Richard Sneider – CFO and Treasurer
John C.C. Fan – Chairman, President and CEO
Timothy Jergins [ph] – CBS Financial Corp. [ph]
Kopin Corporation (KOPN) Q3 2008 Earnings Call Transcript October 30, 2008 5:00 PM ET
Good day, and welcome to the Kopin Corporation's third quarter 2008 financial results conference call. Today's call is being recorded for Internet replay. You may access an archived version of the call on Kopin's website at www.kopin.com. A question-and-answer session will take place at the end of the formal presentation. (Operator instructions) With us today from the company are Chairman and Chief Executive Officer, Dr. John C.C. Fan, and Chief Financial Officer, Mr. Richard Sneider. For opening remarks, I would now like to turn the call over to Mr. Sneider. Please go ahead, sir.
Thank you. Good afternoon, everyone, and thank you for joining us. I'll begin today's call by taking you through our Q3 2008 financial results. John will discuss the operational highlights for the quarter and review our business strategy, after which we will take your questions.
Before we begin, let me remind everyone that during today's call, taking place on Thursday, October 30, 2008, we will be making forward-looking statements as defined in the Private Securities Reform Act of 1995. These statements are based on the company's current expectations, projections, beliefs and estimates and are subject to a number of risks and uncertainties.
Potential risks include, but are not limited to, demand for our CyberDisplay and III-V products, market conditions, foreign currency exchange rates, the availability of raw materials, and other factors discussed in our most recent annual report on Form 10-K and our most recent quarterly report on Form 10-Q, and other documents on file with the Securities and Exchange Commission. The company undertakes no obligation to update these forward-looking statements made during today's call.
Turning to our financial results, total revenue for the third quarter of 2008 increased 5% year-over-year to a record $30.7 million on a quarterly basis. CyberDisplay revenue was $18.9 million, up approximately 4% year-over-year, while III-V revenue increased approximately 6% to $11.8 million.
On a reportable segment basis, Kowon sales to external customers were approximately $2 million in the third quarter of 2008 and $1.9 million in the third quarter of 2007. Kopin US revenues were $28.7 million and $27.4 million for the third quarters of 2008 and 2007 respectively.
Sales of our display products for the military applications increased to $10.5 million in the third quarter of 2008 from $4.4 million in the same period of 2007. Sales from consumer electronic applications declined to $4.8 million from $10 million, primarily as a result of our strategy of lowering sales of our display products for digital still camera applications.
Research and development revenues were $1.4 million in Q3 of 2008 as compared to $1.6 million in Q3 of 2007. Gross margin for Q3 2008 was approximately 33.8% compared with 18% in the third quarter of 2007. The increase in gross margin primarily resulted from an increase in the sale of display products for military and eyewear applications.
Research and development expenses were $4.1 million or approximately 13% of third quarter revenue. This compares with $3 million or approximately 10% of Q3 revenue in 2007. Third quarter R&D expenses were associated with the development of high resolution displays as well as the development of new III-V products. We model R&D expenses to be in the range of 15% to 20% of revenue.
Selling, general and administrative expenses in Q3 2008 were $4 million or approximately 13% of revenue compared with $4.2 million or roughly 15% of revenue in the third quarter of 2007. Essentially they were flat and within the 12% to 15% of sales that we expect.
Kopin reported net income for the third quarter of 2008 of $1.5 million or $0.02 per diluted share based on 68.5 million weighted average common shares outstanding. This compares with a net loss of $0.4 million or $0.01 per share for the third quarter of 2007 based on 67.5 million weighted average common shares outstanding. Net income for the third quarter of 2008 included a write-down of our investment in Kenet of $2 million, a write-down of certain corporate debt securities of $0.5 million. And these were partially offset by a translation and transaction gain of $1.2 million.
A little more detail on these items. As you may know, several years ago we invested in Kenet, a mixed-signal IC company. In October, Kenet was sold for cash. The sales proceeds we initially received exceeded our $2 million investment – exceeded our investment by $2 million. There is also continuing consideration we may receive consisting of amounts held in escrow and amounts which may be earned if the sale of Kenet products exceed certain thresholds over the next couple of years.
Our Q3 net income also reflected $0.5 million of impairment charge on corporate debt investment. Within our $92 million of cash and marketable securities are approximately $18 million of corporate debt securities, which are currently rated as investor grade. However, we determined that the fair market value of approximately $11 million of these securities were other than temporarily impaired because they had been in an unrealized loss position for 12 months. As a result, we recorded an impairment charge of $0.5 million to write these investments down to their prior market value. Finally, as a result of the declining value of the Korean Won as compared with the US dollar, our Korean subsidiary recorded $1.2 million foreign exchange gain.
By operating segment, in the third quarter of 2008, Kopin US reported net income of $0.4 million compared with a net loss of $1.3 million for the comparable period of 2007. Kowon reported a net income of $1.1 million in the third quarter of 2008 compared with net income of $900,000 in the same period of 2007.
For the nine months ended September 27, 2008, total revenues increased 24% to $85.7 million compared with $69.2 million for the comparable period of 2007. Net income for the first nine months of 2008 was $0.8 million or $0.01 per diluted share compared with a net loss of $6.8 million or $0.10 per share for the same period in 2007.
Turning to our balance sheet, cash and marketable securities at September 27, 2008 totaled $92 million compared with $93.3 million at the end of 2007. And we continue to have no long-term debt. Receivables increased to $18.5 million at September 27, 2008 from $14.2 million at year-end. The change resulted from increased sales to military and eyewear customers.
Capital expenditures were approximately $2.8 million for the first nine months of 2008 compared with $5.7 million for the same period. Depreciation and amortization was $4 million for the nine months of 2008 compared with $2.6 for the same period of 2007.
Turning to our guidance, based on the current business environment and the economic conditions in our end market, we continue to expect our full year 2008 revenue guidance to be in the range of $105 million to $115 million.
And with that, I’ll turn the call over to John.
John C.C. Fan
Thank you, Rich. Good afternoon, everyone, and thank you for joining us on today’s conference call. Before I go into detail about CyberDisplay and III-V categories, let me begin with an overview of our financial performance in Q3.
First, I am very pleased that we were able to generate record revenue and strong profits in the third quarter, particularly in a very challenging economic environment. Just as important, we continue to significantly improve our gross margin. As Rich had mentioned, gross margin increased 1,600 basis points year-over-year to 34%. This improvement reflects the steps we have taken to focus on markets and product applications where our display technology is a key differentiator. Clearly, this strategy is beginning to yield measurable results.
Let me first turn to CyberDisplay, which grew modestly in the third quarter of 2008. Keep in mind, however, that we are in the process of deemphasizing the low-end of consumer electronics segment. So year-by-year display growth is not truly a meaningful metric to evaluate our results. We believe the real story continues to be the growth of our military display revenue, which more than doubled to $10.5 million from $4.4 million in the third quarter of 2007.
As we’ve mentioned on previous calls, the primary driver behind the $6.1 million increase is the US Army Thermal Weapons Sight II program. Kopin is a primary display supplier for TWS II in partnership with DRS and BAE Systems. In addition, we’re producing a shipping display for a number of weapon systems in development, including the next generation Thermal Weapon Sight, TWS Bridge, and the Enhanced Night Vision Goggle program, ENVG.
Let me point out, as part of our military work, our customers ask us to supply higher level assemblies. To that end, we have built earlier this year a dedicated 3,000 square foot clean room in Taunton where the work is now taking place. Our proprietary display had been the display of choice for our customers. And now, this new facility provides additional differentiation for Kopin. Given the strength of our customer relations, the skill of our military participation, and the depth of our expertise, we expect sales of our military display products to be strong in 2009 and beyond.
Turning to the commercial side of our display business, we continue to achieve measurable progress in video eyewear segment. Eyewear display sales have been up modestly in third quarter of 2008 to $2.4 million. For the first nine months of 2008, eyewear display revenue was up nearly 30% to $5.7 million. We are seeing an accelerated pace of design activities involving increasing number of large companies. We continue to believe that video eyewear is the ideal viewing [ph] technology to accommodate the new and emerging array of mobile devices.
As with our military display applications, our displays also are ideal for eyewear applications. As anyone over age 35 knows, the typical screen size of those mobile devices is simply not conducive to browsing the Internet, watching video feed, or working on desktop applications. Video eyewear provides the features and functionality of a full screen computer screen with a privacy and portability required by today's mobile consumers.
Display revenues for camcorder and digital camera declined more than $5 million in Q3, reflecting our strategy to deemphasize the low end of our consumer electronic segment and focus on higher value and differentiable opportunities. III-V product revenue meanwhile increased about 6% for the third quarter and 15% for the first nine months of this year. As we noted in today’s news release, we have seen a continual migration among our wireless circuit partners to our indium gallium phosphide, InGaP power amplifiers. InGaP is an ideal structure for the performance demands of the new wireless handsets and mobile devices. Kopin first introduced InGaP HBT ten years ago. So we're extremely knowledgeable about this technology and are very well positioned as the market moves towards InGaP.
Let me close by saying that our strategy of focusing on high value of opportunity is yielding topline growth, improved margins, and solid profits. The global economic climate may be unsettled for the moment, but Kopin is very well-positioned, both financially and operationally for continued success. With $92 million in cash and no long-term debt, we have the financial muscle to continue to profitably grow its business. By investing in new products to add value for our customers, we extend our competitive advantage.
Innovation is our ongoing focus for our display technology. We continue to aggressively develop new products for military and commercial applications. In III-V, we always strive to enhance consistent performance, and we are delighted with the improvements achieved by our new advanced III-V reactors. Ultimately, the key driver for Kopin’s success is the continued growth in demand for light, power-efficient mobile technology that effectively delivers voice, video, and data. Kopin has the technology and products for this mobile life [ph].
With that, we are ready for your questions. Operator?
Thank you. (Operator instructions) Our first question comes from the line of Timothy Jergins [ph] with CBS Financial Corp. [ph]. Please proceed with your question.
Timothy Jergins – CBS Financial Corp.
I was just wondering with our current cash position and the market outlook if it wouldn’t be wise to ask some kind of stock buyback program to basically put a floor on the stock and give it a better momentum on the upside. Is there any thought to a stock buyback program of, let’s say, $5 million or something that might add some momentum to the stock?
We always are evaluating stock buybacks and stock buyback programs. Frankly, I think – at least management – and that ultimately is a Board decision, but I think the management perception at this point is that no one really understands what this economy is going to do next year and cash is kind of king. And so we’re going to keep it in the bank to weather whatever storm comes our way over the next 12 months. To the extent there is better visibility, then perhaps we might do something. I understand that the stock looks attractive at these levels.
Timothy Jergins – CBS Financial Corp.
Well, it seems to be at an historic low, and some small incremental buyback program, which could be augmented as you gain momentum, and yet have substantial resources to weather the current storm. Are you concerned about the election in terms of a large segment of your business, in terms of military, because evidently one aspect – one group will get the military, which is a standard. Is that something that may hold you back?
Well, as far as the military goes, we feel confident looking into 2009 because of the way the appropriations work in Congress. After 2009, you know, all bets are off. We really don’t know what’s going to happen, nor does anyone else. So it’s really the current economic situation, not necessarily the election, which is driving at least our thought-process that we want to keep as much cash as possible.
Timothy Jergins – CBS Financial Corp.
(Operator instructions) Gentlemen, there are no further questions in the queue at this time. I’d like to hand it back over to you for some closing comments.
John C.C. Fan
Well, thank you very much for joining us for this conference call, and I hope to talk to you guys next time. Adieu. Bye-bye.
Ladies and gentlemen, this does conclude today’s teleconference. Thank you for your participation. You may disconnect your lines at this time.
Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.
THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.
If you have any additional questions about our online transcripts, please contact us at: email@example.com. Thank you!