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Microvision, Inc. (NASDAQ:MVIS)

Q2 2008 Earnings Call

August 5, 2008 4:30 pm ET

Executives

Tiffany Bradford - Investors Relations Specialist

Alexander Tokman - President, Chief Executive Officer, Director

Jeff Wilson - Chief Financial Officer

Analysts

Darice Liu - Maxim Group

Joe Dubroth - Morgan Stanley

Analyst for Richard Woodall - Financial Security Management

Operator

Welcome to the second quarter 2008 Microvision, Inc. earnings conference call. (Operator Instructions) I would now like to turn the presentation over to you host for today's conference, Tiffany Bradford, Investor Relations Specialist.

Tiffany Bradford

. In addition to myself, participants on today's call include Alexander Tokman, President and Chief Executive Officer and Jeff Wilson, Chief Financial Officer.

The information in today's conference call may include forward-looking statements, including statements regarding projections of future operation, product development, introduction, applications, and benefits, business partnering expectations, market opportunities, and growth and demand, as well as statements containing words like "believes", "estimate", "expects", "anticipate", "target", "plans", "will", "could", "would", and other similar expressions. These statements are not guarantees of future performance. Actually results could differ materially from the future results implied or expressed in the forward-looking statement.

Additional information concerning factors that could cause actual results to differ materially from those in the forward-looking statements are in included in our most recent annual report on form 10K 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. I would now like to turn the call over to Alexander Tokman.

Alexander Tokman

The outline of today's session is as follows. I will provide operating result and Jeff will comment and provide detail on the financial results for the quarter and for the first half. I will comeback and give you strategic outlook and we will wrap it up with the questions. So, let me begin with the operating results.

Although second quarter was quiet by external IR standards, we have made very important progress in all four key areas. Specifically, these are customers, technology, supply chain and liquidity. Let me begin with the customers’ update. We believe that market's interest in PicoP remains strong. During the second quarter, we received several letters of intent from customers for the PicoP accessory product for 2009 release. We expect to commence the extended field trials with our OEM partners very soon to solicit broader feedback for the final accessory product requirement.

It is our belief that successful completion of this extended trials that will extend through the remainder of this year and early portion of 2009 and will include both collections of consumer feedback as well as the internal testing on the part of our customers will lead to formal purchase commitment. During this time, we will be working with our OEM partners to determine as their ultimate timing for the accessory product launch. However, we expect to be in a position to launch the accessory product in the first half of 2009 and support volume production in the second half of 2009.

Let us move on to technology and supply chain. During the second quarter, we have made several important advancements on our core technology. As you all know, the new wide-angle MEMS scanner is an integral part of our PicoP display engine that we targeted to serve several different market segments. The requirements for this scanner are driven by stringent requirements by the cell phone market. The new scanner is required to provide reduced power consumption with similar or lesser form factor and be robust at the same time to shock and drop that as compared to earlier Microvision design.

In late 2006, we began the definition and design of the first MEMS device specifically focused on addressing the need of the mobile projection display market. This new device was expected to challenge the existing technology limits and required significant innovation in MEMS scanner and package design on the part of our development change. We exhibited the first prototype of this new scanner about a year ago at the Society of Information Display. We are pleased to say that in the last quarter, we began internal testing of its key attribute.

First, let me talk about power consumption. The power consumption of the latest version of the MEMS scanner has been reduced by approximately 75% over the previous version initially shown about a year ago. What is the significance of this reduction? Let me give you the big picture. The cell phone manufacturers told us that the target spec for the overall power consumption for the embedded Pico Projector which includes MEMS scanner, light sources, ASIC optics and other components should not exceed 1 ½ watt.

Before the 75% reduction that was measured recently, MEMS power contribution was about 25% of the total allocated budget. To date, it is approximately 7%. Second, we implemented internal testing and completed internal testing of the wide-angle MEMS scanner for shock and drop survivability. These results show that our MEMS scanning mirror exceeds the shock and drop tests requirements consistent with mobile handset industry standard.

We are not done yet. There are more reliability tests in progress but the structure reliability milestone is a good validation that we are moving in the right direction. On the ASIC's front, we progressed with our effort on further miniaturization and power reduction of the key ASIC subsystem necessary for the accessory and embedded product.

Finally, let me closed on brief talk about liquidity. As you know, subsequent to the end of the quarter, we raised $26 million, about $24.2 million net through the sale of common stock and warrants from high-quality investors. The primary goal was to strengthen our balance sheet and give us ability to commercialize the accessory product. Jeff will amplify more on this subject during the financial update. We believe that this additional cash could support our overall operating requirement until late 2009 to initial launch in volume production of the PicoP base accessory product.

On the other positive milestone, in June we joined Russell 2000 which all of you know are widely used by investment managers and institutional investors as benchmarks for investment strategy. At this point, I am going to pass the turn to Jeff and he will provide us with financial results.

Jeff Wilson

As Alex mentioned in July we completed the financing of $26 million. In connection with that, we issued 11.2 million shares of common stock and warrants to purchase 6.7 million shares. A little bit about the warrant, the warrants have a stock price of $3.60 per share. They can be called by the Company one year after they were issued if the average market price of stock exceeds $7.20 per share for 20 trading days. If the warrants are called by the Company, the Company would receive an additional $24 million in cash. In addition, we expect to list the warrants on NASDAQ.

Just going through the financials for the Company for the six months, during the first six months, the Company had revenue of $4.2 million compared to $4.9 million for the same period in 2007 and a $1.6 million in the second quarter compared to $2.7 million in the second quarter of last year. As of the end of the quarter, we had a backlog of $679,000 compared to $7.7 million last year. The decrease in the backlog is primarily attributable to the completion of government and commercial development contracts in 2007 and early 2008.

The decline in contract revenue and backlog is also part of the Company's conversion from the technology development company to a products company. We are entering the final stages of productization and there are fewer opportunities now to enter into development contracts since our customers are more focused on product introduction. As we have stated in the past, our goal is to bring high-volume products to market while minimizing our cash burn and working toward this goal may require us to forego certain short-term revenue opportunities that are not consistent with our overall product roadmap.

Now, we reported an operating loss for the first six months of 2008 of $16.4 million compared to $12.3 million in 2007 and $9.3 million for the second quarter of 2008 compared to $6.3 million in the same quarter last year. The higher loss is primarily attributable to lower revenue, an increased development cost, an increase headcount and strategic sourcing and business development. Our net loss for the first six months of 2008 was $14.3 million compared to $9 million in 2007 and $9.3 million for the second quarter of 2008 compared to $2.2 million in 2007. Remember that in the six months end of quarter of 2007, those results included the gain from the sale of our investment in Lumera Corporation were approximately $6 million.

Excluding this gain, the adjusted net loss for the first six months of 2007 was $15 million and $8.1 million for the second quarter. The net loss per share was $0.25 per share for the first six months of 2008 and $0.16 per share for the second quarter of this year compared to $0.21 and $0.05 respectively for the same period in 2007.

Excluding the gain on Lumera, the adjusted net loss was $0.35 per share for the first six months and $0.19 for the second quarter of 2007. The net cash used in operations for the first six months was $14.9 million compared to $11.5 million for the same period in 2007 and our cash burn from operations for the second quarter was approximately $9.6 million which reflects both the higher loss and some one-time payment for our MEMS development partner and employee benefits for 2007 of approximately $1.8 million.

We ended the quarter with $20.7 million in cash, cash equivalents and investment securities. To that we added approximately $24.2 million from the proceeds of the common stock and warrants.

Alexander Tokman

Now, before we move to the question session, I would like to give everyone an outlook for the next couple of years or what to expect from us and commercialization strategy that we defined in 2006. But since 2006 after we declined and implemented and announced PicoP commercialization strategy, we identified specific milestones on the annual basis that would lead us to the ultimate goal.

During the same time, we have been very predictable in the successful execution of the external communication operational milestone which included defining and implementing a new business and technology roadmap that will support this new strategy. We are focusing the business on the vital few market opportunities where the customer pool was the strongest, reorganizing the company around the new business model, continuing maturing our product development skills that are absolutely necessary to be a viable products company and simplifying capitalization structure and eliminating debt.

As we progress through development and commercialization milestone and get closer to product introduction, the specific timing of product launch will be determined not only by our ability to be ready but also by final commercialization of key component by our strategic supply chain partners as well as by established commercial product launch windows of our customers. With respect to the key component, most of our strategic suppliers continue to meet original product development timelines project but somehow experience longer development and commercialization cycles than we originally anticipated.

This is not unusual for bringing new technologies to market. The good news is that in the instances where the progress have been delayed, these companies have invested millions of dollars and continued to communicate their commitment to bring their critical component to market because of the large market opportunity.

In addition, as you all know, we have been pursuing dual supply chain capabilities in several key areas and consequently we remain optimistic about getting PicoP display engine to market in 2009. Based on what we know today about critical components availability and consumer electronic sale cycle, the outlook looks as follows so we are going to each segment and provide some color on what and when.

Starting with accessory and embedded consumer PicoP segments. All of you are well aware that we need red, blue and green to generate a full color projector. Red and blue light sources have been successfully commercialized and adopted in various industries in the past while green laser technology is currently being commercialized. The green laser development has experienced a longer development cycle than originally anticipated. Based on the ongoing discussion with our partners, we believe that we will be in the position to execute initial quantities of the accessory PicoP in the first half and move to higher volume in the second half of 2009.

Based on all of our communications with prospective customers, we anticipate that embedded product will be commercialized approximately 12 months following the introduction of the accessory. Moving on to the automotive PicoP segment, to date, we have provided vehicle display samples to all three of our Tier I automotive integrators early in the year. To date, there are marketing these samples to their OEM customers. Typical automobile design cycle that leads to the end-product takes approximately three years. Also, the automotive industry, as you know is currently reacting to the changes in the global economy and the rising energy price.

This could potentially result in industry reprioritization of key programs, focusing more on improved mileage and reducing emissions versus implementation of safety features such as embedded HUD. In response to the global economic changes and three year automotive design cycles, we have been placing more and more attention on the aftermarket HUD opportunities because commercialization timelines are shorter. In support of this effort, we have developed a demonstrated already a proof-of-concept, aftermarket head-up display that could be installed on the existing vehicle.

We are marketing this concept to segments where safety is greatest with the target product introduction for 2010. Finally, let me conclude with the eyewear PicoP segments. It is crystal clear to us that in order to create a successful eyewear solution for consumers, fashion and ergonomic factor are just as important, if not more important, than image quality performance of the product. In addition to the progress we made on the PicoP display engine which is expected to be an integral part for Microvision eyewear solution, we made important progress in creating a lightweight thin optical design that could be incorporated into fashionable eyewear.

The market pull factors for our wearable display products are the same as they are for Pico projector, for operation of broadband mobile devices and content which is constrained by tiny display than minimizes usability and enjoyment of mobile media. We expect the demand for wearable display to increase over the next three years and we are starting to meet this demand with a wearable display product about a year after the embedded PicoP solution which is 2007.

In summary, I have laid out our incremental growth strategy that is based on core PicoP platform, accessory first in 2009 followed by the embedded solution a year later, immediately followed by the aftermarket head-up display solution, fashionable eyewear and finally, embedded head-up application.

At this point, I would like to pause and we can open the Q&A session.

Question-and-Answer Session

Operator

(Operator's instruction) Your first question comes from Darice Liu - Maxim Group.

Darice Liu - Maxim Group

In the press release, you mentioned some LOIs from several companies for the PicoP accessory products for 2009 release. Can you give us some color on who these are from? Are they from current customers, new customers and what type of quantity are we talking about?

Alexander Tokman

At this point we would not provide anymore color. The only thing that I can tell you very clearly is that our goal is to move beyond LOIs and to get firmer purchase and commitments from the same customers and then additional customers through the planning that I had just described earlier to commence the external field trials started in September and continue throughout the year with the culmination and the final product testing within the customer shop to confirm that reliability as well as the core performance of the product will be consistent with their expectation. Anything else?

Darice Liu - Maxim Group

Well, I guess so it is safe to assume, though, that most of the LOIs that you received are actually from current customers.

Alexander Tokman

We, to date, we only announced there is only one customer that was on consumer side was announced even though we have a list of customers, core group of customers we have been working consistently with the past year for the accessory as well as for the embedded PicoP application. Only one has been acknowledged and the letters of intent that we received today include some new customers and old customers.

Darice Liu - Maxim Group

Let us move on to your timeline. So, the accessory product timeline is now about six months behind schedule and the embedded product is about a year behind early expectation. What gives you confidence in this current timeline and in the prior conference call, you said part of the issue regarding the timeline was green laser supply. Can you give us an update on what is going on with the availability for that product?

Alexander Tokman

It is true that along these starts, I think there are three questions. It is true that until recently we publicly had stated the stretch goal for accessory was end of the year, December of 2008. Again it was explicitly stated with a stretch goal because we are depending on component availability. As we have gone through the year, we warned that the quantity and availability of some of these critical components will be limited which will push our launch into 2009 for accessory.

In terms of the embedded, most customers that we are in discussions with want accessory immediately followed by the embedded product. They typically decide to launch accessory with smaller numbers, test the market and immediately we follow up with the larger quantity in embedded solution. So the embedded timeline is actually tied in certain ways to the accessory and this is why when accessory product was moved into the first half, the embedded trailed accordingly.

Finally, confidence about green laser supply. The good news is that our partners who we are continuously in discussion with and monitoring on the progress and issues resolution are very confident and excited about this market opportunity. There is an enormous amount of investment being placed in success of the green laser program at several of the institution and they all are driven by the large market opportunity that is in front of us. Other than that, I can tell you that the will and desire is there and it is all up to resolving some of the issues that are typically found when you transfer technology from in-house to your CM partners. And everything we have seen today shows that there is a strong commitment on everybody's part to solve the issues and enable the green laser quantities for 2009.

Darice Liu - Maxim Group

Okay, so let me just clarify two points. One, the green laser, that component constraints is what is holding back your timeline, is that what you are saying?

Alexander Tokman

Typically, when you develop and commercialize a product, you have a series of issues when you have some or one more critical than others and the green laser is the integral part of the integrated photonics module which is an integral part of the Pico Projector which is the integral part of the accessories. So, you need to have all the components in order to complete critical tests and determine what the final configuration of your product is.

Darice Liu - Maxim Group

So, the answer is yes. I guess the second point is I am a little bit confused when you say that most customers want the accessory product first then the embedded product second. So guys like Motorola who really do not have an accessory product, would not they want the embedded product first and does during new timeline mean that there will not be a Motorola product until 2010?

Alexander Tokman

I do not want to single out anyone in particular but what I can tell you in 9 out of 10 cases, whether it is cell phone manufacturer or whether it is a consumer we are trying to co-OEM which has that larger portfolio of products which may include cell phones as well as other devices, everyone first is interested in accessory and immediately followed by the embedded. And again I think this desire is driven by the risk profile that they expect to incur whether going directly to embedded without proving something with the accessories. But again it is not unanimous. There are incidences were the specific customer is interested in embedded solution first.

Operator

Your next question comes from Joe Dubroth - Morgan Stanley.

Joe Dubroth - Morgan Stanley

Can you give us any color on the latest round of financing that you did? Based on the filing, it appears that you have Highland Capital Partners, but there is also Highland Credit fund and then James Dondero listed individually for, it looks like maybe 3% of the shares or…can you tell us how these shares are held? Is it held by Highland Capital themselves or individually by Dondero or by the Highland's Credit Strategies Fund?

Jeff Wilson

I think the short answer is we were not privy to exactly where Highland is holding their shares. As you said, Highland is a very large investment fund. They have lots of different funds so we do not know exactly which fund is holding those shares but as you can tell from the filings, Highland was, by mathematics, the largest investor in the financing.

Joe Dubroth - Morgan Stanley

Right and as far as your timeline is concerned going forward and letting us, I mean obviously guys, you do not make it a practice of maybe you could not but announcing LOIs which is fine by me but at what point of your timeline going forward stays in place? When will you be able to let us know some additional information about LOIs turning into hard contracts? How far ahead of the game where your customers let you announce that?

Alexander Tokman

Notice we have not issued any separate press releases regarding letters of intent because we do not intend to do this. This update simply to summarize that there is a strong interest from the existing customers and it has been supported by the letters of intent which they do not have to sign if they have no interest at all.

In terms of the conversion of LOIs into firmer purchasing commitment, again I come back to what I said earlier, it starts with the further validation of the device externally and internally by our pull in customers. In terms of the planning, we expect to commence the extended field trials with OEM companies in September. At this point, we are going to provide them with units to attain a broader feedback from their customers for the final accessory product confirm. That is the first step.

The second step, units also will be provided in the second half of the year to our OEM customers to complete their own reliability testing. It is a normal part of the product acceptance by OEMs from their supplier. This process is going to continue from September until potentially as late as early 2009, first couple of months of 2009 and during throughout this process, it is our intention that we start converting some of the LOIs into firmer purchasing commitments. When exactly this will happen? It is difficult to pinpoint because the validation cycles for each customer is different.

Some take fewer time to get all the answers. Some take longer time and it is very difficult for us to predict and speak on their behalf when they can make the decision. But logically, it is going to happen between one when we make the initial units available and increase the quantity so they can not only can solicit the consumer feedback but also do some destructive testing internally to convince themselves that we have reliable product.

Joe Dubroth - Morgan Stanley

If you are planning on providing them, somewhat quantity in September for their field trials, does that mean you have a little more confidence from this point going forward that you actually have quantity available of the green laser?

Alexander Tokman

We have confidence we are going to have quantities available to do the necessary validation but the launch, the pre-production and production quantities will be available in 2009.

Operator

Your next question comes from Analyst for Richard Woodall - Financial Security Management.

Analyst for Richard Woodall - Financial Security Management

We are trying to better understand who owns the existing shares that are outstanding. Jeff Wilson

It sounds like you asked a question about who owns the shares and obviously we cannot make any comments about what is in the public filings. So the people who own large shares, they are filed with the SEC. That is the only comment we would make about who owns the shares.

Tiffany Bradford

That concludes our Q&A.

Alexander Tokman

What can I say? We remain confident about our commercialization for PicoP despite the delays in some of the supply chain component. We are still very excited about the opportunity to fundamentally change the way people view and share information with their friends, family, colleagues and customers. We continue to pursue 2008 priorities in the second half of the year which includes continued maturation and validation of the PicoP technology from the example you have seen today, completion and announcement of the executed supply chain agreement with the product assemblers and integrators that will enable this go-to market strategy and finally, securing OEM commitments for the accessory and embedded product. You understand hopefully the timeline. We believe we have a very credible plan and now, everybody have to execute. We understand that opportunities is amazing and this is why we believe that our supply chain partners will address whatever issues remain and we would launch the first product in 2009.

I am looking forward to talking to you three months from now and have great rest of the day. Thank you for joining us.

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Source: Microvision, Inc. Q2 2008 Earnings Call Transcript
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