MicroVision's (MVIS) CEO Alexander Tokman on Q1 2016 Results - Earnings Call Transcript

| About: Microvision, Inc. (MVIS)

MicroVision, Inc. (NASDAQ:MVIS)

Q1 2016 Earnings Conference Call

April 27, 2016 8:30 AM ET

Executives

Dawn Goetter - Director-Marketing Communications

Alexander Tokman - President & CEO

Stephen Holt - CFO

Analysts

Mike Latimore - Northland Capital

Kevin Dede - Rodman & Renshaw

Henry James - State of Michigan

Operator

Welcome to the First Quarter 2016 Microvision Incorporated Financial and Operating Results Conference Call. My name is Alwyn, and I will be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note that this conference is being recorded.

I will now turn the call over to Dawn Goetter. Ms. Goetter, you may begin.

Dawn Goetter

Thank you. I'd like to welcome everyone to MicroVision's first quarter 2016 financial and operating results conference call. In addition to myself, participants on today's call include Alexander Tokman, President and Chief Executive Officer; and Stephen Holt, Chief Financial Officer.

The information in today's conference call may include forward-looking statements, including statements regarding; benefits under existing contracts and the negotiation of future agreements; our competitive advantages; progress with prospective customers; projections of future operations and financial results; product development, applications and benefits; availability and supply of product and key components; market opportunities and growth in demand, plans to manage cash used in operations, as well as statements containing words like believes, goals, paths, expects, plan, will, could, would and other similar expressions.

These statements are not guarantees of future performance. Actual results could differ materially from the future results implied or expressed in the forward-looking statements. Additional information concerning factors that could cause actual results to differ materially from those in the forward-looking statements are included in our most recent Annual Report on Form 10-K filed with the Securities and Exchange Commission under the heading Risk Factors relating to the Company's Business and our other reports filed with the commission from time to time. Except as expressly required by the Federal Securities laws, we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, changes in circumstances or any other reason. The financial numbers presented on the call today by Steve are included in our press release and in 8-K filed today, both are available from the investor page of our website.

The agenda for today's call will be as follows, Alex will report on the operation results. Steve will then report the financial results. There will be a question-and-answer session and then Alex will conclude the call with some final remarks.

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

Alexander Tokman

Thank you, Dawn. Good morning. Thank you for joining us for the discussion of MicroVision's first quarter 2016 business results. We have very positive first quarter results to report to you. Revenue is up, margin is up, we're making solid progress on growing the customer funnel with Sony for its display module. We are talking to Sony about road map for engine enhancements and in addition, we're exploring new opportunities outside of Sony in 3D sensing and augmented reality, while advancing our PicoP scanning technology platform.

In early March, we discussed that our 2016 goals are organized around two primary initiatives: first, to significantly grow revenue and improve margin; and second, to invest in our technology road map not only in pico projection, but into other emerging applications such as 3D scanning and augmented reality. Let's examine the status on each.

First let's talk growth. Our revenue for the first quarter was up 311% from the same quarter last year and 100% from fourth quarter of 2015. Gross margin improved significantly as well to 30%. Recall that last year for the same period, we reported negative gross margin. This represents obviously a large swing in the right direction. We expect that most of the revenue growth in 2016 will come from component sales and royalties to our two commercial customers: Sharp and Sony.

The first quarter results give us strong start for the rest of the year. Supporting our existing customers is our top priority for this year. In the first quarter, we continue to actively assist Sony in shepherding existing opportunities and add in new opportunities to the customer funnel for Sony display module. Our goal is to keep the pipeline strong for 2016 and beyond.

The funnel of opportunities currently contains a number of OEMs including several top-tier consumer electronic companies. These opportunities are above and beyond the customers and products of what's introduced last year. Based on the information available to us today, we believe that several of these opportunities will result in commercial offerings by OEMs this year. In addition, some of the display engine enhancements made by Microvision and Sony last year are expected to result into new features inside OEM products later this year.

Switching to Sharp. Sharp announced recently that RoBoHoN will be launched at the end of May in Japan. This product is loaded with attractive features never-seen before and has been marketed by Sharp as an example with technology innovation. For us, for Microvision, it showcases the adaptability of PicoP scanning technology to different form factors and product categories.

Now let's examine the second goal: investing into new emerging opportunities in pico projection, 3D sensing and augmented reality for 2017 and beyond. Starting with pico projection - we continue to invest in creating new features centered around entire activity and ease of use for pico projection applications. To date, we have received very good feedback on our road map from major brands. Moreover, we're also in discussion with Sony on additional development projects in this area.

Moving to 3D sensing. Many top-tier consumer electronic companies are defining new products that use 3D sensing features. This field contains a broad array of applications falling into three primary categories: gesture recognition, 3D measurement and machine vision for automated inspection, robot guidance or autonomous cars. Our initial focus is on 3D gesture recognition features for mobile devices to create an interactive pico projection experience. We're also actively exploring future opportunities in machine vision space.

Our core strengths for such applications include ability to create a slim, power-efficient scanning engine that can capture 3D data and project high definition data simultaneously. Also, advantage includes ability of our technology to work with multiple sensing methods that are used by industry which include time-a-flight, structure guide and triangulation. And finally, ability to offer extremely low persistence and latency which are important performance characteristics. For example, in an advanced driver assistance systems or autonomous vehicles that need a superfast and accurate responses to its environment. As we explore, we're best to focus our efforts in 3D sensing. We have begun discussions with some of the industry giants to align our road map with the needs of these emerging applications.

Shifting to augmented reality. Microvision's scanning technology offers inherent display and optical advantages for augmented reality applications. Images are scanned safely into a person's retina, creating large field of view, high definition, see-through images with extremely low latency and persistence which are crucial for such applications. Other than 3D sensing, we are working to align our technology road map with the needs of this market.

Now, I will turn over to Steve to give you a full update on Q1 financials.

Stephen Holt

Thank you, Alex. We made solid progress on our financial goals in the first quarter. We reached a new high for product and royalty revenue of $3.7 million, an increased gross margin to 30%. First quarter revenue was $3.7 million, comprised of $3.2 million of product revenue and $500,000 of royalty revenue. This is more than double the Q4 2015 revenue of $1.8 million and four times Q1 2015 revenue of $900,000.

We are very pleased to see some real progress with gross margin in the corner. Gross margin was 30%, nearly a 10-point improvement over the last quarter. Manufacturing activity in the quarter went off pretty much as planned and the 30% gross margin reflects the benefit of steady production that resulted in better yields and lower scrap. Also the increase in volume resulted in less overhead per unit.

In Q1 of 2015, gross margin was -16%. We've got a significant improvement over that. The 30% gross margin is a nice improvement over the past and we are continuing to drive improvement and gross margin. Our goal is to increase margin, but recognize that there can be unexpected fluctuations. Q1 operating expenses were $4.7 million, compared to $4.7 million in operating expenses in Q4 of 2015 and $3.8 million in Q1 of 2015. The $900,000 increase over Q1 in 2015 is comprised of three parts: a third is due to an increase in people and compensation; a third in relocation and engineering materials spending; and the final part is due to in Q1 of 2015, around $300,000 of engineering effort was charged to the cost of contract revenue for development contract with Sony. That lowered the amount of engineering expenses reflected in operating expenses in Q1.

Our first quarter of 2016 net loss was $3.6 million or $0.07 per share in comparison to $4.3 million or $0.09 per share last quarter. The net loss in Q1 of 2015 was $4 million or $0.09 per share. Cash use in operating activities was $3 million and is $700,000 lower than the $3.7 million use in the fourth quarter. In Q1 of 2015, we received an $8 million payment from Sony that resulted in a positive cash flow from operations of $5.1 million.

March, we raised net proceeds of $6.3 million on the sale of equity and we did not use our ATM facility. As a result, cash and cash equivalents on hand on March 31st were $11.2 million. Backlog at the end of the quarter was $9.2 million, primarily related to Sony orders and we expect to fulfill these orders in 2016.

That concludes the financial results. We will now open the call for questions.

Question-and-Answer Session

Operator

Thank you. We will now begin the question-and-answer session. [Operator instructions] Our first question is from Mike Latimore with Northland Capital Markets. Please go ahead.

Mike Latimore

Great. Good morning, guys. It's a very good quarter there.

Stephen Holt

Thanks, Mike.

Mike Latimore

So out from the last call you gave full-year revenue guidance, you didn't really touched on it. Today, I assume that means that you still support the prior guidance?

Stephen Holt

Absolutely.

Mike Latimore

Okay, great. And then on the backlog, it was down about, I think $1.8 million sequentially where the revenues were up - we recognize $3.7. Did you get some incremental orders in the quarter.

Stephen Holt

Yes. We received a few additional orders.

Mike Latimore

Okay. Is that mainly from Sony or others?

Stephen Holt

It was mainly from others.

Mike Latimore

Yes, got it. I guess on Sony real quick, they delayed their earnings release because of earthquake in Japan. Does that had any influence on your discussions with them at all?

Alexander Tokman

No. At this point, we don't see any impact to what we're doing with Sony.

Mike Latimore

Okay, got it. And then you talk about potential other customers of Sony launching product this year. What kind of products do you see? Is it most of these wireless companion investor products or others?

Alexander Tokman

Mike, we see a variety of products. The large category would be wireless companions, but there are some derivatives, where engine is embedded inside devices. You would not think normally. We hope to see some of these in the next 12 months.

Mike Latimore

Got it. This is the last question for me. You've had two quarters now where you broke out product versus royalty. I think royalty was about 17% of the product in the fourth quarter and then 27% in the first quarter. Is that kind of a reasonable range to think of in terms of royalty as a percent of that?

Stephen Holt

Yes. We still think it's still too early to look for patterns from quarter to quarter. So we still caution to not look for a pattern yet in the royalty as a percentage of revenue.

Mike Latimore

Okay, great. Thanks a lot.

Alexander Tokman

Okay, Mike.

Operator

Our next question is from Kevin Dede with Rodman & Renshaw.

Kevin Dede

Good morning, gentlemen. I'm just kind of curious. Obviously you compare March to March last year or December, but I think in terms of revenue, it's helpful to look at June last year given the strength in product revenue there where gross margin was about flat. Maybe just a little bit less. I'm wondering if you might be able to talk a little bit to product rev and gross margin on that kind of comparison.

Alexander Tokman

You're talking about the mid-year report where we had $2 point something million?

Kevin Dede

Correct. Absolutely. Yes, exactly. It was about $2.2 million, Alex, and gross margin was about 29.5% roughly.

Stephen Holt

Right. Product revenue was $2.2 million, but the product margin was $4.9 million that quarter. We're up about three times that with 18% on product margin in this quarter.

Alexander Tokman

Kevin, we steadily improve product margin from the first quarter of last year until now. There was a little hiccup in the fourth quarter. Remember, we stayed flat and decreased a bit, but we backed up and as Steve said, we improved that. It's 3x versus what we had in June.

Kevin Dede

Right. You talked about manufacturing efficiencies and less scrap. I'm just kind of wondering, this will be your target, I guess at the low 40%. How do you see yourselves tracking?

Stephen Holt

We still see 40% as our goal. We haven't given guidance specifically when we'll get there, but we're really happy that we hit the 30% range. And we had a quarter where we had good production each month and we haven't had that since back early last year when we were just beginning. We're very happy with the way the quarter progressed, in the way the manufacturing went.

Kevin Dede

Okay. On that point, Steve, can you speak to what you've seen thus far and the visibility you have for June?

Stephen Holt

No. We're not giving any guidance on that. So I don't have anything to say on that.

Alexander Tokman

Kevin, we're not given quarterly guidance. We gave guidance for the year, but everything that we see right now, the production issue that hindered us, slowed us down a bit in September/November has been solved and I think you could see it from the Q1 results, things are improving in every front. Our goal is to continue this moving forward.

Kevin Dede

Great. Okay. Steve, last question for me. Just give me a ballpark on where you see the share count falling out at the end of June?

Stephen Holt

Shares outstanding is $51,494,000.

Kevin Dede

Okay.

Alexander Tokman

You remember that, by the way? You didn't look it up?

Kevin Dede

Yes, it sounded like it came right from the back of his hand. Thanks, gentlemen.

Operator

The next question is from Henry James with State of Michigan.

Henry James

Good morning, gentlemen. My first question had to do with the royalty revenue and I just want to make sure that I'm understanding this sort of correctly. But from the way I look at it, it looks like that the part of the increase results from the fact that you're probably now collecting royalties from two products rather than just one? Is that correct?

Stephen Holt

On the Sharp, where their royalty is embedded in the price of the components. So it is reflected in product revenue.

Henry James

Okay. But I mean as far as the Celluon product and then there's the Sony product - I believe this was really the first quarter that reflects revenue from the Sony product?

Alexander Tokman

We typically get that report from Sony where they basically break down the royalties by price, not necessarily by customers, so we can compute.

Stephen Holt

Yes. Henry, the royalty revenue that we've been recording through last year, we had $1.165 million of total royalty revenue. That's Sony, been primarily Sony and it's what we've been experiencing.

Henry James

What I mean is though that your initial product, even though the engine is from Sony, the Celluon product, that was the only product in the market. So whatever royalties came about sort of from that product?

Alexander Tokman

That's correct. [Cross Talks] Quite nearly it was Celluon and Sony's product. But keep in mind, when Sony is developing their funnel of new opportunities, new OEM opportunities, they typically shift smaller quantities to other people to test drive it and determine what they want to do ultimately with their products. Even though it was dominated by those specific products you mentioned, there are some additional things as well.

Henry James

Okay. Just on the automobile HUD opportunity, I was wondering if you feel any differently about that opportunity? Or your competitive position is changed? Could you just speak to that a little bit?

Alexander Tokman

Sure. HUD remains a focus area for us, Henry. The display technology that we developed with Sony actually is well-suited for HUD applications. So we've done a lot of heavy-lifting already to enable our technology to be offered by others for head-up display applications. So again, it remains a focus. We don't have to do a lot of heavy-lifting anymore and we're happy to see that our partners now can offer this other solution to car manufacturers in tier 1s.

Henry James

Okay. One final question, sort of with respect to some of the enhancements. I know one of the things that you'll work on is automatic keystone correction. Do these enhancements require extra cost or is this just simply sort of embedded in the IP that you provide to your customers?

Alexander Tokman

This is a well-thought question. There are two implementations. These features are developed in conjunction with our technology. Initially they offered a stand-alone additions. They add very little cost, but there is a little cost at it. Eventually, they become part of the engine technology in the next generation engines, so you don't need to add extra components and they basically command other feature of the primary offering. So today, we're working with people where they potentially add something on top, but tomorrow, we expect it to be part of the primary offering.

Henry James

Okay. All right, thank you.

Operator

Our next question is from Tom Zulist [ph], Private Investor.

Unidentified Analyst

Hey, Alex, how are you?

Alexander Tokman

Hi, Tom.

Unidentified Analyst

Great quarter. Question, brighter lumens - can you give us a little update on where we stand? I believe Celluon at CES announced the product that's going to have brighter lumens and I'm just wondering how the progress is.

Alexander Tokman

I think the progress in this area is going very, very well. We want to wait for Sony to actually do the official announcement by them because it's their engine and their technology. But the work that Microvision and Sony has done last year will result in a much brighter engine and product later this year.

Unidentified Analyst

Now, do you see any technological walls or difficulties and getting to your road map of 80 lumens, which is I think what we talked about theoretically last year?

Alexander Tokman

Our road map supports this brightness - oh, listen, I remember, when we started this, I recall a couple of years ago, there were a bunch of skeptics that said we can go above 10 lumen and we went to 25, and we went to 35, and we're going higher. So our road map supports higher brightness's and keep in mind, because we're using lasers, our perceived brightness is almost twice as much as that of all other devices that claim to have higher brightness's. So we feel pretty good about brightness road map and hopefully the customers will actually be able to experience later this year what we created last year with Sony.

Unidentified Analyst

Now also because Sony is dealing with a lot of these customers and I got to imagine you're not even aware of some of the customers looking at this potential product, which means that you may end up getting orders that are going to come at you. How well are you equipped to be able to handle the ramp should that happen?

Alexander Tokman

We feel pretty comfortable about our supply capabilities to support Sony's needs today. We're aware pretty much of what's going on with their funnel. We're focusing together on top 10, top 20 opportunities, but obviously Sony manages much larger funnel.

Unidentified Analyst

Now as far as development kit, are you still shipping development kits to companies like Sony that would be developing a new engine, or Sharp?

Alexander Tokman

We have developed special development kits that we only provide to people who we feel will have strategic fit for bigger opportunities. We don't simply sell development kits anymore, but when we do, we have them for specifically strategic exploratory and forward-going opportunities. If we see a right fit and we see the customer that has the product plans that makes sense to us and are supported by our technology, we provide specific kits and then we support them with their product and experimentation.

Unidentified Analyst

Also, apparently at CES, Sony had a product called the Xperian [ph], which is like a desktop prototype, which kind of look like the Amazon Echo. Can you confirm that that actually has your projector in it?

Alexander Tokman

Sony did showcase a couple of products, both at CES and at Mobile World Congress - something to look and one of those products did have our technology inside. Yes.

Unidentified Analyst

Okay. And then as far as short throw, is your technology - I think I read somewhere - where your technology is state-of-the-art in the short throw capabilities? Is that correct?

Alexander Tokman

We developed something very special that is very difficult to do where we basically manipulate the beam that comes out our devices and we can short throw with software, not necessarily with optical solutions, which makes it a lot easier for people to implement. So we are excited. We showcase in this feature as a part of our road map enhancement and people alike.

Unidentified Analyst

Excellent. Thank you, Alex. Appreciate all your efforts.

Alexander Tokman

Thanks, Tom.

Operator

[Operator Instructions] And we have no further questions at this time. I will now turn the call over to Alex Tokman for closing remarks.

Alexander Tokman

We are very pleased with the progress we made this quarter and we believe the results speak for themselves. We followed up a breakthrough 2015 with very strong Q1. We believe we are seeing the impact of the investments made last year as we build up supply chain and fostered products to market with our technology. The revenue is up over 300% year-over-year and 100% sequentially, gross margin reached 30% for the first time for product and royalty. We are prudent with our cash management. Sharp is launching its innovative smartphone robot in late May. We expect more product with Sony display engine enter the market later this year and we're advancing our laser beam scanning technology platform by investing in emerging opportunities in 3D sensing and augmented reality.

Our aim is to truly showcase the value of Microvision's PicoP scanning technology and intellectual property in multiple markets. We have never been in a better place as a company in terms of fundamentals. We're very happy with what the team has done and looking forward to speaking with you in three months.

With this, we will conclude this call and on behalf of Dawn, Steve, I would like to thank you for joining us this morning. Thank you.

Operator

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

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