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MicroVision, Inc. (NASDAQ:MVIS)

Q3 2012 Earnings Conference Call

November 05, 2012, 08:30 a.m. ET

Executives

Jeff Wilson - CFO

Alexander Tokman - President and CEO

Analysts

Andrew Uerkwitz - Oppenheimer

Mike Latimore - Northland Capital Markets

Joel Achramowicz - Merriman Capital

Randy Hough - ProEquities

Operator

Welcome to the Q3 2012 MicroVision, Inc. Financial Results Call. My name is Kim 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 Mr. Jeff Wilson. Mr. Wilson.

Jeff Wilson

Thank you. I’d like to welcome everyone to MicroVision’s third quarter 2012 financial and operating results conference call. In addition to myself participants on today’s call include Alexander Tokman, President and Chief Executive Officer.

The information in today’s conference call may include forward-looking statements including statements regarding projections of future operations and financial results, product development, applications and benefits, availability and supply of product and key components, business partnering expectations, market opportunities and growth in demand as well as statements containing words like belief, estimate, target, 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 expressed 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 and circumstances, or any other reason.

The agenda for today’s call will be as follows, Alex will first give a business update, I will then report on the financial results. There will be a question-and-answer session and then Alex will conclude the call with some final remarks.

I’d now like to turn the call over to Alexander Tokman. Alex.

Alexander Tokman

Thank you, Jeff. Thanks everyone for joining us this morning and we want to extent for everyone who is calling from New York and New Jersey, (inaudible) families are okay.

Let’s just jump into the call. In Q3 we accomplished several important milestones that we believe should significantly strengthen our fundamentals and provide a strong platform for future growth. We grew year-over-year revenue over 40% by beginning volume shipment of components to Pioneer for the launch of their Cyber Navi head-up display system. We reduced cost using operations significantly from the previous quarter by almost 40% from the same period a year ago all is consistent with the guidance given earlier. And we finalized and announced a strategic agreement with Intersil for the next generation electronics for PicoP display technology.

I will now expand a bit on each of these milestones as well as current business activities. Starting with some financials and Jeff will provide a little more detail shortly. I’m pleased to say that revenue for the third quarter increased more than 40% from the same period a year ago and 100% from previous quarter. And the third quarter operating expenses realized the benefit of our restructuring effort performed in early Q2 of this year, therefore, the cash burn is down.

Moving to Pioneer. Recall Pioneer began shipments of its Cyber Navi head-up display system in late July and this launch was consistent with our guidance and goal to commercially introduce PicoP display technologies starting mid-2012. We began component delivery in late Q2 and consistent with the guidance we gave on the last conference call, we saw increasing delivery of volumes and revenue in the third quarter.

To-date we have delivered about third of Pioneer’s backlog, and we expect to continue fulfillment of orders through Q1, Q2 of 2013. The preliminary results indicate that the quality of the components provided by MicroVision has been commendable. Pioneer has consistently indicated to us that it will take three to five months to gauge the Cyber Navi uptake in the Japanese market. However, some of you may know already from press coverage that Pioneer is accessing opportunity to sell in Europe. Consequently, we are executing against the current orders and continue to support our partner as they move forward.

Moving to the next subject, Intersil. In September we announced a strategic relationship with Intersil, a (inaudible) in the semiconductor industry. The agreement is part of cementing our ingredient brand business model by offering a solution that not only has industry leading feature to-date but also has a strong roadmap that advances technology for years to come.

Today PicoP Gen2 display technology is the only high definition capable focus free largest screen size solution available for Pico projectors in the market. And it can be delivered in the package that is about one increase wide and less than the quarter inch thick. It is low powered while displaying up to 25 lumens. This combination of stacks make Gen2 optimized formidability but like any high tech solutions what is optimal today can and should get better as it progresses overtime. Through corporation with Intersil, PicoP display technology is expected to offer much higher brightness while simultaneously lowering power usage without increasing the size of the mobile or the cost.

This combination extents the mobility value proposition of PicoP display technology because remaining a battery powered solution with higher brightness is a key necessity for all mobile product. Our PicoP display technology roadmap strengthened our licensing strategy because it offers OEMs access to a sustained continues improvement to better their own product roadmaps to meet the long consumer expectations.

Now let’s briefly discuss new opportunities. We continued to receive new orders for our PicoP evaluation kits in the third quarter. That’s further increasing the opportunity space for future products and applications. In fact, in the third quarter alone we shipped design evaluations sample to more than 20 companies mostly in the automotive and consumer electronic space, some in industrial. So, they can begin their test and evaluation studies.

We are currently engaged in business discussions with a sub group of companies who purchase our evaluation kits prior to Q3 and who have finished their preliminary technical evaluations of our technology. The ultimate goal is to secure their commitment to design products based on our industry leading high definition Pico projection solution with specific objectives focused on establishing and agreeing on the business model details. In several cases, a meaningful progress has been made.

Before I turn it to Jeff, I’d like to state several updates regarding the green laser developments. During the quarter, Osram Semiconductor announced the launch of its first direct green laser offering and called out its significance for the Pico projection market. In the release Osram discussed the benefit specifically for the MEMS based Pico Projectors such as MicroVision’s display technology.

As you know entering 2012 there was no commercial availability of this key component for Pico Projectors. Pioneer shipments of its Cyber Navi head-up display product this summer marked the first instantiation of a commercially available direct green laser diode. You know from our conference call throughout 2012 that we accepted several direct green laser suppliers to be in the market by the end of 2012 which is exactly what we see with the Osram now joining the supplier to Pioneer.

In addition to these two commercial supply sources, Sony announced in June its intention to enter direct green laser market with Sumitomo. We have discussed at length the benefit of the direct green laser synthetic counterpart including standard small size lower prices, higher volumes and yields. As you can imagine, multiple sources for this key component eases the concerns of OEMs which they had in the past about availability of this critical component.

We expect multiple sources and competitive pricing will benefit our licensing partners when they procure lasers to manufacturer display engines and end products in corporate and PicoP display technology.

At this point I will stop and Jeff will take up with financials.

Jeff Wilson

Thank you, Alex. As Alex mentioned, during the third quarter we began volume component shipments to Pioneer and began to realize the benefits of the steps we took in the second quarter to align our cost to our ingredient brand strategy. As a result we increased revenue by over 100% from the second quarter of this year and more importantly increased margins from the second quarter.

We continue to expect to achieve our goal of an overall reduction in our cost used in operations by approximately 50% in the second half of 2012 compared to the first half of this year. With that background let me provide additional details on our revenue, operating results and cash position.

Our revenue for the third quarter increased to $2.6 million compared to $1.8 million for the third quarter last year. And for the first nine months of 2012 our revenue increased 37% to $5.6 million compared to $4.1 million for the same period last year.

Our revenue for the third quarter was comprised of sales of components to Pioneer [outside of the ex product] and the initial royalty revenue earned on Pioneer shipments of the Cyber Navi product. We have almost completed our sales [outside of the ex products] and expect to complete these sales in the current quarter. Our backlog at the end of the quarter was $4.5 million composed primarily of components for Pioneer.

Next moving to our operating results. Our operating loss for the third quarter was $4 million compared to the $7.8 million for the third quarter last year and $18.8 million for the first nine months of 2012 compared to $26.1 million for the first nine months of last year.

Our net loss for the third quarter was $3.8 million or $0.15 per share compared to $7.8 million or $0.57 per share for the third quarter last year. And $18.6 million or $0.91 per share for the first nine months of 2012 compared to $26 million or $1.96 per share for the first nine months of 2011.

Finally, moving to our cash position. For the first nine months of 2012 we reduced our cash used in operations to $17 million from $21.8 million for the first nine months of 2011. The cash used in operations in the first nine months of 2012 include approximately $400,000 in restructuring and related cost. We ended the quarter with $10.7 million in cash.

With that I’d like to open the call for questions.

Question-and-Answer Session

Operator

(Operator Instructions) And at this time we have a question from Andrew Uerkwitz from Oppenheimer. Please go ahead.

Andrew Uerkwitz - Oppenheimer

Could you talk a little bit about Pioneer’s competitive, where they stand competitively, what the competitors are doing. Is that an opportunity for you guys, you can still put the color around that?

Alexander Tokman

Pioneer’s product is the first, it's one of a kind and they are really no competition has been established for a biggest, Pioneer has some time to market advantage because they start earlier with us and from the feedback that we have access to, it appears to be that the people will like this product. As I mentioned on the previous call, Pioneer has done a market study before they launched it because they wanted to get the feedback and get their feet wet before launching the product. And it appears to be at that time that 80% of the people who were solicited and ask questions said that this product was revolutionary. Obviously, they need some time in the market [in Japan] to truly understand the demand but we believe that they are happy with what they are getting from us and we hope that the market uptake is gearing up where they come back to us, and get more. At the same time we are obviously working and developing other opportunities in this area as well as the other areas.

Andrew Uerkwitz - Oppenheimer

Could you also just to change (inaudible) little bit here. How do you perceive pricing of green laser as we head into this year into next?

Alexander Tokman

The pricing of green laser even at the introduction has been exceptional, compare it what we saw over the past two or three years from synthetic green laser counterparts, the green laser price for the laser diode is well within the market expectations in terms of generate and create opportunities in several different segments including consumer. Obviously, at the onset, the prices are little higher, but once you get into any reasonable volume we see a very attractive price for anybody who wants to license this technology in the future.

Andrew Uerkwitz - Oppenheimer

[Question Inaudible].

Alexander Tokman

At the beginning we are talking about hundreds of thousands and then the volume we are talking about tens of millions here.

Operator

Our next question comes from Mike Latimore from Northland Capital. Please go ahead.

Mike Latimore - Northland Capital Markets

I guess just on the backlog, over what timeframe will the majority of that be recognized do you think?

Alexander Tokman

We were scheduling deliveries of those who would expect at that most of that backlog will be delivered in the next six months.

Mike Latimore - Northland Capital Markets

It sounds like most of the backlog is Pioneer, so I wanted to clarify (inaudible) that is going to be basically done in the fourth quarter in terms of (inaudible).

Alexander Tokman

We believe so yes, that’s the way we are talking right now.

Mike Latimore - Northland Capital Markets

I know if you give any color for next quarter, but how are gross margin looking at next quarter, should we assume similar to this quarter?

Jeff Wilson

That’s a great question again. We are at the very beginning part of the market on margins that we are not until things stabilized and we have more predictability around the revenue mix. I don't think we are in a position to give guidance around margins other than to say that obviously part of our strategy going to a licensing component model will have better margins than what we have on the product side.

Alexander Tokman

Mike on the positive side, remember when we introduced a product based on the synthetic green laser, the margin was not positive it was negative for (inaudible). This is for the first time we have positive margin on a product and big contribution comes from the fact that we are using direct green laser is not the synthetic counterparts.

Mike Latimore - Northland Capital Markets

It sounds like the supply of direct green lasers is ample at this point. What about just kind of overall manufacturing among your partners. Do you see that as keeping up with demand here is there any issue about getting full capacity up and running?

Alexander Tokman

As we start developing more and bringing more licensing partners to the table, we believe at this point the display of green lasers should not be a limiting factor. And the people who participate in it right now, there are two players already with Sony coming within 12 months most likely. We expect that the volume would be adjusted to the demand and there should not be any limitations as we experienced in the past with the synthetic.

Mike Latimore - Northland Capital Markets

And last what was the stock-based comp expense in the quarter?

Jeff Wilson

Total stock-based comp in this quarter was about $850,000.

Operator

Our next question comes from Joel Achramowicz from Merriman Capital. Please go ahead.

Joel Achramowicz - Merriman Capital

Alex and Jeff, can I ask a follow-up question on the head-up display opportunities with Pioneer. Do you have any indication of how many vehicle or car companies are perhaps looking at this technology and is implemented in high end luxury automobiles?

Alexander Tokman

I can give you the general figures Joel, so the Pioneer activities independent of the question that you asked, because most of the car companies are interested in embedded head of displays not the after mark version. And to-date we have discussions with several major companies and (inaudible) in North America, in Europe and in Asia, particularly in Japan.

Joel Achramowicz - Merriman Capital

So, lot of these products are probably going into after-market in installations.

Alexander Tokman

The way it works, the setup itself is up to mark Cyber Navi head-up display that Pioneer is offering typically go through the distribution of recent channels and channels such as equivalent of car toys, etcetera where people basically can purchase this and install it retroactively on variety of models. We don't have actual indication on which models, which drivers buying these but what we know is that this system is agnostic to the car model as long as the buyer has the subscription from DOCOMO which is provided with the purchase of device.

Joel Achramowicz - Merriman Capital

A lot of (inaudible) relationship with [Visteon] and I think some other tier 1 part suppliers. I mean is that relationship still viable, I mean is it now that you made so much progress with Pioneer.

Alexander Tokman

We have historically a good relationship with at least half a dozen tier 1s, [Visteon] we had relationship maybe four or five years ago. This is before the green laser (inaudible) there somewhat. We are still dealing with the large group including [Visteon] was part of this group. Right now we have negotiations again with series of this prospective partners. I can’t identify them by name, but what I can tell you they represent a major players on each continent and they are directly tied into major car manufacturers who are part of this triangle to determine how to go forward.

Joel Achramowicz - Merriman Capital

Another question we have talked about the projector which seem like one of the first mobile phone based projection devices incorporated into mobile phone by Samsung. I guess they are using the TI engine. And you talked about really having some interesting discussions with some of the development people and how excited they were to see the MicroVision technology a PicoP Gen2. Have any discussions with Samsung continued from their?

Alexander Tokman

So, there are couple of questions in which you are asking. Let me just try to address each one of them. First, Samsung introduced our first cell phone with the embedded Pico Projection technology even though it's from TI, it's actually good for the market because it shows basically there is interest from one of the major players. And secondly, Samsung is spending all the market endorse to promote this technology, so it benefits everyone in the world. That’s number one. Number two, we have discussions with a series of topnotch tier 1 OEMs in the consumer space from Korea, from Japan, from North America and again we would like to not to disclose specific names, but you can imagine that the name that you are asking (inaudible).

Joel Achramowicz - Merriman Capital

I know you can’t give us, but I mean can you describe at least on general basis what kind of reactions you get from development people and marketing people in some of these major players.

Alexander Tokman

The reaction has always been positive and while because people always, development people from this organization has always told us consistently that they prefer our type of technology versus panel technology such as [DLP and LCOS]. And in the past the limitation was supply. Everybody was concerned, you don't have enough green lasers, your green lasers is too expensive and hopefully now this barrier has been greatly, greatly mitigated and the tier 1 OEMs actually can go and validate this condition by themselves. They can go either way to Osram, the Pioneer supplier, so any and have a discussion and understand what are the volumes and what are the pricing that they could get for their own product. So, we believe this becomes non-issue and as a result we see an increased interest in our technology for a variety of licensing models that we are pursuing with prospective partners.

Joel Achramowicz - Merriman Capital

And when we see (inaudible) in January will you have an improvement in the actual form factor of the engine. I mean it seems every year you have been able to do that, do you see a roadmap in that regard to continued reduction and improvement in performance?

Alexander Tokman

Well, we definitely have a roadmap. We have a roadmap to reduce power, to increase brightness, to add some very salient features that no one else has and we obviously expect to show the progress to our prospective partners [HCS] and hopefully this will proliferate our licensing discussion and help us to get sooner to the (inaudible).

Operator

Our next question comes from Randy Hough from ProEquities. Please go ahead.

Randy Hough - ProEquities

Jeff, first you, with all the financing that’s been done in the last year and so, would you bring up the date on what the fully diluted share count is now?

Jeff Wilson

Sure. So, the actual shares outstanding is right about 25 million and in fully diluted with a warrants is another let’s call it 6.5, so about 31.5 million.

Randy Hough - ProEquities

And in terms of financing opportunities, I guess it's principally in the near-term is going to be coming from exercise of warrants?

Jeff Wilson

In the near-term we look at any one of the number of financing opportunities.

Randy Hough - ProEquities

But if you were to project your current cash reserves will be sufficient to carry on the operations of business, could you give us a timeline on it.

Jeff Wilson

Sure, so as we look at, we ended the quarter at $10.8 million in cash. As you look at increased revenue coming up from Pioneer continuation of our reduction of burn rate. We expect that cash to be sufficient to allow this at least to the second quarter of next year.

Randy Hough - ProEquities

At least through the second quarter or to the second quarter of next year?

Jeff Wilson

No, at least through the second quarter.

Randy Hough - ProEquities

And Alex, if you would please, when you had the first [test kits] help me remember was it in March?

Alexander Tokman

Last week of February.

Randy Hough - ProEquities

So, we have been seven months, eight months out there with the test kits and you talked I think, correct me if I’m wrong here, but the normal cycle for potential OEM relationships as option of your technology and some sort of licensing agreement maybe anywhere from 12 to 18 months. And we are venting now with Intersil in a way that’s pretty impressive. I mean if I heard you correctly, tell me I’m not dreaming, I did here the number 25 lumens in your comments earlier?

Alexander Tokman

25 lumens is what we have to be Randy, we actually with Intersil we were working on to double that.

Randy Hough - ProEquities

Double it?

Alexander Tokman

Yes.

Randy Hough - ProEquities

Well. Okay, so that leads into my question. What more do these OEMs need before they see that and get overall these things that have been inhibitors to adopting our technology in years gone by. What more if anything do they have to see. And wrapped up in that is when we get the conference call 30 or 90 days from now at the end of Q4, and you report, can you give us any feel for what you might be doing in terms of identifying or projecting a number of potential relationship starting in calendar year 2013?

Alexander Tokman

We will try to address all your questions. First one, (inaudible) it’s very hard to guide to the timing on the specific deals, because it's so customer-to-customer specific and sometimes you have to spend more or less time to get so in terms closed on the beneficial to you and everybody around this table. So, it's really the quality of the deal, it's more important than the quantity or the timing to be honest with you. And so we are trying to basically to ensure that everybody we are having business discussions with and when we define and agreeing on specific business terms they are beneficial to MicroVision as much as they are beneficial to all partner. And as a result you are right, it takes about approximately on average 12 months to get from A to Z.

We started shipping first samples at the end of February and then the first prospective customers who we shipped these units to, they have to complete their own evaluation study. That first step is to strictly validate what we have been saying. Because they can believe us but most of the people want to test it an ensure that what we are saying is true. So, the people who received the earlier units, some of them already completed the studies and said let’s negotiate the business terms how we can go to market together. So, we are actually making progress in this area as well. In the third quarter we shipped the new samples to more than 20 entities and we hope then within one to six months subset of these people also will come back to us and say we are ready to talk about new business. So, it's a very tier structure there is no one specific start time, one specific end time.

The good news is that, half a dozen companies who receive samples from us earlier in q2 already completed the studies and we are in business negotiations how we will go forward and how do we provide what they need to introduce their products in the future. Keep in mind one important factor that everybody needs to understand is that, each OEM has their own fiscal years. And typically what you do, you negotiate and assess viability of a product for the next fiscal year, because the budget has been frozen year prior to this, so we are right now working with multiple people who are at the end of their fiscal year. And as you know in Asia specifically in Japan the fiscal year starts on April 1. So, we are in negotiations with lot of people for example in Asia to ensure that they budget for the program that we are trying to negotiate with them to introduce their products in the future.

So, there is three benefits, one evaluation time which some of these people already have completed when business negotiations were sound. And once the business negotiations are completed the programs typically begin. Sometimes, earlier phases of the programs start even before the definitive agreement. And we are hopeful we will have couple of those as well.

Randy Hough - ProEquities

Are you ready yet to kind of give us a range could you from that information, give us a range of when we might look for an inflection point in revenue ramp, royalty income and licensing fees. Could it be the end of second quarter next year, the end of third quarter next year, when several of these pieces are going to drop in and bring the cash registered.

Alexander Tokman

We cannot give guidance at this time. As Jeff mentioned, until we have a group of customers and we assess and have some historical data on their performance, because keep in mind, our licensing model is (inaudible) other people launch their products on their timelines and until we have some level of comfort of what they are doing and how predictable they are. It will be difficult for us to guide people, but we will do this as soon as we have some lower stability and understanding what they are doing and how predictable they can be.

Randy Hough - ProEquities

You still sense and I would hope increasingly so excitement about this technology in the marketplace across a variety of applications, can we at least say that?

Alexander Tokman

Absolutely. Not only have the older players who have been dealing with us for the past four years and who has been detracted by the situation with synthetic green laser that are coming back to the table, but we have a lot of new entries, because the market is even though is still in its mason form which I mean, we have been struggling to get the right green laser over the past three years. But the other people haven’t and the market is not exactly exploiting right now and the reason is because ecosystem was not ready. Now more and more devices are equipped with the HDMI output so there is a connectivity to devices such as our and somebody else Pico Projectors. And people start finally understand the value proposition and with Samsung and other suite in the way hopefully it would create a lot more opportunities and people become more of risk takers. Because everybody is waiting for somebody else to make the first step unfortunately in this market, there is not what will be there, believe or not in this stage, but we have seen already several entities who are not (inaudible) want to take that chance.

Operator

This concludes the time that we have for the question-and-answer session. I’ll now turn it back to Alexander Tokman for closing remarks.

Alexander Tokman

Thank you. To conclude this call, just recap what we just described. Pioneer first product commercialization is on track, be began volume shipment of components to Pioneer for the launch of their Cyber Navi head-up display system, and the revenue is up more than 40% year-over-year. Where advance and features roadmap to enhance their feel of our PicoP display technology for OEMs interested in the multi generational product plan and most OEMs are interested in multi generational product plan. Specifically, in this regard we have finalized and announced a strategic agreement with Intersil for the next generation electronics for a brighter and lower power engine.

There are now two direct green laser suppliers who can provide commercial grade direct green lasers to OEMs for their future products, and more are expected to be in the market in the near to mid future. We are seeing new sample into the market, in order to create new business opportunities. The feedback so far has been positive and we entered into business discussions with the group of prospective customers to establish details of the business models for going forward. Several discussions have shown a significant progress however, establishing a common framework for future relationship. Operating cash requirements are down more than 48% from previous quarter following the restructuring we performed in early Q2. We are hitting on critical milestones that we articulated earlier in the year and by continuing to move the business forward we believe again it makes us an attractive investment opportunity for longer term minded investors around the world.

And at this point I’d like to thank everyone for joining and we will talk in 90 days. 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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