Kopin Corporation
Q4 2008 Earnings Call Transcript

Published: 6 Mar 2009

[Operator:]

Good day, and welcome to the Kopin Corporation's fourth quarter 2008 and full year financial results conference call. Today's call is being recorded for internet replay. You may access an archived version of the call on Kopin's website at www.kopin.com.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. We will be conducting a question-and-answer session during the conference. (Operator's instruction) For opening remarks, I would now like to turn the call over to Mr. Sneider. Please go ahead, sir.

[Richard Sneider:]

Thank you and good afternoon, everyone, and thanks for joining us. I will begin today's call by taking you through our Q4 2008 financial results. John will discuss our financial and operational highlights and review our business strategy, after which we will take your questions. Before we begin, let me remind everyone that during today's call, taking place on Thursday, March 5, 2009, we will make some forward-looking statements as defined in the Private Securities Reform Act of 1995. These statements are based on the Company's current expectations, projections, beliefs and estimates and are subject to a number of risks and uncertainties. Potential risks include, but are not limited to, demand for our qualification of our CyberDisplay and III-V products, market conditions, foreign currency exchange rates, the availability of raw materials, and other factors discussed in our most recent annual filing on Form 10-K and our most recent quarterly report on Form 10-Q, and other documents on file with the Securities and 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 of 2008 increased to $29.1 million. CyberDisplay revenue grew 9% from Q4 2007 to $18.2 million from Q4 2008. This was driven by significantly higher revenues form our military display product. III-V revenue decreased approximately 11% to $10.9 million in the fourth quarter of 2008 reflecting the effects of global economic slowdown on the wireless handset market. Looking at our CyberDisplay revenue by product category, sales of our display products for military application increased approximately 150% to $12.3 million in Q4 2008 from $4.9 million in the same period of 2007. Display sales from consumer electronic applications declined to $3.3 million in Q4 of 2008 from $8.7 million in Q4 of 2007. Primarily as a result of our strategy of deemphasizing lower margin consumer electronics including low and mid range digital still camera. Sales of our display products for eyewear application decreased $1.1 million to $0.8 million in Q4 2008 from $1.9 million in Q4 of 2007 and again primarily as a result of effects of the global economic downturn of sales in consumer electronics. Research and development revenues were $1.8 million in Q4 of 2008 compared with $1.3 million in Q4 of 2007 reflecting increasing participation in emerging military programs with cooperation on display technology. Gross margin for Q4 2008 was approximately 27.8% compared to 20% for the fourth quarter of 2007. The increase in gross margin primarily resulted from the higher sales and higher margin products. Research and development expenses were $3.1 million or approximately 11% of fourth quarter revenue. This compared with R&D expenses of $3.3 million or approximately 11% of revenues for the fourth quarter of 2007. R&D expenses were associated with the development of high resolution displays as well as the development of new III-V products. Selling, general and administrative expenses in Q4 2008 were $3.1 million or approximately 11% of revenue compared with $4.4 million or roughly 15% of revenue in the fourth quarter of 2007. In comparing Q4 2008 to Q4 2007, Q4 2007 SG&A expenses include $400,000 for professional fees associated with the stock option practices investigation and the reinstatement of our historical financial statements. In addition, bad debt expense for Q4 2008 was $400,000 lower in Q4 2007. Our net income for the fourth quarter of 2008 was $1.8 million or $0.03 per diluted share based on 68.6 million weighted average common shares outstanding. This compares with net income of $0.3 million or essentially breakeven for the fourth quarter of 2007 based on $67.7 million weighted average common shares outstanding. Net income for the fourth quarter of 2008 includes a loss of $1.2 million associated with the impairment of loans to KTC and a rate down of certain corporate debt securities of $0.8 million which I will discuss shortly. For the year ended December 27, 2008, total revenues increased 17% to $114.8 million as compared to total revenues of $98.1 million for 2007. On a segment basis, Kopin US and Kowon, our South Korean subsidiary, accounted for $109.2 million and $5.6 million of 2008 revenues respectively as compared to $92.6 million and $5.5 million for 2007. R&D revenues for 2008 were up approximately $3.3 million over 2007. In addition to an increase in new program, you may recall in the first quarter, we noted that the initial shipments of a military program were classified as R&D revenue. In subsequent quarters, those revenues were classified as products after the units have been qualified. For 2008, 10% customers were Skyworks Solutions at 29% and DRS Technologies at 19%. Research and development expenses were $16 million as compared to $11.5 million for 2007. The increase relates to the previous comment regarding R&D revenue. The costs of units with military program are included in R&D expense in the first quarter. Selling, general and administrative expenses in 2008 were approximately $16 million compared to $18 million for 2007. The 2007 SG&A expenses included $1.8 million for professional fees associated with the stock option practices investigation and reinstatements of our internal financial statements. We had several and frequently occurring items recorded in 2008. First, we sold our investment in Kenet and we recorded a loss on the sale of approximately $2.7 million. We own approximately $16 million in corporate debt securities, primarily bank notes. For 2008, we recorded an impairment loss of approximately $1.3 million on these securities because we determined they were other than temporarily impaired. During 2008, we loaned $2 million to KTC, our Taiwanese III-V OEM where we owned approximately 40% of as long as collateral is by liens, equipments and buildings. Due to the current economic situation, we included reserves against these loans. For financial reporting purposes, approximately $1.2 million of the $2 million loss is shown as a loan loss reserve and $800,000 is included in equity losses of affiliates. Finally, we recorded $2.3 million translation gain on cash balances maintained at our Korean subsidiary. The average effect of these items was to reduce net income by $3.7 million. Net income for 2008 was $2.6 million or $0.04 per diluted share compared with a net loss of $6.6 million or $0.10 per basic share for the same period of 2007. By operating segment 2008, Kopin US was breakeven while Kowon reported net income of $2.6 million. The comparable period in 2007, Kopin US reported a loss of $7.8 million while Kowon reported a net income of $1.2 million. Turning to our balance sheet, cash and marketable securities at December 27, 2008 increased to $100 million from $93.3 million at the end of 2007. The $6.7 million increase is the net of $11.7 million of cash generated from operating activities and $2.7 million from the sales of our Kenet investment less the $2 million of loans we made at KTC, $3.3 million of capital expenditures and a loss of $1.5 million on the exchange rate of our cash holdings at our Korean subsidiary. We continue to have no long-term debt. Accounts receivable increased to $19.6 million as with the end of year 2008 from $15.1 million at December 29, 2007 primarily due to the rapid increase in military completion. Inventory at yearend was $13.3 million versus $16.7 million at December 29, 2007. Depreciation and amortization was $5.2 million for 2008 compared with $3.7 million for 2007. As previously announced in December 2008, our Board of Directors approved a share repurchase program authorizing the Company to purchase up to $15 million of the common stock. Kopin plans to buy shares in the open market or to private negotiation transactions from time to time subject to market conditions and other factors and in compliance to the applicable legal requirement. The plan does not obligate us to acquire any particular amount of stock. It can be suspended at any time with the Company's full discretion. We fully recognize that it is difficult macro economic environment, our strong cash position is key to competitive advantage but we want to assure shareholders that we will implement the repurchase program judiciously. Turning to our guidance, we expect our military revenue to continue to grow in fiscal 2009 and the sales of our commercial and industrial will decline as a result of weakness in the global economy. Currently, the degree of decline in sales of our commercial and industrial products is difficult to forecast and as a result, we expect to provide full year guidance later in the year. And with that, I will turn the call over to John.

[John C.C. Fan:]

Thank you, Rich. Good afternoon, everyone, and thank you for joining us in today’s conference call. Before I review our CyberDisplay and III-V business in more depth, let me briefly discuss our financial performance in 2008. First, we delivered record annual revenue of nearly $115 million fueled by the outstanding performance on our military CyberDisplay products. As Rich mentioned, our gross margin increased 1,100 basis points reflecting our emphasis on higher-value applications to our advance CyberDisplay system. High expense control throughout the year yielded a strong operating income of $4.9 million and we maintain a healthy balance sheet ending 2008 with $100 million in cash and securities and no debt. Now, let us turn to our CyberDisplay business. Our military product continued to be the real growth engine for Kopin. Military display revenue was up by more than 130% for the year and 150% for the fourth quarter driven by active participation in production programs for Thermal Weapon Sight and Enhanced Night Vision Goggle. These systems will continue to ramp in 2009. We believe that enhancing the capability of our soldiers will continue to be an important military objective going forward. I cannot overstate the importance of our status as the supplier of micro display systems for those vital military programs. We achieved this position at the vigorous qualification processes to establish our CyberDisplay product to consistently lead the panel defense setting, technical specification and performance standards. As a result, we believe that Thermal Weapon Sight tool, Thermal Weapon Sight Bridge and Enhanced Night Vision Google programs are just the beginning of opportunity in this growing area. Our military display business expanded from the two important events in 2008. The first was the installation of an 8-inch CyberDisplay manufacturing line which resulted in considerable enhancement in both production efficiency and display performance as we go forward. The second major event was the completion of a new 3,000 square feet clean room dedicated to the assembly of particle free high-level vision system. This facility is an essentially part of our military manufacturing capability. Based on our success with a military protection program, we continue to advance aggressively on micro display technology for the future weapon and the equipments now being designed and developed for our US troops. For example, we will receive the first of a plan III phase 4.2 million US Army contract award to accelerate the manufacturing capability of our CyberDisplay XGA micro display. This full color XGA which 1280 by 1024 full color pixel, the world's highest resolution that could equip the micro display is now being designed for the Army's Next Generation Night Vision System. This new 0.97-inch diagonal LCD will provide resolution contrast necessary to capture images for minute details. It will increase the soldier situation awareness through its added capabilities such as displaying color map, color symbology and sensor field images. Our research on next generation military display does not end there. In December, we won another three year one $3.1 million contract to develop even higher resolution and higher density display for using future vision systems including integrated night and day night vision system sight as well as solid state imaging intensifier. This program provides a funding for multiple military agencies for Kopin to expand to that boundary of micro display resolution and performance but developing an LCD with 2048 by 2048 micro chrome pixel resolution. In the latest resolution phase, there will be a 2048 by 2048 full color resolution in our less than one inch diagonal form factor. This will represent an important element of the strategic research and development initiative we have undertaken for over the last decade. Both for military and commercial application, the market trends favor micro display with higher resolution density, lower power consumption and better display performance. Our initiative resulted in innovation including low-voltage architecture; integrate heater, small pixel geometry and our unique ruggedized LCD processes. We will reach this 2048 by 2048 color pixel resolution density. Our over a decade-long quest for vision system that do replicate our human eyes capability will be achieved. We are optimistic that many of our recent technical advances will enable us to achieve this almost impossible dream which it has yet to be achieved in the world. From military products, let me turn to the commercial side of our display business. Display sales for consumer electronics declined in both in the fourth quarter and full year 2008 primarily reflecting our decision to emphasize on lower and digital still cameras and camcorders. Display for eyewear applications remains essentially flat for whole year 2008 but decrease approximately 58% in the fourth quarter. This decrease largely reflected the effect of a shock economic slowdown on consumer electronic sales. In terms of our III-V business, revenues for our III-V products were up year-over-year and a down for our fourth quarter, again reflecting the effect of the economic environment. As with the commission side of display business, the economic situation with the near-term outlook will be difficult to forecast but we continue to work very closely with our tier-one customers to provide the best III-V products for next generation wireless handset. During this economic slowdown, we observed a very strong shift to more advanced handsets, 3D and even 4D handsets especially in China. We continue to believe that our unrivaled wafer and manufacturing experience and strong experience and expertise with III-V technology such as the Indium Gallium Phosphide representing important advantage for Kopin as new handset standards are being installed worldwide. Wireless handsets are becoming ubiquitous and in dispense part of our everyday life. We are here to stay. Our III-V technology products are essential for the upcoming generation of advance handset and also those handsets on the drawing board. We expect to remain the leading supplier to this market for long time to come. Let us close by saying that we are very pleased we have achieved so many of our objective in 2008. After a year of record revenue and strong financial performance, we will maintain our strategic focus and advantage. We were encouraged by the market opportunities ahead of us. Despite the global economic downturn, our product and technology are dominating our market and are positioned well to weather the current slowdown. We look forward to build our momentum that we have generated with our military display product and to continue to focus diligently on rapid innovations and new product development. Our manufacturing expertise, our solid base of tier one customers, our strong balance sheet and outstanding technologies provide us with ability to capture our new opportunities, to successfully navigate this challenging environment and to emerge as an even stronger company. With that, we are ready for your questions. Operator?

[Operator:]

(Operator instructions) Your first question comes from the line of Brian Alger - Strata Capital Management.

[Brian Alger:]

A number of questions here. I will just crank through them. Can you refresh things for me here, Rich, in terms of where is the cash breakeven point for the III-V business?

[Richard Sneider:]

From a revenue standpoint?

[Brian Alger:]

Yes. Quarterly or annually.

[Richard Sneider:]

Historically, it has been somewhere in the neighborhood of around $10 million to $12 million.

[Brian Alger:]

Okay, should the extent that the business continue to be on a pressure with handsets and whatnot being soft, is that something you guys are watching or you might be cutting back some expenditures in the future or how should we think about that?

[Richard Sneider:]

Yes, I mean I think we are doing what everybody else is probably doing in the industry as far as headcount reductions and so on and so forth.

[Brian Alger:]

Okay, fair enough. Well Richard the military obviously has big highlight right now, great run rate in Q4, you are not giving guidance on the full year but can you maybe tell us how things are going here in the first quarter? Is it on a similar run rate in Q4? Is it faster based on where are the projects are? Should we anticipate that it will maintain that pace or accelerate through the year? Give us some color.

[Richard Sneider:]

The military should accelerate throughout the year.

[Brian Alger:]

And in the first quarter, is it maintaining the pace of Q4?

[Richard Sneider:]

From a product revenue standpoint, yes but I am not sure honestly about the contract revenue. I will take a look at that but from the actual shipment of unit, yes.

[John C.C. Fan:]

I think the momentum on the military is continuing right now.

[Brian Alger:]

Right. So that is obviously accelerating and you talked about getting on the low end of the camera business. What kind of the baseline worse case? I mean is it pretty much how we should be thinking about what consumer electronics could go to or is there some place for any business there that we should maybe canceling going forward?

[Richard Sneider:]

Well, I think we have some orders in Q1 for some of the consumer electronics and legacy products that we still have and I think that some of them might spillover to Q2. We are seeing push outs in a lot of that but I am not really sure if in fact from the push out in Q1 is going to be pushed in the Q2 or is it ultimately just going to be canceled because it just depends on where the whole world economy goes. But at this point, it is really hard to tell you whether it is going to be a, for instance, a zero in Q2 or we are actually going to have some sales. Right now, what we are doing is being told to push stuff out.

[Brian Alger:]

And is that stuff, the business itself is probably running in a loss but the products themselves still carry some margin when you sell, right?

[Richard Sneider:]

Not much.

[Brian Alger:]

Okay. You guys have focused on the cash obviously with the military business ramping up, you expect to exit the year at a higher cash levels than what you come in with?

[Richard Sneider:]

Yes. One question will be what we do with the cash and stock buyback, but right now the game plan is, yes, to exit with more cash.

[Operator:]

(Operator's instruction) Your next question comes from the line of Edwin Lyon - Lyon Investment Management.

[Edwin Lyon:]

My question is with what I understand is around the 24% holding of the Chinese operation with LEDs over there, how is that operation going for example, what is the total revenues of that operation and are you profitable or are they profitable?

[Richard Sneider:]

No, the investment that you are referring to was Cobright and it is not profitable at this time and I think the other key market has been very tough over the last quarter just like the rest of the consumer market.

[Edwin Lyon:]

Could you give me some idea of the company revenues?

[Richard Sneider:]

No, actually I do not have it in top of my head. We will be filing our Form 10-K the early part of next week and the revenue will be in there.

[Operator:]

(Operator's instruction) At this time, we have reached the end of the Q&A session. I will now turn the conference back over to Dr. Fan for any closing or additional remarks.

[John C.C. Fan:]

Well, thank you very much for joining us this afternoon. We look forward to keeping you updated on our progress. Have a great evening. Thank you.

[Operator:]

Ladies and gentlemen, this does conclude our conference call. Thank you for joining us today and have a pleasant evening.