Microvision Management Discusses Q4 2012 Results - Earnings Call Transcript

| About: Microvision, Inc. (MVIS)

Microvision (NASDAQ:MVIS)

2012 Earnings Call

February 27, 2013 8:30 am ET

Executives

Jeff T. Wilson - Executive

Alexander Y. Tokman - Chief Executive Officer, President and Director

Analysts

Ryan Macdonald

Joel W. Achramowicz - Merriman Capital, Inc., Research Division

Andrew Uerkwitz - Oppenheimer & Co. Inc., Research Division

Operator

Welcome to the 2012 MicroVision Inc. Financial Results Call. My name is John, and I'll be your operator for today's call. [Operator Instructions] Please note that this conference is being recorded. I will now turn the call over to Mr. Jeff Wilson, Chief Financial Officer. Mr. Wilson, you may begin.

Jeff T. Wilson

Thank you. I'd like to welcome everyone to MicroVision's 2012 Financial and Operating Results Conference Call. In addition to myself, participants on today's call include Alexander Tokman, President and Chief Executive Officer.

The information in today’s conference call may include forward-looking statements, including statements regarding projections of future operations and financial results, product development, applications and benefits, availability and supply of product and key components, business partnering expectations, market opportunities and growth in demand, ability to manage cash used in operations, as well as statements containing words like believes, estimate, expects, anticipates, target, 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 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 any reason.

The agenda for today's call will be as follows: Alex will first give a 2012 business update. I will then report the financial results. Alex will then discuss key business objectives for 2013. There'll be a question-and-answer session, and then Alex will conclude the call with some final remarks. I would now like to turn the call over to Alexander Tokman. Alex?

Alexander Y. Tokman

Thank you, Jeff. Good morning. I will highlight, as Jeff mentioned, key business milestones we accomplished in 2012 and will come back after Jeff is done with financials to discuss key goals for 2013, as well as what we see as external enablers in the market that should facilitate adoption of our technologies by OEM.

Overall in 2012, we accomplished or made significant progress on all of the business goals that we articulated at the beginning of 2012. We believe the foundation established in 2012 should significantly strengthen our fundamentals and provide a strong platform for future growth. Ultimately, as a result of this strategy, tactics and execution in 2012, we were able to improve on each key financial metric in 2012 versus 2011. Revenue grew 49%, cash used in operations was reduced by 26% and net operating loss was reduced by 37%. Jeff will have more shortly in the financial summary section.

The availability of high-definition PicoP Gen2 display technology design around emerging direct green laser technology was absolutely instrumental in achieving the improved financial performance in 2012. Advancing our technology platform also was fundamental contributor to make a solid progress in the design win process with OEMs in 2012, as well as achieving our other critical goals which included: first transition into Image by PicoP ingredient brand licensing model; secondly, commercializing our high-definition PicoP Gen2 display technology as a part of Pioneer's Cyber Navi head-up display product launch in July; and finally, significantly reducing cash used in operations, particularly in the second half of the year.

Let's take a look at each, starting with the availability of Gen2 technology. The year began on a positive note after we unveiled high-definition PicoP Gen2 display technology using direct green lasers at the 2012 Consumer Electronic Show. It was a culmination of the year-plus development effort that began in late 2010. With its small form factor, low power consumption and superior brightness and image quality and the only HD solution in the market, our technology received major award at the show and generated a great deal of interest from prospective customers. After CES, request for our design samples have begun.

In late February, we completed preliminary internal qualification and released the third design samples to a handful of customers to begin their internal technology evaluation studies. And as the year progressed, we shipped design samples to over 50 OEMs in our targeted markets, more on this later. Because PicoP Gen2 technology was built around the new direct green laser technology and the emerging direct green laser suppliers show considerable progress in addressing the 2 largest limitations of the synthetic green laser, which were cost and volume, for the first time, a clear green laser supply path was starting to emerge that offered OEMs a promise to address the needs of the high-volume consumer and automotive markets. As we projected, 2 direct green laser suppliers offered their commercial lasers in the second half of 2012, as was demonstrated by Pioneer's product launch in July and subsequent Osram announcement in October.

Let's move on to the transition to Image by PicoP ingredient brand licensing model. The availability of technology, emergence of direct green lasers facilitated our transition to the core ingredient brand licensing model which we call Image by PicoP, and we've done it in April. It was made possible, because for the first time, the unmatched MicroVision's PicoP display technology performance was paired with a much lower cost and higher volume green laser solution. We announced the transition in April and completed it by mid-year. As a result, we were able to achieve the following: First, offer OEMs an attractive go-to-market option for their product where they would utilize their supply strengths while relying on us to provide a license to the technology, as well as proprietary components. Secondly, we are able to commercialize our technology inside Pioneer's product under this model. Thirdly, it allowed us to significantly reduce the cash used in operations by more than 40% in the second half of the year versus the first half. And finally, it allowed us to enlist new go-to-market supply partners who understood the value of this proposition.

This leads us to another important goal we closed in 2012 which was launching our technology inside a commercial OEM product. In July, after close 1.5 year cooperation with Pioneer, we were able to launch our high-definition PicoP Gen2 display technology based on direct green lasers inside Pioneer's Cyber navigational systems, which was the world's first head-up display to project augmented reality information in front of the windshield. We shipped purchase orders from Pioneer that we began converging into revenue and positive margins starting at tail end of the second quarter in 2012. Commercializing PicoP display technology as part of Pioneer's product under the new licensing model has shown prospective customers that MicroVision's technology possesses a high-quality performance, it's reliable and is positioned for wide adoption.

Let's take a look now at the pipeline and progress we made with the new licensing opportunities beyond Pioneer. We shipped samples for evaluation to more than 50 customers in 2012, with the majority of customers coming from our primary target markets, consumer electronics and automotive. The initial shipments began in late February of last year and escalated as the year progressed. Our delivery of samples for evaluation and technical support was the first important phase in the overall design win process. The evaluation phase is followed by negotiation phase, and then by the product development and commercialization phase. These phases are typically serial, although, as we demonstrated with Pioneer, when the customer is truly motivated, some of them can overlap, particularly the latter 2 phases. After the initial recipients of PicoP display technology design samples completed their evaluation, we moved into a negotiation phase in the latter portion of 2012 with our top priority customers. The negotiation phase itself is a complex, detailed, multifaceted process that involves agreement on key business supply technology and IP terms. In several cases, we made significant progress. More on this during 2013 goals discussion.

At this point, I will pause and let Jeff to summarize financials for the fourth quarter and full year. Jeff?

Jeff T. Wilson

Thank you, Alex. This morning, I'd like to cover 3 areas: our revenue, operating results, and finally, our cash position as of the end of the year. First, I'd like to start by highlighting a couple of key points for our financial results. As Alex mentioned, our revenue for 2012 was $8.4 million, a 49% increase from last year. In addition, we continued to aggressively manage our cash and reduced our cash used in operations by 26% from last year.

Let's move to revenue. For the fourth quarter, revenue grew by 81% to $2.7 million compared to $1.5 million for the same period last year. As I stated earlier, revenue for the full year was $8.4 million compared to $5.6 million last year. Our revenue growth was driven primarily by component shipments to Pioneer for use their Cyber Navi HUD products. Our backlog at the end of the year was $1.8 million, and we have an additional $600,000 in deferred revenue, all of which we expect to recognize as revenue in the first half of 2013. Most of the backlog is comprised of component orders for Pioneer.

Next, for our operating results. Our operating loss decreased by 59% for the fourth quarter to $4.1 million compared to $9.9 million for the fourth quarter last year. Our operating loss for the full year declined by 37% to $22.9 million compared to $36 million last year. The decrease in our operating loss was primarily driven by higher margins on product revenue and aggressive management of our operating cost. During the fourth quarter, we reduced our net loss to $4.1 million or $0.16 per share compared to $9.8 million or $0.62 per share for the same quarter a year ago. And for the full year, our net loss was $22.7 million or $1.05 per share compared to $35.8 million or $2.57 per share for 2011.

Finally, moving to our cash position. As we've discussed on prior calls, we continued to reduce our operating costs and cash used in operations. And for the fourth quarter, we reduced our cash used in operations to $3.7 million, a 40% reduction from the fourth quarter of last year. For the full year, our cash used in operations declined to $20.6 million compared to $27.9 million last year. This reflects a 26% decrease from 2011. As of the end of 2012, our cash balance was $6.8 million. We expect our cash balance will satisfy our operational cash requirements through at least June of this year. With that, I'd like to turn the call back to Alex to discuss our 2013 business objectives.

Alexander Y. Tokman

Thanks, Jeff. Moving on to 2013. Our key objectives for the year include the following: first, to secure design wins and enter into licensing agreements with OEMs; secondly, to strengthen the supply chain for key components of PicoP display technology to offer multiple sources of components to OEMs as they prepare for their product development and launches; and finally, further reduce and aggressively manage cash used in operations.

In 2012, we made significant progress on further increasing the value proposition of the high-definition PicoP display technology through performance enhancements and strong roadmap. Both of these factors make our technology very attractive to future consumer electronics and automotive licensing customers as they further distinguish us from competitors' offerings. The significant performance enhancements included boosting the brightness while decreasing the power consumption and reducing the size of the engine, all of which are critical for mobility applications. Today, PicoP display solutions, as many of you know, is the only HD-capable, focus-free pico projection technology that can achieve the largest screen size for pico projectors in the market. It can be delivered in a package that is about 1 inch wide and 0.25 inch thick. The best part of our technology is that the size does not increase as we increase brightness.

At the recent 2013 Consumer Electronics Show, MicroVision hosted numerous confidential meetings with OEMs, audience and component suppliers. During these meetings, we showcased different product concepts, including a 35 lumen PicoP display engine embedded inside an off-the-shelf branded tablet, showcasing to all the type of product PicoP display technology can enable for them. The feedback was wow. People were simply amazed to see such a bright, high-definition image from an engine this small and battery-powered. We're currently in the detailed negotiation stages with several of these customers with the goal of securing their commitments this year.

Let me give you an inside look on what we are doing to attain these design licensing wins. Recall that we just mentioned that last year, we shipped the design samples to over 50 prospective customers. A large portion of them have completed their technology evaluation studies by Q4 of last year. And a large percentage of those who completed their studies indicated to us that they're interested in discussing with us their preferred go-to-market strategy for their products.

So then, what's next? The next step for us was to prioritize this global interest and select the vital few targets we want to focus on first. The negotiation phase process requires a significant support from all key business functions because each prospective customers -- each one of prospective customers has their unique requirements for us. Consequently, we have to be very selective and have to be very focused to be successful. We looked at the forward 5 attributes in determining the final -- the vital few target list. First, are they a blue chip company or not? Having a market maker is always desired but you need to have more. The second attribute was how strong was their business case? What value proposition does PicoP offer to them? Is it just a hardware play, or the benefits stretch beyond the hardware into software, operating system, content, gaming, services, advertisement? We place a higher priority on OEMs who derive revenue from multiple sources, not just the hardware. The third attribute was how strong was their level of commitment? Are they willing to share the risk with us? The fourth one, are there expectations and gaps, manageable or large? How much of it they are to close the gaps with us? And finally, is there an opportunity for upfront revenue for MicroVision in the form of license and NRE before the product come to market? All of these were carefully considered, and in the fourth quarter, we forced rank all available opportunities based on the criteria I just mentioned. And our current vital few list contains mostly large OEMs from consumer and automotive space. The detailed negotiation process with this list has begun late last year, and, in several cases, we made a significant progress.

Another important factor that helps to drive the pico projection market tremendously is the evolution of modality ecosystem in 2012. First of all, today, many smartphones comes with HDMI video-out capabilities. In 2011 there were some; in 2010, it was 1 or 2. Studies continue to show that consumer consumption of video on mobile devices is rapidly increasing. According to Cisco's recently published Visual Networking Index study, mobile video will generate over 2/3 of mobile data traffic by 2017, and have the highest compound annual growth rate of any mobile application category.

Another study by Harvard Business Review also recently published an article that brought down consumer use of mobile devices into what the study deemed 7 primary motivations, which included discovery, [indiscernible] productivity, shopping, socializing and the category they call "me time". With the vast majority of users, in fact, 46% use it for "me time", dedicated "me time," which is implied relaxation and entertainment, which includes watching short videos, long videos and playing games. The finding also points out that 68% of the time people engaged in the "me time" activity was at home, which indicates that accessing the web-based content for mobile devices is become an intrinsic use case for people, not a convenience model when they're away from the laptop.

What does it mean to us? Well, if you're watching a video or playing a game on a 5-inch handset screen, wouldn't you rather watch this information on a 5-foot screen? Do you think mobile operators, content providers, advertisers should care about this? We think so.

At this point, I would like to stop the update and jump into Q&A session, and I'll come back with closing remarks.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question comes from Mike Latimore from Northland Capital.

Ryan Macdonald

This is Ryan MacDonald down for Mike Latimore. What percent of the Pioneer backlog has now been fulfilled?

Jeff T. Wilson

This is Jeff. It's approximately -- just a second. We cut, paste the number here. It's approximately 2/3 of [indiscernible].

Ryan Macdonald

Okay, okay. And then are there any -- I mean, of the current companies that you're in, like, negotiations with that you've ranked, I mean, how many of those do you think could lead to a structure of an up-front-royalty-payment-type structure?

Alexander Y. Tokman

Our goal is to have -- this is one of the motivations and one of the selection criteria for us, as I mentioned, Ryan, and we expect that some of these companies will have up-front components and we're counting on them as a revenue for 2013. In terms of your backlog question, I think we had about a total approximately 6 million order backlog from Pioneer. Our total order from Pioneer, I think, will -- we fulfilled about 4 million of those.

Ryan Macdonald

Okay. 4 million of the 6 million. Okay, got you. And then Japan's fiscal year is in April. How are you positioned for products in -- or projects in Japan?

Alexander Y. Tokman

Great question. A lot of our discussions are with -- some of them are with Japanese entities and some negotiations are aligned with their fiscal operating year and some of the decisions are being made are in line with their transition to the new year in April 1.

Ryan Macdonald

Got you. And then just a final question, what was stock comp during the quarter, if any?

Jeff T. Wilson

Stock comp, I can get you that number. It is 5 -- for the quarter, it was $500,000 approximately. For the year, $2.2 million.

Ryan Macdonald

For the year, $2.2 million.

Operator

Our next question comes from Joel Achramowicz from Merriman Capital.

Joel W. Achramowicz - Merriman Capital, Inc., Research Division

I'm trying to get a handle, Alec (sic) [Alex], on the -- your -- can you give us an indication of the 50 -- that the vendors that you sampled last year. How many are in the second or third stage of the model you articulated?

Alexander Y. Tokman

Well, it's a good question, Joel. Remember, 3 key phases to get to a final product revenue: you got evaluation, technology evaluation phase, which was completed last year; the negotiation phase began in the latter portion of 2012. And our goal is to get couple of contracts signed this year that will begin the product development commercialization cycle. And as I mentioned to you, majority of the 50 people that completed evaluation studies have indicated interest to go-to-market with us. But we have to make a very, very stringent look and prioritize in top 5, second top 5, third top 5, because we want to focus on vital few that give us highest probability of success and not defocus on too many different opportunities and not being successful. So the goal, focus on a vital few that were selected by the 5 attribute that I just described: so blue-chip or not; business, how strong is the business case; third, how motivated they are to close the gaps; is there up-front component in terms of license or NRE. And that's what we're focusing on right now. Our goal is basically to -- essentially to complete some of these agreements this year, and start getting revenue hopefully from up from license and NRE in 2013 and product revenue in 2014.

Joel W. Achramowicz - Merriman Capital, Inc., Research Division

So you must have a focused team or your multiple teams that are constantly triaging these opportunities and allocating resources efficiently in order to optimize the progress.

Alexander Y. Tokman

Absolutely. You have to have laser focus on this, no pun intended. And once we grow, once we become larger, we'll be able to handle more cases simultaneously. Right now, we're focusing on the vital few, get something accomplished and then, build on this with others. Because the others are not going away. They simply understand that we're focusing on other opportunities.

Joel W. Achramowicz - Merriman Capital, Inc., Research Division

And one of the questions, Alex. How do you feel that your progress -- it's been a year since the 2012 show and went CES and of course you attended the 2013 show. And I mean, can you describe the progress that you feel you've made over this last year? I mean, is it are you in a better or more aggressive position now than you were 12 months ago?

Alexander Y. Tokman

No question, Joel. No question. In 2012 CES, remember, we first introduced the first samples of the Gen2 technology. It was 15 lumen. We were showing the path to higher than 15 lumens but fundamentally we have something. It was better than Gen1 technology. It was built around green lasers. We have some product concepts.

This year we introduced -- we basically did create our own demonstration devices to show product concepts and we implemented 35 lumen engines that were low-power, brighter, into the off-the-shelf commercial result product to show -- hey, look. It's very simple stretch between taking this and putting in something that you would sell. And the fact that we increased the brightness by more than 2x without increasing the power and without increasing the size created the extreme, very positive buzz in the -- in all the meetings that we held during the CES. And people also observed that we launched our technology inside a commercially viable product, which was Pioneer launch in the middle of last year. So they now not only see a great technology, they see complimentary supply chain with direct green lasers, they see we already launched something inside automotive, which is typically requires much more stringent requirements than consumer products. All these factors added together increased the confidence of the partners who approaching us for their product solutions.

Joel W. Achramowicz - Merriman Capital, Inc., Research Division

And one final question. I mean, it's the end of February now. Would you be disappointed if you did not have some kind of an announcement by June?

Alexander Y. Tokman

Yes.

Operator

The question from Andrew Uerkwitz from Oppenheimer.

Andrew Uerkwitz - Oppenheimer & Co. Inc., Research Division

The first one is, Alex, is has the competitive landscape gotten tougher, whether it's pico projectors or alternative technologies? And can you kind of give us an update on that landscape?

Alexander Y. Tokman

Sorry, could you repeat this. I did not hear the first portion of your question.

Andrew Uerkwitz - Oppenheimer & Co. Inc., Research Division

Yes. Could you -- sorry, could you kind of discuss how the competitive landscapes changed over the past 6 to 9 months, and has it gotten tougher, easier? And how does it look to you guys?

Alexander Y. Tokman

Okay, great. We carefully monitoring what's happened with competition, obviously. TI just introduced at CES a new chips [indiscernible] with 30% brighter. The problem is, they didn't say what was the initial condition, 30% brighter than what? We know today that our technology allows to manage brightness with power and size much more effectively than panel technologies which include DLP and LCOS. So fundamentally there's been a progress in competitive fronts.

For example, we launched, if I can give you a little historical information, we launched our first product, Gen1 product based on synthetic green lasers since -- end of 2009, early 2010. We launched it with the WVGA resolution where everybody else came into market with half VGA, so resolution, far inferior, and brightness was far inferior. Now people at CES showing WVGA technology for pico projectors. We're moved on to HD. People are just showing 20 lumen projectors with the WVGA. We're showing 35 lumen projectors with 720. So even though there isn't been significant progress on the competitive front, and there are several LCOS players enter the market, one of them Compontetonics [ph] and somebody else, we fundamentally feel that our roadmap keeps us ahead of competitive offerings. And we actually anticipate that improvement in their part and that's what drives our technology roadmap to be always ahead, 2 steps ahead of them. So we feel comfortable about performance, about value, and now with direct green laser supply coming from 2 sources in 2012 and more in 2013, we feel, look, finally we can address the cost and volume issue that had been hindered us with synthetic green lasers in 2010 and 2011.

Andrew Uerkwitz - Oppenheimer & Co. Inc., Research Division

Great. If I could ask around the Pioneer deal, is that an exclusive deal, meaning you couldn't do other automotive deals?

Alexander Y. Tokman

No. Pioneer was one of the very few companies who wanted to introduce us to market head-up display. The big momentum right now in the HUD market is for the embedded HUD. There are, I believe, 6 to 7 car manufacturers pulling on about 10 to 11 Tier 1 and Tier 2 in automotive sectors to come up with laser head-up display, and as you can imagine, most of these people referring back to us.

Andrew Uerkwitz - Oppenheimer & Co. Inc., Research Division

Sure. And the last question, when you look across the landscape of your list of potential customers, is it pretty traditional end-users as far as automotive, entertainment? Or are there some sort of innovative ideas out there that could really change the market?

Alexander Y. Tokman

You know what, that's a great question. There are a few, few see -- looking for innovative ideas. Most think traditionally. But what we have been trying to do very, very selectively is pick people who derive their revenue not just from hardware, from -- but from other sources: content, game, operating system, software, so that the value proposition of our solution increases in their eyes. We also have a list of product ideas for them that they have not thought about that we offer as essentially good, safe offering to help them to formulate their product ideas. Most of the people on our lists are blue chips because we're looking at market makers to take our technology and make it thunder.

Operator

And I'll turn the call back over to Alexander Tokman for closing remarks.

Alexander Y. Tokman

Well, first of all, thanks for joining today. Let me just wrap this up. Achieving the commercialization milestone for Gen2 display technology and the availability of direct green laser from several sources in 2012 were the 2 cornerstones that should position the company for growth moving forward. We believe the progress we're seeing in 4 critical areas, which include mobile ecosystem maturity, MicroVision's display technology advancement, transition to the core Image by PicoP licensing model, and as availability to green laser supply broadens the prospects for OEMs adopting our differentiating technology in 2013 and beyond. We're looking forward to updating you on the progress throughout the year, focusing on the 3 primary goals, which include: securing design wins and entering into licensing agreements; secondary, strengthening the supply chain for key components of PicoP display technology to offer more assurance to OEMs; and finally, to aggressively manage cash used in operations and reduced it, just what we've done last year. Thank you, and we'll speak in 2 months.

Operator

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.

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