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Microvision, Inc. (NASDAQ:MVIS)

Q4 2008 Earnings Call Transcript

March 5, 2009 4:30 pm ET

Executives

Tiffany Bradford – IR

Alexander Tokman – President and CEO

Jeff Wilson – CFO

Analysts

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]

Operator

Good day, ladies and gentlemen, and welcome to the fourth quarter 2008 Microvision Incorporated earnings conference call. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of this conference. (Operator instructions) I will now turn the call over to Tiffany Bradford, Investor Relations Specialist. Please proceed, ma'am.

Tiffany Bradford

Thank you. I'd like to welcome everyone to Microvision's fourth quarter and year-end 2008 financial results conference call. In addition to myself, participants on today's call include Alexander Tokman, President and Chief Executive Officer, and Jeff Wilson, Chief Financial Officer.

The information in today's conference call may include forward-looking statements, including statements regarding projections of future operations, product development, introduction, applications and benefits, business partnering expectations, market opportunities and growth and demand, as well as statements containing words like believe, estimate, expects, anticipate, target, plans, 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 statement, whether as a result of new information, future events, changes in circumstances, or any other reason.

I would now like to turn the call over to Alexander Tokman. Alex?

Alexander Tokman

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.

Everything that we've been doing throughout 2008 did not go unnoticed. We won numerous awards. Most notably, Frost & Sullivan awarded us North American Technology Innovation Award for the ultra-miniature Pico head-up display based on our PicoP display engine. As I mentioned earlier, we won several awards at CES and Macworld Expo, which we affirm that we are moving in the right direction.

Now, before I pass it on to Jeff, who will cover the 2008 financials, I want to stress one important point. Anytime a company moves closer to commercial product introduction, the expenses grow substantially. It's a fact of developing and bringing new products to market. While not sizeable for us, this factor is reflected in our financials for 2008 versus 2007, as you're going to see in a moment. We were still able to close the year with $24 million in cash in hand and it was made possible only because of how carefully we managed expenses throughout the year once we realized that economic conditions and the critical components being delayed.

Jeff?

Jeff Wilson

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.

We will need additional working capital to fully fund our operating plan for 2009. And we are continually assessing our opportunities for obtaining additional capital through discussions with bankers, existing and potential investors and strategic partners. We use the information we receive from the market combined with our progress on completing our supply chain, signing OEM agreements, and launching our accessory product to determine the appropriate time and manner for obtaining additional capital.

We believe that even in this difficult market, we will be able to raise additional capital. Alex?

Alexander Tokman

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.

Question-and-Answer Session

Operator

(Operator instructions) Our first question comes from the line of Jed Dorsheimer with Canaccord Adams. You may proceed.

Jed Dorsheimer – Canaccord Adams

Hi. Thanks. Couple questions. I guess the first one is, you mentioned contract revenue is going to not be much, could you further quantify what not much is? Is it a couple hundred thousand? Is it a million? Any sort of idea of what we should expect for 2009 in that business?

Jeff Wilson

I'm sorry, Jed. If I said not too much, I meant not much different.

Jed Dorsheimer – Canaccord Adams

How much different?

Jeff Wilson

We expect it to be pretty much in line with this year.

Jed Dorsheimer – Canaccord Adams

All right. Perhaps I wrote it down wrong.

Jeff Wilson

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

That's helpful. And then, could you provide some more clarity around the green laser timing and what gives you the confidence that your suppliers will be able to get you the green lasers in time for your launch and what specifically is the issue around it?

Alexander Tokman

Fair question, Jed. I’ll try to be as transparent as I can. The commitment to deliver the commercial quantities by several green laser manufacturers are still very much intact. And if you wanted some external validation, I would highly encourage you to visit Corning's website and read a transcript from the most recent annual shareholders meeting.

Corning executive team is reiterated its belief in the enormous market opportunity for Pico Projectors, their significant support behind the green laser program, as well as our leadership in this emerging segment. The issues that were driving delays in the delivery of green lasers last year are being resolved and the samples we are receiving today are far closer to production from what we've seen just three, four months ago. So this gives us added confidence that we're going to have a commercial launch mid-year for the second half of 2009.

Jed Dorsheimer – Canaccord Adams

And the mid-year launch, that's for accessory products, correct?

Alexander Tokman

For accessory product, correct.

Jed Dorsheimer – Canaccord Adams

And what type of volumes are your customers that you – I assume you've already signed many of these customers for the accessory. What type of volumes are they talking about?

Alexander Tokman

Jed, right now, we're having a good problem, but it's still a problem. Right now, the bottoms-up demand from the core list of our customer exceeds our anticipated supply for 2009 by 20 times. And we're trying – as we get more refined estimates from our strategic green laser partners, we will have a lot more confidence in what we can provide back to our customers because you don't want to over-commit and under-deliver because you don't have a handle on exactly how many units you're going to have by what time because of the green laser supply availability.

On the other hand, you don't want to provide too low of a number because they may say, it's below my minimum expectation. So, we have a list of customers who are waiting for us. We have weekly meetings with green laser partners and at every level within each organization and we feel comfortable we're going to get volume to have commercial product starting mid-year in the second half of 2009. How many exact units? I think I will provide you with much greater clarity next time we talk.

Jed Dorsheimer – Canaccord Adams

You mentioned 20 – I mean, that's a great problem to have, Alec, 20 times over your capacity. What is capacity?

Alexander Tokman

Good one. Let's say that the bottoms-up demand is measured at minimum, in hundreds of thousands of units for 2009.

Jed Dorsheimer – Canaccord Adams

All right. And so that 20 times the hundreds of thousands, how many customers –?

Alexander Tokman

No, no it's actually the other way around. Go ahead.

Jed Dorsheimer – Canaccord Adams

No, I'm sorry. What do you mean the other way around?

Alexander Tokman

No, the bottoms-up demand is measured in several hundreds of thousands of units, and supply, you can basically divide it into 20.

Jed Dorsheimer – Canaccord Adams

Got you. And the – how many customers are you – are making up that demand that –?

Alexander Tokman

Right now, believe it or not, this is based on less than six customers. We actually had to trim down our initial list because we don't want to greatly over-commit and under-deliver. So we streamlined the initial funnel of the first movers for our technology and we are waiting right now for more refined estimates from our green laser partners. As soon as this comes available, which we expect within the next few months, we are ready to move forward in a big way.

Jed Dorsheimer – Canaccord Adams

Great. Last question and I'll jump in the queue. How many of those less than six customers would also be doing an embedded product in 2010?

Alexander Tokman

90%.

Jed Dorsheimer – Canaccord Adams

90%? Great. Thank you

Operator

Our next question comes from the line of Brian Yurinich with Craig-Hallum Capital. You may proceed.

Brian Yurinich – Craig-Hallum Capital

Hi. This is Brian Yurinich on behalf of Christian Schwab. I was wondering, with Samsung introducing two Pico Projector phones and GSM with the competitor’s technology, could you walk us through like what your competitive advantages and cost advantages versus Texas Instruments are?

Alexander Tokman

Absolutely. This is a very good question that I believe is on a lot of people's minds. Here is a simple answer. We think that Samsung's pioneering work that was shown at Barcelona is actually helping our cause. For several reasons, A, it validates a huge market opportunity. We don't have to own the whole pie, just a fraction and we're very, very successful.

Second reason is that it's putting additional pressure on the other handset manufacturers to move faster to find there own solutions. As far as the utility of that product, there are still lots of unanswered questions. I was in Barcelona myself and had a chance of seeing the device. And although Samsung has done a commendable job of integrating a larger power-hungry TI engine into their prototype handset, the brightness, image size, and the power raise big questions. How well market will accept it? The device was less than (inaudible). The image could only be seen in a dark black box, and the image was twice the size of the iPhone screen.

So there are still a lot of questions that they need to answer, but the good news is that large companies see the value. This puts pressure on other handset manufacturers, and we have some distinct advantages. Our brightness is twice as high as what we've seen in the Samsung phone. Our form factor is probably 30% to 40% to 50% less than the TI engine, and we have focus-free operation. We have – our resolution is DVD quality, not half VGA-like like Samsung phone, and our image could be at least two to three times larger at the same distance versus what I've seen in Barcelona.

Brian Yurinich – Craig-Hallum Capital

Thank you. And then, also I was wondering what you expected your cash burn to be like next year?

Alexander Tokman

As we mentioned – as Jeff has mentioned, we ended last year north of $28 million in cash and we're confident that our cash balance is sufficient to support the planned launch of the accessory product. Jeff also mentioned we will need some additional working capital to fully fund the operating plant for 2009, and we're continuing to assess the opportunities for obtaining additional capital through various discussions, including strategic investors.

Brian Yurinich – Craig-Hallum Capital

All right. Thank you very much.

Operator

Our next question comes from the line of Suji De Silva with Kaufman Brothers. You may proceed.

Suji De Silva – Kaufman Brothers

Hi, Alex. Hi, Jeff. How are you guys doing?

Alexander Tokman

Good.

Suji De Silva – Kaufman Brothers

Real quick, I'm following up on that question. Where is your headcount now? And I guess looking forward, what revenue level would you be at sort of break even?

Jeff Wilson

So, headcount we're just right around 150 people. And breakeven, what we've talked about is that breakeven we think comes very soon after you get to an embedded product. And we've talked consistently that we see an embedded product being nine to 12 months after the launch of an accessory product. When you get to embedded volumes, you get to breakeven relatively quickly within a quarter or two of a launch of the product.

Suji De Silva – Kaufman Brothers

Okay, great. That color helps. And then – and Alex, you've met with many customers here. What, of all the different attributes you've said you think you are competitively advantaged at, which one was really kind of the one or two that resonate with the customers to get them on board for what you're trying to do?

Alexander Tokman

It always starts and ends with user experience and there's no feature that facilitates ease of use than focus-free operation, where you basically hold this device in your hand, project it on any surface and you can read text and see any image clearly. It's not the case with the competitive products.

Suji De Silva – Kaufman Brothers

And last question, on the accessory versus the embedded, it sounds like you have time frames of when you think those will happen, 2009/2010. But Alex, Jeff, what is the timeframe from a new customer starting wanting to do an accessory with you, the cycle time of that versus the development time for an embedded from the start when they engage with you to getting a product? What's the difference in those lengths of time?

Alexander Tokman

We estimate it at about 12 months. From the time we launch the accessory, I think within 12 months our expectation with the end gauge customers we can get several embedded offerings to market.

Suji De Silva – Kaufman Brothers

So, once accessory is launched, you can get the embedded within 12 months after that?

Alexander Tokman

Right. Because – think about this. Jed has asked very valuable questions. How many of the customers on our core funnel list of six interested in embedded? And 90% are interested in embedded. They just want to reduce – due to this poor economy, people are conserving cash. They tried to push the risks on somebody else. In this case, it's us. So they want to validate the accessory quickly, ensure that everything is in place and move quickly to bigger and better pastures, which is the embedded application, which is the thesis on which we build this company.

Suji De Silva – Kaufman Brothers

Great. Maybe one last numbers question. On the backlog, is that a 12-month number or just an ongoing number or a three-month number? Just want to get some color on that.

Jeff Wilson

Yes, that is all for delivery during this year.

Suji De Silva – Kaufman Brothers

Okay, great. Thanks, guys. Good luck to you.

Operator

(Operator instructions) Our next question comes from the line of Arthur Doglione with Alpha Fiduciary. You may proceed.

Arthur Doglione – Alpha Fiduciary

Well, hi, Alex. Hope everything is going well. Sounds like you're making very good progress up there. Question that I – my original question was actually asked, but with regard to the anticipated product ramp relative to the cash burn, are you anticipating any of the agreements that you might sign from a distribution or branding perspective would involve perhaps some cash?

Alexander Tokman

You're talking about the purchase orders?

Arthur Doglione – Alpha Fiduciary

Yes. In other words, as these folks would commit to getting involved with having the display engine utilizing the technology, would they sign a distribution deal and then pay Microvision to do that as a way to help just keep the company going without having to seek additional financing?

Alexander Tokman

Are you talking specifically about accessory or embedded efforts?

Arthur Doglione – Alpha Fiduciary

Well, I guess we could throw it out for either one.

Alexander Tokman

Well, the accessory business model is quite simple. It's basically – it’s worked of purchase orders. A customer once turn them on a volume and they issue PO and we use this PO to feed the supply chain. On the embedded efforts, there are some opportunities for additional funding, but because of the economic situation, we don't expect large contract revenue from these efforts. Our goal is to get to market as soon as possible. So we obviously welcome and solicit and expect some of the help from the large consumer electronic players. But in this economy, to count on this and to build the operating plan is very difficult. So, we treat it as a pure outside in this case.

Arthur Doglione – Alpha Fiduciary

Okay, great. Thank you.

Operator

Our next question comes from the line of Joe Dubroth [ph] with Morgan Stanley. You may proceed.

Joe Dubroth – Morgan Stanley

Hey, guys. Can you give us any color on what the technology issues are at Corning and your other suppliers and why it has taken them so long to produce this product?

Alexander Tokman

Joe, I can't – you know, I can’t in all full consciousness tell you about – every company, when developing new technology, goes through these pains. You're just seeing this because we're a small public company and it's amplified times 100. Every company on this earth has gone through these things. Unfortunately – or fortunately for them, no one knows about this until they are ready to launch this. We don't have this luxury. So, Corning has extremely bright hard-working team of people. They have support from the highest levels within their organization. They pour a lot of funding to get this program to market and to commercialize in the second half of 2009. And we have no reason to believe why they would not be there.

Right now, same thing with the OSRAM. It's basically – both companies see huge market potential and upside, and these are just normal technology to manufacturing conversion pains that are experienced by every company. And again, unfortunately we cannot hide this because – because of us, you know that they are experiencing this problem. Because we are a public company, we're relying on their components. All I can tell you is that the problems that were hampering them and us last year are being solved and the green laser components we're receiving today are much closer to the commercialization than we were just three months ago.

Joe Dubroth – Morgan Stanley

So, Alec, it sounds like to me you have customer demand. You're getting closer to actually having a product. Can you build that product at a price that you can make money on?

Alexander Tokman

That's the goal. We are for-profit organization. So that's the ultimate goal, yes.

Joe Dubroth – Morgan Stanley

All right. So, if you've got that, then really the remaining issue is how you are going to fund yourself without – at a dollar, whatever the stock closed at, although I think it was higher than Citigroup's, so congratulations. The question is, how do you finance this thing without completely diluting your shareholder base? Is there – can you go to your supply chain partners? Can you get upfront cash from OEMs for, say, territorial exclusivity or first-mover advantages? For your shareholders' sake, I hope you are looking at some other possibilities besides going to the public market.

Alexander Tokman

Joe, we're looking at all options. We are continuously assessing all options, including the strategic investments. And so basically, there's nothing that can be done right now we are not doing right now. We are evaluating continuously. And over the past three years, we've been pretty consistent about being proactive and being opportunistic about what we see. And our goal is to minimize dilution as much as possible, but at the same time, we have to get to market. And it's like the old Greek mythology. Obviously you have to go between the Scylla and Charybdis, two rocks, and you have to decide how you're going to navigate. This is exactly the problem we are facing, and I think we're going to get on the other side of that rock.

Joe Dubroth – Morgan Stanley

Sounds good. Thanks, guys.

Operator

Our next question comes from the line of Larry Sisson [ph], private investor. You may proceed.

Larry Sisson

Alex, we've heard that there will be multiple channels of distribution. And I'm assuming that's for the SHOW product, is as obviously the embedded product. And yet today, you say that it will be Microvision-branded, and I'm assuming that part of that marketing channel will be on your website. Is there no possibility that you won't have another customer who wants to put his name on it?

Alexander Tokman

Larry, this is a good question. Let me clarify this. I think it's simple problem than what it appears right now. I'm saying Microvision direct, it means we're going to move some of the units and some of the volume through the lower cost, higher average selling price channels. Traditional route, you go through OEMs to retailers. That's a high-cost channel because you have OEM that takes a big cut and you have a retailer that takes a big cut.

There are lower cost channels that exist, especially at the onset of the introduction when you're trying just to create the momentum and maximize your margin. You want to have ability to go through several channels. So it doesn't mean that we're going to sell it off the web. What it means is that it's going to have Microvision's name, and the product will be sold through the largest global distributors to retailers and other channels to optimize our – to give us flexibility on volume and margin.

Larry Sisson

Okay. I want to go back to HUD for just a second. When are you going to get some orders? When are you going to be able to make some deliveries?

Alexander Tokman

We actually made the deliveries, Larry. The problem is not us. The problem is the automotive industry condition that it is right now. Most of – you don't need – you open a newspaper and take a look at what happened with GM Ford. Toyota had first plus in the history of the company just announced what, three months ago. So, the automotive industry right now is focused on fuel conservation, not other features. I Mean, this is why everything has stopped and everybody's focusing on core things, and the core thing is fuel economy.

Larry Sisson

Yes, but if you're going to go after the secondary market, you expect some orders there at some point, I assume?

Alexander Tokman

Well, we're using right now. We develop these tiny prototype HUDs specifically. We don't know where they're going to go. What we said, we're going to give it to people who actually have products that will take advantage of this, let them develop applications and then we'll sell them the components. I mean, that's our strategy. We don't want to be in the HUD business. We want to be in PicoP engine business.

Larry Sisson

Yes. What is your best judgment as to when these customers' decisions will materialize?

Alexander Tokman

Larry, good question. I don't have an answer. All I can tell you is that current economy is hampering everybody's excitement and euphoria. And we have sold several units to some very large names. And they are going to be validating this and we expect some response this year. When it's going to happen? It's difficult to say at this point in time.

Larry Sisson

Thank you very much.

Operator

Our next question comes from the line of Tom Lardner [ph] with Microvision [ph]. You may proceed.

Tom Lardner – Microvision

Hi, Alex, and everybody.

Alexander Tokman

Hi, Tom.

Tom Lardner – Microvision

Got a good call. I have a couple of questions. What will a price – or has the price for the accessory been determined?

Alexander Tokman

The price for the accessory – good question, first of all. The price of the accessory is a function of several things. First of all, each OEM, which will private label or accessory, has determined the ultimate determination of what they're going to price it at. That's number one. Second variable is where you are going to sell it and to what channels? If you take and look at the existing products sold in different regions around the globe, through different distribution channels, you will find out that prices are varying by a factor of two. Third variable is what functionality are we going to put on show to differentiate versus the existing competitive products. So, we have three variables in the mix. All of them give us the confidence that what we know today is that some of the earlier competitive products are sold somewhere from $300 to $600, depending on whether it's in Japan, United States, Australia, or China.

Going through different channels changes this price mix. What we know is that we're going to use that as a baseline. We're going to then have some additional features and advantages, which will allow us to have premium to market and we're going to use the same time of ranges that have been established by the market. So, market will dictate the price, but we think – we feel comfortable about a twist within the year from introducing it to have a price point and to have a cost position that makes us profitable.

Tom Lardner – Microvision

Thanks. Second issue is, have you been able to model – you have your SHOW product, let's pick a date, say, June 15th, and then go out a year for the embedded, as they are both in distribution in June of 2010, as you look out, do they run parallel in terms of sales growth as far as you can tell? Or is it the expectation that embedded takes a faster growth angle or the SHOW?

Alexander Tokman

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.

If you look at top five cell phone manufacturers and look what they sell today, their top-end models typically sold in ranges from $1million to $5 million, if you discount iPhone, which is an aberration. So, $1million to $5 million for high-end cell phones. Imagine now, you put projector into one cell phone model from one handset manufacturer on the lower end of that volume. That is your business case. You now multiply it times two models, times two cell phone manufacturers, and immediately you have this exponential potential growth that far exceeds any of the accessory volume that we will ever have.

Tom Lardner – Microvision

Thanks. Just one final observation. At today's close, General Motors only eight times as valuable as Microvision. So it won't be long that they may become your subsidiary.

Alexander Tokman

We may buy GM if we decide so and put our own hand [ph].

Tom Lardner – Microvision

Thanks, Alex.

Alexander Tokman

All right.

Operator

Lastly, we have a follow-up from the line of Brian Yurinich. You may proceed.

Brian Yurinich – Craig-Hallum Capital

Yes, hi. I was just wondering if I could get any clarification on what is the cost of your kind of Pico solution versus the cost of TI's DLP chip technology.

Alexander Tokman

It's a more complex question than what you just – let me break it down. There is TI – if you look at the business model and go to market, there are several layers. Think of it as a Russian doll, matryoshka doll, where you have a doll inside a doll. So, the lowest doll is the chip set. It's a panel and the driver. That's what TI's playing. And you take a panel and a driver and you package it into optical engine. That's what we play, but we use our MEMS technology instead of DLP technology. Then you package the engine into a product, whether it's accessory-embedded or anything else of that nature. So, if you just compare apples-to-apples, our MEMS technology with TI's DLP technology, we're favorable in pricing because our component is much simpler and has higher yield.

Brian Yurinich – Craig-Hallum Capital

Do you have any idea of what the difference is in initial volumes or at commercial volumes?

Alexander Tokman

You are asking information for which competitors would pay you an enormous amount of money to get. We can't disclose this obviously.

Brian Yurinich – Craig-Hallum Capital

All right, thank you.

Operator

It appears there are no additional questions. I will now turn the call over to Mr. Tokman for closing remarks.

Alexander Tokman

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.

Thank you. And look forward to talking to you in three months.

Operator

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

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Source: Microvision, Inc. Q4 2008 Earnings Call Transcript
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