Kopin Corporation (KOPN) Q4 2017 Earnings Report, Transcript and Summary

Greetings and welcome to the Kopin conference call. At this time, all participants are in listen only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions]. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mister Richard Sneider, Chief Financial Officer. Thank you. You may begin.

Thank you, operator. Welcome, everyone, and thank you for joining us this morning. John will begin today's call with a discussion of our strategy, technology and markets. I will go through the fourth quarter and 2017 results at a high level and discuss our 2018 outlook. And then, John will conclude our prepared remarks. Following that, we'll be happy to take your questions. I would like to remind everyone that during today's call, taking place on Thursday, March 8, 2018, 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 products, operating results of our subsidiaries, 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. And with that, I'll turn the call over to John.

Thank you for joining us this morning to discuss our strong finish to the year. We were pleased to post our strongest revenue quarter since we transformed Kopin to focus just on wearables. Revenue growth of 78% in the fourth quarter as compared to 2016 allowed us to achieve our goal of 70% revenue growth in the second half over the first half of 2017. Strengthen in our military operations primarily drove our results. As we have discussed about in the past, our display and optics have been developed initially for the military, meeting its demand for quality and reliability. In Q4, we saw good momentum in shipments of the F-35 fighter jet helmets and we expect that to accelerate in 2018. The FWS-I program substantially completed development in 2017 and with initial volume production to commence this year, reaching full production in 2019. The FWS-C program is also on track and we believe it will contribute a significant potential revenue stream in 2019 and beyond. In addition, we're in the early stages with a new military program win for armored vehicles, which we mentioned last quarter. And we believe this will be important for our longer-term military revenues. Finally, our Brillian LCD micro display product line, which we introduced in Q3 last year, was created to meet the requirements of extremely high brightness for the next generation avionic AR applications. Full color Brillian displays exhibit contrast ratios higher than 500 to 1 and brightness level greater than 34,000 nits or 10,000 foot-lamberts. Brillian displays are now being designed to full-color pilot helmet on the display systems. And our customers believe we are the best for the application. We also have good uptake in the military enterprise AR business. Two of our partners, Vuzix and RealWear, have indicated strong reception for their new industrial products. Other industrial customers, they have been doing pilot programs over the last couple of years, have forecast now they were going to higher volume production in 2018. We believe most of the industrial and enterprise AR headsets in production nowadays all use our displays. CES 2018, which was last January, was very exciting for Kopin. The new generation SOLOS smartglasses received a good deal of attention on the show floor. And our booth was very busy. This new version enables cyclers and runners to leverage wearable sensors to provide real-time progress updates, such as speed, power, heartbeat and many other metrics, and use the SOLOS platform to track their progress. With this new generation SOLOS on plan to begin shipping in the next few weeks, we took an important step to establish SOLOS marketing and retail strategy with the addition of Tom Futch as our senior VP of SOLOS sales and marketing. Tom's experience leading global fitness health and wellness brands such as FitBit, BodyMedia/Jawbone and Weight Watchers is a great fit for Kopin's direction. And we're very excited to have him join us. We also demonstrated our latest development in OLED displays at CES. We first introduced our Lightning OLED display at CES 2017, a year ago. And now, in just one year's time, we have increased the brightness of OLED displays by a factor of 10, an amazing improvement in performance. At CES this year, we also showed the ELF VR headset, which won a CES Innovation Award. We believe ELF is the most compact and lightweight virtual reality headset developed today. The ELF incorporates our two 2k x 2k Lighting displays, deliver a picture-like image and eliminate potential dizziness with a 120 Hz refresh rate. We believe this is the first VR headset that meets the size, weight and performance that may drive adoption of VR technology. Also, with our partner Pico, we introduced Eagle, a lightweight mobile headset that creates a home theatre experience on the go. This Eagle, another CES award-winning product, incorporates our two 720p Lighting OLED displays in a 0.49-inch diagonal size. In effect, the user gets the experience of an 80-inch HD screen viewed from 10 feet away, while still maintaining their situational awareness. We expect the Eagle to begin shipping in 2018. The Eagle and ELF will not be possible without the coming volume production of Lightning OLED displays. You may recall, Kopin and OliGHTEK jointly purchased a new OLED deposition equipment. And now it has been installed at OliGHTEK's facility. We expect to begin production of Lightning OLED displays later this year using this state-of-the-art OLED deposition system. We also have positive developments on the new OLED on silicon foundry being built with BOE and OliGHTEK. We were honored to have Mr. Liu Xiaodong, the President and COO of BOE, attended our reception at the CES and told the group that he believed the fab is on track for mass production by the end of 2019. This fab, located in Kunming, China, will be the world's largest OLED on silicon fab. I have long shared Kopin's view of what it takes for wearable to be done right. The design capability of SOLOS reflect our thoughts. And I also shared these ideas when I spoke recently at MIT Media Lab and discussed my five rules for helping companies succeed in AR. The video of that talk is now on our website if you would like to watch it. We're increasingly confident in our outlook as our technology is helping to drive the AR/VR industry. We anticipate the momentum from our strong finish in 2017 will continue into 2018. We believe the continued ramp of our military business, the growing adoption of AR systems for industry and enterprise and the demand for SOLOS, along with other new product rolls out, will allow us to increase revenue in 2018 by 25% to 40% to a range of about $35 million to $40 million. In addition, we anticipate an increasing demand for our products and components to allow us to achieve breakeven profitability by year-end 2019. As always, we're careful in utilizing our capital. So, with $69 million in cash and no debt, we continue to move forward on our global vision of AR and VR. Now, I will let Richard to provide more details.

Thanks, John. Beginning with the results for the quarter, total revenues for the fourth quarter of 2017 were $11.4 million compared with $6.4 million for the fourth quarter of 2016. The increase in quarterly revenue year-over-year was primarily driven by military sales. In addition to sales to our normal military programs F-35 and FWS-I, this quarter, we also shipped components to an army training and simulation program. This was a short duration program. So, the fourth quarter results should not be considered a run rate for our military revenue. Cost of sale for the fourth quarter was 64.9% of product revenues compared with 71.7% for the fourth quarter of last year. Gross margins improved due to an increase in sales of our military products, which have gross margins than our other products. R&D expense in the fourth quarter of 2017 was $4.7 million compared with $3.8 million in the fourth quarter of 2015, with the higher cost reflected higher funded R&D expense in 2017. SG&A expenses were $4.4 million in the fourth quarter of 2017 compared with $4.9 million in the fourth quarter of 2016. Included in Q4 2017 operating expenses is a $600,000 impairment of goodwill. Other income and expense was income of $1.3 million in the fourth quarter of 2017 as compared with $2 million in the fourth quarter of 2016. The fourth quarter of 2017 includes a $1.7 million gain from the mark to market of a warrant we received when we licensed technology to a customer. The fourth quarter of 2016 includes a $1 million gain on the sale of investment. The fourth quarter of 2017 includes approximately $600,000 of foreign currency losses as compared to approximately $900,000 foreign currency gains in 2016. Turning to the bottom line, our net loss attributable to controlling interest for the quarter was approximately $2.9 million or $0.04 per share compared with a loss of $5.2 million or $0.08 per share for the fourth quarter of 2016. Turning to results for the full year, total revenues for 2017 were $27.8 million compared with $22.6 million for 2016. Cost of goods sold for 2017 were 72.8% compared with 84.6% of product revenues for 2016. The decline was due to an increase in sale of military products, which, as I said, have higher gross margins than other products. R&D expense in 2017 was $18.9 million compared with $16 million in 2016. The increase in R&D expense year-over-year was primarily driven by an increase in funded development programs. SG&A expenses were $20.5 million for 2017 compared with $17 million for 2016. SG&A for 2017 increased as compared to the prior-year reflecting an incremental SG&A of $1.4 million for our acquisition of NVIS and $1.5 million in professional fees. The incremental SG&A from NVIS for 2017 includes approximately $800,000 of amortization of intangibles resulting from the acquisition. 2017 operating expenses includes $600,00 related to the impairment of goodwill and the loss from operations for 2016 included a $7.7 million gain on the sale of a facility in Korea. Other income and expense was income of $2 million for 2017 as compared with $600,000 for 2016. 2017 included $2 million gain from the mark to market of a warrant we received. 2016 includes a $1 million gain from the sale of the investment. 2017 includes approximately of $1 million foreign currency losses as compared to 2016 which had approximately $700,000 of foreign currency losses. Turning to the bottom line, our net loss attributable to controlling interest for 2017 was approximately $26.3 million or $0.38 per share compared with a net loss of $23.4 million or $0.37 per share for 2016. 10% customers for 2017 were the US Army at 12% and Rockwell Collins and DRS who were both 10%. Fourth quarter and year-end amounts for depreciation and stock compensation are attached in a table to the Q4 and year-end press release. As John mentioned, turning to 2018, we expect full-year revenues to be in the range of $35 million to $40 million. We expect the revenue to ramp through the year similar to 2017 corresponding with the introduction of new products later in the year. We believe operating expenses will remain relatively flat compared to 2017. As always, the amounts discussed are subject to final audit. So, please refer to our Form 10-K for the year ended December 30, 2017 for final year-end disposition as well as important risk factors. With that, operator, we'll take questions.

[Operator Instructions]. Our first question comes from the line of Robert Mertens with Needham & Company. Please proceed with your question.

Hi. Thanks for taking my question. I just wanted to get a better sense around the military revenue ramp. I know this quarter was unusually high with the one time contract going through. I just wanted to get a little bit more color around that and maybe how we should think about it throughout the year. Thank you.

So, currently, the F-35 program is pretty much on a sustainable ramp. Should be increasing somewhere in the neighborhood of 20% over the course of the year. We believe it will be pretty much on a linear basis. And then, the FWS will go into production this year. As John mentioned, we've pretty much finished all the development efforts. So, now, it's in full production. And so, that's all going to be incremental revenue. So, year-over-year, it should be increasing in the 10%, 20% range.

Great. And if I can just add one more along the industrial sector. You mentioned that you're in the majority of the industrial AR headsets. I just wanted to see if you knew of any sort of competition in that regard or if that business line is really just contingent on some of your customers ramping throughout the year.

This is John Fan. I will answer that question. As you well know, the enterprise – AR headset for enterprise has been considered to be very important for business. The actual RAM has been slower than most would think. But, right now, we see the tipping point. The tipping point is really occurring some time – probably it late last year or beginning of this year. We actually are basically almost in all major systems for enterprise. And almost all the customers now are seeing double-digit growth this year. So, we're excited about this. We think that, finally, the large projection for enterprise application for AR headsets are here.

Great, thank you.

Thank you. Our next question comes from the line Jeff Bernstein with Cowen Prime Advisors. Please proceed with your question.

Hey, guys. So, just wanted to follow up a little bit more on the guidance. You talked about profitability in 2019. Was that sort of a run rate somewhere in 2019 or is that a full year number for 2019?

Yeah. That would be an exit.

So, that's an exit run rate.

Yes.

Got you. Okay. And then, just on military, so you said overall military probably grows around 20%. So, it's going to be less than the 50% or so of revenue in the coming year.

Yeah. It depends on different programs. There are programs like F-35, which is now in a growth rate of about 20%. But we have now a lot of new programs that are coming online, even in military.

So, just in terms of – you think military is still going to be about 50% of the business in 2018?

Is it a fair assumption? No. SOLOS and all the other enterprise products are still just coming up.

Yeah.

SOLOS will not be introduced until a few weeks from now. So, yeah, this year is still military thing. But let's go back to military. I'm sort of hedging a little bit is because military – as you well know, the military budget is increasing. And we do not know exactly how this increase is going to affect us. But since we're really the sole provider of displays to all the helmet systems, so I think we may be benefitting a lot from that. So, that's why I'm hedging it. We're already seeing discussion about increased volume for military. So, let's put it that way. It's all good news.

I understand. And then, you have new programs in consumers that are coming out for the back half of the year and it's kind of hard to say what those ramps will look like, I guess. When is the SOLOS actual launch?

As we discussed, in a few weeks. As you know, the devil is in the details. There are so many details that affect us, including even packaging, how the box will look like, everything. So, we're in the final stretch right now. So, don't jinx us please.

Okay. And then, again, the Eagle product, at this point, just sometime in 2018. No better precision on that?

Yeah. That is a very brand-new product. I don't know whether you have seen it when we showed it at the CES. It's actually very well received. But, yes, so many new ideas in that system. There are a lot of mechanical parts moving up and up, up down, detachable. So, we just have to make sure it's reliable.

And then, just switching gears for a minute, on the industrial side, what's going on with the 3D Machine Vision application?

I'm glad you mentioned, Jeff. It's actually using a display, our ferroelectric LCD display that we are -- LCoS display that we make in UK and Scotland. That business is actually in many ways is ramping very rapidly now. People finally find that 2D methodology is not good. Everything is going to be 3D as the packaging becomes more complicated. Our market share there is over 60% in the world. So, as this business ramps, and I think this can be ramped much faster than people think because once one factory comes out, many factories will follow. So, we're going to see a very significant growth this year. But I think the real growth would come in 2019 and 2020.

And then, there was an upgrade coming, I guess, of the Scott helmet. Any news there? What's happening there?

We did mention in the narrative, but Scott helmets actually shipping pretty well. And the new versions should be coming out hopefully soon. But that depends on the customer.

Great. Thanks very much.

Thank you. This concludes our question-and-answer session. I would like to turn the call back over to Dr. Fan for any closing remarks.

Well, thank you very much for joining us. Things are going pretty well. Thank you.