MicroVision, Inc. (MVIS) Q4 2018 Earnings Report, Transcript and Summary

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

Thank you. Good afternoon and welcome everyone to Microvision's Fourth Quarter and Full-Year 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 expected customer orders; progress under and benefits of existing contracts and license agreements and the negotiation of future agreements; customer product launches; advantages of our technology; litigation; 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; as well as statements containing words like opportunity, positioned, believe, goals, focus, paths, expects, plans, will, could, would, likely, track, optimistic 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 October 26, 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 the Sidoti & Company, LLC Spring Investor Conference in New York City on March 28. Information about this 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. We made tremendous progress in 2018 and are very excited by the sales opportunities we have for 2019. By advancing our company culture, our technology, products and our ability to execute, we have positioned the company to deliver our technology and solutions to multiple OEMs in 2019. Let me provide some details on the work that we have done to get here. 15 months ago, we set out with the goal to transform Microvision. We worked to change our corporate culture and sharpen our product roadmaps. We have focused on communicating our plans and deliverables to every employee, making sure we are all aligned on our goals and objectives. As a result, we are demonstrating to our customers that they can count on our commitments and performance. Feedback from major Tier 1 technology companies, including those we met at CES in January, has been encouraging and they have welcomed the change. We invested in our core technology. We completed the development of new ASICs which are key to the products we expect to ship in 2019 and beyond. We have also developed our next generation MEMS that uses two mirrors to achieve industry leading resolution for a laser beam scanned display, operating at 120 hertz providing users with a flicker-free experience, while maintaining about the same power consumption as our current single mirror product. Finally, we have advanced our system level performance by incorporating machine intelligence with edge computing in our modules. The addition of machine intelligence with edge computing in our modules allows LiDAR enabled products to understand what the user is doing without going to the cloud, which provides a much faster and more efficient processing. We have also made significant progress on our product roadmaps. We are wrapping up the final stages of our April 2017 development agreement with the Tier 1 technology company. We expect to have the milestones for the last portion of the developed agreement completed shortly and the last invoice for this agreement issued early in Q2. In May 2018, we entered into a license agreement for our display-only products with a global technology leader and received a $10 million licensing fee. We understand that there is significant interest from a Tier 1 technology company that could lead to a design award for the display-only product. Our interactive display was very positively received at CES. This complete solution of hardware, software, and machine learning at the edge delivers a unique interactive experience with low latency that results in a high-quality user experience. This integrated module that enables instant on display and time-of-flight-based touch and gesture recognition is truly remarkable. We advanced our Consumer LiDAR sensors from a proof-of-concept stage and we announced last week that our “explorer kits” will be available this month. Explorer kits give OEMs the ability to develop products that incorporate our sensor. We believe the advanced capabilities of our sensor in the Consumer LiDAR space opens up a range of possibilities for our customers. Any of these of items I just mentioned could be considered a major achievement. All of these accomplishments set the table for revenue opportunities for us across multiple OEMs in 2019 and beyond. As it relates to our April 2017 contract, we have been advised that our customer is committed to launching its product in the second half of this year. We expect to receive orders this month or next to supply components in support of the customer’s product launch in the second half of the year. We expect to begin shipping in Q2. While we are not in a position to identify this customer because of our confidentiality agreement with them, once the product has been released our involvement would become evident. Until such time or unless the customer gives us permission, we cannot share the name of the customer or the type of product they are making. Regarding our license partner and the display-only products, we understand that there is significant interest from a Tier 1 technology company that could lead to a design award very soon. We remain highly optimistic that we will receive orders supporting a 2019 product launch. Our interactive display is truly an amazing solution and has received significant interest from multiple North America Tier 1 OEMs. Interest in this product has noticeably increased since showing our demonstrators at CES. We are working to get wins and potentially orders in 2019. There is also the opportunity for some NRE this year. We also expect the adoption of our Consumer LiDAR technology to be very disruptive in the market and as such, the integration of our powerful solutions will likely take more time to be integrated into our customer product roadmaps than our display-only or interactive display solutions. The launch of the explorer kits will help this integration process. We expect our Consumer LiDAR modules incorporated into customer solutions in the market in 2020. As I mentioned on previous calls, we believe our technology is well suited for Automotive LiDAR applications. While we continue to engage with automotive OEMs on possible paths forward, our primary focus is to secure the near-term opportunities that our display-only, interactive display and Consumer LiDAR products offer. Let me conclude my opening remarks by saying we remain on track with our business plan, product roadmaps, go-to-market strategy and continue to move up the value chain as a solutions provider. Our progress is being powered by our cultural change that is demonstrating to our customers that they can count on our commitments and performance. Our goal to be profitable at some point in 2019 is still a very strong focus for us. Until purchase orders are received and the customer shipment schedules firm up, it is difficult to predict exactly when that may happen. That said, let me recap our 2019 sales opportunities: Our customer from the April 2017 contract is committed to a product launch this year. We expect to have orders for the components we supply and the forecast for the production ramp shortly. We expect a significant design win for our display-only licensee with a Tier 1 OEM and are very optimistic that we will receive purchase orders for components related to the display only module. Our interactive display has received significant interest from multiple North America Tier 1 OEMs. We think we could see design wins and orders in 2019, and we think this has the potential for a very significant 2020 launch. I'll now turn the call over to Steve, our CFO, who will discuss our financial performance.

Thank you, Perry. Good afternoon, everyone. Let’s start with revenue. Fourth quarter revenue was $1.8 million which was related to the contract we announced in April 2017. Revenue in the prior quarter was $11.6 million, which consisted of $10 million in license revenue and about $1.6 million of development revenue from the April 2017 contract. Let me provide some additional remarks about the contract we announced in April 2017. As you may recall the total contract value was $24 million, with $14 million related to development work, and $10 million as a prepayment for future component purchases. The customer has subsequently increased the work they want us to do under the development portion of the contract by about $1.2 million, so now the total development is $15.2 million, making the total contract value worth $25.2 million. We expect to complete the development portion of this contract early in the second quarter. Thus far, we have recognized $12.1 million in development revenue on this contract, and we expect to recognize the remaining $3.1 million in the first two quarters of 2019. Also, as Perry mentioned, we anticipate receiving additional purchase orders soon for components to support their product launch later this year. Revenue for the year was $17.6 million, up from $9.6 million in 2017. The Q4 and full-year 2017 numbers have been adjusted for the new Revenue Standard, ASC 606, which we adopted on January 1 2018, using the full retrospective approach. Now let me provide an update on Ragentek, our Chinese smartphone customer. We had expected that in the fourth quarter Ragentek would take delivery of approximately half of the inventory we built for them. To make this happen, we agreed to a price discount. However, they failed to live up to their commitments and did not take delivery of any units in the fourth quarter. It now appears to us that it is very unlikely that Ragentek will take delivery of the units they ordered back in 2017. We are pursuing other customers for the product we built for Regantek, and have initiated legal proceedings against Ragentek. As a result, we wrote down the value of the inventory from $3.2 million to $1 million in the fourth quarter. We have estimated that $1 million is the net realizable value of selling the inventory to others. In our legal proceedings in Hong Kong, we are seeking approximately $4 million in compensation, which is the amount we believe Ragentek owes Microvision under the agreement. We believe we have a sound case, but there can be no assurance we will prevail in the arbitration. Now, let’s move to gross profit. Gross profit for the fourth quarter was a negative $2.6 million compared with $8.9 million in the prior quarter and a negative $248,000 in the same quarter a year ago. The quarter-over-quarter decline in gross profit in Q4 was primarily due to the $10 million in gross profit we recognized in the third quarter from a license agreement, and to a lesser extent the inventory write-downs of $3.3 million we recorded in Q4, $2.2 million of inventory we built for Ragentek and $1.1 million related to other components that we deemed to be obsolete. Fourth quarter operating expenses were $9.3 million, compared to the prior quarter’s $8.6 million. The increase is primarily due to an increase in non-cash compensation, salaries, and bonus accruals. Operating expenses were $7.9 million in the same quarter a year ago. The year-over-year increase in operating expenses is primarily due to increased expenses related to the development of ASICS and engineering prototypes and demonstrators. Some of the increase is also due to increased salaries and benefits. The lower revenue and higher expenses in Q4 relative to Q3, resulted in a net loss in the quarter of $11.9 million, which comes to $0.13 per share. This compares with a slight net profit of $289,000 or $0.00 per share in the prior quarter and a net loss of $8.1 million or $0.10 per share in the same quarter a year ago. We ended the quarter with cash and cash equivalents of $13.8 million, compared to $13.2 million at the end of the prior quarter, and $17 million at the end of the same quarter a year ago. The $13.8 million at the end of the fourth quarter includes the second $5 million payment we received on October 1 from our display-only licensee and $3.7 million from an underwritten public offering of our common stock. The cash position at the end of Q4 does not include $1.2 million in gross proceeds from a common stock private placement completed in January. I'll now turn the call back over to Perry for some comments before opening the call to questions.

Thank you, Steve. I believe the progress we made in 2018 was tremendous. We are committed to the product path we can provide with each vertical and the associated go-to-market strategy. While we have continued to advance our technology and made significant progress on the products in our portfolio, our real achievement is the progress that we have made in our journey to become a solutions provider. With multiple product launches anticipated in 2019, including products for the April 2017 contract, our licensee for display-only products, and our interactive display product and the associated revenue from them, I look forward to reporting our progress on future calls as we set our sights on delivering our technology in volume in 2019. With that, 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 Malouf with Craig-Hallum Capital Group. Please go ahead.

Great. Thanks guys. Congratulations on the progress. I have a couple of questions for you.

Hi Mike.

If we could just start off with the April, 2017 contract. It sounds like you're getting really close. I know you can't tell us who it is or what it is, but can you give us a sense of whether or not this is more of a component that you're providing them or a couple of components? Or is this more of a module? And if it is a module, is it more closer to that sort of $100 a module or $75 a module? Can you give us just a little bit of color on how much something like that might go for?

Yes. The sale in that contract is for components, and unfortunately, we can't go into exactly what the price per component is. Certainly would be less than the module sale, but we aren't in a position that we can tell you what that component ASP would be.

Okay, great. And then just a follow-up on the display-only comments. What gives you confidence that you think you're going to get actual orders and there's going to be some product launches. I know that you've been kind of saying that for a while. It sounds like you're a little bit more definitive now. Can you give us a little bit of color into that communication?

I think all of the Tier 1 OEMs that we deal with, Mike, follow a somewhat similar process in design evaluation and determining what products they're going to bring to market. So we once articulated this is a journey of a thousand steps. And so as we see the progress that's being made, we tell that the next hurdle that would be achieved would be a design win for this product. And all indications are that we're getting close to having evidence of that.

And would you announce that at the time of the design win?

It wouldn't necessarily be ours to announce. We will see the byproduct of that as the licensee starts to place POs for us or the ramp that is associated with making the product happen.

Got it. Okay, thanks for the help. Appreciated.

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

Hi guys. Thanks for taking the questions. Back to the April 2017 contract, can you give us just a better sense of – I think you mentioned that the customer is looking to launch in second half of 2019, so you would expect to see some shipments in Q2. Can you give us a sense of kind of have they kind of given you some indications as to what kind of size of a launch we're talking about and just the better sense of how much – how long the lead times are for instance, for when, for how much you need to build or ship in Q2 for them to support that second half of launch?

I think there's a two or several questions perhaps embedded in there. Let me see if we can answer them sequentially, Glenn. First of all, we said that we're in preliminary discussions to see the forecast and the POs associated with that volume launch. So we're not in a position that we can provide any more color than that. But I think, as you talked about the lead times associated with ramping this product, I think it brings up or it illustrates a very key point. When you think of the development portion of this agreement, there was a lot of innovation required to make this product available. As we go to bring the product to market, you can see that this is a very synchronized sets of activity throughout the supply chain. So this isn't starting from zero and beginning to ramp. This is something that has been coordinated through the 24 months worth of development. So that's why the confidence exists that all the pieces are being staged appropriately to secure the volumes that they require as they bring a product to market. And I think that pattern is similar across most Tier 1 OEMs. It's not a zero to 100. It's a coordinated effort across the entire supply chain to ensure supply is available.

Okay. Thanks for that color. So let's see, moving on to the other kind of news that you're optimistic for 2019 launch from a Tier 1 on the license – via the license partner. I guess in a similar line of question, do you have any sense of like how big of a launch you're talking about there maybe what region of the globe that customers operating in or looking to ship into? What are they see as the – what's the driving force for that end customer for why they want to incorporate projection to their device? Maybe some more color on that.

Well, I think in previous calls, Glenn you’ve articulated the value of the display-only technology as being a natural fit for AI connected devices, smart speaker applications. We've always said that voice-only has a very unique set of skills and attributes that it supports that we see the voice plus display having a set of requirements that it fills. And then we think that the interactive display, again, having another dimension to that. So it's within that context, we said that our licensing partner was focused on the same sort of a go-to-market strategy and it’s looking to engage with these market movers, AI platform owners that have – that are responsible for these connected devices. And that's about as far as I can go on that. I have no other color I can give you until they give us more [Inaudiable].

Okay, great. Thanks for that. And on the interactive, that you mentioned is, it sounds like it's a bigger process than you previously kind of thought about as far as getting designed in. You mentioned that possible NRE work, could you just maybe give us some more color as to how you came to those conclusions? I mean obviously I have discussions with customers or whatever, but just kind of some of the back and forth that led you to this conclusion that there could be some NRE work ahead of some bigger orders for later in the year.

So if I could Glenn, I think the key to that question lies in the notion of multiple Tier 1 OEMs. So we've been very confident and very pleased with the fact that our solution that was provided was well received and look to be quite applicable from the get go. So we're really pleased with the decisions we made in the way we've brought to the customer set that that of solutions. Now with multiple people looking at it, it's not uncommon for everyone then to say, well, I want mine to look slightly different. So while we're still very pleased with the progress we've made on the version that we brought to market, it's not unreasonable or advised to think that somebody might want to make small changes to that to fit their specific need. So the fact that there's multiple OEMs sort of answers the question why there is a potential for NREs, just as because there's multiple OEMs, you can get a sense why we're still optimistic. We could see POs for 2019 shipments.

Okay, great. That's very helpful. Thanks, Perry. I'll jump back in the queue.

Thank you, Glenn.

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

Yes, great. Thanks a lot. I guess on the May 19 [later changed by the company to 18] license agreement, you talked about you could see a design award soon. I guess is that when you say soon, do you mean sort of month of March? Do you mean first half of the year? Can you bracket it that a little bit more maybe?

We haven't provided any more color than we would expect that to be something that we see evidence in the first – before the first half of the year is true.

Okay, got it. Great. And then when you talk about like on the – you talked about the smart speaker opportunity, would it be natural for a company to launch that kind of in a region? Or would – if you have a smart speaker, would that be kind of natural launch that kind of globally in the mass market at once?

I appreciate the question, but I really think you're asking us for something sort of that two layers removed at this stage, right. So we know that North America still dominates the speaker market space. How somebody wants to bring that product to market is up to them.

Got it. And then you mentioned some extras, I think you said stock comp in the quarter. Do you have idea of what stock camp was for the quarter?

340,000.

Great. Yes, thank you.

The next question will be from Kevin Dede with H.C. Wainwright. Please go ahead.

Hi, guys. Thanks for taking my question. Congrats on some of this good news. Steve, would you mind going through sort of your back of the envelope calculations that gets you to that breakeven number? I would just kind of wondering, what you're thinking your margin structure would look like, what sort of that topline range probably needs to be?

Right. We've said that, if you're looking at OpEx, let say $8 million range and your margins are between 30% and 40%. Just doing the math, you would be breakeven at $20 million to $25 million of revenue in a quarter. That would be the range that you would be seeing.

Okay. For a kit – the press release was pretty clear in saying select customers, plural. Can you talk to that a little bit and maybe can you refresh my memory on some of the code for the other modules that you use internally? So should we see a press release? We'd be able to identify them?

So I think externally we talk about the Consumer LiDAR product, and we talked about our interactive display products and we talked about the display-only licensee products. So I think that's how we referred to them externally. If by chance we've casually mentioned internal names to them, it's really just development names. So that was part of the question. I'm sorry, what was the other part?

I was just hoping you could offer a little more detail regarding the press on the explorer kits, granted – it's just development, but the indications seem to be that there was more than one customer there as well.

If you think of the applications for this, while we recognized that there is a plethora of solutions that people could apply this kind of a LiDAR-based sensor too. We've continuously refresh the fact or restate the fact that we think the best use case for it today would be the AI connected home hub. If you think of the number of smart devices in your home connected through the hub that needs spatial awareness. That need to understand the sense of what's going on in the environment, the number of people occupied, the number of users in the space being able to track an individual through the space, listening to a voice, the one specific device out of a crowd. There's just a number of use cases for smart hub to have sense the space that it's in and enabling the connected devices to that smart hub that host the smart home devices to benefit from that awareness in that sense. So we really see those smart – the AI platform owners that own smart connected devices hubs being the primary targets for the Consumer LiDAR, while we still have a plethora of others that are looking at ways to deploy it as well.

Okay. Is there any sense of volume you can offer with this? I mean, clearly it's got to be more than one per customer, but is there any way to sort of characterize that and maybe the – I guess revenue still de minimis, but I was just wondering if you could kind of size that up a little bit?

The volume of the explorer kits, Kevin, is that what you're asking?

Yes. And the revenue implication, Steve.

Yes, I would say small revenue – a few thousand kits would probably make sense.

Okay. All right. Thanks. The cash balances, what’s around a bunch because of what you've recognized and the rate that you're spending and the raise you've done? Would you mind going through the cash flow for the quarter specifically in what you expect this quarter, Steve? I guess the current one, March 1Q?

Yes. We don't give out guidance on cash flow for the future quarters. But when you look at Q4, the cash used in operations was $3.1 million, and the big help on that was the $5 million payment from the display-only licensee. And we received another, I think $1.5 million or so from a customer that also was helpful in reducing that from the Q3 number, which was like 7.2.

Okay. All right. Thanks for entertaining the questions. That's all I got at the moment.

Thanks, Kevin.

Thank you.

[Operator Instructions] The next question will be from Aman Gulani with B. Riley FBR. Please go ahead.

Hi guys. Thanks for taking the question. So you talked about increase in development revenues by $1.2 million. Can you give us a little bit more color on what that exactly is? And then is there any potential for more development revenue to come in from that same customer?

There's a possibility that the customer could ask for something. We haven't announced anything about that, but I suppose there's nothing that would preclude that. On this contract, the $1.2 million additional – just in the last few months, we've done some additional work on things that I really can't disclose, and also provided some additional component parts and samples to them that is the bulk of the $1.2 million.

Got it. Okay. That's helpful. And then you talked about a display-only design win with a Tier 1 OEM, and I believe you mentioned that something that can be one in the first half of this year. So my question is what does a typical timeframe between securing a design win and that transitioning to full scale production?

I think there's a couple of things that we'd like to bring your attention back to. The fact that the OEMs have been working with the products that we've been discussing for a period of time implies that there's a fair amount of work already solutioned. We've talked in previous calls about working with our supply base to be ready to ramp in volume, help us reduce some of the operating – OpEx or the CapEx costs associated with those ramps. We know that the supply chain in and itself has the capacity to ramp pretty quickly. So when you think of this in context, again we go back to the notion of thinking that these aren't activities that are in isolation. There is the possibility that steps are being taken by the Tier 1 to secure other elements with the supply chain, so that they could ramp quite easily in the second half of the year after making this design win, should they choose to do that?

Got it. Thank you. That's all the questions from me. I'll pass it on.

Ladies and gentlemen, 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 once again thank our employees, our 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.