Now, I would like to move from this space to our III-V business. III-V business combined has continued its consistent contribution to our top line in 2007 reflecting the strong relationship with our tier one integrated circuit customers. As I mentioned, over the last couple of years we’ve worked diligently to expand our HBT manufacturing capacity and capability with recent installation of three MOCVD reactors at our Taunton facilities. These new systems greatly enhance our capability to process six inch [inaudible] wafers used in both power amplifiers as well as a number of emerging wireless and optic electronic applications. Among these emerging areas we’re beginning to develop advanced III-V high electron mobility transistors HEMT structured for the new generation of mercury public mobile radios and base station products as well as photovoltaic solar cells for energy applications. We believe our MOCVD systems are ideal to produce the yield and uniformity required for air structured as well as for solar cells. It is interesting to note that solar cells are our first product we introduced commercially following our inception in the 1980s. As a result, we have substantial intellectual property and the manufacturing known how around this technology. The HEMT and solar cell initiatives represent long term opportunities for Kopin but I believe they are technologies that we are uniquely qualified to address. In summary, during the past two years Kopin has made strategic capital investments in our III-V and CyberDisplay business that increase our capability, our capacity and position Kopin for continued growth. This year 2008 we will continue and complete our three year plan through our aggressive process and product development initiatives while still maintaining our strong financial position. We are widening our lead in the marketplace. As Rich earlier considering the current economic and business environment we expect 2008 revenue to be in the range of $105 to $115 million. Now, we’re happy to take questions.

[Operator:]

(Operator Instructions) One moment please while we poll for questions. Our first question comes from the line of Mike Burton with ThinkEquity Partners. Please proceed with your question.

[Michael Burton:]

I just wanted to go through the guidance for 2008 a little more. If you could talk a little bit about what the components are regarding III-V versus display? Then maybe within the display segment are we expecting a big lift out of the military? Then, if you could follow up with that and talk a little bit about where the target model is going forward into 2008 for gross margins as these different products ramp.

[Richard A. Sneider:]

We would expect that HBT or III-V is relatively flat. We’re expecting normal price declines of anywhere between 5 and 10% and potential increase in volumes of about the same so they’ll probably offset. So, the growth is primarily being driven by the CyberDisplay business and the bulk of that growth is being generated by the military at this point in time. That’s how we see it sorting out. I think I gave you kind of the target model to some respects other than gross margins for the year we are in the 16% range and we’re trying to get into the mid 20s in 2008. Otherwise, as I said SG&A is somewhere in the 8 to 12% range and R&D will be somewhere in the 10 to 15% range of sales.

[Michael Burton:]

Okay. Then to follow up just a little bit more there, it sounds like the majority of it being military growth, John did talk about some effect from the economy on the eyewear segment but how should we also expect the camera portion to grow? Is it going to be up or is that more flattish as well?

[John C. C. Fan Ph.D.:]

I will make a comment that we expect the digital camera segment will actually decrease somewhat because we no longer are aiming at the fixed focus model but it’s still going to be quite healthy. The eyewear business will continue to grow because that market is that [inaudible] unknown because it depends on the economy but we expect it to grow.

[Operator:]

Our next question comes from the line of Dan DeClue with ASB Advisors. Please proceed with your question.

[Daniel DeClue:]

John, there was some news today about a possible joint venture in the WiMAX area reported in the Wall Street Journal, it’s not clear if it’s going to happen or not but there have been fits and starts around a roll out of a national WiMAX with some implications for all types of mobile use. Could you speak to a little bit about what impact that might have on Kopin in terms of the use of power amplifiers?

[John C. C. Fan Ph.D.:]

The question from Dan is how the WiMAX is going to affect the III-V business of Kopin’s business. Rich answered is that when the ASP decline is increased it really does not include the WiMAX growth. WiMAX has been pushed to the right every year. Almost all WiMAX now using HPT as a PA so if WiMAX grow then I would say that our demand for HPT wafer will greatly increase so we have capacity for it, we have three large systems already installed so that’s not included in our estimate. I saw the release also but I think it will take a while for it to really materialize. It will probably impact us next year more than this year.

[Daniel DeClue:]

Could I ask you to maybe expand a little bit John? How does it relate to a phone that has an additional band in it? Is the additional demand for a phone that’s enabled for WiMAX as well as the traditional couple of types of bands roughly the same as adding another band? Or, is there something particular about WiMAX that makes it more intensive in terms of its demand for amplification?

[John C. C. Fan Ph.D.:]

I think WiMAX, a lot of them will be more in the base station area. By the way Dan, your discussion about WiMAX WiFi phones is also very important, there’s a lot of discussion the last two days about a lot more phones that have WiFi in them that will also increase the demand for HPTs. So although the HPT right now we still expect to be static kind of stable, there are some elements that can change the whole equation. As you well know in high-tech sometimes a new cooler application comes in and there’s a quantum jump. So I still think in a year or two the demand for the HPT will be much higher than people expect.

[Operator:]

At this time there are no further questions. Gentlemen do you have any closing comments?

[John C. C. Fan Ph.D.:]

Thank you for joining us this afternoon. We are looking forward to seeing you updated on our progress next time. Bye-bye.

[Operator:]

Thank you. This concludes today’s conference call. Thank you for joining us today.