MicroVision, Inc. (MVIS) Q1 2018 Earnings Report, Transcript and Summary

Good afternoon, and welcome to the MicroVision First Quarter 2018 Financial and Operational Results Conference Call. All participants will be in listen-only mode. [Operator Instructions]. After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions]. Please note this event is being recorded. I’d now like to turn the conference over to Lindsey Stibbard. Please go ahead.

Thank you. Good afternoon, and welcome everyone to MicroVision’s first quarter 2018 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 license agreements 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, ensure, 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 Annual Report on Form 10-K filed on February 23, 2018 and other SEC filings made from time-to-time in which we discuss risk factors associated with investing in MicroVision. These risk factors could cause results to differ from those implied or expressed in our forward-looking statements. All forward-looking statements are made as of the date of this call, and except as required by law, we undertake no obligation 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. We have also posted a slide deck that provides an overview of MicroVision on the Investor Relations section of our website. In addition, on June the 5th, we will be conducting our Annual Shareholders Meeting in Redmond, Washington, and shareholders are welcome to attend. Information about the annual meeting is posted on the Investor Relations section of our website. MicroVision will also be present at the Ladenburg Technology Conference taking place in New York City on May 31. Information about the event will be posted on the Investor Relations section of our website. And now I’d like to turn the call over to Perry Mulligan. Perry?

Thank you, Lindsey. Good afternoon, everyone. Now with my first full quarter as CEO behind me, I’d like to share my thoughts on the progress we have made and the key milestones ahead. I’m encouraged that we are moving in the right direction that will pave the way to achieving profitability during 2019. On our last call, I reaffirmed our commitment to five vertical markets: Display-only; augmented or mixed reality display; interactive display; consumer LiDAR; and automotive LiDAR. History has clearly indicated that we have had trouble unlocking value for our customers in the display-only vertical. As we considered our options, we looked for a solution that enabled us to get this technology into the market, while improving our position to serve the other vertical markets we are targeting. I’m pleased to announce that we signed a new $10 million license agreement for display-only products. The license fee has all of the attributes we think are necessary to be successful providing this technology to Tier 1 customers. This worldwide exclusive license agreement with the leading global technology company is for the manufacture and sale of display-only products based on MicroVision’s reference designs. This agreement is exclusive to display-only technology, and as such, does not include rights to our augmented or mixed reality, interactive display, or LiDAR technologies. There are four basic elements to the new display-only license agreement. One, payment of $10 million licensee fee; two, expected receipt of NRE or non-recurring engineering expenses associated with the design transfer and manufacturing support; three, the ongoing supply of MicroVision MEMS and ASIC that must be used in the licensee’s products; and four, minimum purchase requirements for MicroVision MEMS and ASICs for the licensee to maintain exclusivity. A cornerstone of this deal was that, we believe our partner shares our focus on Tier 1 customers. We also believe the subsequent volume that we expect from our licensees success with display-only products in Tier 1 customers will result in a lower-cost of our components, which could reduce the cost of products serving other verticals that we expect to be available for mass production in 2019. We specifically expect our interactive display and consumer LiDAR solutions to benefit from these overall cost reductions, thus facilitating necessary price points for our customers. Another accomplishment in the quarter came from a $24 million contract we signed a year ago with the Tier 1 technology company. Our engineering teams continue to make progress on this program and have completed the next milestone for payment. We expect to receive the $2.5 million payment in the current quarter and plan to have the work on the next milestone completed by the end of this quarter. As we have previously communicated, we remain on track to have the balance of the work on this development agreement completed in Q1 of 2019, with product launch expected to follow shortly thereafter. Now let me adjust the focus slightly and discuss our new product developments that we plan to have ready for mass production in 2019. As we outlined in our previous call, we have refined our go-to-market strategy to focus on Tier 1 customers. As it relates to our interactive display and consumer sensing products, we’re specifically targeting customers with artificial intelligence platforms. We believe that enhancing our product strategy and incorporating machine learning into our sensor products will make it easier for our customers to integrate our solutions into their products, providing them with a faster time to market, and a more natural end user experience. We’re convinced that our display, interactive display and consumer LiDAR products can provide AI platforms with input/output capability that are unavailable today. By enabling users to interactive voice image, gesture and special awareness, it should be easier for them to interact with an AI platform, making it easier for the user to transact, increasing the monetization opportunities for our customers. To enable these products to be successful, we need to deliver three elements in our solutions. First, performance that meets or exceeds customer expectations; second, had an acceptable price point; third, product available at the right time synchronized to the customer’s product launch. We expect that the new display-only license agreement that I mentioned should help us lower our cost and thus allow us to hit the right price for our customers. Let me now address where we’re positioned regarding the other two items I just mentioned. Our product solutions are contingent on the core elements of our technology. Here we have also made significant strides to ensure the performance and feature set required by our customers are met. Let me be specific. We recently provided samples for customers evaluation of our new MEMS scanner. We have provided samples to our customers of our new time-of-flight ASIC. We taped out our next generation analog ASIC and made significant progress on our next generation digital ASIC. All of the core elements of our technology remain on track to meet our product requirements for mass production in 2019. Beyond the hardware, the machine learning team continues to develop a new user experience for OEMs, enabling a unique customer experience from our sensing products. The product made with these key technology drivers should ensure that we have the necessary performance for our solutions at the right time, with the right price, for the market. In addition to the progress in our core technology, we are currently working on the next generation of development kits for use with our interactive display and consumer LiDAR solution. Successful execution and marketing in these two areas could enable us to have customers products incorporating our modules introduced into the marketplace in 2019. The adoption of our interactive display model – module would represent a significant step forward in the evolution of smart speaker product category. Our consumer LiDAR activities are currently focused on smart home and security applications, where our significantly higher resolution combined with machine learning capabilities would represent another major step forward in the category’s evolution. We are also continuing to work on our collision avoiding solutions with our automotive LiDAR technology. While we believe our technology can provide a superior solution to those in the market today, we do not expect revenue from automotive applications in the near-term or to contribute significant revenue in 2019. Let me conclude my opening remarks by saying, we remain committed to the five verticals that I discussed on the last call, believing that they have the potential to unlock value for our customs. Again, these verticals are augmented and mixed reality, display-only, interactive display, consumer LiDAR, meaning 3D sensing and automotive LiDAR. The markets we are targeting have exceptional growth potential. We believe our technology and the underlying ability to deliver it has never been better. I’m convinced, coupling these elements with a very customer-focused, value-driven, concentration of effort, will result in us increasing shareholder value. I’ll now turn the call over to Steve, our CFO, who will discuss our financial performance in the first quarter and offer some commentary on how we see 2018 shaping up.

Thank you, Perry. Good afternoon, everyone. I’ll start by reviewing the first quarter 2018 income statement. First quarter revenue was $2.2 million. Essentially all the quarter’s revenue was from our contract with our Tier 1 technology customer that we announced in April 2017. For comparison purposes, the revenue in the prior quarter was $2.3 million, while revenue in the first quarter a year ago was $568,000. I would like to point out that the company has implemented Revenue Standard ASC 606 for the year beginning January 1, 2018. We transition to the new standard using the full retrospective approach. So historical periods have been adjusted as if this new standard was in place for historical periods. The result is that some of the numbers we reference for Q1 or Q4 of last year won’t sound familiar, because they’ve been adjusted as if the new standard was in place in – for the historical periods. Revenue in Q1 was below our expectations, because our customer Ragentek asked that we not ship product to them in the quarter. The result is that, those units remained in our inventory. This is disappointing as Ragentek hasn’t taking any units since September. However, we are aware, they’re working on new products that use our modules and believe they remain committed to their contractual obligations. While Ragentek is contractually obligated to take the units, we believe the proper course of action at the current time is to be a little more patient and allow our customer to launch these new products. The backlog related to Ragentek totals $4.3 million. Gross profit for the quarter was $315,000, compared with negative $248,000 in the prior quarter and negative $48,000 in the same quarter a year ago. The improvement over the prior quarter was mostly due to lower production-related expenses. Our first quarter operating expenses were $7.4 million, compared with $7.9 million in the prior quarter and $5.9 million in the same quarter a year ago. The decrease compared to the prior quarter is related to lower SG&A expenses. Our first quarter net loss was $7.1 million, or $0.09 per share, compared with a net loss of $8.1 million, or $0.10 per share in the prior quarter and a net loss of $5.9 million, or $0.09 per share in the same quarter a year ago. We ended the first quarter with cash and cash equivalents of $7.2 million, compared to $17 million at the end of the prior quarter and $7.7 million at the end of the same quarter a year ago. The cash burn this quarter of $9.7 million was unusually high as we did not receive any cash payments from customers. However, we do expect to receive $2.5 million later this month from our Tier 1 customer and expect to invoice that customer another $2.5 million later this quarter. Additionally, the $10 million license fee that Perry mentioned has a $5 million payment scheduled in Q2 and a second $5 million payment scheduled in early October. So if you add all that up, we expect to receive $15 million between now and early October in addition to the funds that we expect to receive from Ragentek. On our last earnings call, I recapped the potential sources for 2018 revenue and I will update that now. We expect to recognize this year around $8.5 million to $9 million from the $24 million Tier 1 contract and $4 million from the Ragentek order. Additionally, we have two new revenue sources from the display-only license agreement. First, we expect to provide technical support to the licensee as they prepare to launch products. We expect NRE revenue of $3 million to $4 million related to this quarter. The $3 million to $4 million is not under contract and therefore, not yet in backlog. Second, is the $10 million license fee. We have not completed our determination on how we will recognize revenue for the license fee, so I can’t give you the 2018 impact today. When one adds up these opportunities, we have 2018 revenue of $15 million to $17 million, plus a yet to be determined amount of what we can recognize as revenue from the $10 million license fee. Last year, our revenue was $9.6 million, when adjusted for the new Revenue Standard. I’ll now turn the call back over to Perry for some comments before we open the call to questions.

Thank you, Steve. As I mentioned on our last call, MicroVision has created a solid technology foundation of IP and technical know-how. I’m now more convinced than ever in our revised go-to-market strategy, targeting Tier 1 technology leaders. Our recently signed licensing agreement for display-only products, coupled with successful execution of new product development could position MicroVision to capitalize on several large emerging markets with our display and LiDAR technologies. I remain encouraged by the progress we continue to make on our previously announced $24 million development contract with the Tier 1 technology company. Our teams work on the components and development kits that we need to market our technology for 2019 product is further evidence of the progress we’re making to become a solutions provider. Successful follow-on activity in the coming months could position us to reach revenue levels, where we can begin to post profits during 2019. Let me wrap up by saying that, I’m pleased with the focus of the team, the results delivered this quarter and the progress we’re making on our journey from an R&D company to a solutions provider. I look forward to sharing more details with you as the second-half of 2018 progresses. We will now open the call for question.

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Glenn Mattson with Ladenburg. Please go ahead.

Hi, guys. Can you hear me, okay?

Yes.

Great. Sorry, if there’s background noise, I’m on the road travelling. But – so great. Congratulations on the new order you announced today. Certainly, very interesting. Can you give us an idea of what kind of scale you expect once this gets up and running either something about the minimum purchase agreements or just kind of how big the end markets are that these products should be developed for? And maybe you could even talk about what kind of end – exactly what kind of end market applications you foresee?

First, on the size of it. So there’s a – the minimum to maintain the exclusivity is a certain quantity and there’s product mix that can affect us. So it’s a little bit difficult to put a handle on. But generally speaking, we’d say that, the dollars to maintain the minimum would be in the range of $20 million a year, plus or minus $5 million depending on product mix and again, that would be the minimum to maintain the exclusivity. So that kind of gets us some kind of calibrations.

As far as the products that you are referencing, Glenn, we still believe that display-only has a space or place in the AI platform architecture. So we fully understand that they could conceivably be targeting that kind of an application. I absolutely believe that they have other venues that they’re exploring as far as consumer electronics, as well as. advertising and other applications. So the suite of solutions that they can come up with are pretty exhausting – pretty large and I leave it to them to articulate how they plan to come into the marketplace. But again, really understand that the AI platform is a good focus areas well.

Okay, great. That’s encouraging. On the $24 million contract, you clearly made some progress, you talked about the milestones you hit. Can you – would you say that the customers level commitment is as high now as it was when you signed the contract, or is it increased or stayed the same, or – any color on that?

We’re making good progress on the contract. We think the customers are happy with the results. It’s difficult to interpret for them what their level of happiness is – around happinesses or commitment, but there’s nothing that we have that says there’s anything different than when we started.

I believe through the dialogues we’ve had, we’ve described this has as being a major undertaking, a major investment, a major effort for the customer that work – working with. And there’s no demonstrative evidence that they’re doing anything other than continue to drive for success. There is no shift in schedule, there’s no shift in pressure for us to continue our focus and our delivery and we’re pleased to be part of the solution.

That’s great. A little bit [indiscernible] list of comments you made. I think you referenced – specifically referenced smart speakers when you talk about Interactive Display. I guess,. is that – you think that’s the next major avenue of differentiation amongst these companies? And is that, I guess, is that focus the same as it was clearly five months ago when you kind of reshifted the company towards this idea of solution as far as one-off products?

Yes, Glenn, the data science that we have on the subject implies that voice-only still is a limiting or a gating factor for monetization of the AI platform. I think that Google, as an example, released yesterday on their presentations, a series of display embedded home speakers as an attempt to try to start to unlock that. We think this is the tip of the iceberg. I think we’re – we believe our process or our focus here is validated that the value that we can unlock for people to monetize this huge investment exists and we’re excited by the opportunity. So no shift from us on that focus.

Okay, that’s makes sense. And last one, Steve, on the Ragentek order, how much leeway did you give them? How many quarters, I guess, you think about – how much time you give them until you start to have to go become more aggressive with that? And as far as the inventory goes, does it get stale at any point in time, or just some thoughts about that?

Yes, the inventory has a long shelf life, I’m not worried about that. We understand the products that they’re coming out with or are targeting this summer. And so we’re going to let those launch and then we’ll see what happens after that.

Okay, great. That’s it for me, guys. Good luck going forward.

Thank you.

Our next question comes from Mike Latimore with Northland Capital Markets. Please go ahead.

Great. Yes, thanks. Congratulations on that announcement today. Steve, you sort of – you gave a overview of the revenue sources for the year. If you were to sort of blend that all together, what does that mean for gross margins for those revenue sources?

We are in the range of – been running on the development agreement in the 20% to 25% range And so that’s kind of where we’ve been running. I can’t give you a real good forecast yet, but that’s kind of where the development agreement has been running.

And the $10 million of license fees, does that basically sort of 100% billed into cash, or is there a commission on that, or how much of that actually goes into cash?

100%.

Okay, got it. And then the $20 million per year minimum commitment, does that effectively start in fiscal 2019, or later or some other point?

The – it’s kind of an annual minimum, but there’s a period of time to ramp up. So I would expect to see quantities coming in, in 2019 related to that, but they have a little bit longer period to get to those annual minimums just from the start of the contract to the first measurement point.

Okay, makes sense. And then in terms of the go-to-market strategy with that relationship, are they going to be out pursuing customers primarily on their own, or do you help them – you guide them into certain opportunities, or how does that go-to-market works out?

Yes, and at the risk of trying to get too far down the pipe of maybe tipping our hand as to who they are, because they’re announced we have worked with them on customer engagements recently and recognize that there is excitement and interest in them being able to provide this solution. So I fully expect that they’re capable and we’ll pursue the path on their own. But by the same token, I understand that if you think of some of the targeted areas we’ve described, there’s only a handful of folks, so I’m sure we’ll pass them in the lobby.

Okay. And just last one, if I’ve missed it. Do you have the total backlog year quarter-end in the press release?

Yes, the backlog at the quarter end was $11.5 million, $7.2 on April 2017 contract and $4.3 million on Ragentek.

Okay, great. Thanks a lot.

Yes

Thank you, Mike.

Our next question comes from Henry James with Michigan. Please go ahead.

Congratulations on the new license agreement. I wanted to talk just a little bit about that. I was wondering what encourages you or gives you greater confidence that display-only products coming from the new agreement will have greater success than the display-only products that are in the market today. Is it the fact they were targeting new applications, or are there other product features that might make the product more successful?

I think, there’s a combination of factors, Henry. And maybe if I start off by saying, I think, the approach that this organization took by leveraging our reference designs is one, enabling feature set, it helps them get there quickly. The second feature set is that, the reference designs we’re providing are easily adaptable from a form factor perspective to let them adjust. And one of the things that we understand when you’re dealing with any large Tier 1 customer is that they want it their way. So, it has to be somewhat unique or somewhat differentiated. So they’re approaching the market with that mindset, understanding that flexibility and responsiveness is critical. The third element is, there is absolutely a volume scale here that they have access to that will enable a price point and you call it margin stocking elimination, whichever you want. A combination of things that we think they will be able to provide the feature set at a price point that will enable them to be successful in the space. I hope that helps.

It does. And also, I know this is an exclusive agreement, given – the fact that they have to have minimum purchase agreements for display-only. So I was wondering and I don’t – what impact that has on your other license agreements? I know you had an agreement with Sony, I know you signed an agreement with a Taiwanese ODM, I don’t know if those agreements are still effective. But does this have any effect on those other agreements?

No, it doesn’t have any effect on those. That’s probably – it doesn’t have, it doesn’t affect those agreements at all.

So then if someone wanted to purchase – if they were – they could still sell engines for display?

Well, Sony’s license was for a specific engine.

Okay.

And so – and as we’ve noted that we last shipped components to Sony in Q4 of 2016 and there hasn’t been a follow-on order. So…

Okay.

…I don’t know that anybody is too worried about that.

Okay. Okay, all right. Thank you.

Thanks, Henry.

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

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

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.