MicroVision, Inc. (MVIS) Q4 2008 Earnings Call Transcript

Tiffany Bradford – IR Alexander Tokman – President and CEO Jeff Wilson – CFO

Jed Dorsheimer – Canaccord Adams Brian Yurinich – Craig-Hallum Capital Suji De Silva – Kaufman Brothers Arthur Doglione – Alpha Fiduciary Joe Dubroth [ph] – Morgan Stanley Larry Sisson [ph] Tom Lardner [ph] – Microvision [ph]

Thank you, Tiffany. Welcome everyone. Our call is divided into several parts. First, I will give you update on 2008 results. Jeff will come back with financials, and we will jump into 2009 outlook followed by question session. So without further ado, let me just start with 2008 results. While at times challenging, 2008 was an exciting and very productive year for the Microvision team as we continued to execute on our PicoP commercialization roadmap. We made substantial progress on the objectives that we set for ourselves early in 2008 in completing multiple business developments, technology and supply chain milestones. All were more essential for bringing our first PicoP consumer product to market. Now, you are also aware that the longer than expected development and commercialization cycles of one of our key light source components as well as the deteriorating economic conditions have delayed a full fulfillment of our goals for 2008. We will highlight on these later in the discussion. A key indicator of how we have progressed against the commercialization milestones is measured not by us, not by you, but by our customers and interests that OEMs have expressed for our product. And judging by the most recent feedback we received at the shows, OEM interest remains very strong for bringing our unique solution to market in 2009. Clearly, the positive results of 2008 execution were realized at the three global commercial trade shows, Macworld Expo, Consumer Electronics show, and Mobile World Congress, all of which happened in the January and February of this year. We have demonstrated, to the delight of many prospective customers, a preproduction ultra-miniature plug-and-play accessory, Pico Projector, code named SHOW WX. WX stands for wide-screen experience. I would qualify a different way. I think it's a wild experience, because if you had a chance to see the units and you would immediately recognize that no one today, except for Microvision, is able in controlled lighting environment to produce a screen of 70, 80 inches and watch entourage [ph] on 24 while seeing every detail in the image. We are not limited by resolution, like some of our competitors, and we are not limited by focus, which is also one of the limitations that – and advantages that we have over the competitive products. SHOW WX was selected by the editors of Appletell, one of Apple ecosystem premier players and websites as one of their favorite gadgets in 2009 Macworld Expo. We were also acknowledged by the Discovery Channel as one of the top technology innovations at CES for 2009. The significance of SHOW WX lied not only in the fact that it offered performance features superior to its predecessors as well as the existing competitive products, but more importantly that this accessory projector, for the first time, was produced by our manufacturing partner, Asia Optical, which in itself represents a major milestone on the path to launch of our first PicoP-enabled consumer product in mid-2009. We're going to hit on several critical areas that describe and characterize our commercial launch readiness. These areas obviously include customer development, technology maturity, and supply chain readiness. Let's start with customer development first. Recall that we began customer trials late in 2008 with the goal to get an early feedback in order to finalize the accessory product design by the end the year. We've done this. Those trial units incorporated several important advancements, including new generation green lasers, improved PicoP engines, as well as several image quality improvements. The outcome of those initial customer trials resulted in two important wins. First, it allowed us to incorporate the valuable customer feedback that resulted in SHOW WX. Second, they allow us to develop a core funnel of prospective OEM customers, which includes some of the well-known handset manufacturers, mobile operators, and large consumer electronic brands, as well as the distributors. By our current estimates, the bottoms-up demand expressed by this core group of prospective customers exceeds our estimated supply for 2009 by almost 20X. So the question that ultimately comes to your mind, where are the POs [ph]. Well, the answer is quite simple. The longer-than-expected development cycles and lack of a detailed delivery schedule for some of the components have made it challenging for us to complete final product testing and complete customer agreements to date. However, as the light source suppliers move closer to commercialization and finalize their delivery schedule, we expect to complete our final product testing and anticipate signing customer agreements soon after. We have also implemented other go-to market measures that will provide more flexibility in distributing the initial volume of units. Let's focus now on the technologies. None of our progress with prospective customers in 2008 and early 2009 would have been possible if we did not make a significant leap forward on maturing the PicoP technology platform. In addition to our inherent advantages, such as infinite focus and immersive large screen viewing experience, we made considerable improvements in the areas of image quality, optical engine maturity, overall product size reduction, and MEMS reliability, resulting in the following relevant attributes, relevant to customer that is. First, unmatched small font readability and viewing screen size versus the existing competitive products, 25% reduction in the form factor versus our earlier prototype, and attaining drop test performance requirements for MEMS, one of the most critical components of the PicoP display engine that exceeds known industry standards. We have also completed all the necessary ASIC electronics with world-renowned electronic component manufacturers to enable the initial accessory product launch in mid-2009. Supply chain. In 2008, we considered both shrinking our supply chain by engaging Asia Optical, who is one of the world's largest manufacturers of digital cameras, DVD engines, to manufacture PicoP display engine, as well as our first accessory product. Asia Optical's list of customers and partners is very impressive, and it includes the likes of Fuji, Olympus, Kodak, Nikon, GE, Toshiba, and Hitachi. So we have confidence that they will enable us to get to market with the expectations we have of us and of them. Throughout 2008, we actually managed all key component suppliers. And while we received the initial delivery of next generation green lasers for September customer trials, the green laser suppliers have experienced longer than expected development and commercialization cycles for this critical component, which forced us to delay our plans to the mid of 2009. Let me now briefly recap the other highlights for the year. Let's start with automotive display applications. We develop first truly tiny head-up display demonstrator based on our core PicoP display engine. This is the first of a kind. Many of you who have followed Microvision know that we have developed hard prototypes over the past five years. This is the first one that is based on our core platform. This is the first one that produced the images that are four times brighter, 15 times higher contrast, and half the size of anything that's been produced in the past. These complex units are being marketed to global mobility players for after-market automotive applications, including navigation, telematics and others to facilitate driver safety and situational awareness. During 2008, we also delivered head-up display and instrument cluster display prototypes to several large global automotive tier ones, with the intent of following contracts laid [ph] into the embedded hard products. However, due to a deteriorating economy and specifically the automotive industry challenges, the follow-on [ph] customer programs were suspended for at least 2009. Let's now focus – let's come to PicoP whereabout display. This is the segment we work primarily with the US government and government contractors, and we've been using the leverage in these efforts in proliferating our consumer platform. 2008 was no different. We delivered on government contracts, which resulted in new funding opportunities for 2009. We already discussed the two new contracts we've signed with customers for the development of high definition PicoP display engines that total about $1.5 million. The high-definition development is a part of our ongoing strategy to anticipate future market needs and stay ahead of competition while improving PicoP platform functionality. Last but not least, bar code scanner. The bar code scanner segment achieved about 25% growth in revenue over prior year, but the sales were impacted by the deteriorating economy. Our continued focus on product quality, however, has resulted in dramatic improvement in the field return rate, which is less than 0.5% today of all units shipped. It's a huge improvement from the 50% returns just three years ago. Our yields at manufacturing has improved to 98%, which is another big win for the team, and the current PicoP team is heavily leveraging the experience gained from the efforts we conducted in 2007 in redesigning the bar code scanner.

Thank you, Alec. For 2008, we reported revenue of $6.6 million compared to $10.5 million for 2007, and $1.5 million for the fourth quarter 2008 compared to $3.0 million for the same period in 2007. The decline in revenue is primarily due to the deteriorating economic conditions resulting in reduced contract activities in 2008 and, to a lesser extent, on our focus on commercialization of the PicoP display engine. As of December 31, our backlog totaled $1.2 million compared to $4.1 million last year. We expect that under the current economic conditions and as we continue to focus on our commercial products, we will not see much growth in contracts revenue in 2009. We had an operating loss for 2008 of $35.5 million compared to $26.7 million in 2007, and $10.2 million for the fourth quarter of 2008 compared to $7.9 million in the same period of 2007. The increase is primarily attributable to increased development costs associated with the planned introduction of PicoP-enabled products, including increased headcount in strategic sourcing, supplier quality, and business development and increased material costs consistent with product commercialization. We reported net loss available for common shareholders of $32.6 million or $0.53 per share for 2008 compared to $19.8 million or $0.40 per share for 2007. The 2007 loss included a one-time gain from our sale of our investment in Lumera of $6.6 million. Excluding this gain, the net loss available for common shareholders in 2007 was $26.4 million, or $0.53 per share. For the fourth quarter of 2008, the net loss available for common shareholders was $9.9 million or $0.15 per share compared to $6 million or $0.11 per share for the fourth quarter of 2007. For 2008, our net cash used in operating activities was $31.2 million compared to $21.3 million in 2007. We ended 2008 with $28.2 million in cash, cash equivalents and investment securities. As Alec mentioned, we've taken steps over the past several months to reduce our cash burn. We are confident that our cash balance is sufficient to support the planned launch of our accessory product.

Thank you, Jeff. 2009 priorities. There is nothing ambiguous about these. We have three goals. First, launch first PicoP accessory product by mid-year and convert the strong OEM interest into firm POS. Second, develop embedded opportunities this year for 2010 launch for embedded applications that will include handsets and other consumer devices. And number three, conserve cash. Jeff has mentioned that early in the year we implemented a number of cost reduction efforts, including consolidation of internal development programs, reduction of planned expenditures, joint funding on some longer-term development programs, and we reduced our headcount. We've done this to focus most of our efforts this year on two primary opportunities. Again, launching the accessory product and developing high-growth opportunities for the embedded launch in 2010. In January, to facilitate the latter, in January we've made commercially available PicoP Evaluation Kits as a part of our strategy to increase the embedded product opportunities. What some of you may think, why have we done this? Well, there are almost limitless number of products and applications which could take advantage of our unique PicoP offering. So we put the power into the hands of the user. We have a lot of bright people in Microvision, but we don't know everything. We do know, however, that there is a lot of ingenious applications and products that our customers have today that could get even better with the inclusion of our engine. And that's exactly the purpose for PicoP Evaluation Kits. We have a high demand today. We just started this exercise in January and we're already experiencing a very high demand for these tools and we already sold a number of these to world’s largest global OEMs. As I mentioned previously, we have developed a core funnel of prospective OEM customers for the launch of the accessory product. In addition, we also created and implemented a distribution strategy for Microvision-branded accessory product. We've done this to maximize our go-to market flexibility in 2009. As green laser suppliers move closer to commercialization in the next few months and finalize their delivery schedule, we expect to complete our final product testing and anticipate signing customer agreements to get ready for mid-year launch. We also – although – I stress the fact that we're going to focus on two big things. We are going to be very opportunistic about new business development opportunities and product opportunities in consumer, eyewear, entertainment and automotive segments beyond the two both mentioned activities. I think at this point, it would be wise for us to stop and get some questions from you, and we'll take it from there.

Jed Dorsheimer – Canaccord Adams:

Jed Dorsheimer – Canaccord Adams:

Jed Dorsheimer – Canaccord Adams:

We've already announced that we've signed two contracts. We announced in January and December, so, for this year. And yes, we think we'll be in line with this year. Jed Dorsheimer – Canaccord Adams:

Jed Dorsheimer – Canaccord Adams:

Jed Dorsheimer – Canaccord Adams:

Jed Dorsheimer – Canaccord Adams:

Jed Dorsheimer – Canaccord Adams:

Jed Dorsheimer – Canaccord Adams:

Jed Dorsheimer – Canaccord Adams:

Jed Dorsheimer – Canaccord Adams:

Jed Dorsheimer – Canaccord Adams:

Brian Yurinich – Craig-Hallum Capital:

Brian Yurinich – Craig-Hallum Capital:

Brian Yurinich – Craig-Hallum Capital:

Suji De Silva – Kaufman Brothers: Hi, Alex. Hi, Jeff. How are you guys doing?

Good. Suji De Silva – Kaufman Brothers:

Suji De Silva – Kaufman Brothers:

Suji De Silva – Kaufman Brothers:

Suji De Silva – Kaufman Brothers:

Suji De Silva – Kaufman Brothers:

Yes, that is all for delivery during this year. Suji De Silva – Kaufman Brothers:

Arthur Doglione – Alpha Fiduciary:

Arthur Doglione – Alpha Fiduciary:

Arthur Doglione – Alpha Fiduciary:

Arthur Doglione – Alpha Fiduciary:

Joe Dubroth – Morgan Stanley:

Joe Dubroth – Morgan Stanley:

Joe Dubroth – Morgan Stanley:

Joe Dubroth – Morgan Stanley:

Tom Lardner – Microvision:

Tom Lardner – Microvision:

Tom Lardner – Microvision:

Tom, embedded is going to be a major leap in volume versus any of the accessory products we're ever going to sell, because for the embedded, the math is relatively straight forward. Think about this. I'm going to give you kind of top down market analysis, not that we rationalize against bottoms-up. Say, you have $1.5 billion unit handset market globally, of which about 11% to 12% are smart phones, which is our first addressable market. Why smart phones? Because they're more expensive, they have more features, and business users can afford them, as well as some of the kids in some of the countries. So, this market – the addressable market then becomes about $150 million. Tom Lardner – Microvision:

Tom Lardner – Microvision:

Brian Yurinich – Craig-Hallum Capital:

Brian Yurinich – Craig-Hallum Capital:

Brian Yurinich – Craig-Hallum Capital:

Thank you, everyone, for joining us. Just to wrap this, what can I say, we expect 2009 to be a pivotal year for us as we complete preparation for the commercial launch of the PicoP-enabled accessory projector in mid-2009. We have streamlined our operating plan for 2009 by consolidating programs to focus on the two primary opportunities. During the past year, we have seen tremendous growth in the global demand for Pico projectors. This demand is accelerating as consumers become more accustomed to accessing information through mobile devices, such as smart phones, media players, and MIDs, which are small computers. We're seeing the increasing interest in embedded Pico projector applications in the growing number of applications well beyond the cell phones. These include digital cameras, video cameras, portable media players, mobile television players. There are many applications for what we are producing. To facilitate this development, we have introduced PicoP Evaluation Kits to increase the business opportunities in these emerging applications. And I guess the most important takeaway for everyone is that you've seen that we are getting very close to the accessory product launch. Remember, the market is still in its infancy and we are on the fringe of tapping into a very large unconquered market opportunity. Our technology has inherent advantages that are being recognized by prospective customers, and we have an impressive funnel of OEM customers. I know many of you want to hear who they are. We can't disclose it at this time until firm agreements are in place. Microvision direct channel will help us to optimize go-to-market flexibility for the initial units, and our supply chain is getting more mature as we're preparing for mid-year launch and second half ramp. And we feel good about where we are at right now. Even though there’s been a lot of issues that everyone in supply chain has been working on, these issues are being solved. And that's the best indicator as we move forward and we feel comfortable about having commercial offering in the second half of '09.

This concludes today's conference. You may now disconnect. Good day.