MicroVision, Inc. (MVIS) Q2 2018 Earnings Report, Transcript and Summary

Good day, and welcome to the MicroVision second 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 second 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, Form 10-Q filed on May 10, 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. MicroVision plans to participate in two conferences this quarter, the Liolios Gateway Conference in San Francisco and the H.C. Wainwright 20th Annual Global Investment Conference in New York City. Information about these events 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. When I assumed the CEO role nine months ago, I believed we had an exceptional opportunity to transform MicroVision from being a R&D company into a solutions provider, a solutions provider with innovative technology that could unlock significant value for Tier 1 technology customers and ultimately reward our shareholders. Today, because of the customer reaction we see and the technical progress we’ve made, I’m more convinced than ever that is the case. We are moving in the right direction. We are doing what we said we would do, working to have products ready at the right time and at the right price when the market is ready. During the second quarter, we raised cash to bolster our balance sheet through a public stock offering and signed a display license agreement that provides for payment of $10 million in license fees this year. Throughout these activities, we remain focused on our goal of achieving profitability at some point during 2019. Investors attending our Annual Shareholder meeting in June had the opportunity to see firsthand why I’m so excited. At the Shareholder meeting, we demonstrated several of our technical solutions, including our new display engine that has improved video image quality and is capable of projecting at 80 lumens, approaching twice the brightness of our previous solutions. Later this quarter, we plan to provide investors with an opportunity to view these demonstrations along with the improvements in our interactive display products through videos that we plan to post on our website. On prior conference calls, we discussed our go-to-market strategy and commitment to five vertical markets. We are targeting Tier 1 technology companies, where we can bring compelling value to enable them to introduce disruptive solutions to the market. On this call, I would like to update you on our progress on those verticals, namely display-only, augmented or mixed reality display, interactive display, consumer LiDAR and automotive LiDAR. On the last call, I reported a new world-wide exclusive license agreement with a leading global technology company for the manufacture and sale of display-only products. As part of that license agreement, the licensee agreed to pay MicroVision a $10 million license fee. The transfer of our technology to the licensee is progressing well, and to date, we have received the first of two $5 million-dollar payments and we expect the second payment in early October. Our licensee has been actively meeting with Tier 1 customers about the sales opportunity using MicroVision’s display-only technologies. We understand that they are getting good response from these customers and remain optimistic that they will be successful in landing. Of course, this would result in sales of our components to them in 2019. We also continue to make progress with the $24 million contract that we signed a year ago with a Tier 1 technology company. We are about two-thirds of the way through that contract and we believe the difficult technical tasks are now behind us. Through the first seven months of this year, we have received $5 million in payments for the completion of milestones, bringing the total payments under the $14 million development portion of this contract to $9 million. We remain on track and expect to complete the development agreement in Q1 of 2019. We have been advised by our customer that we should expect a product launch sometime in 2019 and that they are still determining the size and timing of their launch. On our last call, I also discussed several technical initiatives that were underway to meet our product requirements for production in 2019. Initial feedback on our new 1440p MEMS scanner, new time of flight ASIC and next generation analog ASIC have been encouraging. We are also on track to tape out our new digital ASIC this summer, in time to meet our product requirements for production in 2019. In other words, all the core elements of our technology required to meet production launches of display, interactive display and consumer LiDAR products in 2019 remain on track. Also, our machine intelligence team continues to develop their capabilities. For example, we recently did customer demonstrations where we equipped a smart speaker with our interactive display. To highlight how easy it is to order goods and services with the interactive display, we simulated ordering various products. These demonstrations clearly captured how fast and natural it was to custom order an item with many different options using interactive display with an Artificial Intelligence or AI assistant. We expect our next developer kit incorporating these capabilities to be ready to ship later this quarter to targeted Tier 1 technology companies. For smart home and security applications, our next generation of development kits for use with consumer LiDAR solutions is scheduled to be available in Q4. Our consumer LiDAR solutions project a significantly higher resolution than available today, and when combined with machine intelligence capabilities, would represent another major step forward in this category’s evolution. In automotive LiDAR, we believe our technology can provide a smaller form factor, higher-line count resolution, and a more cost-effective solution to those in the market today. Additionally, we believe the latency advantage that our system should have through the deployment of machine intelligence at the sensor will provide a feature that will be especially important as we look to adapt this solution to collision avoidance applications. We expect to demonstrate the proof-of-concept for our automotive solutions early in 2019. Given the extensive testing and long sales cycle in this industry, we would expect to see limited initial revenue in late 2019 or 2020, with the opportunity for significant sales more likely in late 2020 or 2021. Let me conclude my opening remarks by saying we are moving in the right direction, we strengthened our balance sheet, and we’re doing what we said we would do to pave the way to achieving profitability during 2019. We remain committed to five verticals that we believe have the potential to unlock significant value for our customers. We believe that enhancing our product strategy and incorporating machine learning into our sensor products will make it easier for Tier 1 technology companies with AI roadmaps to integrate our solutions into their products. Our solutions should provide these companies with products that have a more natural end-user experience and a faster time-to-market path. We are convinced that our display-only products provided through our licensee and our interactive display and consumer LiDAR products can provide AI platforms with Input/Output capabilities that are unavailable today. By enabling users to interact through voice, image, gesture and spatial awareness, it should be easier for them to interact with the AI platform, making it easier for the user to transact, increasing the monetization opportunities for our customers. I’ll now turn the call over to Steve, our CFO, who will discuss our financial performance in the second quarter and offer some commentary of how we see the second-half of 2018 shaping up.

Thank you, Perry. Good afternoon, everyone. I’ll start by updating you on some of the cash items we discussed on the last call. First, related to the $24 million contract, we did receive in May the $2.5 million that we had billed our customer in Q1. Additionally, we billed this customer an additional $2.5 million in the second quarter and that invoice was paid in July. Second, we received the first of two $5 million payments related to the license of our display-only business and we expect to receive the second payment in early October. Also, we have completed the evaluation of the revenue recognition treatment for the display-only license and have concluded that we will recognize the entire $10 million license fee when our performance obligations under the agreement have been completed. We expect to complete our remaining obligations, which include providing certain technical documentation in the third quarter. Now, I will turn to the second quarter 2018 income statement. Second quarter revenue was $2 million. Essentially all of the quarter’s revenue was from our contract with our Tier 1 technology customer that we announced in April 2017. The status with Ragentek, the Chinese smartphone manufacturer has not changed. As we mentioned last quarter, we understand that Ragentek plans to launch two new products this summer and we have agreed to give them time to launch these products. We did not ship product to Ragentek in Q2. We did not recognize any product revenue, and the units that we built for them remain in our inventory. For comparison purposes, revenue in the prior quarter was $2.2 million, while revenue in the second quarter a year ago was $1.3 million. The Q2 2017 numbers have been adjusted for the new Revenue Standard ASC 606, which we adopted on January 1st of this year, using the full retrospective approach. Gross profit for the second quarter was $333,000, compared with $315,000 in the prior quarter and $346,000 in the same quarter a year ago. The improvement over the prior quarter was mostly due to improved margin on contract revenue. Second quarter operating expenses were $8.8 million and compared with $7.4 million in the prior quarter and $6 million in the same quarter a year ago. The main contributor to the increased OpEx was spending on ASIC development and prototypes of our interactive display. These items increased OpEx by about $900,000 over last quarter, and in total, represent $1.9 million of spend. ASIC development fees, which are paid to third parties should decrease over the next few quarters. We do not expect these elevated levels of OpEx beyond one or two quarters. Our second quarter net loss was $8.5 million, or $0.10 per share, compared with a net loss of $7.1 million, or $0.9 per share in prior quarter and a net loss of $5.7 million, or $0.8 per share in the same quarter a year ago. We ended the second quarter with cash and cash equivalents of $21 million, compared to $7.2 million at the end of the prior quarter and $17.7 million at the end of the same quarter a year ago. The increase was primarily due to the proceeds received from the stock offering completed in June. In the financing, we raised $16.6 million net of expenses. On our last earnings call, I recapped the potential sources for 2018 revenue and I will update that today. This year, we expect to recognize $10 million from the license agreement for our display-only products, $8.5 to $9 million from the $24 million Tier 1 contract, and $4 million from the Ragentek order. We also expect approximately $3 million of non-recurring engineering or NRE related to the display-only license. When one adds up these opportunities, we have 2018 revenue opportunities totaling $25 million to $26 million. 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 opening the call to questions.

Thank you, Steve. Let me wrap up by saying we are doing what we set out to do when I assumed the CEO role. We refined our go-to-market strategy to target Tier 1 technology leaders who have the capabilities to bring to market our innovative solutions. We entered into a license agreement with a global technology company to address the display-only vertical. For our interactive display and consumer LiDAR products we are executing on the technical requirements, finalizing development kits and product demonstrations to share with potential customers over the next few months, in support of product sales targeting in 2019. We have also taken the necessary steps to shore up our cash position, while keeping our sights on achieving profitability at some point in 2019. We are well-positioned to execute the plan we have laid out for you and are excited by the benefits we believe this plan will provide our customers, shareholders, employees and suppliers. I look forward to sharing more details with you as the second-half of 2018 progresses on our journey from an R&D company to a solutions provider. We will now open the call for questions.

Thank you. We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Mike Latimore with Northland Securities. Please go ahead.

Thanks. Hey, guys, it’s very helpful. In terms of the – you mentioned that the one customer that they expect this product launch sometime in 2019. So I just – anymore color there? I mean, if they launch, I don’t know, say, later in the year, would that mean that order is third quarter or like what would be the latest where you would actually start seeing orders growth there?

I think, as we described in the call Mike, we expect that we will complete our development agreements with them in Q1 of 2019. We expect that there would be a quarter’s offset or lead time required to secure devices. So I’m not sure, as we articulated in the call, when they expect to launch the product. But we would think that we see visibility to that shortly after – within a quarter or two of launching the – of completing the development work.

Got it. And then should we think of it as one specific device or could there be multiple devices there?

At this point in time, Mike, I don’t believe we can comment on what their plans are to go-to-market with this product.

Okay, got it. And then just to be clear, you expect to recognize the full $10 million license fee in the third quarter even though the cash may come in October?

That’s correct, yes.

Okay.

Totally.

Got it. And so the – when you say that means that you’re effectively done with whatever work that needs to occur. So basically, should we think of that as the full technology transfer has occurred and they can early selling sort of – or doing full production shortly thereafter?

Yes, I look at it from the accountant’s point of view. What that means is that, all of our obligations into the license agreement would be complete and that’s primarily technology transfer. Yes, that’s obviously what we’re transferring to them.

Okay, great. And then I guess, just one last question on the – on that specific deal, if they’re out sort of selling now to prospects, what would be a kind of a reasonable timeframe to think of those prospects kind of buying the technology and getting to market? Is that six months or is it 12 months, like kind of general ballpark to think about that?

I think, when we talk about our display-only technology, there is an existing technology available in the marketplace today. So it’s conceivable that our licensee could engage with customers on that product family, it’s available now and subsequently orders for that kinds or those kinds of products could be available. We’ve also identified that the technology improvements we’re making for our interactive display consumer LiDAR and general core technologies would benefit the display-only license partner as well. And – because those will be available in 2019, we would expect that ramp to occur sometime in 2019.

Okay., great. Thank you.

Okay.

Okay. The next question comes from Glenn Mattson with Ladenburg Thalmann. Please go ahead.

Yes. Just to clear up on Ragentek. The two – they’re expecting, you said two new launches this summer. Well, I guess, which is about August now. So, I guess, a launch would require them to pull product ahead of that launch, right? So would they – have you shipped that product yet, or is it imminent, I guess?

We – on the – in the second quarter, we didn’t ship them any product. They have inventory and there’s inventory from us available, but I can’t comment beyond the second quarter.

Okay. Would you expect it all to ship in Q3, or would it be spread out over the next two quarters, I mean, if it goes to plan?

I would not think it’s going to be all Q3. No.

Okay. Let’s see what else. Just about the timing, right, I think you said that you’ll be shipping interactive display to potential customers later this quarter, is that right? And can you talk about how many people are pulling products there? How many customers do you expect to ship to or potential customers?

Yes. So we have a list of – we have a sort of a funnel of people that are looking for the dev kits. So we’re talking about for shipments later this quarter for interactive display, where customers that wanted to start to do some work with our development kits on these products. And again, we’ve characterized these folks as being people at own AI platforms. We haven’t been any more definitive than saying who they are. But I think, it’s restricted to a relatively small handful of people globally that have that capability.

All right. And I imagine for consumer LiDAR, you’d be similarly vague. You’re gong to ship to a handful of customers in Q4, but you’re not – you wouldn’t – you’re not going to mention how many or any one in specific?

Hey, backward. [ph]

What about for automotive LiDAR? Proof-of-concept in early 2019. How long will it take if that goes well to actually translate into product in the field?

Well, again, we fully respect that the qualification cycle there is pretty long. But if you think of the automotive LiDAR opportunity, the transition from proof-of-concept to hard revenue sort of in volume. There’s an interim step where the development kits or the qualification samples could exist for a period of time representing a relatively high by our standards price point, even though it’s a small number of units. So think of this as an interim step in the automotive space.

Okay, great. That’s it from me, guys. Thanks.

Thanks, Glenn.

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 investors for their support and look forward to reporting our progress over the next several quarters. Thank you.

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