Q2 2014 Results Earnings Conference Call
August 13, 2014, 04:45 PM ET
Paul Campbell - CFO
Andrew Sculley - CEO and President
Josh Buchalter - Needham & Co.
Dennis Van Zelfden - Brazos Research
Good afternoon and welcome to the Second Quarter 2014 eMagin Corporation Earnings Conference Call. All participants will be in a listen-only mode. (Operator instructions)
I would now like to turn the conference call over to Mr. Paul Campbell, Chief Financial Officer. Mr. Campbell, the floor is your sir.
Thanks very much, Mike. Welcome everyone and thanks for joining us today for our second quarter 2014 earnings conference call. Andrew and I are here in our Bellevue offices today where naturally it’s a cloudy and rainy, of course, even in August. But we will sold you are on.
Let's get started. As always, before we begin, please note that we will be referring to numbers that are part of our quarterly report on Form 10-Q for the fiscal second quarter ended June 30, 2014. During today’s call, we may make forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995.
These forward-looking statements are based on the company's current projections, expectations, beliefs, and estimates, which are subject to a number of risks and uncertainties. Such statements include references to projections of future revenues, plans for product development and production, the company's ability to ramp up production at its manufacturing facilities, future contracts and commercial arrangements, future product benefits, future operations, liquidity and capital resources, as well as statements regarding words like believe, expect, estimate, plan, target, will, intend, could, and other similar expressions.
Our risk factors are included in the company's Form 10-K for 2013, which is on file with the Securities and Exchange Commission. Except where required by 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, or changes in circumstances or any other reasons.
Okay. With that said, I will turn it over to Andrew Sculley, our President and CEO.
Thanks, Paul, and thanks everyone for being on the call today. I’ll begin with some corporate highlights, and then Paul will discuss our financial results. Following his remarks, I’ll update you on new product and then open the call up for questions.
In the second quarter, we shipped our outstanding OLED microdisplay products to 87 different customers worldwide. Total revenues increased about 12% over last quarter, and equaled second quarter last year. Display sales, however, were up about 3% over second quarter last year.
Recently, the company was notified it will be awarded a number of new R&D contracts. This was announced in a press release in July. We believe these awards will significantly increase R&D contract revenues in the coming quarters beginning in third quarter 2014.
The awards also provide funding for important research and development for our high brightness technology. This includes steps needed for volume manufacturing of the technology. The first of these R&D contracts has been signed and we expect to release the detail soon.
We have made great strides this quarter in developing groundbreaking new processes for ultra-high brightness displays. These applications are for Avionics Head Mounted Displays, HMDs for pilots of military, aircraft including helicopters, but now some of these companies are working on commercial aircraft HMDs.
On the consumer side, we understand there are more than 40 companies working on wearable personal headsets. And these high brightness displays make sense in each of these markets.
Our team successfully demonstrated a direct pattern ultra-high brightness display in June. We showed select companies to display at the Society of Information Display Conference or SID, which is a major display trade show. Everyone who saw display was impressed. This display had about our VGA resolution and a larger pixel than our other displays, but it was still a much smaller direct pattern pixel size than any other company has done.
When we showed one company, a person in the group claim that it wasn’t that bright, we pulled out a cell phone dialed it up as high as it could go, and compared. The rest of the people from the company and group laughed and everybody agreed it was very bright. It is impressive.
Last week at Patuxent -- and I apologize for all of those from Maryland if I said that in correctly -- Patuxent Naval Air Station eMagin had a very successful demonstration for the Navy Air Systems Command that's NAVAIR. We demonstrated the microdisplay using the new Direct Patterning process. The NAVAIR program manager stated, the eMagin display was well received and the display was very impressive. The Direct Patterning display was developed under a joint effort by NAVAIR and the U.S. Army.
Also this month, we took a giant step forward. We started new equipment that we installed over the prior month in July and we produced the direct pattern display with 9.6 micron pixel pitch. So that's just like our WUXGA display pixel size. Our team has done an outstanding job here. The new patterning tools have successfully patterned with pixel -- some pixel pictures under 3 microns on the WUXGA resolution display.
This -- what we are going to do now is make samples for key companies. And these displays will be capable of brightness of over 5,000 candelas per meter squared or nits, in color. And just as a reminder, your TV is probably around 350 nits or as I measured some smartphones the other day, if you have a good smartphone, it may be about 450 nits.
We have a program to increase the brightness above 10,000 nits in color and this is mostly for avionics, nobody else really needs that high. Outside the avionics, there are many companies working on augmented reality, near-eye applications, and I am not sure everyone on this phone calls or at least one company. And again, we count about 40 companies are working on these near-eye headsets and we have talked to about a quarter of them, the ones that makes to us.
We have been told that ultra-high brightness color at about 5,000 nits or above is what is needed for these augmented reality wearable applications and that are used in sunlight or daylight. And many of the current headsets used LCOS displays.
I mentioned earlier and I mention again later, but LCOS displays are going to give problems. The same issue the fighter pilot see by --because of low contrast, where the display supposed to be where the features supposed to be clear and actually isn’t because you can't turn the pixels off. So our color displays with their outstanding contrast, low-power and this large brightness have a terrific advantage.
Again, as far as we know, no other OLED company, Display Company can produce ultra-high brightness color displays at 5,000 plus nits at our very small pixel size. And to the best of our knowledge the other microdisplay companies do not have a viable Direct Patterning technique. The companies producing cellphone or TV size OLED displays cannot pattern the OLED at our pixel size. We are unique here. And we are uniquely qualified to advance in the markets for ultra-high brightness OLED microdisplays.
Our new OLED deposition tool this quarter has been very good for us in terms of throughput. As you know, we have successfully addressed the number of problems bringing up this new tool. We have improved uptime, TAT time. TAT time is, just in case you don’t know, is the speed of start to finish or it is speed of each product out, so we have improved uptime, TAT time and yield all. And we still have ways to go, but we are feeling again much better.
Also we successfully met the challenges associated with the first quarter 2014 stop ship order from three of our customers regarding a product issue. And yesterday you might recall our stop ship order essentially delays product shipment until a particular issue or issues are resolved with the customer. The issues relating to the stop ship order have been now mostly resolved.
For the first customer, shipments have resumed with no expected loss of revenue. Shipments to the second customer resumed and shipments continued uninterrupted to this customer for other programs.
The customer changed to a new display configuration for the program as did the customer number three. And the customer number three for production shipments of the new display configuration, we expect to begin shipping once our qualification process is completed.
No loss of revenue is expected for the second customer, but some of the shipments were originally scheduled for 2014 May extended 2015, depends upon their timing. And for the third customer, we expect less revenue under this program than we originally anticipated.
In the second quarter, there have been significant interest in our current high brightness products and these are not the ones I spoke of earlier direct pattern, but the ones we produced today in volume. And that is both our XLS and XLT type products. The XLS is a color display that can be driven through 1,000 candelas per meter square.
The XLS display has multiple uses, for example, there are some optics with outstanding properties, they are small, white, great properties, but they are less efficient, so the optics need a brighter display.
We have some customers whose optics would be viable without this OLED stack capability. It can also be used in situations where the brightness is needed to compete with outside light, like a wearable display.
It should be over twice as bright as your smartphone's maximum brightness, more than twice that and when you look at your smartphone in bright sunlight; you can imagine how much better it would look, if it were twice as bright. I know mine -- of course mine measured at 400 nits, so it wasn’t as good as the best one we saw. But mine -- if I hold it out in the light, I could stand at being brighter.
These displays also have outstanding contrast, brightness and high contrast at all brightness levels will likely drive applications requiring this high brightness like wearable displays to imagine OLED displays.
This past quarter we've produced our third generation of the XLS architecture. We worked very hard on this because the first two generations just weren’t good enough for us. We needed to improve them. The improvement in lifetime has been significant to give some perspective compared to this new generation XLS to our current XL cover displays. And our XL displays what competes in the market today; we've gained shares in our major market, so it competes very well.
The XLS, again, compared to our XL has over twice the maximum brightness. At normal illuminants, it has twice the lifetime and lower power and that lower power is 30% lower power regardless of what the brightness is. It's always 30% lower than the XL. So, at 200 nits, the XLS is 30% plus power. And you remember what drove the military to our product, was power.
So, we feel very good about this performance. The key drivers again for adoption of high brightness displays will be contrast, size, weight power, and of course, brightness. And that's what the military has always told us. And by the way so were those 40 customers -- that 40 companies that we've talked to, the fraction of those that we talked to say the same things.
The XLT monochrome green is the frontrunner for avionics, both military and now commercial. Customers who are looking at this technology for military avionics are also becoming involved in commercial avionics.
The military avionics market is for helicopters and fixed wing aircraft, including fighters. I know I've told you before, we put some of our displays in the fighter helmet and when we put the color ones in there, they then wanted us to do high brightness color.
This is an existing market that today uses LCOS displays, so the fixed wing and helicopter use LCOS displays we get today, we believe we will win because the outstanding contrast of our OLED displays versus either in LCOS or LCD, we hear for example, that the U.S. military pilots complain about the green glow on the part of the visor that's supports to be clear win the LCOS -- the green LCOS displays are turned to high to combat the sun.
So, our OLEDs have much better contrast and the screen glow doesn’t occur. And that's why we feel that we've got the upper hand here. And this is growth market for us as we take share away from LCOS. Now that share is for both new aircraft and also retrofitting existing aircraft equipment. So, it's not only for the F-35 type aircraft new, it's for the ones going backward, F-16, F-17, F18, et cetera, as well as helicopters.
The commercial market today doesn’t use HMDs; it is potentially a very large market for us. One of our customers -- you can look this up, has produced an HMD for commercial helicopters and they showed it in an Air Show.
The XLT green can produce 24,000 nits where the contrast -- remember your TV is 350, so 24,000 nits where the contrast of 50,000 to 1 at that very high brightness. And the contrast at normal illuminants is 100,000 to 1. So, no other microdisplay has demonstrated this capability.
So, our display again in an aircraft, it would be very high brightness, combating the bright sunlight looking at icons, they are always right in front your face no matter which way you turn your head, the icons are there for you to see.
However, at night, you want low brightness and you want to see night vision. And our displays have that capability and we also have the full dynamic range at that low illuminants as well as the very high contrast at high illuminants. So, these displays are outstanding for this purpose.
The other thing is the high luminous displays also have an advantage of lower power versus the normal illuminants and they have longer life time. And the example here is the monochrome green again has five times the improvement in power versus a non-high brightness and 13 times an improvement in life time versus a normal illuminants display. So, they have advantages even if you don't need to dial them up very brightly.
Now, we expect this revenue from this market to become significant in the next five years from 2015 through the 2020 timeframe and if you do some research, you'll see both on the military side is significant for us and the commercial side is many more times significant for us.
In the first quarter, we discussed our new seal structure that has the potential to increase the overall yield and certainly does increase the reliability of our display products. So, less selected customers have received displays with this new process and the -- some of them put them through paces.
This system has endured 1,000 hours at 85 degrees centigrade and you don't have to calculate that's 185 Fahrenheit and 85% relative humidity which is much more than at least one of the large direct view OLED display makers and direct view -- I mean cellphone, TV that type of thing.
This larger direct view display market requires of this product, this company requires 100 hours at 60 degree centigrade, that's 140 Fahrenheit and high humidity and this is an enormous difference.
And they also -- so 100 hours at 60 degree C and high humidity versus 1,000 hours at 85 degree C and high humidity. This seal system is impressive. We are going to be upgrading the entire system with regard to software, so that we can run it at full capacity shortly.
Throughout -- or Throughput has improved during the second quarter, thanks to some other improvements in the Cleanroom operations and the new OLED deposition tool that successfully run through its maximum rate -- run rate as we needed. We ran that much more in the old Satella machine. We didn’t have to run very much during the second quarter.
The higher volume not only helped with additional sales, but also in building inventory, and we needed to build inventory at the end of June, because in July, we shut the factory down. The shutdown addressed a number of things.
One is the Satella hadn’t been due to full cleaning for quite some time and we needed to do that, but also upgraded the Cleanroom. We did a lot of work on the Cleanroom and we installed some equipment in the packaging operation.
Some of this new equipment is being used on the new displays I mentioned earlier. We also installed the direct patterning equipment during this shutdown. So, the additional equipment in the assembly area was ordered, delivered and will improve both consistency of the product and cycle time. We will get the benefit of all of this work during this quarter. Obviously, we started the tools up again in August.
And now I will turn the phone back over to Paul to take you through our financial results.
Okay. Thanks, Andrew. Let's start with the income statement. Revenues for the second quarter were $7 million and that was equal to second quarter last year, and as Andrew mentioned up over 12% from last quarter.
The product revenue increased 3% over last year and 11% over last quarter. Both of these increases are due to a very strong increase in our average selling price. Our pricing structure hasn’t changed, but we always sell a different mix of product in a quarter, every quarter is different. And also every quarter is different in the volume discounts in the customer mix. So the combination in this quarter produced a very high average selling price.
Our R&D contract revenue was $62,000 versus $255,000 in Q2 last year. Recall that most of our contract revenues are comprised of U.S. government related spending, and we have reported before how we believe this has been impacted the past couple of years by budget issues, sequestration et cetera.
If you look back years prior to 2013, our R&D contract revenue ranged from about 15% of total revenue up to as highest 22% of total revenue, so a very significant piece of revenue here.
Quarter two was less than 1% of revenue. And we have down at those low levels for -- in 2013 and in 2014. But as Andrew mentioned we have been notified that that we have won a number of new awards, R&D awards. And beginning in Q3, we will see a strong increase in R&D revenues going forward. So we are very excited about that.
Our gross margin for Q2 was 31%. And gross profit was $2.2 million as compared to 34% Q2 last year and $2.4 million. The decrease in the gross margin from last year was primarily due to some higher production cost including labor and chemicals and little lower yield that we had last year. Sequentially, however, the gross margin was equal with last quarter and a strong improvement with over quarter four of 2013.
Move to operating expenses. These are comprised of non-funded internal R&D expenses, also selling, general and administrative expenses, SG&A. So the R&D portion for the second quarter decreased to $172,000 to $1.3 million or 18% of revenue. This is compared to $1.5 million or 21% of revenue in the Q2 last year.
The reason for the decrease is as we had less product development expense where we spent more on our own unfunded R&D for product development last year as opposed to this year. And we had less stock compensation expenses in Q2 this year.
For the SG&A portion, second quarter was $1.9 million versus $2.1 million for the same quarter last year. The decrease in these expenses was due primarily also to the decrease in stock compensation expenses, and this was partially offset by an increase in salary costs as we do get people salary increases every year. But again, we have been very effective in keeping our operating expenses under good control.
So moving onto the operating loss for Q2. It was $1.1 million, and that was compared to $1.1 million last or Q2 last year. So we narrowed the loss a little bit quarter-over-quarter. Adjusted EBITDA was approximately a loss of $595,000 compared to $438,000 in the second quarter in the second quarter last year, so not too different.
Taking a look at the balance sheet. June 30, we had cash, cash equivalents and CDs of $5.6 million. And during the second quarter, we invested about $600,000 or so in additional manufacturing equipment. Andrew mentioned some new equipment that we bought, some of that is in that number.
And on the balance sheet, you will see that we did increase inventory during the quarter. Primarily this was -- so we have product to ship in July, while the line was shut down as Andrew mentioned earlier about the shutdown.
So as far as balance sheet goes, we continue to have no debt. We have been self-funding for more than five years. We haven’t done any equity raises and we haven’t suffered any of the associated dilution in the stock.
Regarding guidance, we affirm our previous guidance. And that was that we anticipate higher average revenue per quarter over the balance of 2014 over our Q1 result.
And with that, I will turn it back over Andrew. He has some further comments on our technology.
Thanks again, Paul. As a reminder for those of you who are new to eMagin, our active matrix OLED microdisplay technology lead the industry in a number of important areas. First, we have offered the highest brightness in monochrome green and yellow, I didn’t mention yellow before and now color. These displays have high contrast even at the extreme end of the luminance range.
Our OLED microdisplay have gained shares in the military because the military needs better power, contrast, size and weight. And for some markets like avionics needs all of that size, power, contrast and weight at very high brightness.
Contrast is critical in see-through or augmented reality applications like the pilot HMDs and the same properties of power, contrast, size, weight and high brightness are needed in the augmented reality wearable market; and also the -- except for the -- don’t need as much brightness, the virtual reality training and simulation and gaming market also needs these properties.
And now I would like to update you on a couple of our displays, let you know how we are progressing. The qualification of our new digital SVGA, DSVGA display was completed in the second quarter. This display is targeted to replace the long running SVGA Plus display, but has our latest digital technology and product improvement such as automatic adjustments for luminance and gamma over temperature. Virtually no motion artifacts and full dynamic range at a very low light levels as well as much better uniformity.
This display will ultimately take the place of the SVGA Plus display and that's our largest seller today. We have already delivered prototypes to a number of customers who are looking at the display for their next-generation equipment.
The other thing to mention is that when outside companies, OLED companies compare to us, they always picks the SVGA Plus because it isn’t as good as our new one. So we are taking the step in the right direction to -- we have now taken the step to upgrade that display. And when our customers want to switch, they can.
We have also finished the design of our new SXGA096 display, and that 096 means 9.6 micron pixel. The first samples are scheduled to be available in the third quarter. This display will provide the high resolution of XGA display, with a smaller form factor. It sizes about the same as our SVGA Plus and again, that's our current major running display. And this means that ultimately, the SXGA096 will be similar in cost, but have a higher resolution than our current large running SVGA Plus.
We have samples that we are evaluating and our customers are also interested in looking these displays. It is, of course, -- it has all the improvements I mentioned before automatic adjustments for luminance and gamma over temperature, the no motion artifacts and full dynamic range and much better uniformity. So these are our two products.
I would like to just summarize on the growth side. Avionics is a key growth area for us. We have delivered prototypes to many contractors and expect to start -- then they will start flight testing on both rotorcraft and fixed-wing platforms later this year.
This is an important progression for us to become the standard configuration on the HMDs for avionics, first in the military, taking share from LCOS. And remember military already exists as LCOS displays and we will -- with the new and also retrofit.
And then the second, as our customers produce versions of the head mounted displays, with our displays for commercial aviation, this opens a new market for microdisplays and certainly one where our OLED microdisplays are in the lead with respect to technology. Our research says that this is a potentially very large market for us.
And the final one, obviously, is the consumer wearable HMDs and then this is likely to be after two avionics markets to be the next very large growth area for us. We continue to see strong demand for the displays. As we mentioned earlier, actually display revenue versus last year has gone up for our key market segments over the next few years. We anticipate that that will continue.
And so I'd like to have that conclude our formal remarks and open up the call to your questions.
Thank you, sir. We will now begin the question-and-answer session. (Operator Instructions) The first question we have comes from (Tom Maguire) [ph], Investor.
Good afternoon, Andrew. Good afternoon, Paul, and really good rundown on your position in OLED. Sometimes I got to get hit over the hit, so maybe you just have to answer this more directly for me. There is a lot of noise in the display world regarding the wearable augmented reality space.
Kopin issued a press release in June highlighting the introduction of their new line of high brightness displays and display modules for smart eyewear market. And they talk about these displays being ultra-compact and energy efficient and bright enough for reading outdoors and they’ve been to these 5,000 nits in the press release.
And I'm wondering how do you respond or what does your intelligence tell you about Kopin and/or LCDs as a competitive threat in this emerging vertical of smart eyewear?
Good question, Tom. The other one I will just mentioned there was also a press release on Himax that they made it compact -- more compact and I will -- let me take that one first. In terms of LCOS display, you know it has a structure that’s like a display, like our display, but on top of that it has to have some optics and around those optics it has to have LED lights to light it up. So it starts out as a disadvantage compared to our display.
And the contrast of those displays are -- they are lucky if they get to a 1,000. Remember even if they are very high-end or at 100,000 or 150,000, the one depending upon which display and how high the luminance is. So we have a great advantage versus the LCOS.
And when I look at the LCD, which is what Kopin does, they have an LC then below them they have the liquid crystal backplane. They put the liquid crystal on the top, they have the backlights there. And so there are not as quite at the same disadvantage as Himax is. So let’s say they are small just like ours is small.
And the thing is the power -- the reason the military -- let’s forget about anything I say. The reason the military went to OLED displays was power. And I will give you just an example, a long time ago there was an LCD that company was looking at and the company came to us and said, they had a power budget of 1,500 milliwatts and that the LCD display took a 1,000 of it, and this was SXGA.
And they took our -- this was long time ago, then new SXGA, and they said, "200, 250 milliwatts, okay, you win." So, I think the power question -- and you know the most famous glass eyewear you hear about is Google, I'm told they last two hours. So they need power. They need a much more power efficient display.
So that 5,000 nits that Kopin advertises and, I'm sure, Himax says the same thing, we can get to it as well, but our contrast will be multiple times that -- like 10 times what they can do -- more than 10 times, 100 times or 50 times what they can do and our power will be better. So how can we lose?
Those guys are -- unfortunately, they are backing the wrong technology. OLED -- if anyone does any research about OLED, what Andrew is saying here, you can substantiate that it's just better for power, better for contrast and it’s also has a much smaller form factor which is really important in some of these goggle applications that are like Google, for example.
The small form factor, you can get the OLED packed closer together the pixels. Smaller form factor its thinner inherently than the LCOS or the LCD applications. And the manufacturers that are putting this goggles together for the consumer market, they wanted to be invisible -- the apparatus, the optics and this display and -- they wanted to look like a normal pair of sunglasses or a normal pair of goggles. And they want it to be very small and you really need the small form factor. It’s a clear advantage.
So, yeah, I guess, if you were the people involved with an LCOS company or an LCD company, you would try to find ways to make is sound like your product is winning the battle.
Okay. Good. And then -- thanks. That’s really helpful. And then secondly, I noticed -- I thought your press release for the quarter was real bullish in terms of the progress you've made in filter, high brightness and direct patterning and the -- and all that.
So, my question is, what's your comfort level now regarding the ability to be able to produce, high-quality, high-brightness displays at a reasonable cost 12 months out or something. So you will be able to produce enough quantity to get someone interested in you as the supplier?
That’s good question. We certainly introduced monochrome today in reasonable quantities that obviously the military wants. But as well could satisfy some of the startup volumes that the consumer applications have.
And the high-brightness, the XLS, I spoke off, that can be produced today as well. The 5,000 nit color that will take a little more effort on our part to get it up to high volume and that’s part of the R&D program that we have as I mentioned earlier.
So we're certainly in the right direction. We've talked to companies about monochrome as well as color and you can imagine you are only looking at icons on the screen, doesn’t matter color or not. But we will see.
The other thing is that when companies get interested, they also can help you out with investment, and that’s something that we would be interested in as well.
And some of the things that we are working on even right now as we were shut down some forward the new equipment, we're installing the direct patterning tool installed. We're laying the ground work for being able to do higher volumes at lower cost and we will continue to do that. And we've made a lot of progress. Sometimes it might not sound like we have, but we really have made a lot of progress in our manufacturing capability.
Yeah. Good point on the cost thing. I forgot that. As Paul and I and others have done the homework on the cost side, if I look at avionics displays for a minute, they sell thousands per year, but they are cost thousands of dollars each. They are bigger, they have special features and all that stuff.
A foot solider he is to divide by 10. But the volumes are 20,000 maybe is a good customer of a year -- a couple of years, for one customer. And then if you go to the consumer as we here maybe have to divide by 10 one more time. But then you are talking about the hundred thousand, two hundred thousand to a million a month.
So with those volumes, we've done our homework and said, we can handle the cost. The other thing I should mention is, you hear that the type of display that people are talking about is a very small display, nHD, for example. And if you look at the nHD, that one-ninth HD, we can hit about 600 or wafer and the cost of a wafer processing is the same regardless of how many displays you have on there, so 600 displays on versus our large runner today is 116, so that also helps us on the cost side.
And the other thing is, today we do all our packaging inside, if we had such a huge volume, we may also have some help on the outside world for packaging. And packaging is not necessarily our expertise. It’s the OLED side, the thin-film encapsulation et cetera. Okay?
Okay. Hey thanks a lot for taking my questions and best of luck to you guys. Really good run down again.
Next we have Rajvindra Gill of Needham & Co.
Josh Buchalter - Needham & Co.
Hey guys. This is Josh Buchalter on behalf of Raj. Thanks for taking my question and congrats on quarter, and thank you for all the detail. You touched upon wearables market and consumer market, but maybe talk about timing, helpful to get visibility out of that. Thanks.
Okay. The wearable is twofold and I mentioned that we talk a number of those 40 customers or companies, maybe a quarter of them, and we've talked to them about timing of this as well. If they use monochrome we can do it tomorrow. If they use color, we have a little more runway to go, so we maybe in the next-generation not the one today.
As far as timing goes, also depends on what volume they would want. So I can't tell you what they tell us -- forgive me. But we think we are in a good position to work hard and get there.
Some of the timing relates to the -- what these companies want to do and the major wearable company that you would know today that’s very visible in the public, they’ve made statements that they want to switch their technology to OLED. This has been in the press and we believe it to be true.
So even if a company, as Andrew mentioned, they come out with prototypes or something using the LCOS and LCD display, they recognize that an OLED display is a superior for their application. So they only question is how do they get there from where they are today. Is it going to be Version 2? Is it going to be initial version?
But we believe that an OLED solution is really what they want in the end. And these wearable companies are establishing a platform and they will have a multiple versions. They will come out with an initial version, and there will be version 2, version 3 and so on, just like most other electronics. So we are pretty confident that eventually we will get into many of these applications.
The other thing to note is, if what you have read in the news is true, rumors say that the next-generation will be an OLED, I think, given that what choice does that company have. Say if they really want a high brightness, 5,000 nits or better, they can do -- go to Kopin, they go to Himax and other LCD, LCOS display manufacturers or they can go to eMagin. No one else has announced such a high brightness color display.
Josh Buchalter - Needham & Co.
No, that certainly makes sense, sounds like you guys are in a great position. And one more question on gross margin. It seems like they have leveled off a bit around the same as first quarter. Going back to 2013 and of course it depends on volume. But could you maybe help us understand how you see that the next few quarters? Thank you.
Sure, thanks Josh. Well, just to note on the second quarter number, it was depressed a little bit because we had a little higher warranty expense and so that’s factored in there to the second quarter number where we didn’t have as high an expense in the first quarter. So we actually had a better -- in that respect a better performance in gross margin in Q2 than we did in Q1.
And going forward, we don’t give a lot of specifics about our gross margins going forward, because we just guide on revenue. But we are seeing better yield and we are seeing some better throughput as Andrew mentioned in his remarks. So if you follow that truly, that should result in some better gross margins everything else being equal, of course.
So going forward, I think you could expect that up to some degree, and we'll just have to see how it plays out.
Josh Buchalter - Needham & Co.
Yeah, it makes. Thanks for color and congratulations again on the progress.
Next we have Dennis Van Zelfden of Brazos Research. Please go ahead.
Dennis Van Zelfden - Brazos Research
Thank you. Hello Paul and Andrew.
Dennis Van Zelfden - Brazos Research
I guess it would be more for Paul or Andrew either one. Regarding the R&D contracts, I know you mentioned that you were going to announce them as they are signed. But if you were to look at all of the ones you know about in aggregate, would they result in enough revenue per quarter to kind of you back to the levels you were talking about, i.e. roughly a $1 million to $1.4 million per quarter, say in about six months or so?
Well, we -- the way the contracts work is they are over a time horizon and the amount of revenue we can recognize each quarter depends on the amount of work we do on one of the contracts during that time horizon, because it's percent complete accounting.
So that makes it -- so there is variables in there. So we don’t -- we didn’t -- we purposely didn’t say how much revenue it was going to give us per quarter going forward, because of these variables that we have.
But we can say it's pretty significant compared to the levels we are at today certainly. And if you go back to 2010, I think we had almost $7 million -- $7 million or $8 million for the year in R&D contract revenue. We're not going to get there probably, but somewhere between where we are today and where -- and that level, certainly the numbers you are talking about are not impossible. And I can't really give you too much more guidance on that than that.
Dennis Van Zelfden - Brazos Research
Okay. But whatever the revenue comes out to be over the next couple of quarters, are you stating that probably will build, because you are going to be getting more and more and more?
It will build, because when we first start these programs like we’re starting midway in quarter three and maybe not start until quarter four really. So the revenue over the next few quarter should be build, it is scheduled to actually build with the initial work on a couple of them in Q3. So we will see some good revenue increase there. But Q4 should be more. And then next year should be more as well.
Dennis Van Zelfden - Brazos Research
Okay. Thanks guys. Good luck.
Thank you sir.
Next we have (Vincent Penzia) [ph], Investor.
Thank you for taking my call. Earlier on when you were answering some questions and talking about your market dominance in both brightness and power, you asked the question, how can we go wrong. And where it's conceded that everyone wants OLED and they want the quality that you have and you are dominant the market, the real issue is cost and also your manufacturing constraints.
Now, you mentioned a -- and when you start mentioning the gaming market and the wearable consumer market, those need to be much, much lower cost at the consumer send and much, much higher volume. I don’t see how you can get -- and you did mention that, if we get into the startup consumer application they're going to want 100,000 units a month going into a 1 million units a month.
I don’t see how you can get there quickly enough. You have to be able to ramp up within six months or year to meet the market. How would you envision being able to get into those kind of volume?
Remember the -- one other thing, you have realize is you have 600 on wafer instead of a 100, so you have six times the start. And certainly the equipment we intend to keep on with the uptime, pack time and yield, we need to keep on improving that. And frankly, we are also very open with the companies that we talk to with regard to what capacity we have to set and what we would need to do.
So they talk to us about things like 50,000 a month to 1 million a month. But it's necessarily going to start at 1 million a month. We will start on the smaller end and give us a chance to build up.
But, could you build up in six months or a year to those kind of volumes conceivably?
It depends on which one you are speaking about, a 1 million month in six months that would be hard. I have to admit that. But we have done our homework in terms of cost, what we need to be at cost in terms of yield, et cetera. And we've also asked ourselves the question if this were a very high volume and you can actually find this sort of information as many companies do research on what the wearable glass market will look like and the fact that do it by customer and we've asked ourselves if it's out in the future, they go after 2018, how do we look in 2018, what fraction of that market could we take? What type of machine would we need, et cetera. So we have done that type of homework.
Well, but we're really interested right now in getting our foot in the dark, that's number one.
All right. And remember Andrew's earlier remark, our major runner today is 116 displays per wafer and we feel that the consumer will want a really small display with small form factor as many as 600 displays on each wafer.
So, right away, without doing anything, that's over five times improvement in cost if you just take the proportional size of the wafer which is you can almost do that simply because a lot of the cost in the -- is wafer-driven. A wafer is a certain amount of money no matter if you put 600 dye on it or 116 dye, the wafer still cost the same. The chemical that you put on still cost the same and those are the two big cost in our cost structure.
So, just going to a very small consumer-oriented display, we're going to save five times of cost. So, there are other efficiencies as well. We don't expect that we would do the backend -- what we call the backend on these very high volumes.
We would do the frontend which is the OLED deposition work on the wafer and then we would outsource the backend which is very similar to a semiconductor, very, very similar. And there's probably -- we know there's companies that can do that better and cheaper probably than we can when making a couple of assumptions there.
But we've already actually done some test work with some companies on doing that for us and that's probably the direction we would go. So, we wouldn’t have to ramp a lot of our facility to those kind of volumes.
We would outsource, we would have to ramp just the frontend, the OLED deposition phase where we already have more capacity than we used with our new SNU OLED deposition machine that will handle more capacity than we've had in the past. So, we're working in that direction to be able to handle those kind of volumes, just to give you an idea on some of them.
A note on the backend or packaging, we do everything today and that's because the U.S. military likes to fund in the U.S., but for consumer it could be done anywhere. So, the very volume outside the U.S. as well.
When you talk about outsourcing packaging, would you consider partnerships?
And the only other concern I have is you mentioned that ramp-up in 2028. Two years from now, gives competition with a lot more capital and financial resources than we have, the ability to catch-up looking that far ahead. Is that a concern?
Yes. So, I just mentioned 2016 because the volumes that we have seen were huge. 2018 was just huge, but it’s a long way to get there. We've talked to companies about earlier than that obviously and it depends on what product they want, how soon we can do it. But if -- here's the question, if you're one of those companies and you want a display that does what you needed to do, we're today the one that can do that and therefore, maybe we need to work together to get there.
And we can certainly do that as Paul mentioned, 600 a wafer, 50,000 a month doesn’t seem all that hard for us. So, that's the start and ramp-up from there.
It's very possible we could get a contract for 100,000 a month, for 300,000 a month is more of a reasonable volume, especially as these (Inaudible) glass applications just start to be installed into the consumer area, they may not be 1 million a month for a while. They are not -- some of the market is very functional, they want to establish a platform, make them more functional over time and they will probably gain in share, gain in sales over that time period. The initial volumes may not be there.
I guess at what time do we look at raising more capital and increasing our manufacturing capacity should we leave it and do it now or do we wait until the demand is overwhelming?
Well, I would suggest that we are open with the companies we're talking to and that they know what's required and when, right. And therefore they tell us in enough time so that we can do what we need to.
The other thing I’d like to mention because you mention other companies with more money than us. The other thing to think about is we know our thin-filming capsulation is far superior to companies that may be making very -- larger displays and those are the ones who have the money.
So, that's another reason that we have ban over them. And for these little displays, you don't wanted too thick, you don't want the edges to be too thick because then you're wasting silicon. You can't fit 600 on a wafer because you need the edge to be too thick. So, that's another advantage we have.
Very good. Thank you gentlemen.
Okay. Thank you.
(Operator Instructions) Next we have Eugene (Convoy) [ph], Investor.
Hi, thanks for taking my question.
Just sort of a follow-on from Vince's previous question. Is not only volume, but if you have a big company like Google or something with a very large project, would they be -- would they feel comfortable putting that whole product at the mercy of a single machine in a single site? I mean a fire or tornado or something like that, and that would be -- they'd be toast.
Yeah, good question, but you have to give us some credit just like if you were asked how do you solve that problem, I think you could answer it. How would you solve that problem? So, we should be thinking the same thing, right?
Yeah. I asked this once about a year ago when I asked if there was going to be a snub 2, and you said, that would require a whole another building, you couldn’t just move another machine into the current building.
I'm unfortunately or fortunately, IBM has about 1 million square feet cleanroom space for us. And as soon--
Okay. Well, at that point, you were not too eager make use of that, but has that changed?
Well, let's put it this way if we needed to do it we're very happy to go that way. The other thing is that--
You’re still at a single site though.
Yes, if you're making a -- you mentioned tornado or somebody did--
Yeah, the fire. If you are making consumer products, it need not be made in the U.S. So, we have other opportunities there. So, I would ask you the same question and you have to believe that we're doing the same thinking. I can't tell you all the details of what we're thinking because we haven’t said such a thing publically.
The other thing Eugene is that as -- if you were on the other side, if you were the company making these glass or whatever, you'd probably -- if you were going to be volumes of -- large volumes, million a month or whatever in total, you'd probably spilt it between a couple of manufacturers.
But there aren’t any other manufacturers.
Well, may you'd have an LCD version and an OLED version for a while, that's one way to go. So, that -- this companies think long and hard about that kind of stuff and they protect themselves in those kinds of ways. But when we engage with them, these are the things that are -- that would be discussed and there are ways to get it done is what I'm saying.
Okay. One final question. Every conference call, I mean the technology I just marvelous, you keep hitting new milestones and going gangbusters. But you've also been bleeding money and you've gone from like $14 million cash down to $5.5 million. If you don't get profitable in the next few quarters, won't you run out of money?
Yeah, that is our goal, actually is to -- we had positive cash flows all the way between 2008 and early -- late 2013 -- early 2013. So, yeah, that's our goal and we're working on it and I was glad to see that we narrowed our loss a little bit this quarter and we hope that a combination of continued solid revenue and may be some gross margin improvement will result in better bottom-line.
Okay. Well, thanks for taking my questions.
Thank you, Eugene.
At this time, we're going to conclude our question-and-answer session. I will now like to turn the conference back over to Mr. Andrew Sculley for any closing remarks. Sir?
Folks on the phone I appreciate very much you being with us and asking the questions and as usual I would like to thank the folks in the company. Outstanding progress on things like the new seal system, and the direct patterning, so thanks to Amal and team, Evan, Tariq and the entire group with that direct patterning.
Actually I never tell this to Amal, but I'm really impressed that the darn thing worked first time and we actually patterned these things. Now, he has got some work to do, but wow, I'm impressed.
So, the folks in product development are Santa Clara Group that's working like mad, I gave them a challenge just last week, so they are an outstanding group of people. The business development guys are working like mad to try and get more revenue even though the military spending is not robust, we're very happy that we got the R&D contracts, because that will help us along and actually help us do what we need to do anyway.
The administrative group has held the cost down very well, so I want to thank them all and with the stock ship, quality has done an outstanding jobs, so Christine thanks.
It's an impressive group of people. I'm honored to be able to work with them. So, I thank the eMagin team and again I thank all our shareholders for sticking with us and please don't hesitate to give us your suggestions. Thank you very much.
And we thank you sir and to the management team for your time today. The conference call is now concluded. We thank you all again for attending today's presentation. At this time, you may disconnect your line. Thank you and take care everyone.
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