MicroVision, Inc. (MVIS) Q4 2013 Earnings Call Transcript

Dawn Goetter Alexander Y. Tokman - Chief Executive Officer, President and Director Stephen P. Holt - Chief Financial Officer and Chief Accounting Officer

Michael Latimore - Northland Capital Markets, Research Division Andrew Uerkwitz - Oppenheimer & Co. Inc., Research Division Thomas Szulist Mike Scott - Stephens Capital Management Randall Hough

Good morning, and welcome to the Q4 and Full Year 2013 MicroVision, Inc. Conference Call. My name is Brandon, and I'll be the operator for today's call. [Operator Instructions] Please note that this conference is being recorded. I will now turn it over to Ms. Dawn Goetter, Director of Marketing Communications. Dawn, you may begin.

Thank you. I'd like to welcome everyone to Microvision's fourth quarter and full year 2013 financial and operating results conference call. In addition to myself, participants on today's call include Alex Tokman, President and Chief Executive Officer; and Stephen Holt, Chief Financial Officer. The information in today's conference call may include forward-looking statements, including statements regarding benefits under existing contracts and the negotiation of future agreements, our competitive advantages, progress with prospective customers, projections of future operations and financial results, product development, applications and benefits, availability and supply of product and key components, market opportunities and growth in demand, plans to manage cash used in operations, as well as statements continuing words like believe, goal, path, expects, plan, will, could, would 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. Additional information concerning factors that could cause actual results to differ materially from those in the forward-looking statements are included in our most recent Annual Report on Form 10-K filed with the Securities and Exchange Commission under the heading Risk Factors Relating to the Company's Business and our other reports filed with the Commission from time to time. Except as expressly required by the federal securities laws, we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, changes in circumstances or any other reason. The agenda for today's call will be as follows: Alex will report on the 2013 operation results. Stephen will then report the financial results. Alex will then discuss key business objectives for 2014. There'll be a question-and-answer session, and then Alex will conclude the call with some final remarks. And now, I'd like to turn the call over to Alex Tokman. Alex? Alexander Y. Tokman: Thank you, Dawn. Good morning, everyone. We appreciate you joining us today for an update on the business results for the fourth quarter and full year 2013. Last year, our corporate goals were centered on securing design wins and enlisting customers to license our revolutionary PicoP display technology as well as supporting them through development cycles; second, strengthening the supply chain for key components of PicoP display technology to offer multiple sources to OEMs as they prepare to bring their products to market; and finally, aggressively managing cash used in operations. I'm happy to tell you that we've made significant progress on all 3. Starting with the new customer opportunities. In April 2013, you all know, we secured a development agreement with a Fortune Global 100 brand. As many of you know, they recently announced their progress in the development of our pico projection module, which incorporates MicroVision's proprietary PicoP display technology. They also announced that they aim to bring the display module to market for use in pico projectors as well as other devices with projection functionality. We are engaged currently in commercial negotiations, while the development program continues through the spring of 2014. We've made significant progress and are currently in detailed discussions with other prospective customers in the consumer electronics space, including large brand name electronics manufacturers and smaller OEMs who are interested in a variety of consumer electronic products utilizing our technology. Moving to automotive. I am pleased to tell you that we have signed an agreement with a leading global automaker to deliver head-up display prototype systems for their evaluation and testing as a part of the program to develop head-up display system for their vehicles. Independently of this activity, we continue the engagement and support of a global Tier 1 automotive supplier that we've previously announced in September of last year. Obviously, the success of the both customer activities I just described is predicated on having a high-volume supply of key MicroVision components that could be delivered to consumer electronics and automotive players at competitive market costs. And this segues us to the second goal, which is supply chain. So let's recap this. In 2013, we developed new supply sources for both MEMS and opto-mechanical engines to facilitate the offering of a standardized display solution that could provide OEMs with a quick time-to-market for products incorporating PicoP display technology. The enhanced supply chain we assembled in 2013 is expected to meet our goal of providing significantly higher volume capabilities at significantly lower costs for key components. This capability should greatly facilitate, we believe, the adoption of MicroVision's PicoP display technology by the companies interested in a variety of pico projection applications and products in 2014 and beyond. Our goal for this year is to be prepared for high volume production with MicroVision-specific components, starting in the second half of 2014. Finally, in line with the third objective of further reducing cash used in operations, we reduced cash used in operations by 39% in 2013 versus previous year. This is a significant accomplishment, because it represents that for the third year in a row, we reduced our operating cash burn by a significant double-digit margin. In fact, over the past 3 years, the average reduction in cash burn was 35% per year. With this insight on the financials, I will turn it over to Steve for more details. Stephen P. Holt: Thank you, Alex. The numbers that I am about to share are included in our press release and in the 8-K we filed today, and are available on the Investor page of our website. Fourth quarter revenue was $1.2 million compared to $2.7 million for the fourth quarter of 2012. 2013 total year revenue was $5.9 million compared to $8.4 million for 2012. Q4 operating expenses were $5.1 million, which is lower than the $5.3 million in operating expenses in Q4 of 2012. For 2013, operating expenses were $19.1 million, down 21% from $24.1 million in 2012. The reduction in operating expenses over the prior year reflects the impact of the restructuring that we initiated in Q2 of 2012. Similarly, there was a significant reduction in our operating loss. The 2013 operating loss was $15.1 million, down 33% from our 2012 operating loss of $22.7 million. For the quarter, the operating loss was $3.9 million, down from $4.1 million in 2012. MicroVision's net loss was $13.2 million, down from $22.7 million in 2012; and for 2013, the net loss was $0.47 per share, which compares to a net loss of $1.05 per share in 2012. The fourth quarter net loss was $2.4 million or $0.08 per share, and the Q4 2012 net loss was $4.1 million or $0.16 per share. Cash used in operating activities in Q4 2013 was $2.7 million. This compares to the $3.7 million used in Q4 of 2012. And as Alex mentioned earlier, 2013 cash used in operating activities was down -- was $12.7 million versus $20.6 million in 2012, a 39% decrease. Cash and cash equivalents on hand at December 31 were $5.4 million. Backlog at the end of the year was $2.1 million, mostly related to our development agreement with our Fortune Global 100 partner. That concludes the financial results. Alex will now discuss MicroVision's 2014 plans. Alexander Y. Tokman: Thanks, Steve. So let's look at 2014. Our main goal of this year is to build on the momentum that we established in 2013. The specific objectives include complete development with our announced partner and support them with commercialization efforts, and supply key MicroVision components; second, enlist additional consumer and automotive OEMs that will incorporate PicoP display technology inside their products in the near and mid-future and support them with their go-to-market efforts as required; third, ramp supply chain for high-volume production of MicroVision components, starting in the second half of 2014; and finally, continue to effectively manage cash used in operations, as we've done in the past. It is important to point out that we are aggressively pursuing the companies which possess the attributes that could accelerate the market adoption of PicoP display technology under our license and brand model. These attributes include market-making capabilities in order to jump-start this new and emerging market; second, we're looking at the companies that offer best fit with our go-to-market licensing model; and finally, we're looking at players who offer quicker time to market, so they could bring compelling pico projection products in the near- to mid-term. In this process, and in these developments, MicroVision is brokering a number of go-to-market negotiations and agreements between OEMs, retailers and engine suppliers to ensure winning outcomes for all parties involved. That would conclude our outlook for 2014. And now, we will open for questions.

[Operator Instructions] From Northland Capital, we have Mike Latimore on line. Michael Latimore - Northland Capital Markets, Research Division: You talk about increasing the supply chain in the second half of the year. Can you talk a little bit about what that entails? Are there any additional costs to that? And then what kind of volume expectations do you have there versus, say, 2013? Alexander Y. Tokman: It's a good, complex question. Basically, what we are trying to do, we're putting a baseline in place to start the market. And we're ramping the supply chain to have our components available to others, starting second half of this year. The actual amount and per-month capacity will be determined as we're going through the year and getting updates from our customers on their product program status. So we decided, basically, to -- we obviously have to take some risks, so we're taking the risk to develop the baseline capabilities of at least several hundred thousand units per year to start with. But this capacity can quickly ramp to much larger numbers with only 3 to 4 months of lead time to -- and we will adjust our numbers based on what we see in terms of timelines for product introductions for different players. Michael Latimore - Northland Capital Markets, Research Division: Got it. And then I'm just curious. In terms of some of the prospects you're talking to now, say, the top 10 prospects, how does that list look relative to, say, 6 to 12 months ago -- same guys, different guys? Alexander Y. Tokman: You know what, a couple of entities are the same. It's about 50%, 50-50. 50% of the people are the same entities we've been in detailed discussions, and 50% is the new list. The good news is that there has been -- we've seen acceleration in not just the interest, but commitments from several players. Michael Latimore - Northland Capital Markets, Research Division: Do you see any of those prospects or any customers having plans to get product out by the holiday season? Alexander Y. Tokman: I would be giving away, but I can tell you that, yes, some of these customers are interested in introducing products for holiday seasons. Keep in mind that holiday season is different depending whether you're introducing something in North America or Europe or Asia. Christmas is a North American phenomenon for the most part, and there are some other holidays that they time differently elsewhere in the world. Michael Latimore - Northland Capital Markets, Research Division: And then how many of the prospects that you're talking to are using, say, LCOS technology right now, and may be looking to switch out, or are most of them kind of greenfield? Alexander Y. Tokman: You know what, most of the -- there are a few players that are switching. But most of the players did not enter the market before, because they didn't find the previously available capability compelling enough to create products. Now they're changing their mindset because of what they've seen from us and from our partners, and that's one of the reasons that the momentum has accelerated. Michael Latimore - Northland Capital Markets, Research Division: Just, Steve, on the OpEx side of things. How do you think about OpEx over the next couple of quarters here, and then maybe gross margin as well? Stephen P. Holt: We haven't been giving any forward guidance on our spending and our margin. So we'll leave it at that there. I think that we've been running at a fairly consistent level for the past few quarters. And, I guess, that's where I'd leave that.

From Oppenheimer & Co., we have Andrew Uerkwitz on line. Andrew Uerkwitz - Oppenheimer & Co. Inc., Research Division: It seemed at the Geneva auto show that new auto interfaces were pretty popular and kind of pushing the envelope. How does that -- what does that mean for you guys, and how does that ultimately affect your strategy? Alexander Y. Tokman: Well, our strategy has not -- is not changed. Andrew, we, obviously, have seen a significant pull from the market for the embedded head-up displays, and a lot of people are interested in the MEMS laser-based head-up displays. So from that respect, we actually -- we won't seeing a lot of difference. We'll be seeing the same momentum last year that we're seeing this year. And this recent deal that we signed with the major automotive, major carmaker kind of supports that hypothesis. But again, I think head-up display is going to be in about -- our expectation's, within the next decade, head-up display is going to be essentially as common as ABS brakes, and most people believe that laser-based, MEMS-based head-up display is the solution that everybody seeks and covets for embedded applications. Andrew Uerkwitz - Oppenheimer & Co. Inc., Research Division: The last question is, if we look back a year and then look at what you're doing now, have the end markets -- the end-market opportunities changed at all, or have they remained fairly stable? I mean, primarily on the consumer side. Alexander Y. Tokman: You're referring to specifically to use cases, use models? Andrew Uerkwitz - Oppenheimer & Co. Inc., Research Division: Exactly, use cases. Correct. Whether it's gaming, whether it's mobile, or whatnot. Alexander Y. Tokman: Listen, for the most part, there has been a shift. Remember, initially everybody thought that the Holy Grail is the embedded solution, and it still is. It still is -- this is still the end state for our type of technology. But with the emergence of wireless technologies, specifically at the tail end of last year, now we have capabilities to create a very cool looking, slim pocketable pico projectors that basically speak to your cell phone and tablet without any cables, without any significant overhead, and it's very easy to use. So right now, there is a use case that is emerging, which is related to availability of Miracast, AirPlay and other wireless technologies that would develop a television. So basically, for cell phone to speak -- to connect to television wireless way [ph], that technologies translates very well to pico projection, and we believe a lot of players will be interested in this specific use case.

From No Limits Capital, we have Tom Szulist on the line.

Question. Where do we stand now with the actual lumen output of the engine that seems to be progressing. Are we at 25 lumens, or where do we stand with that? Alexander Y. Tokman: We're actually showing right now 35-lumen devices to people. And, obviously, we have roadmaps for 50- and 100-lumen within the near future.

Now, apparently, in the LBS system, there are a couple of solutions. One has a 2-mirror system, and the yours, obviously, is a 1-mirror system. Are you finding that there are advantages and more efficiency with the 1-mirror system in that there are no limitations for you competing with the 2-mirror systems? Alexander Y. Tokman: Today, based on everything we know, there is about 6 or 7 independent MEMS developments going on around the world, small and large. So far, we believe we are at least several years ahead of most of these people. So that's number one. Although we monitor our competition and we respect competition, but we always -- we try to be ahead. Secondary, we have developed a lot of intellectual property that covers not just single mirror, but dual-mirror solutions, so we feel comfortable about moving forward. And hopefully, some of these people become our customers in the future.

When it comes to the actual production of the laser, it looks like Sony is one of the leading-edge developers. They're at about a 530 wavelength, which seems to be optimum for green. Where do the other competitors stand that are producing other lasers? Are they in the same wavelength, or is Sony still the leader in that area? Alexander Y. Tokman: They are close. But you are absolutely right. The lasers that the Sony has been communicating publicly at least over the past year or so, they show tremendous progress, and we are glad that there are several options now that will be available to people who are trying to incorporate our technology inside their products. It benefits everybody. It creates competition, which is necessary to get the prices further down. And the performance of Sony lasers, from what we've seen, are superior to others, at least at this point in time.

Now the numbers that I had seen was that Sony had projected, or some of the analysts had projected they were looking to produce around 10 million of these laser diodes in 2014 and double that to 20 million in 2015. Do you have any feedback as to those numbers being realistic still? Alexander Y. Tokman: I can't comment on what Sony's guiding in terms of the laser production. All I can tell you is that, for the most part, if you look at where blue, green and red lasers could be utilized at these wavelengths and at these power outputs, there is really one market that everything points, and that's pico projection. Because, remember, most of these devices were applied to DVD markets, which has disappeared. Then Blu-ray takes a lot of blue or purple lasers, which is similar wavelengths with blue. So basically, that market disappears. So if you look at what are the applications for red, green, blue lasers, you will look at pico projection market for consumer and automotive applications. To a lesser degree, there would be, obviously, medical, industrial applications, but the markets would be smaller, and majority of the volume should come from the first 2.

If you can, could you expand a little bit more on the relationship with Sony? Does it appear that they're not only going to be using this for internal products, but possibly marketing these drive engines for other manufacturers of different products? Alexander Y. Tokman: So you're probably -- you are asking a very valid question that I'm pretty sure everybody on the phone want to know. Unfortunately, we cannot comment at this point in time, and we'll let our partner to communicate their plans when they are ready to do so. Okay?

Yes, excellent. And just one last question. It appears as though you are now dealing with 2 in the automotive industry for heads-up display development. Is -- am I hearing [ph] that correct? Alexander Y. Tokman: That's correct. That's correct. We -- recall that we signed an agreement to deliver a couple of advanced prototypes in September for a global Tier 1. And at the tail end of last year, we also inked similar type of agreement with a carmaker, a major carmaker to do the same. Listen, it's nice to have green laser finally. So it helps everybody.

From Stephens, we have Mike Scott on line. Mike Scott - Stephens Capital Management: Alex, I'm still giggling over the comment about the green lasers. Heavens, yes, it's nice to have them finally. A question -- a couple of questions. Number one. I just kind of want to get a feel for you how confident you feel that Sony is going to take the components at this point and explore using them in a myriad of products versus just a projector, number one. And I have one more follow-up. Alexander Y. Tokman: Mike, again, it's a very valid question, and I want to provide more information to you and everybody else. But I have to be constrained to what Sony actually reported in their release. And they said that they're going to apply it to pico projection as well as other devices. What other devices, although we know, we can't specify at this point in time. Mike Scott - Stephens Capital Management: Final question is, I hate to even bring this up, but how are we looking as far as financing in the future? Do we think we can get where we need to be or are we probably looking to have to another fundraise or some other equity or debt situation? Alexander Y. Tokman: Well, you've seen, Steve just reported how much cash had at the end of the year, and Steve and I constantly evaluating opportunities, and once we see an opportunity that makes sense for us at any given time, we'll make a decision. So we'll continue to do what we've done in the past, hopefully, and get money to finish this job.

We have private investor, Tom McGuire, on the line.

My only question is, I know all deals are different, but does the deal that you struck a year ago with the big consumer electronics company, is that kind of going to be a template -- would you hope for future deals with consumer companies, i.e., a development contract and an upfront payment? Is that what you would hope to get? Alexander Y. Tokman: Tom, it won't be different because -- think about this. So, for example, this specific example, you have a vertically integrated player who has capabilities to produce semiconductor components and engines, and also products, not all OEMs possess this capability. Some of them just want to build their own product and they would want to get engines from established players, such as this one, for example. So you're going to see, as the market begins, you're going to see more people will taking off-the-shelf solutions and build products based on what's provided by engine suppliers. However, when the market evolves and becomes large, you're going to see more and more vertical integration, specifically when it comes to embedding it inside their core mobile devices. So we see an evolution. Right now the mix, we'd say, 80-20 in favor of people taking off-the-shelf solutions versus building a solution themselves. But as the market evolves, I think this situation may shift to 50-50.

And from ProEquities, we have Randy Hough on the line.

Alex, my question goes to one of -- just what it is that makes up the technology that's being used by Sony, for example. My understanding of packages of technology all along has been this integrated photonic module that's made up of components, basically, consisting in the MEMS mirror; the projection module, that is, the red, green and blue laser; and its associated software. If you could break those components out, my confusion is, what is the customer actually buying? Here Sony, for example, makes those lasers and could supply that component. So would something like that be in the package that we would receive a potential compensation for, et cetera? Alexander Y. Tokman: Let me -- I think there's 2 questions that you are asking. So first, what's encompassed inside the display engine? A display engine contains 2 primary pieces: One is the opto-mechanical module, and the second piece is the electronics, which has the software and the brain to control the whole system. So each one of them now -- so opto-mechanical module has lasers, MEMS and some additional optical components, as well as the mechanical components. So that's one subsystem. Second subsystems are the ASICs and some additional electronics and software that control the whole operation to produce the image and to do other functions. What we -- I cannot give you specifics what Sony is doing versus what we are doing, but what I can tell you is that the commercial -- what we are negotiating right now is transfer of some of these components and licenses to receive future royalties. What specifically? We can't tell at this moment in time. But I'm pretty sure once the -- everything is formalized and our partner communicates their plans, we would be able to provide more information. But it has both components sales and licenses.

So, just so I understand, it could be the case that, if you just take that basic dual breakdown, that we may be compensated for one of the 2, both of them, or the other. One, 2, or what have you? Alexander Y. Tokman: Right. So it could be a combination. And again, it's too early for us to communicate, because it -- until everything is concluded, until our customer announce their market plans, we would not comment on this. Okay?

We'll now turn it back to Alex Tokman for final remarks. Alexander Y. Tokman: What can I say? We're very pleased with the strong, measurable progress that MicroVision made in 2013, specifically, enabling our Fortune Global 100 customer to create their pico projection module that has potential to be incorporated into many different exciting product categories. We are progressing new consumer electronic and automotive opportunities. We are ramping our enhanced supply chain to provide high-volume, low-cost PicoP components. And we reduced cash used in operations, as Steve mentioned, by 39% versus previous year. Now we plan to build on this momentum in 2014 and focus on helping companies to incorporate our technology into their products so they can offer consumers the pico projection solutions not seen or available before. The entire product -- the entire category of pico projection is still an emerging phenomenon. In the recent market research report by MarketsandMarkets, the pico projection is referred to as an emerging technology said to revolutionize the global projection market. The report forecasts significant growth of over 40% CAGR over 7 years, reaching $10 billion by 2020. In addition, rapid changes in consumer behavior are changing ever-increasing amounts of video viewing to mobile devices. According to YouTube, for example, 40% of global watch time comes from hundreds of millions of mobile devices around the world. This represents billions of hours of video viewing on mobile devices from only this one source. Guess what? You would want a larger screen to enjoy this experience. I'm pretty sure that most of you would concur. In close, I'd like to say we believe that our progress and these market trends and forecasts bode well for the future. And our behalf of Steve, Dawn, I would like to thank you for joining us this morning, and we will conclude this call.

And this concludes today's conference. Thank you for joining. You may now disconnect.