MicroVision, Inc. (MVIS) Q2 2014 Earnings Report, Transcript and Summary

Welcome to the Q2 2014 MicroVision, Inc. Conference Call. My name is Vivian, and I'll be your operator for today's call. [Operator Instructions] Please note that this conference is being recorded. I will now turn the call over to Ms. Dawn Goetter, Director of Marketing and Communications. Ms. Goetter, you may begin.

Thank you. I'd like to welcome everyone to MicroVision's Second Quarter 2014 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 believe, goal, path, 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 agenda for today's call will be as follows: Alex will report on the operation results. Steve will then report the financial results. There'll 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, Dawn. Good morning. Thank you for joining us today for an update on MicroVision business results for the second quarter of 2014. In the second quarter, we continue to make tangible progress on our 3 primary operating goals for the year. Outside of our major announcement with the Fortune Global 500 company, which we communicated in June, Q2 was about completing less visible, but essential blocking-and-tackling milestones associated with completing design and development phases and beginning the transition into the production phase. Let's start with the first goal, which entails 3 elements. First, completing the display module development phase with Fortune Global 100 customer; second, supporting them with their productization and commercialization efforts; and finally, supplying them with key MicroVision components. And many of you know, our customer announced in January that it aims to bring a high-performance, high-definition image quality display module to market for use in PicoP projectors and other devices with projection functionality. We have been closely supporting the development of this module, which incorporates MicroVision's patented PicoP laser-scanned beam display technology. We're currently focusing on production planning and support phase with our partner, now that the design and development phases are nearly complete. We also made progress on the negotiations related to the commercial agreements, which we are targeting to complete later this year. Now moving on to the second operating goal, which encompasses building a pipeline of consumer and automotive opportunities for MicroVision's go-to-market partners. In June, we announced a collaboration with the second consumer electronic company on the Fortune Global 500 list to develop a display engine for an innovative smartphone product to be offered by this company. The new partner has communicated to us that it targets market introduction of the new product in the second half of 2015. Shifting to the automotive segment, we've previously announced that we are working with a global Tier One supplier and a major vehicle OEM. MicroVision delivered multiple prototype HUD systems to the Tier One supplier in the second quarter. The prototype head-up display system for the vehicle OEM is slated for delivery this quarter -- third quarter. These programs are in evaluation and test phases as we mentioned earlier, which are critical steps to have a new technology adopted and embedded automotive applications. Next topic is UPS. We are currently on track to deliver custom PicoP display modules in the third quarter to UPS, which is another Fortune Global 500 customer. The modules are part of a new package guidance application targeted at increasing processing efficiency in real-time package sorting and routing. UPS has informed us that it plans to deploy the system in a facility in the United States. Our business development efforts are focused on 4 main go-to-market coalitions that involve all the key stakeholders needed to enable a new market. In our case, the coalition includes display engine manufacturers, consumer electronic OEMs and major retailers. In Q2, we continued to make important progress on several go-to-market paths involving some of these OEMs and major retailers that are interested in a variety of consumer electronic products utilizing PicoP display technology. The final goal for the year is to ramp supply chain for high-volume production of MicroVision components in the second half of 2014. Recall that in 2013, we begun development of supply sources from MEMS and other key components with some of the world leaders in their respective areas. In the second quarter of this year, we began qualification cycles of production processes for MicroVision-specific components, and we expect volume production capacity for our components to be in place in the fourth quarter of this year. Now I will turn over to Steve for a recap of second quarter and first half financials.

Thank you, Alex. The numbers I'm about to share are included in our press release and in the 8-K filed today. Both are available from the Investor Page of our website. As Alex mentioned, this was a transitional quarter from a development phase toward a production phase. As a result, our development revenue is down from prior quarters. However, by managing operating expenses, our operating loss was $3.4 million, which is the same operating loss that we had in Q2 of last year. Additionally, in the quarter, the company established a $4.5 million aftermarket equity facility, from which the company raised $933,000 of net proceeds. Second quarter revenue was $0.6 million compared to $1.9 million for the second quarter of 2013. Revenue for the first 6 months of this year was $1.8 million versus $3.7 million for the first half of 2013. Q2 operating expenses were $3.8 million, compared to $4.4 million in operating expenses in Q2 of 2013, a decrease of 13%. First half operating expenses were $8.1 million, down from $9.1 million for the same period last year. As mentioned earlier, our second quarter operating loss was $3.4 million, which is the same as our Q2 2013 operating loss of $3.4 million. First half operating loss was $6.5 million, which is favorable to our first half loss in 2013 of $7.1 million. Our second quarter 2014 net loss was $3.4 million, or $0.08 per share, compared to $3.4 million, or $0.13 per share, in the second quarter of 2013. Our year-to-date net loss was $11.4 million or $0.29 per share. Our 2013 first half net loss was $7.1 million or $0.27 per share. As a reminder, this year's first quarter net loss included a $5 million noncash loss on the exchange warrants. Cash used in operating activities was $3.7 million in the second quarter, and $6.7 million for the first half. This compares to $2.8 million used in the second quarter last year, and $6.3 million used in the first 6 months of last year. Cash and cash equivalents on hand at June 30 were $12.5 million, and finally, backlog at the end of the quarter was $1.1 million. That concludes the financial results. We'll now open it up for questions.

[Operator Instructions] And our first question comes from Andrew Uerkwitz from Oppenheimer. Andrew Uerkwitz - Oppenheimer & Co. Inc., Research Division: Alex, question for you. As you kind of enter the production phase here and some of -- several of these potential customers are trying out the products here, what are some of the next milestones that you guys need to accomplish? And what are some of the potential hurdles that you could face to get there?

There are several different milestones that we need to complete on our own and then with our partners. So if you look at just our own deliverables, we need to complete qualification phases of MicroVision-specific components with our specific suppliers and have it ready for mass production in the fourth quarter. We feel comfortable that we can achieve this. The other milestones include support in our Fortune Global 100 and several other customers in development of their engines. Because we still are part of this cycle, and we are enlisted to support them with both technical and market support in preparation for their own commercialization efforts. And finally, product OEMs, we're developing products based on our technology, utilizing the engine of our partners, also need some of our market and technical support to help them to get to deliver products to market. So we have 3 -- we're working 3 fronts right now, our own deliverables and then we supporting our partners, both on the engine and the product side to help them to introduce the best possible products as soon as they're ready. Andrew Uerkwitz - Oppenheimer & Co. Inc., Research Division: Great. I appreciate that color. And then, as you kind of get to close to production, once you get to production, what should be the kind of the expectation around your OpEx and your spending there?

That's a good question. I'm pretty sure everybody is interested. If you look at our cash burn over the past 6 months versus previous year, it's been pretty similar, around one -- just slightly north of $1 million per month, which we maintain aggressively. We try to keep it as low as possible. We anticipate that we will need to invest some additional -- put some additional investment into the production capacity, and we're monitoring the extent of the demand. Right now, we assume it's around base capacity, and we invested based on that assumption. Once we see a deviation to this, specifically, if the demand is greater than what we've been communicated, we will be able to invest some additional -- to introduce larger volume capacity as necessary, and we remain well within the lead times to make these investments and to increase. So again, we continue to be monitoring the feedback from our both engine and product partners, and we think we'll be ready to support them with whatever is necessary.

And our next question comes from Mike Latimore from Northland Capital Management.

Yes, Alex, the -- you mentioned that the design and development is near complete with your Fortune 100 customer there. When do you think that it will be complete? Then what's become [indiscernible]

It's -- we basically completed 95% of all the deliverables. The 5% that remains, we submitted the final deliverables and right now, it's going through acceptance evaluation phases. So for all practical purposes, we expect it to be completed very shortly. And it's not -- it's not hindering any other progress on the production support, nor on commercial agreement negotiations.

Does that have to be completed before the commercial agreement gets complete?

We expect, yes, and we expect that this would be done prior to the commercial agreement's completed, yes.

And then, on the new smartphone opportunity, if they want sort of products out in the second half of next year, would that suggest that you would see revenue on the first half of next year related to that?

Typically, you're right, Mike. Typically, there is a lead time on a component before they convert it into engines before the products. So if they target product for the second half 2015, you need back probably 3 months to -- this is when we start -- we would start receiving something from the engine manufacturers, who will be receiving the orders from the product OEMs and OEMs, correct.

And then, in the -- what's in the $1.1 million of backlog at this point?

There's-- the UPS is a large part of that, as well as some additional development work for the Fortune Global 100. Those are the 2 main pieces of it.

And just generally, I mean, do you think you'll see revenue from the Fortune 100 first or from the smartphone manufacturer first, in terms of production revenue?

Most likely, it would be from Fortune Global 100.

[Operator Instructions] And we have a question from Dennis Dove [ph].

I just wanted to know the commercial agreement that you've made a lot of progress on, talking about the terms, the Global 100, the first big customer. Can you shed any light on how sizable that deal will be? And how close that gets us to the breakeven point in needing to raise more funds?

Yes, it's obviously a question that everybody wants to know. I want to try to stay within the framework of not disclosing something we're not allowed at this time and give you, hopefully, enough information. The agreements that we're pursuing right now with Fortune Global 100 include several: First, there is the supply agreement for delivering some components. Second, there is the product support agreement, which is independent. Third, our licensing agreement for the royalties of -- incorporating our technology inside their offerings. So there is -- there are several agreements ongoing. And each one has different terms and conditions, and we have to cross it -- each one to complete this. In terms of what is the size. The size is going to be determined by the demand that this customer will generate for their own product, and for the products from other customers they will pursue to incorporate their engine. So it's their target plans and we're not at liberty at this point to discuss what their target volumes are, but we're excited about this opportunity. This is the largest opportunity the company have in the history of MicroVision. So we're excited and want to see what -- it come to fruition, and we're do our part to ensure that this will happen.

Okay, good. Yes, it is exciting opportunity. One quick question, the cash that you raised, the $933,000, did you say how many shares you issued to do that?

We -- I don't think we stated that...

It's about 468,000 shares.

And our next question comes from David Morgan [ph].

Alex, as far as the UPS is concerned, the deployment that we've discussed, is that going to be in this calendar year? And I guess that's the first part.

So we're delivering our modules this quarter and they will deploy it in the U.S. They try -- we cannot specify the timing because it's something that they are sensitive about, but you do your own math.

Okay. Now originally, you said this was a pilot development. Is it still in the pilot stage? Or will this be -- it was beyond that at this point?

Well, it's not a pilot. It's a real implementation in one of their flagship sites. It's -- the goal -- remember what the goal is, the goal for UPS is to quantify the potential performance improvement of their processes in terms of increase of throughput and reduction of error rate. So they need to quantify this information and they selected the site to implement this.

Okay, there's actually a news release out of UPS -- or at least, there's an interview from the Memphis facility that was public that said their aim over the next year or so was to increase their efficiencies by 100% and 20% by the end of this year. You may not be able to comment, but I assume, the way the description was, that you're part of that.

We can't comment. We can't comment. What we do, we basically provide them all the -- whatever they ask us to provide, and we hope that it will be successful and make them profitable and makes us profitable.

Great. You also discussed a large volume capacity by the end of the year. Now is there 2 components? Are some of your partners going to supply all the pieces on their own? Or will you be a supplier in every case of at least part of the module?

We will be a supplier in most of the cases because it's case-to-case specific. In some cases, we provide more; in some cases, we provide less. But we should be a part of every endeavor, whether it's engine manufacturer and, obviously, the engines from our partners will flow into products of others. So yes, we expect to be in every module.

And as far as large -- you refer to large volumes by the end of the year. Any kind of idea what large means? I mean, is it less than 1 million units or more than 1 million units? Or...

It's a very sensitive question, David, because it would guide the demand from some of the partners that asked us not to discuss this publicly. Our goal is, as I mentioned, as Steve mentioned, our goal is to have volume capacity ready in the fourth quarter to enable whatever the needs are, and we feel what we put in place will satisfy the initial demand. And we have a plan to ramp that as necessary, as we see the demand increase subject to lead times that everybody knows they need to provide to us to allow for higher demand.

And the commercial agreement that's in progress, when that's negotiated and final, is that something you're going to be able to announce? Or...

We believe so.

And I'm not showing any questions at this time.

Okay. So I guess there's time for closing remarks. Let me start closing remarks by saying that there's -- a lot of work has been done by MicroVision and our partners, and we're excited at the prospects in front of us. As we are moving into commercialization phases for our own components in the second half of this year, we're concurrently providing both technical and market support to our go-to-market partners to facilitate their efforts in launching their solutions, be it engines or products. PicoP display technology, as you know, can enable end-user experiences that are not attainable by other PicoP projection solutions and that are well suited for the mobile video consumption that consumers are now making part of their daily routine. We believe the rapidly expanding consumer behavior of watching video on mobile devices creates a perfect opportunity for PicoP projection. According to Adobe, for example, online video views on a mobile device experiencing a market share increase of 57% year-over-year, with smartphones leading the charge, followed by tablets. No matter how great your smartphone or tablet is, the screen is still too small to share information with others, and you have to admit it. Watching 1.5 hour movie from your smartphone on a 100-inch screen is much more pleasurable than watching it on a 5-inch screen. That's why, having a device or a feature that works in tandem with your primary device offers an -- and offers an immersive experience could be very valuable, we believe. Hence, if anyone wants to have an immersive experience from their mobile device of choice, experience that is characterized by enormous high-definition image that is always in focus and is obtained from a low-power, very slim and light device, then MicroVision's PicoP technology is for you. We're very excited about the business partnerships that we have developed and built, and are developing and building with the leading industry players, who are bullish on this emerging market, and who enlisted our support to bring their solutions to market. At this point, we'll conclude this call. And on behalf of Steve, Dawn, I would like to thank you for joining us this morning.