MicroVision, Inc. (MVIS) Q2 2017 Earnings Report, Transcript and Summary

Welcome to Second Quarter 2017 MicroVision Inc. Financial and Operating Results Conference Call. My name is Sylvia and I will 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. [Operator Instructions] Please note that this conference is being recorded. I will now turn the call over to Dawn Goetter. Dawn, you may begin.

Thank you, Sylvia. I would like to welcome everyone to MicroVision’s second quarter 2017 financial and operating results conference call. In addition to me, 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 products 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, 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 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 reasons. 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. Alex will report on the operation results; Steve will then report the financial results; there will be a question-and-answer session and then Alex will conclude the call with some final remarks. And now I would like to turn the call over to Alex Tokman.

Thank you, Dawn. Great morning. Thank you for joining us for a discussion of Microvision’s second quarter 2017 business results. We have made significant progress in the past 3 months executing our engine plants, while creating new home-run opportunity that could significantly improve our growth trajectory over the next 3 years. First in April, we signed a $24 million contract with a top technology company for a high resolution display application, which included a $10 million upfront payment that we received in the second quarter. Second, we delivered initial commercial units of the small form factor display engine to Ragentek, a Chinese smartphone maker at the end of June and begun production shipments in July. Third, we just announced the first shipment of development kits of the interactive display engine to select customers for application development and evaluation. The timing of this shipment is consistent with the schedule we discussed on the last call. Let’s start with the $24 million contract we signed in April. As we discussed in the last earnings call, the April development agreement with a leading technology company is to develop a high resolution laser beam scanning display and future production of Microvision’s specific components for this display system. The contract includes two elements, a $14 million in development fees for work that is expected to span 21 months and a $10 million upfront payment that is expected to be applied to future component sales. On the development portion, once the development portion is completed, we expect to be providing a new generation of MEMS, ASICs and firmware for the high resolution display system. This could add significant product revenue for us starting in 2019. The technology company plans to produce a high resolution display engine to be incorporated inside its end product. The development work against this contract begun in the second quarter and we recognized some revenue already. We also received the $10 million upfront payment as I mentioned earlier as well as additional $4 million in payments for the early milestones. We are very excited about this opportunity, because it encompasses three critical to success factors. First, it’s a major technology company with a clear goal to market plan. Second, the product they are targeting addresses a large market opportunity. And finally, the product would be based on the differentiated platform technology from us. Way to the engine programs update next, starting with the small form factor display engine. We made an initial shipment of this ultra miniature display engine to Ragentek at the end of second quarter and we follow it with the first production shipments in July. Ragentek who makes smartphones for China, India, Brazil and other countries placed a $6.7 million order with us in March, for a customized display engine to be embedded inside its VOGA flagship smartphone. The VOGA smartphone was revealed by Ragentek on June 28 at the Mobile World Congress in Asia and received positive reaction from Chinese media outlets for its sleek look and innovative features. During second quarter, we made progress with several other customers on opportunities around this display engine and anticipate new orders in the next few months. Our engine portfolio includes two additional scanning engines, one for the interactive display and the other for 3-D LIDAR sensing applications. And speaking about the interactive display engine, we were very pleased to announce yesterday that the first samples of the interactive display engine were shipped to select customers as planned. These initial development kit samples can be used by our prospective customers to evaluate the technology, but more importantly to start developing software applications for their specific products. Think of the possibilities, this engine is expected to offer features and functionality that could be invaluable to the emerging Internet of Things, IoT smart home connected products. The benefits include one-stop shop display and sense solution, multiple 3-D sensing modes, multi-surface operation capability and ease-of-use. It’s a lot. Let me explain each. Starting with the integrated display and sensing solution. What it means is that 3D time of flight sensing and projection functions are combined in a single integrated package. This is an important attribute for OEMs and ODMs as it provides one-stop shop solution for their products. Another attractive feature is the ability to operate in the multiple 3D sensing modes. What this means is that our 3D point cloud can be converted into touch events, aired gesture events and other events to suit multiple interactive applications. This could be a valid feature for the end user as they are not locked into a tabletop mode only as exhibited by most devices today. The third unique benefit is what we term a multi-surface display in 3D sensing capability, where both projected display and 3D time of flight sensor can fully function when directed at the tabletop at a wall, at a ceiling without any additional calibration of focus adjustment. Again, this could be a valuable feature for the end user who wants to move their smart home connected devices from room to room. The final benefit of this system is its ease of use, translation. It works on any surface, flat, curved, wet, dry etcetera, when foreign objects enter the field of view they will interrupt the operation of the system as it is with other solutions to-date. Imagine a scenario where someone is preparing the dinner in the kitchen. They use their IoT smart device to display a recipe and they want to virtually page through the summary. If the tabletop surface upon which the image is being projected is uneven or it’s wet or contains food crumbs, our time of flight system fully functions and responds to users’ gestures, which is not true for most other technologies. The interactive display engine is unique because it outputs both visible images and 3D point cloud necessary to enable the interactive display application. There is an additional step required here developing software that interprets the 3D point cloud generated by our interactive engine to recognize touch, gesture and other specific events for products. We are targeting customers who are enthusiastic about such products and who have the skills to do such development work. Finally, a brief update on the third engine, we continued the development of the LIDAR 3D sensing engine with the goal of having initial samples in the first half of next year. Overall, we continued to believe that the demand for these engines could result in revenue ranging from $30 million to $60 million over 12 months to 18 months starting Q3 of this year. Let’s now move to NRA activities other than April contract. In first three months we continued work on two additional development contracts. One is for augmented reality and the other is for automated driver assistance systems or ADAS. We expect to complete work on both of these development contracts this year. At this point I will pass it back on to Steve to review financials.

Thank you, Alex. A couple of highlights for the quarter were that we increased revenue 83% over Q1, led by the revenue we have recognized on the development agreement we signed in April. Additionally, we improved our cash position through the receipt of $14 million related to the April development agreement and through $6.8 million in financing activities. Now for some details, second quarter revenue was $1.5 million comprised of $1.1 million of contract revenue and $346,000 of royalty revenue. $761,000 of the contract revenue is related to the April development agreement. The balance of the contract revenue is comprised of other development contracts and orders for prototypes and samples. Our total revenue of $1.5 million is $661,000 or 83% higher than the $792,000 in revenue we recorded in Q1, mostly due to the revenue on April development agreement. Also in the quarter we made the initial shipment of our small form factor display engine. The acceptance period had not expired by June 30 and so we did not recognize revenue on those units. In Q2 of last year we had $4.2 million of revenue with most of that coming from product shipments. Gross profit for the quarter was $508,000, up from $254,000 last quarter. The increase is mostly due to the April development agreement. In Q2 of last year, we had gross profit of $1.6 million. That gross profit came primarily from product revenue and royalties. The gross margin percentage for Q2 was 35% and compares to 32% last quarter and 38% in Q2 of last year. Q2 operating expenses were $6 million, which was nearly flat compared to $5.9 million in Q1. Q2 operating expenses were $947,000 higher than the operating expenses in Q2 of last year, mainly due to spending on ASICs and product design work and increases in labor and benefits costs. Our second quarter 2017 net loss was $5.5 million or $0.08 per share and compares to $5.6 million or $0.08 per share in Q1. The net loss in Q2 of 2016 was $3.5 million or $0.07 per share. Now for operating cash flow, this quarter the receipt of the $10 million upfront payment and $4 million of milestone payments on the April development agreement resulted in positive cash flow from operating activities. So cash provided by operating activities was $4.6 million and compares to cash usage of $6.7 million in Q1. In Q2 of 2016, we had operating cash usage of $4.1 million. Let me discuss the accounting for the April development agreement. Recall that the agreement provides for $14 million in development fees paid after certain milestones were met and it provides for a $10 million upfront payment. During the quarter we made the determination of the revenue accounting for the agreement. For the $14 million in development fees, we expect to recognize them under the percentage of completion method over the life of the contract and in fact we did recognize $761,000 as contract revenue in Q2. Note that while we received $4 million in milestone payments, we only recognized $761,000 as revenue in Q2, the balance of about $3.2 million is recorded on the balance sheet as a current liability and is included in the line titled Billings on uncompleted contracts. The $10 million upfront payment is considered contingent revenue and is reflected on the balance sheet as another current liability. The $10 million upfront payment will stay on the balance sheet as another current liability until future events determine its ultimate disposition. We expect that it will ultimately be a prepayment for products if the customer could order from us in the future. So cash and cash equivalents on hand at June 30, were $17.7 million and this includes obviously the $10 million upfront payment and $6.8 million from financing activities most of that from an ATM that we used in the quarter. Backlog at the end of the quarter was $21.5 million, $6.7 million related to our first engine order and $14.8 million for contract revenue, most of which is related to that April development agreement. Q2 non-cash compensation was $393,000 and depreciation and amortization was $116,000. That concludes the financial results. We will now open the call for questions.

Thank you. We will now begin the question-and-answer session. [Operator Instructions] And our first question comes from Glenn Mattson from Ladenburg Thalmann.

Hi, good morning everybody. Congratulations on the significant achievements during the quarter. So first I am curious about, Alex I believe you mentioned that in 2Q you had several of the customers for the first engine that were highly interested and that you anticipated new orders in the next few months, A, can you talk about what gave just so much confidence that you would expect orders and B, maybe just kind of some background about how these customers kind of came about was it from seeing the first phone that’s out there or was it other activity that you have been doing?

Glenn these are primarily the customers we will start working with early this year. They received – one of the first recipients of our samples of the small display engine and they have been developing products throughout the year. So we feel like they are getting closer to the point where they completed development cycle and ready to discuss commercial terms with them. So that’s what gives us, gives me and gives us confidence that in the next few months we should see some additional orders. In terms of applications they are targeting anything that from embedded to accessories. And the recent launch by Ragentek in China, I believe once they start shipping it to their customers and end users we start using that device as a reference to show others what could be done. So we are excited about this. This engine has been working very well. The phone received very, very positive feedback from not just the media, but most importantly perspective users. So we feel confident about.

Great. And then on the Ragentek you said I think in the past that you expect most of that $6.7 million order to ship this year, is that still…?

That’s still our expectation, yes.

Great. On the interactive display, congratulations again on getting the product out on-time, can you give us a sense for how long that the processes between the release you had yesterday until design in and contracts could be awarded and that just kind of what is timeframe, what your thought process is on timeframe there?

It’s so customer, customer dependent. It depends – it’s really driven by two factors. One, they make decision to go forward with it. And second, how long will it take them to get the product out to market, because there is such a huge discrepancy that there is so much variance around this. Let us get the samples out, let us get some initial feedback and we will provide more color or potential in the next call. At this point in time, we just shipped the initial samples, it’s so premature to comment because we don’t have all other information.

Okay, that’s fair. And then on the $24 million I am curious, it kind of just came into play recently and already received the first milestone payment, can you talk about what was achieved so early in the process, I guess it bodes well for the long-term confidence in actually getting the – completing the program and getting a product to market?

Right. I think the thing to keep in mind is that the payments are not necessarily tied to the value of the progress that we made. And so you have to keep that in mind, but we are pleased with where we are on the contract.

Thanks. Steven the rest of the $3.2 million would that come in as kind of ratably over the course of the years, how you see that…?

We are using the percentage of completion method. So as we progress along on the contract parts of that $3.2 million it’s on the balance sheet would start to be recognized as revenue.

Okay, alright, great. That’s it for me. Thanks guys.

Thanks.

Our following question comes from Henry James from State of Michigan.

Good morning gentlemen. The first thing I would like to talk about a little bit is the customer Ragentek and I don’t know if there was any additional information you can give us about sort of their marketing plan whether they plan to try to market the product beyond China, I know you mentioned that they generally sell phones in India and Brazil and other countries as well and perhaps if there is any information on what carriers they might be working with?

Absolutely Henry, so first of all Ragentek is a mid-size smartphone maker that has quite presence in according to what we know in China, Brazil and some other countries. They have been known as to have top five top ten selling smartphones in those markets. One of things we like about them first and this is why we – this project has been on an accelerated path for us. They have done a significant study of demographics they want to target. They did very compelling competitive analysis how would they price this device, what would it offer, how would they charge premium for the features that they embedded inside. And because of this we have seen, we wish that some of the U.S. companies and other large companies done this level of marketing preparation as they have done, so that was very impressive. In terms of their initial rollout, based on what we know they made very small initial shipments in July and they started putting more phones in the market in August, primarily in China to start with. And based on what we know it’s through two markets. One is going to be through mobile operator that we can’t name it, because Ragentek will have to disclose it on their own and the other one through their version of Amazon. So once the product gets these China through several channels, they have expansion plans, they have not articulated to us specifics about this. But what we know is that the markets we described previously are their target markets first.

So I know they placed this initial order of $6.7 million, but as they rollout to other markets and I guess really just depending on the success of the product itself this could perhaps be much more significant than that order?

We hope so. We are excited about this. We just need to allow them some time in the second half this year to get these phones in the hands of consumers first before they can comment on any reorder opportunity. But at the beginning, the start has been exceptional. What they have done in the Mobile World Congress in Shanghai there was a major rollout. They had a lot of media coverage and the participation and most importantly again people who touched this phone and who saw it they were impressed. We will see, hopefully all translates into lot of sales for them and for us.

Okay. And then I just wanted to ask about the relationship with STMicroelectronics, [indiscernible] how is that going and I know when you first announced that, it’s joint marketing, but it also spoke to perhaps joint product roadmap, down the road and I was just wondering how is that going?

It’s continuing very well on three fronts. So first ST is helping us open a lot of doors into places where it’s difficult for us to get on our own and we go as a team, that’s number one. Number two, we continue – they continued to manufacture key components for our engines to-date. And number three, we are actually developing the roadmap together for next breakthrough solutions which we can’t comment at this time.

Okay, alright. Thank you.

Alright.

Following question comes from Kevin Dede from Rodman & Renshaw Capital Group.

Good morning Alex. Thanks so much and congrats all great work. You talked about two development deals that you won in the second quarter outside of $24 million one, I was wondering if you could just expand on those a little bit, I think that part of the question in my mind is not only specifically what you are working on, but it seems to me that one of the biggest problems you are faced with is just how to allocate all the work that you have now, as it seems to be following pretty hard, I know it’s a good problem to have, but I was just hoping you could give us some comfort that you are going to be able to meet all the deadlines that you are kind of faced with now?

No, it is a good question Kevin. Listen this is a good problem to have. We are growing. We are excited. We got some new fresh faces here, some really strong technical people who are helping us to get us to the next level. Fundamentally, about 80% of our resources today are focused on what we are trying to extract in the next 2 years. So this would be the display, interactive display engine and obviously with some of the investment into this 3D sensing only for industrial applications, but we also invested in small percentage into looking further out how do we extend our industrial applications engine to the automotive to provide solution when people we need in the next 5 years to be part of the product proposition in 2021 we need to put small investment at this point in time, because we want to be part of consideration for design-ins at the early stages. So again 80%, 85% is on the revenue that we expect to extract over the next 2 years and another 15% of investment is applied to a longer term opportunities that’s how we spend in it today.

Okay. Could you peel the onion back maybe a little bit on the development work that you are doing outside the 24 big deal that you won in April and yes…?

So the two NRA contracts that we had in addition to the April one are on track. We are really going to close them this year sooner rather than later. And we are looking forward to see what’s going to come out of this. Once we deliver our portion, the customer has need some time to evaluate, determine what’s next and we are optimistic that something may come up as well.

Okay. Can you give us a little feeling for how you evaluate to accept the project?

It’s – there is no specific criteria, basically both contracts were defeasibility studies, so we develop proof of concept system, they go test drive it. They combine it with their pieces. They look at the overall system, how it performs and once they have done it and they do their own internal planning like all the major companies do. And if this program gets to the next level of funding, we hope to be part of it, if it doesn’t we won’t. But we don’t know at this time.

Okay, fair enough. Can you talk a little bit about the software development requirement for the 3D sensing, I mean you made it a clear point that you need a strong partner there and I am wondering if you are to do development work with one particular strong partner, how are you able to secure enough of that IP to incorporate it with your own engine design and perhaps market it to other potential customers?

This is actually very important question. The interactive display engine is different in somewhat – some ways from just the display engine, because not only it outputs the image data, but you can actually see visible images, but also it provides 3D point cloud. 3D point cloud is not a gesture, it’s basically a collection of data that our system collects that needs then to be converted to features that are specific to various products. The reason we decided to move this portion out to the product, because we tried to reduce the cost and power consumption of what we provide, because there will be a redundancy. If we added that piece on our engine side, the engine will be prohibited with high cost and consume too much power for our mobile applications. So we decided, let’s do this, because most of the devices that we are trying to target or we are targeting today already have media processor, already have processing power line output there. But because of this you now need to develop this interface that takes our 3D point cloud data and converts it to applications specific software. What we decided to do first, we are focusing on few people who have the enthusiasms about these products and have the skills, but we also are trying to develop with third-party, a third-party solution that could be provided later to people who don’t want to invest into their own software application development. So we would pursue in both starting with the few key customers first and once we have more samples available we will get start targeting and developing third-party solutions that will be done by somebody else, but will be provided in conjunction with our engine to OEMs and ODMs.

Okay. Thanks Alex. I appreciate that. Now Steve, you mentioned one development, one development deal that you weren’t able to recognize revenue on and I apologize that which couldn’t keep up…?

Yes. Sorry for the speed. It was simply that we did make some shipments of product to our Ragentek on our new engine. But we didn’t recognize revenue on that. That’s the revenue we didn’t recognize, those shipments went out, but the acceptance period hadn’t expired and so we don’t recognize revenue until the acceptance period is expired on product shipments.

Okay. Do you support that that happened near-term or how should we think about that?

Well, it’s just a few days.

Given that’s [indiscernible] in the market?

It’s just a few – it’s a few days for them to have acceptance, but shipped right at the end of the quarter, so.

Okay, got it. Okay. I appreciate and understand the range of guidance that you reiterated regarding your engine development plan, I was wondering if you could potentially make it a little more granular vis-à-vis the current quarter and the fourth quarter just so we have a better understanding on what the P&L looks like near-term?

Well Kevin at this point we are going to stick with what we stated publicly, but you can take the, we discussed $6.7 million contract first order, we expect to deliver in the second half, that’s our current plans. Plus Steve mentioned that we started recognizing against this large April development contracts, so expect revenue coming from this source. Plus we are working on new purchase orders and we are still receiving royalty from Sony. So a combination of all those four, all those factors, we believe the second half is going to be much bigger than the first half for this.

Okay, fair enough. Any feedback from Sharp on the robo phone or Sony sell through?

No updates from Sharp they have been entangled, I mean Foxconn acquired them as you know or invested heavily. And they are doing reengineering every processes, they are redoing all the decisions. So once all this dust settles we will understand more what’s going on with Sharp and Foxconn. But on the Sony’s question we [indiscernible], they ask us. So we – today we are still recognizing – receiving royalty from them of this other engines. We don’t expect any new orders in any foreseeable future, but we never accounted on this as a part of our growth for this year. So if something comes up, it will be great upside, but if it doesn’t, we are okay.

Okay, alright. Thanks very much. Thank you very much. I appreciate it, Steve.

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

Hey, look we accomplished a lot in the past three months. First, we completed several milestones on the $24 million contract with the top technology company. We begun recognizing revenue and received $14 million in payments during last quarter. We believe that the product this top technology company is developing could become home run in 3 years. Second, I was fortunate to be invited by Ragentek to attend the unveiling of their very sexy VOGA smartphone equipped with our PicoP technology. It was priceless to see first hand, the positive reactions from the media covering this event and more importantly the positive reactions from the prospective users who sold this elegant phone in action. We hope that their product becomes a huge success in China first and other countries where and it would encourage others to follow Ragentek suite. Finally, we announced the first shipment of development kits of the interactive display engine to select customers to start applications development process. The timing is consistent with the schedule we shared with you during the last call. This offering is unique in many ways because it merges the display and 3D time of flight sensing functions in one package and unleashes multiple applications and use cases for the emerging market opportunities in the IoT space, Internet of Things. Starting with the smartphone connected devices. We are very excited about Microvision’s future. We are executing on all our current priorities and we developed a strategic roadmap that addresses emerging market opportunities such as IoT and autonomous vehicles which offer a tremendous longer term growth potential for our laser scanning technology. At this point in time on behalf of Steve, Dawn, I would like to thank you for your continued support. And thank you for joining us this morning.

Thank you. Ladies and gentlemen, this concludes today’s conference. Thank you for participating. You may now disconnect.