MicroVision, Inc. (MVIS) Q4 2011 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Fourth Quarter and Full Year 2011 MicroVision, Inc. Earnings Conference Call. My name is Juniata, and I will be your operator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to Ms. Tiffany Bradford, Investor Relations. Please proceed.

Thank you. I'd like to welcome everyone to MicroVision's 2011 Financial and Operating Results Conference Call. In addition to myself, participants on today's call include Alexander Tokman, President and Chief Executive Officer; and Jeff Wilson, Chief Financial Officer. The information in today's conference call may include forward-looking statements, including statements regarding projections of future operations and financial results; product development, applications and benefits; availability and supply of products and key components; business partnering expectations; market opportunities and growth in demand; as well as statements containing words like believe, estimate, expects, anticipates, target, plans, 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 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 agenda for today's call will be as follows: Alex will first give an update on 2011 business results. Jeff will then report the financial results, followed by Alex's discussion of our 2012 objectives. There will be a question-and-answer session, and then Alex will conclude the call with some final remarks. I now would like to turn the call over to Alex Tokman.

Thank you, Tiffany. Thanks, everyone, for joining us this morning, particularly people on the West Coast. Let's start with 2011 results. A year ago, I told you that our 3 key objectives for 2011 were: first, attaining moderate growth in revenue from sale of the first-generation engine and products that were derived from it; second, executing significant operating cash burn reduction in production by 40%; and third, showing the rapid advancement of the next-generation high definition PicoP display engine that is developed around new incoming direct green laser technology. I'm pleased to tell you that we achieved all 3 primary goals from last year. We grew revenue by 19%; we reduced cash used in operations by 40%, which was not a trivial task; and we've made significant progress on the next-generation PicoP engine design and development, as was evidenced in January when we unveiled fully functional engine prototypes at 2012 Consumer Electronics Show. Going forward, I will refer to our next-generation high definition PicoP display engine that is based on direct green lasers simply as PicoP Gen2. Now let's get back to the update. At CES, our new PicoP Gen2 display engine garnered a very strong support and interest from prospective customers. It was first true pico projection solution that offered high-definition, HD, resolution, while preserving a tiny form factor necessary to be embedded inside a variety of mobile devices. Also at CES, we received a Product of the Future award by Popular Science, and the future, ladies and gentlemen, begins this year. Of course, all of this was made possible by the exceptional work performed our team in 2011 after we modified the business tactics in late 2010 in response to market changes regarding both synthetic and direct green lasers' viability. As a result, we were able to do the following: Integrate early samples of direct green lasers from 3 different manufacturers into the first prototypes and validate performance. We substantially completed the design of key components and subsystems of the PicoP Gen2 engine, including the new laser module which houses red, blue and now, direct green laser. Our new high-definition MEMS mirror, new optical engine and updated electronics, as well as our secret recipe that makes everything work together in unison. Throughout 2011, our team worked closely with Pioneer's development teams to ensure that the requirements are met for both, automotive and consumer applications. So this is a quick update on the 3 primarily goals. However, outside of these primarily goals that I just reported on, there were other notable operating achievements that are worth highlighting. Now let's first talk about the 2011 announced business partnerships. We cultivated business partnerships with companies such as Apple, Intel, and RIM by signing distribution agreements with each to put our award-winning SHOWWX+ product through their distribution channels. Each one of them had different objectives. For example, Apple is positioning their tablets as an enterprise play. And with Apple, we had online presence because they wanted to validate use models for enterprise and consumer applications. The reviews from people who have purchased our product through their channels were very encouraging. Intel, on the other hand, wants to find new markets for their high-performance chipsets, and they created an incubation business unit that assesses new technologies. Pico projection was selected as one of the primarily technologies of interest, and we were picked out of all of the available options as the first choice, and they offered our product through their U.S. distribution channels to explore applicability to small business and education applications. RIM offered their first pico projection product, which was also SHOWWX, to their customers to assess enterprise and consumer use models. Finally, at the end of last year, we announced at CES, we partnered with a company named WOWee ONE to introduce a powerful mobile theater bundle that combine sight and sound to provide an ultimate on-the-go cinema experience. All these relationships are important because we hope that -- to expand them moving forward. Our goal is to make these customers comfortable with our technology. And as we develop in new solutions and evolve our roadmap, we would like to continue to work with them. Shifting out to head-up display. The progress on the green laser front also heightened the interest in our technology by the global automotive community. And as a result, we sold pico head development kits to a half dozen automotive customers last year. We also signed an agreement with a major automotive manufacturer to incorporate MicroVision's pico head technology into its test vehicle. Finally, there's another activity that we just showcased at -- most recently at CES. Recall that some of you who remember, we introduced a new application demonstration platform called PicoMagic. What is PicoMagic? It's future applications that are derived from unique capabilities of our PicoP Gen2 technology. Examples are Touch Interactive and 3D applications. Just imagine, you're on the road and you have to present something to others or simply want to watch a movie or play a game on your mobile device. You pull a small device out of your pocket, you project the information you want to convey or simply enjoy on a wall or ceiling, and you use your finger as the controller. Now imagine how cool that is. You don't need any other devices and your finger becomes the primary controller. That's what Touch Interactive technology adds to our PicoP Gen2 engine capability. Finally, before I close this section, I want to update you on one subject that we received questions. Many of you are asking, what about the electronics partner we spoke of at end of last year? We indeed completed a term sheet at the end of last year with a major semiconductor player to further push the size cost and power envelopes of the electronics platform. We plan to complete the definitive agreement with them soon. One important caveat is that our PicoP Gen2 engine launched targeted for this year is not dependent on this collaboration and addresses our follow-on display engine roadmap offerings. So before I pass the microphone to Jeff, I just want to quickly close and state that we met 3 primarily operating goals for 2011, specifically moderately grew revenue by 19%, significantly reduced cash by 40% and made significant progress on the PicoP Gen2 engine, as well as creating new growth opportunities on automotive side, on consumer side and new applications. Now onto Jeff for financials.

Thank you, Alex. This morning, I'd like to cover 3 areas: Revenue, our operating results and finally, our cash position at the end of the year. First, I'd like to start by highlighting a couple of key points from our financial results. As Alex mentioned, our revenue for the year was $5.6 million, a 19% increase from last year and in line with our goal of moderately increasing revenue in 2011 compared to last year. In addition, we continue to aggressively manage our cash and achieved our target of reducing cash used in operations by 40% from last year. Let's go to revenue. For the fourth quarter, revenue grew by 120% to $1.5 million compared to $683,000 for the same period in 2010. As I stated earlier, revenue for the year was $5.6 million compared to $4.7 million a year ago. Our revenue growth was driven primarily from increased sales of our existing SHOWWX+ family of pico projectors, which is the current generation PicoP engine. This is in line with our expectations for 2011, and we expect most of our revenue on the first half of 2012 will continue to be generated from sales of our existing product. Our backlog at the end of the year was $2.1 million, which is comprised mostly of orders from our PicoP engine and accessory pico projectors. As you will call, ESPlus placed a $3.5 million order during the third quarter for delivery during Q4. During the fourth quarter, ESPlus determined they needed additional time to mature the commercial readiness of its media player product and elected to defer pico engine deliveries into 2012. As a result, they have agreed to fill approximately $700,000 of the order in the first quarter of this year, and we're working with the ESPlus to schedule additional shipments. We plan to convert the remaining engines originally scheduled for delivery to ESPlus to accessory projectors for sale to our distribution partners. Next for operating results. Our operating loss decreased by 36% during the fourth quarter of 2011 to $9.9 million compared to $15.4 million for the fourth quarter last year. Net operating loss for the full year declined 25% to $36 million compared to $48.3 million last year. The decrease was primarily driven by aggressive management of our operating costs and lower inventory write-downs compared to the prior year. During the fourth quarter of 2012, we reduced our net loss to $9.8 million or $0.62 per share, compared to $15.4 million or $1.27 per share for the same quarter a year ago. For the full year, our net loss was $35.8 million or $2.57 per share, compared to $47.5 million or $4.17 per share for 2010. I should note that the per-share numbers have been adjusted for the 1-for-8 reverse stock split which became effective on February 17 of this year. Our primary goal for effect in the reverse split was the mechanism to regain our compliance with NASDAQ's minimum bid requirement. As you may recall, we received a notice from NASDAQ in October of last year, and we have until April 23 to regain compliance of this requirement. Once our shareholders approved the proposal to affect the reverse stock split, we felt it was prudent to move forward to remove any uncertainty around regaining compliance with the NASDAQ's requirement. Based on the current trading price, we have a high degree of confidence that we will regain compliance of NASDAQ's minimum bid requirements soon. Finally, moving to our cash position. As we've discussed on prior calls, we've been aggressively managing our cost, and I am pleased to report we achieved our target of a 40% reduction in our operational cash requirements for the full year. For the fourth quarter, we reduced our cash use in operations to $6.1 million, a 45% reduction from the fourth quarter of last year. And for the full year, our cash used in operations declined to $27.9 million compared to $46.2 million for the same period last year. This reflects the 40% decrease from 2010. As of December 31, our cash balance was $13.1 million, which included $9.5 million in net proceeds from our fourth quarter 2011 public offering. We expect this cash will satisfy our operating cash requirements through June of this year. With that, I'd like to turn the call back to Alex to discuss our 2012 business update.

Thank you, Jeff. Let me walk you through 2012 objectives and describe what we plan to do this year to be successful. Three primary goals for this year are; first, secure OEM commitments to design products that will use our PicoP Gen2 display technology; second, to launch PicoP Gen2 display engine with our partners; and finally, to transition to our core Image by PicoP ingredient brand model. Let's now look at each one in greater detail, starting with securing OEM commitments. To have an opportunity to get a design win or secure an OEM commitment, you must first create and make available to others design samples for their evaluation, and I'm very pleased to tell you that this month's last week, we began shipping PicoP Gen2 display design samples to a first group of customers to start their evaluation. What typically happens during evaluation phase is that after MicroVision provides design samples, OEMs take anywhere between 1 to 6 months to determine the set and articulate their go-to-market position to us. Those customers who choose to go forward with us will commence an internal program and begin their own product development cycle. Of course, throughout this decision process, MicroVision will provide design guidelines and any other engineering support in order to secure customer product development commitments. Our target is to begin generating first OEM commits outside of Pioneer in the first half of this year. Now what happens after they commit? After they commit, they create an internal program, as I mentioned, to commercialize their new product that will incorporate our technology. The OEM's product commercialization cycles differ greatly depending on type and complexity of the product they want to introduce, their internal technical and marketing capability, as well as obvious with the investment level into any given program. Industry experience points that most products delivery timelines could be as quick as 6 months and as long as 18 months to bring to market. Once an OEM decides to go forward with us, we will offer assistance early in their development cycle. And of course, later, we would begin supplying commercial engines in larger volumes as they are ready to go to market with their new product. As a good example of this process is Pioneer. Last year, we successfully completed the evaluation phase with Pioneer. We delivered engine samples to them in the latter portion of 2011, which allowed Pioneer to progress their work on the head-up display product to be in the position to launch it sometime around middle of 2012. As a matter fact, Pioneer's head-up display is expected to be the first commercial product in the market that will be based on our PicoP Gen2 display technology. Now I'll move to the second objective, which is launching the PicoP Gen2 engine, and explain to you what it will take to get it out to market. Fundamentally, the launch date will be driven by the qualification and manufacturing readiness of the 3 key elements. First, direct green lasers by at least one manufacturer; second, laser module and display engine subsystems that will be manufactured by Pioneer; and finally, MEMS, electronics and systems controls that will be provided by MicroVision. Let's start with lasers. Based on the most recent discussions with green laser suppliers, we believe that at least one manufacturer will be able to provide commercial direct green lasers to Pioneer and MicroVision in the second quarter of this year, to enable our automotive engine and Pioneer's commercial head-up display product launch around mid-year. The other 2 green laser suppliers now point to introduce commercial version of their laser in the second half of 2012. At commercial introduction, direct green lasers are expected to meet all of the performance criteria necessary to launch PicoP Gen2 engine for aftermarket automotive application with Pioneer, and most requirements for the consumer applications. To address some of the display requirements for consumer applications, MicroVision team has identified and is developing PicoP Gen2 system enhancements that will allow the consumer engine to be available to OEMs after Pioneer's launch in the second half of 2012. So once this completes, this gives you update on the green laser. Now let's move to Pioneer. Once Pioneer receives qualified direct green lasers, it will conduct its own qualification process on the module, on the laser module, and optical engine in which this laser module is housed. As for MicroVision, once Pioneer's qualification process completes, we will receive the qualified optical engine that will be combined with the electronics brain and final PicoP Gen2's engine qualification process will be conducted and completed. So as you can see, there's some dependency. First, we get lasers, qualified lasers, then Pioneer completes qualification on the subsystems that they are manufacturing for us. And finally, the final qualification process on the engine is conducted. Now I will shift to the third objective. This year, we plan to transition to the next stage of our business roadmap an ingredient brand model we call Image by PicoP. Let me give you a little background. As I stated before, in order for PicoP technology or any other product technology for that matter, to become an integral component of any given OEM product, they need answers to 4 questions. First question is prove to me that the new market that you're claiming is real. Specifically, help me to validate new mobility used models. The second question is, prove to me that your technology is ready for prime time. Is it reliable? Do people like it? Third, prove to me that the cost of your offering is consistent with the market expectations. And final question is, prove to me that you have a stable supply. Can I count on you to predictably to provide me a component from a high-volume offering? As you know, we launched the SHOWWX product line to help to answer these questions with Gen1 technology, we were able to show that the used models and market are real, and that our technology is ready for prime time subject to green lasers. Because -- however, because of the difficulty in producing and unacceptable high cost of synthetic green lasers for our Gen1 PicoP technology, the cost and supply predictability questions remained open. But let me be clear here, our Gen1 products are gaining a very good feedback in the market from both users and reviewers alike. However, the Gen1 technology is not and could never become a high-volume play for us because of the limitations imposed by synthetic green laser. Now as we transition from synthetic to direct green lasers, we intend to prove to OEMs that cost and green laser supply questions can be addressed. With this backdrop, we now can and plan to transition to our core business model that will enable others to create products using our disruptive Image by PicoP technology. This ingredient model plays our strength because; first, it frees us from developing the infrastructure necessary to develop and market end user solutions across multiple vertical markets. It allows us to focus all of the resources on continuous innovation of PicoP platform and applications, such as interactive display, such as 3D, such as gaming. It also allows OEMs to leverage their product development abilities and establish product distribution networks. And finally, it will allow us to reduce the financial burden because we expect, over time, less working capital will be required as most of our revenue and margin will be earned from mix shift of engine sales, component sales and royalties and licensing fees. Now before we move to Q&A session, let me give you a quick wrap on 2012 objectives. So again, recall there's 3 things: Securing OEM commitments; the launch of PicoP Gen2 engine; and transition into Image by PicoP business model. Under the first one, we identified initial customers. We began shipping designed samples for their evaluation. We will support them during the evaluation process by providing guidelines for integration and supporting with any questions that they may have. As you know, the stage was already completed with Pioneer at the tail end of last year. Regarding the launch, the key take away here is that we received a strong indication that at least one direct green laser manufacturer should have a qualified green laser available in the second quarter to allow MicroVision and Pioneer to complete the automotive PicoP Gen2 engine and launch Pioneer's head-up display product around midyear point, MicroVision consumer engine to fall in the second half of 2012. Finally, with the new -- transition into a new model, there are several benefits, as I mentioned. Better focus, better margin, the leverage and strengths of others and our strengths and less financial burden. So with this, I would like to stop and begin the Q&A session.

[Operator Instructions] Your first question comes from the line of Ryan MacDonald with Northland Securities.

Ryan MacDonald on for Mike Latimore. So I was just curious, what is -- what are your latest estimates as you -- or do you have estimates as to the volume of direct green lasers that you think will be available during the second half of 2012?

This is very simple question. Based on all the information we have, so first of all, we expect, based on all the discussions with the suppliers, we expect the volumes to reach run rates that far exceed the historical production of the synthetic green laser. And because the direct green laser will be manufactured similarly to the established manufacturing processes used for blue lasers today. Also, we believe we should have enough capacity to fulfill Pioneer's demand for aftermarket head-up display and obviously, for the customers that will be able, at that time, to introduce their products. So larger volumes, the absolute number we cannot give you at this time. But fundamentally, right now, we feel pretty comfortable that we will have sufficient volume to address the initial product launches by the customers.

Okay, got you. And so then, when do you see revenue from -- you talked about this automotive manufacturer OEM, when do you see revenue from this OEM?

The Pioneer set up, just Pioneer's intended -- their target still to introduce their aftermarket head-up display around midyear point, so we would expect that our revenue stream from that activity would start around the same time.

Okay. And then just one final question. I guess how will you divide that -- be able to divide up then who gets the direct green laser when it becomes available? Is it first priority to Pioneer and then to other OEMs and other [indiscernible]?

It's a great question. Since Pioneer's product will be the first one that will leverage PicoP Gen2 technology, we expect that the first lasers would go to Pioneer. We don't expect a lot of competition initially, because our consumer electronic customers will be still developing their products at that time.

Your next question comes from the line of Diane Daggatt with McAdams Wright Ragen.

Quick question on the Pioneer and qualifications on the system and then the engine. Do you think that midyear is enough time or could this take longer? Can you just give us a little bit more on that?

It's still a valid question then. Right now, Pioneer's targeting still mid of 2012. We don't know exactly to a week or -- but everything we see and everything they've shown us tells us that they're within this plus/minus months or so. And again, more information becomes available, we, obviously, will provide it to you. But right now, we're basically reiterating the guidance that they gave to us and to the rest of the world.

Your next question comes from the line of Randy Hough with ProEquities.

Alex, just a point of clarification in your targets for 2012, you make the first objective to secure OEM commitments. Make a distinction, if you would please, if necessary, between a -- what you call an OEM commitment and a partner like Pioneer, if such a distinction exists. So when you talk about OEM commitments, are you talking about partners like Pioneer or is it something different?

It's actually a combination, Randy. This is a very good question because it plays totally into this Image by PicoP brand model that I just described. But fundamentally, when we talk about commitments, OEM commitments, we're specifically talking about customers that will leverage our technology rather than a manufacturer and a customer who will do both, manufacturing something for us and also using it for their own product. So fundamentally, initially, particularly initially, we're talking about customers who will take the end product, which is the engine, and will incorporate it into one of their future products.

Okay. Now to follow on the idea of Pioneer, second question, have you worked through the, let's call it for a lack of a better term, sharing arrangement in terms of division of revenues as you go to final launch of the Pioneer heads-up display?

We're very close in finalizing the definitive agreement with them on distribution and supply. Our respective teams are closing on several final points, including Pioneer's capacity output commitments. But fundamentally, in this agreement, there is a clear division who is getting what, who is going to get revenue from what and where the royalties come from.

And you had mentioned earlier then, just to follow on with that, you'd mentioned earlier that I think Jeff said that revenues for 2012 should be somewhat similar to those of 2011. Will you know, as you get into the second half of the year, whether you'll be able to adjust that once you know the revenue sharing with Pioneer and give a forecast for the full year?

Yes, as Jeff mentioned, in the first half of 2012, we expect to continue what we've done in 2011, essentially selling the first-generation product and engine so the revenues would be similar to what we experienced in 2011. In the second half, as you mentioned, as we transition into a new business model, the 3 important steps: generate design wins, complete the engine, launch Pioneer's hub and hopefully launch other people's products. As we're finalizing the agreements with the supply chain players and customers, each one of these could be different. In some cases, people may want to buy engine. In some cases, people may want to buy components and then get something else. So as we're finalizing these agreements and have more clarity, which will be different between different customers, we'll be able to articulate, give you more precision on what the revenue sources will come from, and it will be able to use this and estimate our revenue.

This concludes the Q&A portion for today's call. I would now like to turn the call back over to Mr. Tokman for any closing remarks.

Thank you. Look, there is no question this is a critical year for us. It's also very exciting year for us because we feel, I feel, like the biggest external limitation, which is green laser, is being addressed. Of course, I don't want to fool you. It does not imply that there are no risks left, but I feel like we are closer than ever to introduce a technology platform that has the bright future to carry us forward. And based on what we and our partners planned, the future starts this year. The direct green laser is becoming a reality this year, not 2014, as some led you to believe. Our progress on the new engine with Pioneer is on track. At this point in time, the market demand for our technology has intensified. People were excited to see HD solution that is smaller than anything that they've seen, and we're creating new and exciting applications that facilitate the -- we believe will facilitate adoptions of our technology, such as Touch Interactive, gaming, 3D. This year, as last year, our goal is to walk the talk, and of course, we plan to continuously provide you with the important business updates as they become available. Obviously, I would be remiss not to acknowledge the pain that all of us had to endure since last August watching our stock taking a hit, but we're keeping our eyes on the big price, the execution by us and our go-to market supply partners will be key this year, and we obviously, everybody understands the importance. For the most important part, remember that the vision and the ultimate goal are still intact. We want to redefine how people on the move view and interact with information, and we also want to become a preferred display solution provider for consumer electronic and automotive OEMs. So the only thing I can say is that no great endeavor in history were accomplished without pain and sacrifice, and I want to thank you for supporting us as we navigate and pave the way for you and for ourselves through a road less traveled. Thank you again, and we'll talk to you in 3 months.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.