Kopin Corporation
Q1 2009 Earnings Call Transcript

Published: 27 Apr 2009

[Operator:]

Welcome to Kopin Corporation's first quarter 2009 financial results conference call. (Operator Instructions) 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.

[Richard Sneider:]

Good morning everyone and thank you for joining us. I'll begin today's call by taking you through our Q1 2009 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 Monday, April 27, 2009 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, projections, beliefs and estimates and are subject to a number of risks and uncertainties. Potential risks include but are not limited to demand of our CyberDisplay and III-V products, market conditions, foreign exchange rates, availability of raw materials and other factors discussed in our most recent annual report on Form 10-K and our most recent quarterly report on Form 10-Q and other documents filed with the Securities and Exchange Commission. The company undertakes no obligation to update the forward-looking statements during today's call. Turning to our financial highlights; total revenues for the first quarter of 2009 were $21.5 million compared with $21.2 million for the year earlier period. The decreased reflects the effects of the global economic recession as well our strategic decision to transition our display business of lower margin consumer electronics to higher value military, industrial and consumer applications. Looking at revenue by product line, CyberDisplay revenues decreased approximately 15% in Q1, 2009 to $14.6 million from $17.1 million in the same period of 2008. Looking at CyberDisplay revenue by product category, revenue from military applications increased $11.3 million in Q1 of 2009 from $7.2 million in the same period of 2008. Display sales from consumer electronic applications declined to $2.2 million in Q1 of 2009 from $6.2 million in Q1 of 2008 primarily as a result of our strategy of de-emphasizing lower margin consumer electronics including low and mid range digital still cameras. Sales of display for higher value applications were $.04 million compared with $1.7 million in Q1 of 2008 primarily as a result of the effects of the global economic downturn on sales of consumer electronics. III-V product revenues decreased $5.2 million to $6.9 million in the first quarter of 2009 from $12.1 million for Q1 of 2008 reflecting the effects of the global economic slowdown on the wireless handset market and the aggressive reduction of inventory by some customers. Research and development revenues were $.7 million in Q1 of 2009 versus $2.1 million in Q1 of 2008. You may recall that R&D revenues in Q1 of 2008 included approximately $0.7 million of revenue from prototype unit shipments to military customers. Despite the lower revenue, our strategy on focusing on higher margin applications continues to result in improved manufacturing efficiencies. Gross margin for the quarter were 29% of net product revenues compared with 25% for the first quarter of 2008. Turning to our operating costs, research and development expenses were $3.1 million or approximately 14% of first quarter revenues. This compared with R&D expenses of $5 million or approximately 17% of revenue for the first quarter of 2008. R&D's expenses were associated with the development of private solutions as well as the development of new III-V products. Selling, general and administrative expenses in Q1 2009 were $4.5 million or approximately 20% of revenue compared with $3.8 million or approximately 13% of revenue in the first quarter of 2008. Q1 2009 SG&A expenses included an additional $1 million in allowance for doubtful account expense primarily attributable to receivables from KTC, our Taiwanese affiliate who is experiencing some liquidity issues. Other income net was $3.3 million in the first quarter of 2009 compared with $1.4 million in the first quarter of 2008. In the first quarter of 2009, we recognized a gain of $2.6 million from the sale of certain patents that we were no longer user. We sold them to a group that licenses the patents to third parties. The amount we receive is contingent on the fees that are generated from these licenses. In addition, we recorded $.9 million translation gain resulting from the $14 million of U.S. dollars we hold in Korea and an impairment of $.9 million on our marketable securities to record them at fair value at March 28, 2009. The write down of marketable securities did not occur as a result of the sale of any securities. On the bottom line, we reported first quarter net income of $1.9 million or $0.03 per diluted share, based on 68.2 million weighted average common shares outstanding. This compared with net income of approximately $1 million or $0.01 per diluted share for the first quarter of 2008 based on 67.7 million weighted average shares outstanding. We continue to have a very strong balance sheet. Cash from marketable securities at March 28, 2009 increased to $104 million from $100 million at the end of 2008. The $4 million increase is the net of $6.5 million of cash generated from operating activity, less $0.6 million of capital expenditures and $.9 million from the repurchase of our stock. We continue to have no long term debt and we expect capital expenditures for the year to be somewhere between $4 million and $8 million. Accounts receivable decreased to $13.4 million at March 28, 2009 from $19.6 million at December 27, 2008. Inventory at year end was $13.3 million at March 28, 2009 which is consistent with year end balances. Depreciation and amortization was $1.5 million for the first quarter of 2009 compared with $1.4 million for Q1 2008. During the first quarter, we repurchased 482,000 shares of our common stock for approximately $887,000 as part of our $15 million stock buy back plan which the Board of Directors approved in December 2008. As previously announced, Kopin plans to buy shares on the open market or through private negotiation transactions from time to time subject to market conditions and other factors and in compliance with the legal requirements. The plan does not obligate us to acquire any particular amount of stock and can be suspended at any time as the company's sole discretion. Turning to our guidance, we expect military display revenues will continue to grow in the fiscal year 2009 and that sales of our commercial and industrial display products will decline as a result of the weakness in the global economy. Currently, the degree of sales decline in the commercial and industrial markets is difficult to forecast. However, based upon discussions with customers and our projections for the military display ramp, we expect 2009 revenues to be in the range of $90 million to $110 million. With that, I'll turn the call over to John.

[John C. C. Fan:]

Good morning everyone and thank you for joining us on today's conference call. Despite this very difficult global economic climate we're facing today, I'm gratified that one of Kopin's enduring strengths has been product and customer diversification. While economic or market conditions are stressed particularly at end product, our A market, our broad product leadership and market diversity keeps us sailing. This is a particularly important attribute in a down market. We certainly benefited from our diversification in the first quarter of this year and expect to benefit even more going forward. Furthermore, our solid and conservative financial management becomes are very important cornerstone in this difficult time. Although the economic recession contributed to a lower total revenue, our military display business is very healthy. We expect Q1 will be our most challenging quarter of this year. As Rich mentioned, revenue for military applications increased about $4 million in the first quarter to $11.3 million. This 57% increase reflects our production ramp of display products for the U.S. Army civil weapons site programs. Our strategic decision to cut the display business for lower margin consumer products to higher value applications is evidenced by the fact that our military applications now represent 77% of CyberDisplay revenue in Q1 of this year compared with Q1 of 2008 where our military applications accounted for about 42% of total CyberDisplay revenues. This significant contribution of military products contributed to a much higher margin in Q1 as our gross margin improved to 25%. We expect our military revenue will continue to grow throughout the year as we are still in the midst of the ramp up. Our display business strategy beyond simply shifting our focus from one end market to another. The key I believe is our business model. It is evolving from one in which we're just selling micro displays to providing our customers with an integrated complete imaging solution. This includes bell light, optics, packaging and electronics. Just as we have done to III-V with our unique and more advanced HBT structures in our display business, we are taking to steps to continue to strengthen our competitive advantage. By concentrating our efforts on higher level display assemblies and other advanced solutions, we're providing customers with products that enable them to improve their efficiency reduce their time to market and deliver high quality products at lower costs. We have achieved solid progress in our display business, having made the investments to install eight inch fiber display line and build a 3,000 square foot clean-room to product higher level assemblies. As Rich noted, over the next 12 months we will continue to make additional investments in our display program and we believe we're very well positioned as customers look to Kopin to provide them with advanced display imaging solutions. Our new fiber system is a good example of solutions in this philosophy. This full color fiber display CGALV micro display, fiber is a remote viewer that's composed of display, satellite, optics, electronics and is assembled inside a clean room into a system that can be directly connected to any surveillance or thermal camera, making it ideal for homeland security, military or first responder markets. Fiber also represents our entry point for industrial product applications where we see significant opportunity going forward. Another example of our display strategy is our new suite of low power, ultra low power; EML CD's which are based on our most recent breakthrough in power efficiencies and performance. Combining our patented, low voltage architecture, and innovative scanner circuit, this display consumes less than 30 miliwatts at full video speed even for high resolution SVGA, XGA and XXGA displays. Low power consumption is a performance feature demanded by all our military and consumer products and we have made great advances in this area. In addition, the market demands higher densities and even better image quality. We have very active programs to reach this goal and I'm very encouraged by recent progress. Let me comment briefly on the consumer side of our display business specifically as it relates to eye wear. Clearly in this economy, some eye wear manufacturers are having difficulties financing their growth but interesting enough, even in this environment demand is still there. Consumers want the product which means retailers want the product. Lower priced eye wear continues to sell very well. Manufacturers are working very hard now to resolve their working capital issues. Our major eye wear customers are challenging us. They have exhausted their inventories and have begun to resume their manufacturing lines. They expect strong double digit growth this year, especially in the second half of this year. Turning to our III-V product line, as Rich noted, revenues were down $5.2 million in the first quarter to $6.9 million largely because the decline of global handset sales which caused some of our customers to drastically reduce their inventories. Despite the current downturn, we're optimistic about our III-V business, particularly in the second half of this year. The excellent popularity of I-phone is fueling other manufacturers to develop handsets that offer faster broadband performance and advanced multi-media capabilities. By enhancing the performance and capabilities of these phones, also means increasing the number of integrated circuits are required to handle the added features and functionality, and that trend plays well into our suite. Our proprietary vertical stack enables circuit manufacturers to add more functionality within each layer and allow for more efficient design. In addition virtually all wafer productions are moving from four inch to six inch. Of course, we are very well positioned for this transition, having made the early investments to expand our six inch wafer capability. We continue to invest in our III-V technology both in terms of new equipment and develop new HBT structures. Our tier one customers are managing well in this downturn and I suspect we are beginning to see our picking up additional market share as we move throughout the year. In summary, we think our most challenging quarter of 2009 is behind us. Our display strategy is producing margin enhancement and creating a foundation for growth. Our military display product is selling strongly in 2009 and we expect it to continue with the ramp of TWS bridge programs. We are also very encouraged by the future of our III-V business. We expect to product market share gains in the second half of this year. In addition, we also think it is worth noting that we have a very enviable balance sheet with a cash balance of $104 million and no long term debt, and we have the facility and resolve to continue to execute our strategy and to further grow our business. We expect to come out of this global recession an even stronger company. With that, we're ready for your questions.

[Operator:]

(Operator Instructions) Your first question comes from [George Blagdin – Private Investor]

[[George Blagdin:]

Could you comment on what's going on with KoBrite?

[John C. C. Fan:]

This question is about KoBrite which is a joint venture we have with a Taiwan company on LED's. The KoBrite business of course comes down with global recession but I'm going down to have a meeting in about two weeks. The business is recovering right now.

[Operator:]

Your next question comes from Edwin Lyon – Lyon Investment Management.

[Edwin Lyon:]

Could you give us some idea of the total revenues of KoBrite?

[John C. C. Fan:]

It's a private company and our share there is only about 19% so it's of no major consequence to us. Because it's a private company, we don't reveal the number.

[Edwin Lyon:]

I understand you don't reveal the numbers. Thank you.

[Operator:]

Your next question comes from [George Blagdin – Private Investor]

[[George Blagdin:]

The ownership of KoBrite is direct 19% but if you add your derivative percentage to your other holdings you end up with much closer to 29% or something like that. Can you correct us on that?

[John C. C. Fan:]

The question is still on KoBrite. KTC does not own anymore of KoBrite shares so our KoBrite shares, Kopin owns 19% and that's the total ownership of KoBrite.

[[George Blagdin:]

Where did those other shares go?

[John C. C. Fan:]

KoBrite bought back the shares from KTC.

[[George Blagdin:]

I see. So you own 19% of a more concentrated company.

[John C. C. Fan:]

Yes. In fact, the LED which is the public company, Taiwan LED now is the majority owner of KoBrite.

[[George Blagdin:]

I know you have patents used in the space program on solar panels. Is there any possibility that those patents and your knowledge in that area can come down to the consumer/industrial market as well as the space market?

[John C. C. Fan:]

The question is whether our IP knowledge in the solar cells is useful for terrestrial solar cells, the answer is yes. We have some active programs with Nasa and other U.S. government to improve solar cells for terrestrial applications and those programs, most of the programs we already announced them so we are working very hard on that where obviously doing our share for efficiency for terrestrial solar applications. Some of the IP's are very useful.

[[George Blagdin:]

What would encourage you to buy in your own shares a little faster than you've been doing?

[Richard Sneider:]

The Board has established certain parameters under which the program operates and we just can't go out and start fluctuating the amount of shares we're buying per se. There are legal requirements as to how much we can buy. It's based upon a trailing four week average, so it's just not solely at our discretion. So between the Board parameters and the legal requirements, that kind of dictates how many shares we can buy per day and those requirements change on a weekly basis.

[[George Blagdin:]

I hope you encourage the directors to be a little more aggressive now that they see what Kopin can do in the first quarter.

[John C. C. Fan:]

I think Rich mentioned that we have some legal requirements that we have to follow in addition to the Board; I think mostly the legal requirements.

[Operator:]

There are no further questions at this time. I would like to turn the call back over to Dr. Fan for closing comments.

[John C. C. Fan:]

Thank you very much for joining us this morning and we looking forward to keeping you updated on our progress. Enjoy the day and of course we have our annual meeting tomorrow.