MicroVision, Inc. (MVIS) Q4 2017 Earnings Report, Transcript and Summary

Good afternoon and welcome to the MicroVision Fourth Quarter Financial and Operational Results Conference Call. All participants will be in listen-only mode. [Operator Instructions]. After today’s presentation, please there will be an opportunity to ask questions. [Operator Instructions]. Please note that today’s event is being recorded. I would now like to turn the conference over to Lindsey Stibbard. Please go ahead.

I'd like to welcome everyone to MicroVision's fourth quarter 2017 financial and operating results conference call. Joining me on today's call are Perry Mulligan, Chief Executive Officer; and Steve Holt, Chief Financial Officer. The information in today's conference call includes forward-looking statements, including statements regarding benefits under existing contracts and the negotiation of future agreements; our competitive advantages; progress with prospective customers; business execution; projections of future operations and financial results; product development, applications and benefits; availability and supply of products and key components; commercialization of our technology; market opportunities and growth in demand; plans to manage cash used in operations; as well as statements containing words like believe, goals, paths, expects, plans, will, evolve, could, would, anticipate, transforming 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. We encourage you to review our various SEC filings, including our third quarter 2017 Form 10-Q filed with the SEC on November 2, 2017, our Annual Report on Form 10-K filed on March 6, 2017, and other SEC filings made from time-to-time in which we discuss risk factors associated with investing in MicroVision. All forward-looking statements are made as of the date of this call, and except as required by law, we do not intend to update this information. The financial numbers presented on the call today are included in our press release and in the 8-K filed today. Both are available from the Investor Relations section of our website. This conference call will also be available for audio replay in the Investor Relations section of MicroVision's website at www.microvision.com. And now I'd like to turn the call over to Perry Mulligan. Perry?

Thank you, Lindsey. Good afternoon, everyone. I'm pleased to be speaking with you on my first MicroVision earnings call. It's been a little over three months since I was appointed CEO, and I want to let you know that I am excited about working with a very talented team. I have no doubt that our technology is amazing, and I believe it is staged for successful commercialization. To that end, I am committed to moving MicroVision forward to realize the opportunities in front of us. Let me be clear, we are committed to evolve MicroVision from an R&D company to a solutions company. We have already started the cultural change required internally. We will monitor the progress of this transformation by targeting to achieve profitable revenue in 2019, delivering shareholder value. We remain committed to our business strategy targeting five verticals with our scanning and display capabilities. The five verticals are grouped as follows: Two in the display category: Stand-alone display; and display used in artificial, mixed and virtual reality. Two in the perceptive LiDAR space: Consumer LiDAR and automotive LiDAR. And one that combines both capabilities in our Interactive Display solutions. We have also refined our go-to-market strategy to focus on Tier 1 market makers. Our approach to these customers is very concentrated and involves engagement in multiple organizational disciplines within these companies to gain their support. This is not about selling off-the-shelf components but providing solutions to these organizations in a very engaged and interactive manner. Over the course of my career I have been involved in launching over 1,000 new products and maintaining strong gross margins in difficult markets. I have learned that it is essential to have the right product at the right time. One that provides the customer with a “must have” benefit that unlocks value for them. To capitalize on the opportunity, however, one must crisply execute a focused go-to-market strategy, a robust product development process and operational execution excellence. This is how we will seize the opportunities in front of us. Said differently, it is not just about our technology. It is about unlocking value or increasing the utility of our customers’ products. We are a B-to-B company, so for us to win mindshare and placement in their product roadmaps we need to understand our customers’ end customer demographics, the key experiential solutions they are trying to solve and the mechanics of how to get incorporated into a Tier 1 market maker’s product launch. This is not about selling a hardware product but providing a solution. We have seen evidence that we can be successful with this approach with the Tier 1 Development Agreement that we started last April. Let me describe how these changes affect our customer engagements on our newest product offerings. As we look at our interactive display and consumer LiDAR product offerings they provide excellent use cases of our technology. Historically, we may have tried to market these products at an early stage. Today, we are enhancing our products by adding Machine Learning capability to our sensors to bring a more developed solution to market. The net result is a device that is easier for our customers to integrate into their products, providing a faster time-to-market. But the real advantage is in the evolution of the device to be “perceptive”. This ability to translate data at the sensor into simple messaging is very powerful. We believe it will enable our solution to make the end-user experience one that is much more intuitive, making it easier for them to interact with the underlying platform and applications. As we all know, if it is easier to interact it becomes easier to transact. So, let’s apply this feature to customers with large Artificial Intelligence or AI platforms today. We know that there are challenges to monetize these platforms using voice only. Research shows that adopters in key demographics have high expectations from these devices. However, they are only using a small fraction of the device capabilities because of today’s limited audio user interface. We believe our PicoP® Laser Beam Scanning and LiDAR technologies can unlock monetization opportunities for our customers and enhance the end-user’s experience by providing a seamless multi-dimensional Input-Output or I/O for end-user interface. With our display, Interactive Display and consumer LiDAR meaning 3D sensing products we can provide these AI platforms with a way to interact with users through voice, image, gesture and spatial awareness that is not easily duplicated using other solutions. We plan to provide a much more robust IO for AI. So, by combining our hardware, software, and firmware algorithms with our machine learning capabilities we can unlock value for our customers by providing them a truly differentiated and superior solution. We believe that we are moving closer to the point in time where commercialization of our technology into mass market products will become a reality. I have been working closely with the management team and the technical teams to improve our execution so that we can successfully commercialize and bring these products to market, on time, at the right price point and quality to ensure success. I am particularly encouraged how our work, targeting one of these verticals, with a Tier 1 technology company on the $24 million contract we announced last April is proceeding. We currently anticipate product revenue from this project to start in early 2019. I am pleased with our progress so far and remain optimistic we can deliver the balance of our development commitments before the end of Q1 2019. I'll now turn the call over to Steve, our CFO, who will discuss our financial performance in the fourth quarter and offer some commentary of how we see 2018 shaping up.

Thank you, Perry, and good afternoon, everyone. I'll start by reviewing the fourth quarter 2017 income statement. Fourth quarter revenue was $2.6 million, comprised of approximately $2.3 million of contract revenue and $300,000 of royalties. This was in line with our January 18th press release that indicated revenue would be in a range between $2.4 to $2.7 million. Contract revenue in the fourth quarter was $1.1 million lower than the $3.4 million recorded in the third quarter. The decrease was due to the fact that in the third quarter we completed two contracts that accounted for $1.5 million of revenue. Revenue on the $24 million April contract was $2.1 million in the fourth quarter, about $300,000 higher than the $1.8 million we recorded in Q3. For comparison purposes, revenue in the prior quarter was $6.1 million, while revenue in the fourth quarter a year ago was $2.9 million. As we noted in our January announcement, we had planned to recognize $4.3 million of product revenue during the fourth quarter by completing the remainder of a previously announced $6.7 million order from Ragentek, a Chinese smartphone manufacturer. This customer, however, requested a deferment in taking the engines until 2018. As a result of our customer’s request to delay shipment, revenue for the full year was $10.9 million, compared with $14.8 million in 2016. Gross profit for the quarter was $10,000 compared with $243,000 in the prior quarter and $505,000 in the same quarter a year ago. The decrease over the prior quarter was mostly due to less contract gross profit because we had less contract revenue. Fourth quarter operating expenses were $7.9 million, compared with $5.5 million in the prior quarter and $5.8 million in the same quarter a year ago. This increase, compared to the prior quarter, was due to increased costs for materials and subcontractors, as we produce demonstrators, and prototypes of our new engines and develop ASICS that are needed to get our new products ready for market. We have also hired more engineers and their costs increased operating expenses by about $400,000. Our fourth quarter net loss was $7.9 million or $0.10 per share, compared with a net loss of $5.2 million or $0.07 per share in prior quarter and a net loss of $5.4 million or $0.09 cents per share in the same quarter a year ago. We ended the fourth quarter with cash and cash equivalents of $17 million, compared to $25.3 million at the end of the prior quarter and $15.1 million at the end of the same quarter a year ago. Before I turn the call back over to Perry, let me give a recap of the events of 2017 and comment on our outlook for 2018. During our third quarter earnings call in November of 2016, we laid out our plans to launch our small form factor display engine in 2017, our interactive projector in late 2017, and our 3D sensor in 2018. From those engines, we expected revenue of $30 million to $60 million in the 12 to 18 months after the first engine went into production. Since we shipped that first engine in Q3 2017, we then expected to hit the $30 million to $60 million target by the end of 2018. Five months after our November 2016 earnings call, in April 2017, we signed a $24 million contract. We are excited that we were awarded this contract as it represents a design win with a Tier 1 technology company and the product revenues associated with this opportunity, which we expect to begin in 2019, can be significant. At the time we signed this contract, we believed the additional work would cause other projects to slip by approximately three months and we announced that on the first quarter 2017 earnings call held in April of 2017. While the $24 million contract is progressing well, it has prevented some critical resources from being deployed on other products. And it now looks to us that the delay on other products is longer than just three months. Also, in 2017 we released development kits of our interactive display engine. The feedback we received was that the display needed to be brighter. We are implementing plans to produce a brighter engine, but that change also cost us some time. The result of these factors is that we now expect our interactive projector and our Consumer LiDAR product to both be ready for volume production in Q1 of 2019. On our last earnings call we indicated that we were in the latter stages of closing orders for our small form factor engine. While we pursued those orders, those negotiations did not produce satisfactory selling terms and did not result in orders. So, for 2018, we see revenue from the following: Approximately $9 million in contract revenue from the $24 million April contract, and $4 million from the remaining Ragentek orders. The Ragentek orders have been built and are ready to ship, however, our customer has experienced slower than anticipated demand and has asked that we ship throughout 2018. Those sources should generate approximately $13 million to $14 million in revenue in 2018. We are working to increase 2018 revenue. But based on our existing backlog, that’s how we currently see 2018. Finally, let me also comment on our S-3 and S-1 filings. In November, we filed an S-3 that was subsequently not approved by the SEC because in October 2017 we were late on a say-on-pay filing and are not eligible until November of this year for an S-3. Any financing involve registered shares will have to be on an S-1 until we are eligible for an S-3. Having an S-1 through the SEC review process will give the company the flexibility, but not the obligation to raise additional funds if needed. I'll now turn the call back over to Perry for some comments before we open the call for questions.

Thank you, Steve. MicroVision has created a solid technology foundation of IP and technical know-how. Coupled with successful execution we are positioned to capitalize on several large emerging markets that we believe would benefit from our display and LiDAR technologies. I am encouraged by the progress we are making on our previously announced $24 million development contract with a Tier 1 technology company. As I mentioned in our opening remarks, we are on track with this project and currently expect this project to translate into product revenue in 2019. I am also excited by the interest that prospective Tier 1 customers have expressed about the products we demonstrated last month at CES in Las Vegas. We believe that successful follow on activity over the next six months could position us to reach revenue levels where we can begin to post profits during 2019. Let me wrap up my prepared remarks by saying as I transition my role from being a board member to a member of management, I'm focused on creating a culture of success and transforming our company from being a technology innovator into a solutions provider. We are focused with a Go-to-Market strategy that targets Tier 1 opportunities and are committed to unlocking value for our customers, enabling them to monetize new opportunities. In the end we believe that this is the path by which we will deliver shareholder value. I look forward to sharing more details with you as 2018 progresses. We will now open the call for questions.

[Operator Instructions] Our first question comes from Glenn Mattson of Ladenburg Thalmann. Please go ahead.

So first, can you give us just a better sense for, a, why you think the product launch wasn’t as successful as perhaps may be, you might have originally hoped. And then b, the confidence that you have in that, they are going to take this complete the contract in the first half of '18.

We're confident that they are going to take the units in 2018, we've a good relationship with them and we’re working well with them, so that’s -- we have confidence in that. As for the why it's difficult for us to know exactly they don’t tell us everything, I think we're expecting as they are making some tweaks to their product and I think they are expecting that sales will improve here as they make some changes to it.

Okay and do you know if inventory in the field has been exchausted at this point?

I'm not aware of the level of inventory they have at their factory if that’s the question, we don’t think they have generally too much built up there tough.

And moving over to the $24 million contract a little bit of color is there any road marks we can expect investors can expect on the outside to kind of judge the progress over the course of the year? Are you able to announce either who the customer is or what the end market is or product maybe towards the end of this year if you are going to start reviewing, seen revenue early in '19 perhaps?

Yes, we obviously can't disclose, it's up to them to disclose the product and when they are going to do that. I think at some point later this year you would start to see some activity from that around orders for 2019 and then off course we will keep you apprised, but the work is progressing and things are on track which they are.

And what about the hiring plans for the coming year is this SaaS where it needs to be at this point or do you have more engineering talent to hire?

We have a few more engineering heads to hire, we are hiring the few more.

Can you give us cash flow from operations for the quarter?

7.6 was the cash flow.

And Q1 will be better because you will get some of the inflow from Ragentek. Is that right?

Well we don’t make projections on our quarter but I would say yes, this quarter had very little cash coming in from those kinds of orders and off course we built the product out, so that is definitely headwinds.

Couple more, I guess Steve at the end you said working on potential opportunities to increase 2018 but that's how we see it now what kind of things could fall into that category what kind of things are on the front runners so to speak.

Product certainly product sales, development agreements and licensing agreements those are all on the table.

Okay, last thing Perry you spoke to building complete solutions that are better easily adaptable so I guess the thing to take away from that is that the next round of orders when they come there wouldn’t be this kind of year -long development agreements type arrangements, it would be more for products that can be built into ready products is that correct?

Yes, the interpretation that you've reflected there is exactly what we are expecting Glenn. What I would caution though is as we work with each of these Tier it becomes interesting to see how they want to make their solutions unique, we are here trusting that the capabilities of the products for providing enable them to unlock the value that we want, that we think they can achieve by using them in as close to standard form as possible but I respect their wishes to have fifth form and function derivatives that allow them to go-to-market with something that's looks a little deep. So, translated loosely, it means I agree with your statement and we expect the commercialization of these things to require minimal amounts or marginal amounts of additional development work and hopefully the time to market comes much more compressed.

[Operator Instructions]. Our next question comes from Kevin Dede of HCW. Please go ahead.

I was wondering if you could just offer a little bit more color about the commentary you made around 2019, in delivering profitable growth, is that something we see happening for one quarter or full year? And I guess specifically what you plan on doing to convert the company from a technology developing machine to something that offers complete solutions. I mean I think I understand what you are trying to say but it seems to me like it’s more semantic than your operational change.

Thanks for the question Kevin, maybe I will do it in reverse order. So, if I talk about the transformation we are trying to achieve here, when we talk about engagement with the Tier 1, I think it’s very important to recognize that the level of interaction with those customers is much more demanding because it’s not adequate or sufficient to have one organizational groups buying. You need multi-departmental support in these engagements to make sure what you bring in to the party, what you bring to the solution in fact is something that they can monetize and that they can prioritize. It’s that focus on end user demographic, it’s that focus on use case, it’s that focus on unlocking the value proposition for them. But I think I am referring to as I talk about going from a technology only company to a solutions provider, and I do believe that while it’s not a big stretch for us from headcount perspective, I think it’s a fundamentally different approach to how we engage discussions with customers. Relative to 2019 your question on, are we going to be profitable for the entire year. I think we are targeting to be profitable in 2019 based on success and traction we gain from bringing these new products to market. So, I don’t want to comment any more than that. But I do believe that if we are successful in executing the plan that we have, you will see profitability from us some time in 2019.

Okay. So, your confidence and your ability to do this predicated on how you rationalize cost or is it more belief that your large Tier 1, the one associated with the $24 million development contract is going to be sufficient enough to deliver the type of revenue that you are going to need to get to bottom-line that you are talking to.

So, Kevin we are committed to growing the company to success. And to that end, we need to have multiple products launched with several tier 1 across multiple verticals. So, while I believe that the market segments we're dealing with are significant enough in that in those side, to generate meaningful and material revenue to the company our obligation is not to try to be restricted to one solution but rather to have plethora solutions available in the market at the rough time in '19 to while as to gain traction across all of them or several of them. So yes, it's true that when you deal with a large tier 1 any single event could provide material meaningful revenue to us and could significantly achieve the goals we both lined. But our desire is not to have our products restricted to one but to have several.

Can you please provide the time to visibility that you think you will need to make that price, I guess that’s the statement in 2019 or I mean how do you see clearly, it’s a big deal, in terms of revenue you're following out this year, but I'm just wondering what all do you think happened this year that drive you to your goals to 2019?

Again, leveraging the success from the engagements, we have so far, we must demonstrate that we have secured product revenue plans and product launch plans with tier 1s through 2018, if I'm going to deliver on what we're describing in 2019. So, this is not predicated on us hoping by January of 2019, I have a purchase order, this is predicated and as doing all the necessary work to secure those design winds today, tomorrow and the upcoming month to make sure that we’re positioned to accomplish that.

Okay so, I'm trying to figure out the best way to approach this, it's not that I haven't seen the incredible progress that this company has made specially over last year, and guys exhibited and capabilities exhibited [to the year]. But I guess there is a little disconnect, and maybe you can help me out in understanding this is that clearly, we didn’t see the type of order, velocity and timing that we were hoping [indiscernible] internally and we didn’t see it. And I'm kind of wondering what we think is changing.

Again, I think that the fundamental shift here to work with tier 1 market anchor, somebody that controlled the space that they are in to the extent that they can have meaningful products launch in volume even as they test the market, is a fundamental shift between what we’re describing as a go forward strategy and what you referenced in cases that you just described.

Our next question comes from Henry James of The State of Michigan.

The first thing I would like to talk about, I think you said and again now that were looking forward for revenue from sort of our second and third engine for 2019 now, and I heard that you referenced consumer LIBOR and is that the LiDAR product that the same sort of product that you've talked about before only with perhaps more solutions provided through it. I know in the past we've talked about LiDAR for sort of industrial uses and perhaps automotive and so is that when you say consumer LiDAR is that what they are talking about?

When we think of the LiDAR solution Henry, thank you for the question. When we think of the LiDAR solutions we think of them in basically three sorts of targeted distances. So, I think that the interactive display solution we talk about that combines our display capabilities with our sensing capabilities it's been 1 meter 1.5-meter kind of range. When I reference consumer LiDAR I think of a device that has 10-meter range 33 feet. And then when we reference the automotive solutions in near term in a new vehicles collision avoidance we think of something as a 30-meter range appropriate perhaps for not being solutions and I think I've said collision avoiding. So, while we've discussed I think historically let's be comment on this the use of our 10-meter sort of solution in the industrial space we really believe that the augmentation of the precepted element to it will allow us to be readily adopted within a consumer space and we're seeing a lot of interest from some of that people you would expect to be looking at this as they can look to figure out how they best use it. It's about just the fundamentally inherent advantageous to anything that's open. The size factor of it the density of the point cloud of it, the sophistication of the software that it supports, this will be a very interesting solution that I think you will see in the market.

And I guess then as it is something that at least at this point now it seems to be more targeted at least, the 10-meter product or for the consumer market?

That's exactly what we're saying Henry but I would just caution that as we focus our energies we still receive a lot of interest from other people who might want to deploy it in different use cases. So, I don’t want to be so my opec to say that we would turn the way the purchase order because somebody wants to use it in an industrial obligation.

Okay, and so suddenly I guess when we talk about augmenting the perceptual capabilities I guess that's what we're talking about but by adding the machine learning functionality and is that what causing sort of more time to develop this product?

What we've uncovered Henry as we look at the product is what if perhaps if I can put this in context for you. There are solutions out there today that do 3D scanning perhaps as an example for facial recognition. They require high energy and use approximately 30,000 points to do that calculation. Our range of solutions will provide between 5 million and 20 million points per second of resolution in the 10-meter space. So, the density of the information we have at the sensor allows us to mix simple messaging analytics or messaging content that enables users to do so much more with the device, they’re simply trying to flood them with this plethora of data. It is almost diametrically close to the way those entities are solving sensitive applications today, almost everybody is trying diligently to get more information from the sensor, pass it down the pipe to a centralized processor that allows it do a calculation and figure out what’s going on. We have so much information as the sensor. We have singing messaging which just makes it much easier for the entire system to be responsible.

Okay. And that mainly I guess in the sort of the LiDAR product is that …

Yes, it is.

Systemic be flat in the interactive projector.

It is, so the capability I am describing is perceptive element exist within the context of the 1 meter, 1.5-meter interactive display, the 10-meter display and the 30-meter display. Perhaps the best way to think of these Henry is to think of them as having sort of different levels of vocabulary. The things that the 1-meter display -- sorry the 1-meter LiDAR will have to recognize will be a relatively small number of things, gestures, point, touch, compressions, squeezing the picture, flipping the page. In the 10-meter LiDAR you can see how that number of things that would have to be recognized will increase. For the device to be able to send the message that says it’s your child walking towards an open door versus your dog running through a dog port, with the example of how those differences made it. It’s you walking down the hall, pass the bouquet, so don’t turn the legs on for the bookshelf or your wife walking towards to the bouquet to get a book, turn the legs on here and illustrate it. So those you can see that the language or the vocabulary perhaps of the device would increase and then within the automotive space would increase the gap.

And then one last. I think always that, I heard that you guys have at least sort of display product that for deck and sense at the same time, I don’t know if you think about that?

That is our interactive display. So, each of the scenario and when we talk about the IO for AI. I am not trying to be cute with acronyms but if you think of being in the whole environment we talk about a suite of solutions. Think about our display imaging embedded in your voice only device so that as you shave in the morning not only do you listen to the music to see it display on the washroom wall, that becomes a little bit more meaningful experience as you walk down the hall towards the kitchen I assume the device knows it's you that’s walking down that hall, adjust the coffee and just turn slice appropriately and then interactive display that’s invisible but when you call it up, comes out of an Alexa type device so there is something of that nature that allows you to interact with it, because of the sensing capabilities just to recognition and then disappears when it's not required. So, we really see this as sort of a suite of solution that helps AI platform with their user interface.

This concludes our question and answer session. I would like to turn the conference back over to Perry Mulligan for any closing remarks.

In closing I want to thank our employees, our business partners and our investors for their support and I look forward to reporting our progress over the next several quarters. Thank you. Operator, please go ahead.

The conference has now concluded. Thank you for attending today's presentation, you may now disconnect.