Kopin Corporation (KOPN) Q4 2012 Earnings Report, Transcript and Summary

Good morning, and welcome to Kopin Corporation's Fourth Quarter 2012 Financial Results Conference Call. Today's call is being recorded for Internet replay. You may access the 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 Fan; and Chief Financial Officer, Mr. Richard Sneider. Please go ahead, sir.

Thank you, operator, welcome, everyone. Thank you for joining us this morning. John will begin today's call with a discussion of our strategy, technology and markets, and I will go through the fiscal 2012 results at a high level. John will conclude our prepared remarks, and then we'll be happy to take your questions. I would like to remind everyone that during today's call, taking place on Wednesday, March 13, 2013, 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 that could cause actual results to differ materially from those forward-looking statements. Potential risks include, but are not limited to, demand for our Golden-i technology platform, operating results of our foreign subsidiaries, Forth Dimension Displays and Ikanos Consulting, Ltd., market conditions and other factors discussed in our most recent annual report on Form 10-K and other documents filed with the Securities and Exchange Commission. The company undertakes no obligation to update the forward-looking statements made during today's call. Our earnings release and prepared remark contains revenue disclosures that have not been calculated in accordance with United States Generally Accepted Accounting Principles or GAAP. We are disclosing non-GAAP revenue to enable investors to reconcile with guidance that management provided during fiscal 2012. For more information on our non-GAAP financial measures, please see the table for a reconciliation of our GAAP results to non-GAAP measures included at the end of earnings. And with that, I'll turn the call over to John.

Thank you, Rich. Hello, everyone, and thank you for joining us for our fourth quarter and full year earning call. I would like to start off this morning by discussing our long-term strategy, assuming a bigger picture on Kopin's technology and markets and laying out a few milestones for investors to watch for as we embark on our growth path. Rich will then give you a clear picture of our results and finances, and then we will open the lines to questions. The sale of our III-V assets in the beginning of this year, January, was a very significant milestone for our company. I've been asked many times why we decided to sell, which has for a long time been such a successful and core part of our business. The answer is that the sale is consistent with our multi-year strategy to position Kopin for the future. Our business model now has moved from commodity business to a business, where higher gross margin potential and growth potential, which mirrors technology companies such as Qualcomm. The future is car-based, hands-free, voice-activated mobile computing systems. And Kopin is now focused and positioned to be a leader in providing critical components, and licensing reference systems through partners who develop branded, wearable computing products. In 2012, the wearable computing computer market was estimated to be about $800 million. Analysts expect this number to grow almost exponentially in the coming years. [indiscernible] research expect the market to be $1.5 billion by 2014. IMS Research expect to be around $6 billion by 2016. APR Research forecasts the wearable computing device market will grow to 485 million annual shipments by 2018. We, actually, believe that in truth, the weighted analyst firms are defining this technology -- does not encompass the full breadth of how we view the…

Thank you, John. Now let me provide an overview of our 2012 financial results. Please keep in mind that in our 2012 results, we have classified our III-V product line, which includes our Taiwan subsidiary, KTC, as we've discontinued operation. Accordingly, while the current assets, long-term assets and current liabilities relate to our III-V product line are shown as a separate line item in the consolidated balance sheet entitled assets sold for sale. And the results of operations of our III-V product line is shown as a separate line item entitled discontinued operations in our consolidated statement of operations. GAAP revenue for the 52-week period of fiscal 2012 is $34.6 million, down from $64.7 million for the 53-week period 2011. The expected decline in 2012 was primarily related to lower military display revenue and decreased display sales in consumer electronics segment. On a non-GAAP basis, revenue for fiscal 2012 was $94.5 million, in line with our revised guidance of $90 million to $95 million. Non-GAAP revenue includes our III-V product line revenue of $58.8 million, which is included in discontinued operations. Gross profit margins for fiscal year 2012 was approximately 30% compared to 42% in 2011. The 2011 period included higher revenues from Military Display applications, which tend to generate high gross margins in other display products. Research and development expense for the year was $14.7 million or 42% of revenues compared with $16.5 million or 26% of revenues for 2011. Decreased R&D expense is related primarily to lower funded R&D by U.S. government. For the full year 2013, we are targeting R&D expense to be in the range of 50% to 55% of revenue. Selling, general, administrative expenses were $17.2 million or 49% of revenues in 2012 compared with approximately $16 million or 25% of revenues a year earlier.…

Well, thank you, Richard. Before I turn the call over to questions and answers, I would like to tell you that in our 25 years, we have never been so much -- we have never seen so much excitement from both consumers, as well as partners towards our pursuit of wearable computing market. We believe that we have seen an inflection point that combines advances in wireless communications, cloud computing, voice recognition and speech enhancement, all new technologies, optics and ergonomics. We were allowed to position -- we have 25 years goal, when I left MIT and formed Kopin to become a reality. Kopin's position now to lead in providing critical components and licensing reference systems to partners who develop branded wearable computing products. Our recurring revenue and business model will position ourselves well to leverage our resources and grow faster than the market. So with that, operator, please open the line for questions.

[Operator Instructions] Our first question comes from Matt Robison of Wunderlich Securities.

Rich, on the operating cash flow, can you give us what it was for the continuing operations in the fourth quarter?

No, actually I do not have that in front of me. I can get that to you later.

Yes, that will be great, because -- obviously, saw the filings made with your pro forma for 3 months, but I didn't get -- I didn't see a quarterly breakdown so -- I mean for 9 months. So it will be tough to end 2 things at this point. And there wasn't cash flow as I recall in that filing either.

We'll be filing our full 10-K tomorrow, which will have everything, but if you call me -- definitely, I can get to that number.

Okay. And CapEx same story?

CapEx for -- do you want -- for the fourth quarter?

Yes.

$1.4 million.

But with the debt, was that only for continuing operations?

Yes.

Okay. So discontinuing operations that whatever you spent to keep that going is not included in there. Just a....

Right. It was a couple of hundred thousand dollars.

Okay. And of the depreciation -- of the G&A, was it all depreciation?

No, we have amortization associated with the intangible assets.

I absolutely expect, so what was that amount?

The actual breakdown of that number, I think -- I can give you that number later. I believe it was around $150,000.

Okay. And that depreciation is, obviously, only for the ongoing, right?

I provided that breakdown in the table.

Okay. Headcount?

Right now, we're about 200 people.

Where do you expect to see that going this year?

Right now, there -- we'll just leave it at the 200 number.

Okay. And why is the revenue guidance for '13 so far below the run rate in both the third and fourth quarter?

Well, we expect a continuing decline in the military during the course of the year. We think what's going to happen this year is that it's going to be more R&D oriented. We're in a number of research and development programs with the government that are really expected to deploy in 2014. So some of the legacy stuff is unwinding, and so we're kind of in a transition year there.

Is there any potential for some business that might be associated with your ability to supply versus competitors?

I'm not sure I understand the question.

Or do you have, are there any opportunities for customers to come and change their requirements, because you've got a heritage of supplying in some of the legacy business, it might not be supported so well by competitors?

Yes, I mean, the business goal is always difficult to prepare -- not prepare -- to predict, so there is potential upside there. And as we've indicated, there's really -- there's no Motorola revenue or any other types of, really, Golden-i type technology revenue that factors in the forecast, so those were all potential upside.

What's going on with the fourth dimension and the other high wear and consumer-type applications?

Fourth dimension has actually done very well over the last 6, 9 months, penetrating the 3D metrology market. I think that they've signed up with the 2 largest players in that market, and they're working on developing a number of other agreements. So they have received a tremendous response. They make it a -- John can speak to this better than I can as far as the quality of their display, but extremely high resolution, beautiful color. And it fits very well into that market, so they're actually doing very well.

And they have other type of wearable technology in the camera business?

Well, you see people like ViewSticks have products that are being offered that we supply, recon ready's another group that is supplying products that are all tangentially related to the wearable computing market. And so we're supplying to those guys. And they're all pretty bullish on the entire market.

Well, that's been true for quite some time as we know. And I did see the ViewSticks stuff at the Consumer Electronics Show; it looks like something late this year that would be a big improvement. But how did that business compare with last year?

The -- you want the breakout, is that what you're asking?

No, if you could I just give me the tone of -- how was -- how the trends, is it -- did it improve or have you got offsetting effects with camera versus wearable? What's the [indiscernible]?

Yes. I mean eye wear was essentially flat and digital camera was down.

And do you expect that -- any reason to expect that the eyewear would come up enough to offset the trend in the digital camera?

If you believe the customers' projections, yes.

[Operator Instructions] Our next question comes from Joseph Zaccaria of Needham & Company.

This is Joe, calling on behalf of Raji. I was wondering if you could talk a little bit about cash burn moving forward.

For 2013, we think cash burn will be in the range of $13 million to $16 million.

All right. And can you talk a little bit about what the revenue expectation is for wearable computing once it hits its run rate?

How far up you want to go?

I guess as far as you'd be comfortable.

I think, John, prepared remarks started at the call. We think this is a huge market, and we think that we're very well positioned in it. And so our drive is to become a billion-dollar company, frankly.

Okay. All right, I appreciate. And, I guess, that's over what the next 4 to 6, 4 to 8 quarters not doubling our company, but the run rate?

Yes. I mean as, John, as Mark indicated, I think we expect products to start being offered probably in the fourth quarter of this year, and then '14's the inflection point where it really starts taking off.

Our next question is from Aram Fuchs of Fertilemind.

I was wondering if you can give a survey of the market as you see it both in displays and in the hurdles that have to be overcome. The weight of these glasses tends to be -- or when I put them on, personally, in interviews I've done with past consumers, the weight is a key variable. Are there other variables that you worry about that you think you have to overcome?

Yes, that's a good question. I think you're addressing the ergonomics and comfort of the 6 areas. In fact, I think it's one of the most important areas, because if people are not willing to wear you kind of get started. It's not just the weight; it's the balance on your head, balance on your ears. There has to be comfort to wear. That's the most important thing. Another thing that's very important, you have to be willing to wear. You have to look good on you. It's just not just the comfort alone, it has to look good -- or look in some way, look familiar, you don't want to look odd. All those things are again subtle, and, of course, also it depends on your application. In the case of industrial application like the Motorola's HC1, those are to really perform a task. You fix, check engine, you try to catch a criminal. In this case, both comfort and look are not as important. But in the case like Glass for consumers, it becomes very important. So all this tells me that it tells us that the ergonomics is very important, also it tells you that the weight is a very important like you mentioned. So the optics, everything -- it's, actually, everything, electronics, every packaging had to be very lightweight. If you have gone to CES see our Golden-i, it was more than 3.8. It's extremely lightweight. It's made out of magnesium. You plan to have it extremely comfortable. And that's really, in many ways, a game changing. So to answer your question, yes, it's very important. We knew about this for a long, long time. We've worked with the military. We've worked with Motorola. We've worked with other companies. And we're very trained to how to solve the problem.

And then on the display, there are all these different technologies, LCD costs, where do you see yourself sitting there, obviously, in Golden?

That's again a very good question. Of course, I'm slightly biased. But let's take away the bias ahead. Just look at the situation. If you go back to your first question again, the weight is very important. That means the optics and the weight started to be very small, and also have to be very bright, because the image has to be very bright, because it has to go outside in the sun. It has to be very bright. So ultimately, we look at all this. And I think our customers and partners agree, there's only 1 technology that exhibit for this kind of application. That is our technology, fiber display technology; the translucent LCD is best tailor-made for this application. It's not an accident. Remember, we work on these things for 25 years. 25 years ago, we already had that dream, that wearable mobile computer will come. We developed our technologies that specifically tailor-made for this market. And right now, we are right. We'll give you the lowest, highest -- lowest-power, brightest, lightest optics system for wearable computing. And I think the market will certainly prove us to be right in the near future.

It appears we have no further questions at this time. I would like to pass the call back to management for closing comments.

Well, thank you for joining us today. And then we'll hope to keep you updated very soon. Bye-bye.