Kopin Management Discusses Q2 2013 Results - Earnings Call Transcript

Aug. 6.13 | About: Kopin Corporation (KOPN)

Kopin (NASDAQ:KOPN)

Q2 2013 Earnings Call

August 06, 2013 9:00 am ET

Executives

Richard A. Sneider - Chief Financial Officer, Principal Accounting Officer and Treasurer

John C.C. Fan - Co-Founder, Chairman, Chief Executive Officer and President

Operator

Good morning, and welcome to Kopin Corporation's Second Quarter 2013 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 You may access an archived version of the call on Kopin's website at www.kopin.com. With us today from the company are Chairman and Chief Executive Officer, Dr. John Fan; and Chief Financial Officer, Mr. Richard Sneider. Thank you, Mr. Sneider. Please go ahead, sir.

Richard A. Sneider

Thank you. Welcome, everyone, and thank you for joining us this morning. John will begin today's call with a discussion of our strategy, technology and markets. And I will go through the fiscal quarter -- second quarter 2013 results at a high level. John will conclude our prepared remarks, and then we'll be happy to take your questions.

I would like to remind everyone that during today's call taking place on Tuesday, August 6, 2013, we'll be making forward-looking statements as defined in the Private Securities Litigation 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 that could cause actual results to differ materially from those forward-looking statements. Potential risks include, but are not limited to, demand for our products, operating results for our subsidiaries, market conditions and other factors discussed in our most recent annual report on Form 10-K and other documents filed with the Securities and Exchange Commission. The company undertakes no obligation to update the forward-looking statements made during today's call.

And with that, I'll turn the call over to John.

John C.C. Fan

Thanks, Rich. Good morning, everyone, and thanks for joining us today. Rich will discuss our financial results with you a bit later. But for now, I would like to give you an update on our business.

As I have mentioned in previous calls, our decision is to focus our engineering talent and IT investment in wearable computing and to transform our business model from a more commodity-like business to a solution-based business with higher gross margin potential. Throughout these years -- this year, we have begun to see a number of growing trends in the wearable technology space. We have been very encouraged by the feedbacks we have received from current and prospective partners and customers. We expect to make a number of signing announcements as the year progresses.

I want to take some time this morning to discuss some of the positive trends and to comment on where I think the wearable computing market is headed and why I believe when you're positioned to capture the -- capitalize on this emerging technology.

With a long history of developing technologies that geared towards wearable computing market, the 3 main aspects of our strategy and directions are very clear. First, our track record of technological innovations in wearable computing and displays have given us an optimum portfolio of critical components and solutions. Our expertise to integrate this technology make us an ideal partner to companies looking to bring wearables to market.

Second, we also work closely with our partners to custom engineer and custom develop tailored solutions to accelerate their wearable product developments and to enable their visions for this emerging wearable marketplace.

And third, our IP and our expertise allow us to innovate solutions to problems that our partners are unable to solve with their own staff. Whether it is a display, optics, software, ASICs, ergonomics or noise cancellation, voice recognition, the breadth of our knowledge and capabilities is of great value to our customers and partners.

The wearable computing wave is coming, and Kopin is uniquely positioned to capture it by helping our partners to enter the market. With more than 20 years of IP and know-hows, they're towards -- geared towards the wearable computing space, Kopin has been focused to make the investment necessary to position the company as the leading developer of wearable technology solutions to partners who develop branded wearable computing products. The wearable wave represents a secular shift towards computers that are more integrated into the way we work, communicate and live by combining advances in wireless connectivities, cloud computings, predictive data analytics, microdisplays, optics and voice recognition technology.

A July 2013 report from Visiongain forecasts a multibillion-dollar market for wearable technology, with explosive growth and high adoption rates expected over the next 5 years. In April 2013, a poll by Modis [ph] found that all ages, income, education levels, 39% of Americans would buy or wear smart glasses. These reports and others that we have seen are consistent with our observation that there is a strong growing interest by many major players in the technology space.

From our discussions with our partners, we anticipate substantial growth in the wearable computing market starting by the middle of 2014. As we continue our transformation, Kopin will be well positioned to meet the demand from this inflection point in the wearables market.

With so much market potential, the desire for companies to become a player in this market is very strong. However, to build a wearable product, competencies in software, speech enhancement, display, ASIC, optics, ergonomics are necessary. Kopin's helping our customer to bring wearable products to market because we have been in this area for many years. We have already a strong portfolio of solutions and critical components to cover these areas and our experience to integrate these technologies. With feedback from our customers and partners, we are actively developing even stronger solutions for this emerging market.

The following items are some recent additional developments worth noting. First, we have grown our patent portfolio to over 200 patents. And this last quarter alone, we have filed 18 more patents related to wearable technology solutions. Second, we're making significant progress in advanced development of a wearable software platform, when we anticipate having an Android version by year end to complement our Windows version. Third, Kopin's technology solutions are being used by Visa and Recon wearable products, 2 companies that are early movers in the wearables market. And finally, we announced our first wearable technology center in Silicon Valley to enable testing and refinement of solutions for our customers and partners.

Companies that make wearable computing products turn to Kopin to use our technology expertise and solutions to accelerate their product development. Given the robust estimate on the size of future wearable computing market and recent uptake in interest in Kopin's wearable technology and solutions, we believe that we are starting to see the confirmation of our business strategy.

In conclusion, the relentless trends of greater and greater mobile connectivities continue to reinforce our vision with the wearables space. Consumer electronics and mobile communication companies are actively exploring the wearable computing technology market. And we believe our company is uniquely positioned to capitalize on this growth, and we look forward to provide updates as they develop throughout the remainder of this year.

With that, I would now turn the call to Richard for the quarter's financial results and guidance. Richard?

Richard A. Sneider

Thank you, John. Beginning with the top line, total revenues for the second quarter of 2013 were at $6.1 million compared with $7 million for the second quarter of 2012, primarily reflecting the expected decline in sales of Display products for military applications.

Now before we go on to the operating expenses, it is important to remember that our expense structure is not tied to the current quarterly revenues or fiscal year revenue projections, which are our longer-term goals. Cost of goods sold for the second quarter was 111% of product revenues compared with 81.5% for the second quarter of last year. The decrease reflects a decrease in the sale of our Display products for military applications, the accrual of $800,000 for a state job grant repayment, approximately $600,000 for the reserve for excess and obsolete inventory and manufacturing inefficiencies resulting from lower volumes. As you may recall, we received a state jobs grant several years ago, and under the terms of the agreement, our selling of our 3.5 product line triggered repayment. However, there are additional terms which may allow us to keep the funds, so this may be reversed in the future.

R&D expense in the second quarter of 2013 was $3.7 million compared with $2.9 million for the second quarter of 2012. The increase reflects an increase in costs to develop wearable computing technologies.

SG&A expenses increased from $4.1 million in the second quarter of 2012 to $4.7 million in the second quarter of this year. The increase in SG&A for the second 3 months of 2013 versus the corresponding period in the prior year is primarily related to an increase of approximately $500,000 in patent expenses and other professional fees. Other income and expense net is primarily composed of $285,000 of interest income and approximately $371,000 of foreign currency gains.

Turning to the bottom line, our net loss for the quarter was $7.8 million or $0.12 per share compared with a net loss of $5.2 million or $0.08 per share for the second quarter of 2012.

Cash and marketable securities totaled $130.4 million at June 29, 2013, compared with $92.5 million at the end of 2012. We continue to have no long-term debt.

Year-to-date, we have used $6.7 million of cash in operating activities. We have spent $2.2 million to repurchase approximately 625,000 shares of our common stock and spent $513,000 on capital expenditures.

Second quarter and year-to-date amounts for depreciation, amortization and stock compensation expenses are included in a table attached to the Q2 press release.

Now for our guidance. We continue to expect full year revenues in the range of $18 million to $22 million. Our current expectations indicate that gross margins will be lower than we initially expected, and that certain expenses, specifically R&D, non-stock compensation and patent expenses, will be higher than we initially forecasted. And accordingly, we have expect -- we expect a consolidated net loss in the range of $28 million to $33 million for 2013.

We have provided guidance for 2013 revenue and net loss ranges in order for investors to understand the impact of both the sale of our 3.5 product line and the expected changes in our remaining business in 2013 as compared to 2012. However, we believe that Kopin has a great opportunity to position itself in the growing wearable computing market. Our primary focus in 2013 is developing technology, establishing relationships with partners and feeding a high potential market. Accordingly, our 2013 losses may exceed our current estimates.

John?

John C.C. Fan

Thank you, Rich. Demand is growing for wearable computing products, and I want to assure everyone that Kopin is not standing still waiting for the wave to hit. We're in active discussions with a number of leading technology companies who are looking to us to accelerate and enable their interest in the wearable computing market. We're not in a position to make any announcement today, but we're committed to keep you informed as quickly as we are able to.

Our balance sheet is very strong and debt-free. As we transform to a solution- and license-based model, we anticipate we'll produce fast-growing, recurring revenue that will drive high gross margins.

Kopin has been a solid leader for many years in exactly the areas that are making the wearables a reality. And our combination of patents, technologies, partnerships and talented employee uniquely position us to ride the wave. We look forward to ongoing discussions with you in the coming months.

And now, operator, please open for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Gentlemen, we have no questions in queue at this time.

John C.C. Fan

With that, I'll say thank you, everyone, for joining us today. I look forward to speaking with you again in the near future.

Operator

Thank you. Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

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Kopin (KOPN): Q2 EPS of -$0.12 in-line. Revenue of $11.5M beats by $6.12M. (PR)