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Kopin Corporation (NASDAQ:KOPN)

Q4 2013 Results Earnings Conference Call

March 11, 2014 5:00 PM ET

Executives

Dr. John Fan - Chairman and CEO

Richard Sneider - Chief Financial Officer

Analysts

Matt Robison - Wunderlich Securities

Joseph Zaccaria - Needham & Company

Operator

Good afternoon. And welcome to Kopin Corporation's Conference Call to provide a Business Update and Results for the Fiscal Fourth Quarter and Year Ended December 28, 2013. 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 You may access an archived version of the call on Kopin's website at www.kopin.com.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. Mr. Sneider, please go ahead, sir.

Richard Sneider

Thank you, Operator. Welcome everyone and thank you for joining us this afternoon. John will begin today's call with a discussion of our strategy, technology and market. I will go through the 2013 fiscal fourth quarter and year end 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, March 11, 2014, we will 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 looking-forward 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 it over to John.

Dr. John Fan

Thank you, Rich. Good morning, everyone. And it is early morning in Tokyo, where I am at right now and thanks for joining us. I want to start out by saying that we are extremely pleased with the progress we have made towards positioning ourselves into a global leader in wearable -- wearable technology.

Our strategy is on track and we are seeing significant interest from customers who are looking to use our components as early as this summer, with designing coming for a number of large customers in the second half of this year. We expect this product will ship in 2015.

This past month we hosted a wearable technology event, an open-house for our new wearable technology center in Silicon Valley. This was a showcase event that featured a panel discussion and keynotes by some of the top minds in this industry. We have demos our prototype wearable technology and we are toured of our state-of-the-art acoustic lab.

We had close to 200 representatives from all sectors of the industry, including customers, potential customers, analyst, media and panel. The energy and anticipation of big things to come was very strong. It was clear that wearable technologies are a viable technology category and ready to go main stream.

We have showed the results of some of our recent innovations. This innovations cover all aspect of our portfolio, on display, for optics, noise cancellation and active speech recognition, ergonomics and ASIC to create a dream product, in order to create a dream product of the wearable market.

The dream is to have a pair of eyeglasses indistinguishable from the pair many people wear today. One of our new innovations was extremely compact Pupil display module, which encompasses our innovative transmissive LCD microdisplay technology and miniaturized optics licensed from our partner Olympus.

Our competent design, embedded as the as Pupil display module in front of us -- inside the front frame of eyeglasses and embedded the electronic circuits, speakers, and batteries in the handles. This is the first smart eyewear that looks natural yet there are many other key functions useful for consumers.

We demonstrate these smart glasses, providing notifications and updates tagged from a smartphone, responding to voice comment and yet translating languages in real-time, to allow people to communicate in their natural tongue. Our patented noise cancellation technology allowed the voice commands to be reliably recognized, even in a very noisy environment. As we have demonstrated, this technology in our new acoustic lab, in the wearable technology center.

It was extremely gratifying to see the excitement over the progress we have made among all the attendees and some of the editors champing with their possible review. Yet we’re not slowing down a bit. Speaking to you today from Japan, where I’m at medium with some of the companies in the industry.

Wherever you went in a direction that market is moving further confirms our strategy. Over the coming year, we hope to select -- selectively tour the U.S. with aims of displaying more of our technologies. We have more than 10 years of international properties geared to the wearable computing space, and we will continue to make investments necessary to position ourselves as a leading developer on wearable technology solutions to partners over the world, who developed branded wearable computing product.

In terms of partnership and customers, we have in the pipeline, we are actively working with a number of customers under NDA. We help them bring wearable products to the market. It’s related to good returns because we have a very strong portfolio of solutions and critical components that cover all the important areas and the experience to integrate our technologies data.

While we are limited in what we can say regarding what we are doing and working with and what types of projects we are working on. There are a number of recent development that further comes from our progress. We are growing our portfolio to over 250 patents related to the wearable commodity solutions.

Since we embarked on business transitions, in January of the last year, we had filed more than 80 additional patents related to wearable technology solutions. We have announced pupil, our latest in display technologies plus stock for eyewear. This Pupil is a major milestone for the company as we help customers realize the dream of smart eyewear in the consumer segment.

We have launched a new partnership with Ooredoo to make Qatar, one of the leading countries in the world for the next generation wearable computing technology. This collaboration will focus on our partner’s public safety and emergency sectors, and will help Qatar for the 2022 World Cup by using our reference designs to create products with life-saving potential.

Finally, we debuted our patent-pending, Augmented Reality Weapon Sight Technology, which was developed for high performance weapon sight programs including the U.S. Army’s XM25 weapon platform and the Precision Sniper Rifle day scope used by the U.S. Special Forces in the Army, Navy, Air Force, and Marine Corps.

We are seeing strong signs that wearable headsets will begin to be introduced starting in late 2014 and grow rapidly into 2015. For Kopin, we expect to have our first generation components as well as concept and reference systems ready by the end of this summer, and then prepare for component manufacturing in the second half of this year, with substantial wearable revenue growth expected in 2015.

In conclusion, the trends of advancing technology and greater mobile connectivity continue to reinforce our vision of the wearable space. The dream of consumer electronics and mobile communications companies are exploring the wearable computing technology market. And we believe Kopin is uniquely positioned to capitalize on these opportunities.

Given the robust estimate of the size of this big market and interest in Kopin’s wearable technology and solutions, we remain confident in our strategy and ability to enable the progress of the wearable headset computing markets.

We are midway through our transformation to establish Kopin as the preeminent developer of critical components, reference systems and total system solutions for the wearable sales. We are confidently on track and expect to see continued positive momentum throughout this year.

The interest we have seen is increasing at a very substantial rate. And we believe by 2015, we will really see wearable computer technology become a bigger part of everybody’s life. We look forward to provide updates as they developed throughout the remainder of this year.

With that, I would now turn the call back to Richard for the quarterly financial results and guidance. Richard?

Richard Sneider

Thank you, John. Beginning with our results for the fourth quarter, total revenues for the fourth quarter of 2013 were $5.5 million, compared with $8.6 million for the fourth quarter 2012, primarily reflecting the expected decline in sales of display products for military applications.

Before we go into the operating expenses, it' important to remember that our expense structure is not tied to the current quarterly revenues or fiscal year revenue projections, but to our longer-term goals.

Cost of sales for the fourth quarter was 85.7% of product revenues compared with 67.6% for the fourth quarter of last year. The increase reflects a decrease in the sale of our display products for applications and lower manufacturing utilizations.

R&D expense in the fourth quarter of 2013 was $4 million, compared with $3.6 million for the fourth quarter of 2012. The increase reflects investments in wearable technologies.

SG&A expenses increased from $3.5 million in the fourth quarter of 2012 to $4.1 million in the fourth quarter of this year. In the fourth quarter this year, we took a non-cash charge to write-down certain intangible assets of approximately $1.5 million.

Other income/expense net is primarily composed of approximately $380,000 of interest income, approximately $200,000 in foreign currency losses. We also recorded an impairment charge in an equity investment of approximately $2.5 million.

Turning to the bottom line, our net loss for the quarter was $9.7 million, or $0.16 per fully diluted share, compared with a net loss of $3.9 million, or $0.06 per share, for the fourth quarter of 2012.

Now turning to results for the full year, total revenues for 2013 were $22.9 million, compared with $34.6 million in 2012, again primarily reflecting expected decline in sales of display products for military applications.

Cost of goods for the full year was approximately 100% of revenues compared with 70% for the prior year. The increase reflects a decrease in the sale of our products to military applications and lower manufacturing utilization.

R&D expenses in 2013 were $17.5 million, compared with $14.3 million for the prior year. The increase reflects an increase in our investment in wearable technology.

SG&A expenses increased from $17.2 million in 2012 to $19.1 million in 2013. The increase in SG&A for the full fiscal 2013 versus the corresponding period in the prior year reflects an increase in tax and legal expenses.

As previously discussed in the fourth quarter we look a non-cash charge to write-down certain intangible assets of $1.5 million. Other income/expense net primarily composed of $1.3 million of interest income, $1.9 million on the gain on the sale of investments, approximately $387,000 foreign currency losses and the non-cash write-down of approximately $5 million in investment.

Turning to the bottom line, our net loss for the year was $4.7 million, or $0.08 per fully diluted share, compared with a net loss of $18.4 million, or $0.29 per fully diluted share, for fiscal 2012.

To remind you on January 16 last year we sold our III-V product line and investment in Kopin Taiwan Corporation, or KTC. The gain on the sale and the results of operations of our III-V product line and KTC through the date of sale are shown as discontinued operations.

Our net loss from continuing operations for the 12 months ended December 28, 2013 was $24.9 million, or $0.40 per share, compared with net loss from continuing operations of $21.2 million, or $0.33 per share, for the same period 2012.

With cash, equivalents and marketable securities totaling approximately $112.7 million at December 28, 2013, and no long-term debt, we are well-positioned to execute and fund our strategy.

Fourth quarter and year end amounts for depreciation and stock compensation expenses are attached in a table to the Q4 press release.

Now for guidance, for the full 2014, we expect revenues to be in the range of $18 million to $22 million. Our guidance assumes that our customers product don't gain significant traction for 2015. In addition, we have recently received inquiries from military customers that we had not factored into our guidance previously.

We expect a consolidated net loss in the range of $30 million to $40 million. This guidance excludes the income from discontinued operations net of tax. Excluding the effects of working capital, our stock buyback program and other investing activities, we estimate the use of cash between $30 million and $35 million for operations for 2014.

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

Dr. John Fan

Thank you, Rich. As I've said earlier in the call, we are on track with our transformation, and are extremely pleased with our progress so far. Demand is growing for wearable computing products and the recent development are only a sample of things to come. We remain in active discussions with a number of leading technology companies. We're looking to accelerate and enable their entrance into wearable computing market.

Kopin has been a thought leader for many years, in exactly the areas that are making wearable a reality. We expect our business model will allow us to generate potentially higher gross margin and position ourselves for high rapid growth.

We have a very strong cash position and debt-free balance sheet. We expect to maintain our level of investments in the growing wearable systems for the foreseeable future. We look forward to reporting exciting opportunities and developments on future costs.

And now operator, please open the line for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question is from Matt Robison of Wunderlich Securities. Please go ahead.

Matt Robison - Wunderlich Securities

Hey, thanks for taking my question. You have nice uptick in funded R&D. Can you give us a little background for that and if there is any visibility for that to continue?

Richard Sneider

You see the uptick is related to commercial activities. Some of the partners and activities that John spoke about in the call have funded certain product development and that's what was reflected there. And as John indicated, we're in discussion with a number of people so as those discussions come to fruition, we would hope there would be more of it. It's not like the military where it has a little bit more visibility. These will really be dependent on when we close deals. But military is kind of based upon the U.S. government procurement schedule.

Matt Robison - Wunderlich Securities

You mentioned military inquiries recently and it wasn’t clear whether you meant to say that -- you said it wasn’t included in your old guidance but you didn't previously give guidance for 2014 I don't think so. Is the 2014 guidance that you gave with or without incremental military business?

Richard Sneider

It is without.

Matt Robison - Wunderlich Securities

Okay. So you are still in some discussions that could yield something incremental from the military then, is that what we should takeaway?

Richard Sneider

Right, it is upside on the military right now.

Matt Robison - Wunderlich Securities

Would we first see that as funded R&D and or…?

Richard Sneider

No, it’s programs that we have been designed into.

Matt Robison - Wunderlich Securities

Okay. So really something that might materialize in a quarter or two that kind of a thing?

Richard Sneider

Yes.

Matt Robison - Wunderlich Securities

Okay. Then, you mentioned $30 million to $35 million in cash from operations, cash used from operation this year. What’s the backdrop for that increasing, I guess, about $10 million plus over what was used in 2013?

Richard Sneider

The biggest factor is coming out of last year, we had working capital, which we -- as the revenues have declined, we haven’t actually had to refund the working capital. So this year, we had a boost of about $7 million from working capital which I’m not factoring into 2014.

Matt Robison - Wunderlich Securities

Okay.

Richard Sneider

You follow me, Matt with a question of receivables and so on.

Matt Robison - Wunderlich Securities

Yeah. Sure. Sure. Now, what do you think you are going to do in terms of CapEx this year?

Richard Sneider

Honestly, the number we’ve been looking at is $2 million to $3 million. In the current year, we did little less than a $1 million. It’s actually about $750,000, but right now we’re seeing $2 million to $3 million.

Matt Robison - Wunderlich Securities

Okay. So, ’13 was 750k. And so there is none of that cash consumption reflects the reverse of the working capital effect that you had in 2015? You don’t expect any kind of inventory or anything like that baked into that?

Richard Sneider

That’s correct.

Matt Robison - Wunderlich Securities

Okay. That’s all for me. Thanks.

Operator

Thank you. (Operator Instructions) And the next question is from Joseph Zaccaria of Needham & Company. Please go ahead.

Joseph Zaccaria - Needham & Company

Hey guys, thanks for taking the question and congrats on the results and appreciate the figured outlook. I was wondering if you could talk a little bit about the OpEx for the full year. I know you guys have said that it is tied into your assumptions of future revenue stream. I was wondering if you could give little bit clarity on whether or not that includes in Silicon Valley Center or how we can model that into it. And then also a little bit about the -- how much leverage there is once you start to see the ramp in wearables, how can we see OpEx trend there? Thanks.

Richard Sneider

As far as the OpEx, we kind of give you the top and bottom line. The composition will probably for the first couple of quarters of the year will be consistent with what we’ve had coming out of the fourth quarter. And then we would expect the R&D to start declining as more of it potentially moves into manufacturing, as customers start trying to get prototype products out, things like that. So there will be a shift in the second half, (indiscernible) same run rate as the fourth quarter.

Joseph Zaccaria - Needham & Company

Okay, thanks. And I guess, if I read it on a 20,000 foot level, it seems to me like the push-out, there's been a bit of a push-out in wearables. Is that fair? And if so, what are some of the dynamics at play there?

Richard Sneider

I will let, John…

Dr. John Fan

I don’t think there's a push-out at all. I think there’s a pull-in right now.

Joseph Zaccaria - Needham & Company

Okay, great. I appreciate guys.

Dr. John Fan

Thank you.

Operator

We have no further questions in queue at this time. I would like to turn the call back over to management for any closing remarks.

Dr. John Fan

Well, thank you everyone for joining us today. We look forward to speaking with you again in the near future. Thank you.

Operator

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

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