MicroVision, Inc.
Q2 2016 Earnings Call Transcript

Published: 28 Jul 2016

[Operator:]

Welcome to the Q2 2016 MicroVision Incorporated Financial and Operating Results Call. My name is Richard and I'll be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note that this conference is being recorded. I'll now turn the call over to Dawn Goetter, Director of Marketing-Communications. You may begin.

[Dawn Goetter:]

Thank you. I'd like to welcome everyone to MicroVision's second quarter 2016 financial and operating results conference call. In addition to myself, participants on today's call include Alexander Tokman, President and Chief Executive Officer and Stephen Holt, Chief Financial Officer. The information in today's conference call may include forward-looking statements, including statements regarding benefits under existing contracts and the negotiation of future agreements; our competitive advantages; progress with prospective customers; projections of future operations and financial results; product development, applications and benefits; availability and supply of product and key components; market opportunities and growth in demand; plans to manage cash used in operations, as well as statements containing words like believes, goals, paths, expects, plan, will, could, would and other similar expressions. These statements are not guarantees of future performance. Actual results could differ materially from the future results implied or expressed in the forward-looking statements. Additional information concerning factors that could cause actual results to differ materially from those in the forward-looking statements are included in our most recent Annual Report on Form 10-K filed with the Securities and Exchange Commission under the heading Risk Factors Relating to the Company's Business and our other reports filed with the commission from time to time. Except as expressly required by 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 an 8-K filed today; both are available from the investor page of our website. The agenda for today's call will be as follows

[Alexander Tokman:]

Thank you, Dawn. Good morning, and thank you for joining us for the discussion of MicroVision's second quarter 2016 business results. We are pleased to report to you very positive second quarter results. Year-over-year revenue is up, combined product and royalty growth margin is up, and we've made forward strides in creating new, beyond-projection opportunities in 3D sensing and augmented reality. The results are in line with our 2016 stated goals

[Stephen Holt:]

Thank you, Alex. Q2 was another good quarter for MicroVision, with our most significant accomplishment being the increase of gross margin to 38%. Second quarter revenue was $4.2 million, comprised of $3.5 million of product revenue and $609,000 of royalty revenue. This is up about 12% from Q1's revenue of $3.7 million. Q2 of 2015 revenue was $4 million, which included $1.5 million of contract revenue. So if you compare our product and royalty revenue of this quarter to the same period a year ago, product and royalty revenue is up about 65%. Backlog at the end of the quarter was $5.3 million, primarily related to Sony product orders. We expect to fulfill these orders in 2016. We are very pleased to report continued improvement in gross margin for the quarter. Both total gross margin and royalty gross margin were 38%. That's a significant improvement over last quarter's 30% gross margin. The improvement stems mostly from better manufacturing yields and lower costs for materials. Margin was also helped by the increase in royalty revenue. In Q2 2015, gross margin on product and royalty revenue was 17%. Let's look at product margin alone. So just product margin, excluding royalty. Product margin was 27% in the quarter and that compares to 18% last quarter and 5% in Q2 of last year. As I mentioned earlier, the improvement is from better yields and lower costs from materials. The 38% gross margin is very close to our stated goal of 40% and we will continue to drive improvement in gross margin. However, we do want to remind everyone that there can be fluctuations. Q2 operating expenses were $5.1 million, compared to $4.7 million in operating expenses in Q1. The $400,000 increase was driven by increased material purchases and increases in compensation and benefits. First half operating expenses were $9.7 million, and that compares to the first half of 2015 operating expenses of $7.8 million. The increase of $1.9 million comes from the following sources

[Operator:]

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question on the line comes from Mr. Andrew Uerkwitz from Oppenheimer and Company. Please go ahead.

[Andrew Uerkwitz:]

Hey, thanks, gentlemen, for taking my call. I actually have two here. The first one, Alex, if you could talk about an AR opportunity. Could you talk a little about the differentiation between your technology and what's currently being used?

[Alexander Tokman:]

Sure, Andrew. We believe we have -- we believe we have a display solution that offers merits that LCOS and DLP technologies do not possess. Specifically, one of the requirements for AR products is to have an ergonomic design with large field-of-view. And this is where a lot of technologies struggle because, if you want to get high-definition image with large field-of-view, the optical solution grows significantly and becomes a very bulky device. Because our element -- essential element is -- 1-millimeter silicon mirror, we don't need all this intermediate optics to basically redirect the image onto the retina. What this allows us to do, it allows us to create larger field-of-view images with a compact solution, so that's kind of the key advantage. Including the high-def resolution.

[Andrew Uerkwitz:]

Great, thank you. I very appreciate that. And secondly, kind of more business related, you have a couple of big opportunities in front of you here. How do you manage the two, where to invest, when to invest, with who and so forth?

[Alexander Tokman:]

Great question. So we have basically -- if you look at the applications that we described, so we have pico projection; then we have pico projection combined with 3D sensing; now we have 3D sensing alone; we also have AR, and we also have HOD, which we didn't discuss yet. Each one of these have different time to market opportunities based on when we see the products rolled out by major players. Our goal is to become part of their product portfolios and based on what we see, it looks like pico projection is the near-term opportunity. Then we see 3D sensing or nearfield 3D sensing opportunities coming to market, combined with either pico projection or with other use cases. Then we see augmented reality and head-up displays, in this specific order. It's all driven by the product development timelines for these specific areas.

[Andrew Uerkwitz:]

Great, thank you, guys. Appreciate it.

[Operator:]

Thank you. Our next question on the line comes from Mr. Mike Latimore from Northland Capital. Please go ahead.

[Mike Latimore:]

Great, thanks. Thanks a lot. I guess first, on this -- I think that you said it was a regional brand. Can you elaborate a little bit more on that when you add with Sony, what region, what type of product might they come out with? That sort of thing?

[Alexander Tokman:]

Mike, at this point, there isn't a label that major regional brands because, to separate it from some of the global brands, this is a well-known, very large brand, but may not necessarily be recognized by North American population, so this is why we label it the way it is.

[Mike Latimore:]

Yes, okay. And just in terms of -- when do you think you might see another order out of Sony, say? Would this type of win drive enough volume for another order or would Sony just be from their own kind of internal use for their own pico projector, drive another order this year? Do you think you'll see another order this year out of Sony?

[Alexander Tokman:]

You know, so far, what's been proven is we have a great relationship and working closely with Sony, on many topics

[Mike Latimore:]

Okay, that makes sense. Then on the operating expense, is the kind of $5.1 million a quarter, is that a good number to use going forward here?

[Stephen Holt:]

Well, we see that they are going to -- operating expense are going to rise and fall over time, so there will be some fluctuation as indicated. There's a fair amount of materials and some engineering services that we're purchasing right now. So that'll have some ebbs and flows.

[Mike Latimore:]

Got it. And what was the stock base caught up in the quarter?

[Stephen Holt:]

$374,000.

[Mike Latimore:]

Okay. And it looks like royalty has been about 15% of revenue in kind of each quarter of this year. Is that kind of a good mix, do you think, about going forward?

[Stephen Holt:]

Yes, as we said before, there are time lags and fluctuations in that. And so I guess I'd still say -- encourage you to be cautious about drawing hard conclusions about what the royalty rate is as a percentage of product revenue.

[Mike Latimore:]

Got it. And I guess, as it relates to the augmented reality opportunity

[Alexander Tokman:]

We -- Mike, we developed -- we basically pushed an envelope on different features of our technology independent of the partners that we will be engaging in the future, so right now, we developing that for everybody and even when Sony chooses to pursue it, we will update you.

[Mike Latimore:]

Okay, thanks a lot.

[Operator:]

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

[Kevin Dede:]

Good morning, Alex, Dawn, Steve. I wanted to thank you, Alex, for taking the time to lay out the product development and timeline. I thought that was very helpful. So thanks for doing that. I just wanted to go back a little bit to Mike's question just on the order workflow for Sony and your response, I guess, is to deliver to the backlog that you have. I'm just wondering -- I'm wondering how you see the way they think about it. I mean, is that what you've relayed to us, pretty much, best as you can, that you just expect them to continue to order from -- or continue to run with the backlog that you have? Even though -- I mean, what seems to me is you go deliver a pretty sizable amount of that backlog this June quarter. So I'm just wondering if you could talk about a little bit more in depth and maybe related that to the overall guidance that you've given us for the year.

[Alexander Tokman:]

Sure. Let me start off with guidance. We feel good about hitting guidance. And we obviously want to do better, but we feel comfortable hitting the guidance at this time. A lot of it is dependent on delivering the existing backlog to Sony. So far, as you can see, we've been steadily increasing volume and improving margin through improving operational efficiencies and basically better pricing. We expect to continue to provide our contribution to Sony's success and, at the same time, when we talk about purchase orders, purchase orders are function of basically products getting to the market and Sony's customers start issuing purchase orders to them, which allows them to issue new orders to us. As you can see, we're cultivating this funnel, but it's not totally predictable. We have ability. We and Sony team, we have ability to convince people to join the race, to invest in new product. But then it's all up to them how quickly they bring their products to market. And it varies from company to company for many different reasons that have nothing to do with technological. It's just business, normal business issues, normal friction between Sales and Marketing teams, and engineering teams, in different organizations to optimize the product configurations and get the right product to market. So we are optimistic the funnel is real and is being developed. Where I get frustrated we don't see more products in the market, but we believe more products to the market are coming, and we will work with Sony tightly on the next orders.

[Kevin Dede:]

Okay, Alex. Thanks. I was curious to see if you've had any feedback on the Sharp RoBoHoN launch?

[Alexander Tokman:]

Yes! Sharp began selling RoBoHoN at the end of May, so it's been only two months, right, since they launched the product. And then a lot of promotion and media attention. We fulfilled the initial orders in Q1 and following orders have been received and fulfillment is ongoing. And we have some still backlog in Q2. Sharp appears to be marketing this product as a showcase of its innovative steward [ph] and for us, it's cool for us because people need to start recognizing that what we produce is not just enabling the standalone pocket pico projectors. There are many use cases for our technology, including mobile devices, mobile smart devices, that are not necessarily rectangular in shape. And we believe that Sharp's introduction of this product now allows people to see what they can do within their product roadmaps, and that's what's exciting to us. So robotics, as you know, continues to be a rising phenomenon, particularly in Asia, and we look forward to seeing how the market reacts to this innovative product. I don't know if you've seen some of the press clips, but Terry Gou, who is a CEO of FoxConn, is pretty high on this product.

[Kevin Dede:]

Okay, so you, I guess what you're saying is that you delivered the initial orders and you've already seen follow-on orders?

[Stephen Holt:]

Yes, we have a backlog of Sharp orders, I think 150,000 is what's in backorder.

[Kevin Dede:]

Well, congrats on that. Any view to sort of a sales rate, or do you think it's pretty much sort of initial fulfillment that you satisfy that initial demand?

[Alexander Tokman:]

So right now, we feel that it's an initial fulfillment. Honestly, we don't know about their sales rate. This is something that Sharp needs to update their investors. But, again, what we like about this specific proposition is that Sharp really invested into marketing and awareness, which is the key for this new category of product. And independent of what volume they will sell, we don't know. But what we do know is that people now start noticing this and start saying hey, listen, if they can do this, why can't we do something similar to this that may have different use case? So that's the exciting piece.

[Kevin Dede:]

Right. Okay. The pico projector combined with a cell phone in China -- have you seen that launch and any kind of feedback you can give us on that?

[Alexander Tokman:]

This is not our direct customer, it's Sony's direct customer. We don't have all that information. What we know is that this product has been introduced in China a month, a month and a half, or two months ago. And we actually purchased it, and we were pretty impressed with the quality of the product. It actually looks solid. It has beautiful image quality. They incorporated -- they created actual software application to enable it using soft buttons rather than hard buttons. They've done a beautiful job. We hope that they are successful. And we hope that they will empower others to see that it can be done and replicate.

[Kevin Dede:]

Yes, so, Alex, do you have any insight as to the distribution that you think that product's getting in China? Is it in the Android operating system?

[Alexander Tokman:]

It's in the Android operating system and the system is pretty complex and diverse, so we don't have the details for which channels they will be distributed in. what we know is they initially introduced it, starting with their website, and then as far as we know, or this -- their goal could be engage with mobile operators, we don't know but that would be the natural next step.

[Kevin Dede:]

Right. Okay. Then the -- on the interactivity that -- I mean, obviously you'll talk the September quarter, but what would you recommend that we look for just to sort of watch that aspect of your development from, I guess, from a press perspective? Where do you think -- I mean, clearly, there is that basic sort of table top stuff, but what do you think we will see in initial product rollout and development, given you suspect we'd have something in the market, maybe, within 12 months or so; you said mid-2017, if I remember correctly.

[Alexander Tokman:]

Our goal, what I said was our goal is to start simple in the market with this feature in the second half of 2017. And the reason is because, again, remember, there is a big step between having something proved conceptually and people believing that it's a good feature. And actually implementing it into real hardware and software component that we can actually provide to others. So we -- one of the reasons you see Steve mention slightly increasing the R&D development is because actually investing in the development, detail design and development of these long-lived proprietary components.

[Kevin Dede:]

Okay. So fair enough to say that investment spikes up but there'll still be some time before you think we'll see, I guess, tangible proof of your progress?

[Alexander Tokman:]

Well, you know, tangible proof can be validated by robot demonstrators and could come earlier than the actual product that hits the market. Because you need these, typically the way the cycle works, people don't wait until you have productized version of your system or your component to introduce their product. You actually engage them earlier with advanced demonstrators, so they start evaluating product with feedback and optimizing this specific application. So we anticipate to provide samples, demo samples and prototype samples, before second half of 2017. That's how we get to market, by getting feedback, before we actually finalize the solution and package it.

[Kevin Dede:]

Okay, then, do you suspect that you might have a similar type of marketing splash at CES early next year that you did this year?

[Alexander Tokman:]

Listen, we're so much focused right now on delivering on our 2016 goals, hitting guidance, creating some exciting opportunities to discuss with you this year; 2017 is far away. We'll update as we get -- we obviously at this point in time, we're not going to comment about 2017, but what we will do, we'll provide you updates, hopefully exciting updates, for 2016.

[Kevin Dede:]

Okay. Last question is for Steve. Now, it goes back to what Mike asked about and that's the $5.0 million expense rate, and you said that you'd expect it to sort of slow and shrink, I guess, a little here and there. But you made the point that you had two new hires, and that seems to me that that's going to add a consistent increase. And I'm wondering if you can give us a baseline.

[Stephen Holt:]

Yes, that was two hires in the Engineering over last year. Those hires actually happened in the last half of last year. So, in terms of operating expenses that you might view as more permanent or less fluctuating, like materials go up and down, we've added since December 31, we've added give people -- I'm sorry, six people, five of them in Operations, and one of them in IT. And of those six, two of them were replacements for headcount that we had previously. So, we're trying to keep headcount down. We think the investment in Operations is paying off. We like the effect we're seeing on margining -- on margins, and some of the things we're getting out of that. Those folks are helping us position us for some good results in the future.

[Kevin Dede:]

So the R&D investment, then, Steve, that's not -- I mean, to continue with that is that necessarily a headcount requirement?

[Stephen Holt:]

Right. Like I said, there's a little bit of headcount but what we're seeing quite a bit of is materials and engineering services, fabricating parts, those are the things that we're doing now that are driving expense. And then also remember there was about $0.5 million of engineering effort that was charged to contract, so if you look back at the first half of last year, operating expenses are kind of on the low side because a fair amount of -- $500,000 worth of engineering resources were working on a Sony contract and those costs ended up being classified to cost of goods sold.

[Kevin Dede:]

Okay. Well, thank you very much, gentlemen, for all the additional color. Much appreciated.

[Stephen Holt:]

You're welcome.

[Operator:]

Thank you. Our last question comes from Mr. Tom Duluth [ph], private investor. Please go ahead.

[Unidentified Analyst:]

Great quarter. Appreciate all your efforts. Most of my questions were answered by the previous caller, but I did want to ask about number 1, the next-generation product that's coming out. Can you talk at all about lumens and size? Is it the same size as the existing? Is it additional need for heat sinks or anything that would increase the size?

[Alexander Tokman:]

This next generation, it's a -- so we have multi-generational platform that, as time progresses, spins out certain features that getting adopted by our customers or, in some cases, could be us. And so brightness is one of the key attributes that we're enhancing. And remember, we spoke last time; we believe that products with higher brightness's will hit market as soon as this year. And we believe that because we developed certain enhancement features that will be incorporated by one of our partners, you know who that is. And we believe that the products with superior brightness from what exists today will be available as early as this year. It doesn't mean that we stop whatever the brightness that they will launch their product. It's just a step in the evolution of increasing brightness, pushing brightness to higher limits. The same refers to our other features we will look to optimize, including the size over time, power consumption over time, and the resolution.

[Unidentified Analyst:]

Great. Rampability. You had a slight ramp from the prior quarter, it sounds like everything is running very smooth. What is your rampability and what is your production limits that you see?

[Alexander Tokman:]

We feel comfortable that we put in place capacity and capability to enable our customers at this time, and we feel that, if there's an upside, we'll be able to handle it.

[Unidentified Analyst:]

Excellent. When it comes to virtual reality, it appears as though what you're saying is that wearing a pair of glasses is probably going to be the system that makes sense because of the delivery of the signal to the eye. Does this mean that finally the technology that you started with is finally miniaturized and the market is ready for realizing what this technology can do? Are we finally at that point?

[Alexander Tokman:]

The inherent mechanism for delivering the image to the retina have not changed with our technology. What changed, we evolved and matured our technology by increasing resolution, reducing size, making it manufacturable. That is what has changed over time since we started investing in this area. And, again, remember

[Unidentified Analyst:]

So when you look at some of the technology that some of these virtual reality companies are taking about using in their prototypes, and you look at that compared to the technology that you have, you're extremely comfortable with the platform that yours is able to deliver, now that the market is developing and other technologies are in the limelight. Your technology is not out of the running, is what you feel confident with. Is that correct?

[Alexander Tokman:]

We feel confident that we've proven to ourselves and to others that through simulations and analysis what we can do is -- exceeds the capabilities of the current technologies. What we need to do next, as I mentioned earlier, there's so much paper you can have. In order to get into the next step with these players, you actually start creating something. And that's what we're investing in this year, and this is why you see some moderate increases in the outback's is that we're starting now with the programs not only that would bring us revenue for the next two years, but we're also thinking about three years and beyond because if you want to be part of that proposition three years from now, you have to invest now.

[Unidentified Analyst:]

Thanks for all your efforts, Alex. Appreciate it.

[Operator:]

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

[Alexander Tokman:]

Again, thank you for joining us this morning. We're very pleased with the strong progress made in the second quarter. We followed up our breakthrough 2015 with a very strong second quarter. Product and royalty revenue is up over 65% year-over-year for the quarter. Gross margin reached 38% in the quarter. We're investing in future opportunities while being prudent with our cash management. We helped Sony to close a deal with a large regional brand, who we understand wants to launch its pico projector project later this year. We are advancing our laser beam scanning technology platform to meet the requirements of emerging applications in 3D sensing and augmented reality. Our aim is to clearly showcase, as I just mentioned, the value of MicroVision's PicoP scanning technology and intellectual property for multiple markets and applications. We are proud of these accomplishments, but not satisfied with the status quo. We believe that the investments that we make today will fuel MicroVision's growth, not just in the near term, but for years to come. With this, we will conclude this call and, on behalf of Dawn and Steve, again, thank you for joining us this morning.

[Operator:]

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.