Kopin's (KOPN) CEO John C. C. Fan on Q2 2014 Results - Earnings Call Transcript

| About: Kopin Corporation (KOPN)
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Kopin (NASDAQ:KOPN) Q2 2014 Earnings Call August 6, 2014 5:00 PM ET

Executives

Richard A. Sneider - Chief Financial Officer, Principal Accounting Officer and Treasurer

John C. C. Fan - Co-Founder, Chairman, Chief Executive Officer and President

Analysts

Matthew S. Robison - Wunderlich Securities Inc., Research Division

Joshua Buchalter

Elizabeth Murphy Lilly - Gabelli Fund, LDC

Operator

Good afternoon, and welcome to Kopin Corporation's conference call to provide a business update and results for the fiscal second quarter ended June 28, 2014. Today's call is being recorded for Internet replay. You may access an archived version of the call on Kopin's website at www.kopin.com. With us today from the company are Chairman and Chief Executive Officer, Dr. John Fan; and Chief Financial Officer, Mr. Richard Sneider. Please go ahead, sir.

Richard A. Sneider

Thank you. Welcome, everyone, and thank you for joining us this afternoon. John will begin today's call with the discussion of our strategy, technology and markets. I will go through the second quarter results at a high level. John will conclude our prepared remarks, and then we'll be happy to take your questions.

I would like to remind everyone that during today's call, taking place on Wednesday, August 6, 2014, we'll be making forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. These statements are based on the company's current expectations, projections, beliefs and estimates and are subject to a number of risks and uncertainties that could cause actual results to differ materially from those forward-looking statements. Potential risks include, but are not limited to, demand for our products, operating results of our subsidiaries, market conditions and other factors discussed in our most recent annual report on Form 10-K and other documents filed with the Securities and Exchange Commission. The company undertakes no obligation to update the forward-looking statements made during today's call.

And with that, I'll turn it over to John.

John C. C. Fan

Thank you, Richard. Good afternoon, everyone, and thank you for joining us. Yesterday, I returned from a very productive trip to Asia, where I visited a number of technology partners as well as a few large global electronics companies. I must say that there is a very strong excitement and interest in the wearable space everywhere I went.

As a reminder, Kopin provides critical components to our customers and partners in the wearable space. For example, our long-term partners, Vuzix and Recon Instruments, all use our optical modules in their wearable assets. We also develop concept systems with our critical components so as to enable our customers to enter the market faster. We find our concept systems are so well received, with having strong interest in actually [ph] licensing our concept systems.

Although we are very well versed in many aspects of wearable technologies, we're especially strong in display, optics, ASIC and noise-cancellation speech recognition technology. During our transformation, we're focused on these differentiable products, and we are very pleased with our progress. We now expect those products will be ready by the end of this year, on schedule for the big wearable wave expected to come in 2015. From various discussions with our partners, there's really no longer any doubt that the wearable market applications are going to be huge.

I would not go into detail in this call on all the optical and audio products that we're developing. It's suffice it to say that customers are actively working with us in defining these innovative products. However, I would like -- I would love to stress that greater [ph] progress is being made. Our transmissive CyberDisplay products, as I've stated earlier, do provide the tiniest and brightest optical modules for the wearable headsets in which size, weight and power consumptions are critical.

Since wearables are going to be used extensively in outdoor environment, high brightness from the display is very important. Our CyberDisplay provides the best combination of this design feature. The superiority of our products will become very evident in 2015 as our customers start introducing their devices. We expect to see a substantial revenue growth in 2015.

I also would like to express our appreciation about the new $9 million order for one of our key partners in thermal weapon sight systems. This order is for 9 months starting in July, and we have raised our revenue guidance for the second half of this year. There are also 2 additional options, and if they are fully exercised, the order will be increased to $13 million, with shipment extended through the middle of next year. This order was not expected as the customer was using another display. However, because of some quality issues discovered with the other display, our record and well-proven display is the superior choice.

With the new order, we have shipped more than 200,000 TWS optical modules with about $300 million of revenue to Kopin. We believe our market share of the current generation of the installed TWS systems is well over 90%. Here, I would like to point out that Kopin is not only strong in innovation, but also has a very good reputation in quality and on-time delivery of manufactured products.

Now it's time to discuss our IP position. Kopin has been in wearable space for very early, initially for defense applications. We now have more than 200 patents -- 250 patents and patents pending in the wearable. Just in 2014, we have filed 43 patents with 12 granted patents. We will continue our active IP filing in this emerging category.

In summary, our transformation is progressing very well. We have increased our revenue guidance for the second half of this year. Our very differentiable products are getting ready, and we have a quiet -- we have quite a few exciting customers and partners coming out with great products. We expect our revenue in wearables to ramp up in 2015, and our cash position will remain strong. Our future is bright.

We look forward to providing additional updates as they develop throughout the second half of this year. With that, I will now turn the call over to Richard for the quarter's financial results and guidance. Richard?

Richard A. Sneider

Thank you, John. Beginning with our results for the quarter, total revenues for the second quarter of 2014 were $6.9 million compared with $6.1 million for the second quarter of 2013. Revenues from the sales of products for wearable applications increased approximately 100% in the second quarter of 2014 as compared with the same period in 2013. The second quarter 2014 revenues from the sales of products for wearable applications was $1.5 million compared to $800,000 in Q2 of 2013.

In the second quarter of 2014, R&D revenues were approximately $2 million as compared to $500,000 in Q2 of 2013. The increase was driven by funded programs with commercial customers for the development of wearable products. In addition, as we previously discussed, we expect revenues from the sale of products for military applications to be stronger than the second half of 2014 as a result of recent orders.

Before we go into operating expense, it is important to remember that our expense structure is not tied to the current quarterly revenues or fiscal revenue projections but to our longer-term goals. Cost of goods sold for the second quarter was 84.7% of product revenues compared with 110.6% for the second quarter of last year. The improvement in gross margin reflects a higher percentage of our sales being driven by the higher-margin products.

R&D expense in the second quarter of 2014 was $5.1 million compared with $3.7 million for the second quarter of 2013. The increase reflects an increase in costs to develop our wearable and military technologies. SG&A expenses were $4.9 million in both the second quarter of 2014 and '13.

Other income and expense was an expense of approximately $1.6 million for the second quarter of 2014 as compared with income of $0.9 million for the same quarter of 2013. Included in the $1.6 million expense is an impairment charge for the write-down of an equity investment of $1.3 million related to our wearables -- excuse me, related to an equity investment unrelated to our wearable strategy, and this was a noncash write-off. In addition, we've recorded foreign exchange losses of $0.7 million for the second quarter of 2014 as compared to foreign exchange gains of $0.4 million for the same period in 2013.

Turning to the bottom line. Our net loss for the quarter was $8.8 million or $0.14 per fully diluted share as compared with the loss of $7.9 million or $0.13 per share for the second quarter of 2013. For the 6 months ended June 28, 2014, cash used in operating activities was approximately $13 million. Second quarter amounts for depreciation, amortization and stock compensation expense as well as CapEx and share repurchase amounts are included in the tables attached to the Q2 press release.

Now for our guidance. For the full year 2014, we have increased our revenue guidance in the range of $24 million to $28 million, up from the prior range of $18 million to $22 million for the year. This is due to our recently announced order for thermal weapon sight components of $9 million. Of the $9 million, only $6 million will be shipped in this year. Our guidance for consolidated net loss remains in the range of $32 million to $40 million. We estimate we will use between $28 million and $32 million to fund operations for 2014.

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

John C. C. Fan

Thank you, Richard. I just want to reiterate that we believe the market continues to validate our strategy, and the inroads we're making with partners will begin to show in our performance towards the end of 2014 and into 2015. We are clearly in the right place at the right time. Our business model should position us for rapid growth and provide us with higher gross margin products. We look forward to reporting exciting developments on the future calls.

And now operator, please open the line for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Matt Robison with Wunderlich.

Matthew S. Robison - Wunderlich Securities Inc., Research Division

I guess the first question I have for you, John, is it sounds like you're getting maybe inside a 5- to 6-month window towards some equipment that you can talk about in more specifics. Are we -- should we think that, that time frame early next year is being customer prototypes or kind of products that might actually be sold by the customers?

John C. C. Fan

Matthew, it's John Fan. I think that your question is talking about our customers coming out with products next year. They will not be prototypes. Many of them -- quite a few of them will be real products, and I think they will sell well.

Matthew S. Robison - Wunderlich Securities Inc., Research Division

Okay. And on the -- maybe, Rich, for you. On the R&D revenue and the expenses, how should we model the repeatability of that big uptick in R&D revenue? Is that going to -- is that just a one-quarter phenomenon? And I guess the same question about the expenses.

Richard A. Sneider

No. I mean, I think that the second half of the year will mirror in some respects the first half of the year as far as total revenue. I just don't know whether it's going to be Q3 or Q4, honestly, at this point. We earn it based upon deliveries and achieving certain milestones. So we feel confident that we'll get it done in the year, but again, it's always a question of whether it's -- which quarter.

Matthew S. Robison - Wunderlich Securities Inc., Research Division

I see. So maybe we look at it as being towards the back half -- sorry, the fourth quarter after maybe a little less in the third quarter. Is that maybe a reasonable way to look at it?

Richard A. Sneider

Honestly, it's all dependent on how the engineers do achieving milestones. So with no other information, I'd say it's 50-50 between third and fourth.

Matthew S. Robison - Wunderlich Securities Inc., Research Division

And is it pretty much just military? Or are you getting NRE for commercial applications in that line of revenue?

Richard A. Sneider

It's commercial driving it.

John C. C. Fan

It's all commercial, not military, yes.

Matthew S. Robison - Wunderlich Securities Inc., Research Division

Okay. Great. And on the expenses, is this kind of the run rate now?

Richard A. Sneider

Yes, it's in that range. It's been running about $5 million a quarter.

Operator

Our next question comes from the line of Rajvindra Gill with Needham & Company.

Joshua Buchalter

This is Josh Buchalter in for Raji. Could you give us -- I think this might have been touched on, but can you give us an insight into gross margins? They've been pretty volatile. And how should we think about modeling that? I don't know if the last question was just on OpEx or gross margins.

Richard A. Sneider

Yes, the gross margins have been improving because as we articulated the strategy back last year, 2013, we're moving away from some of the lower-end consumer products to the higher margins. So if you look at it, industrial products are up. The wearable products are up. In the second half, we expect the military products to be up. So those are higher gross margins than maybe some of the legacy stuff that we said that we're going to move out of. So the gross margin should be improving. But ultimately, to get really significant gross margins, it's the volume because we obviously are a fixed cost structure. So you're talking about a few percentage points here and there, but there won't be significant improvements till next year when we get the volume to really pick up.

John C. C. Fan

Yes, at the current situation, we expect wearable will continue to ramp up quickly in 2015.

Joshua Buchalter

Yes. All right. And then on wearables, could you maybe speak to some general trends you're seeing in the space and how Pupil displays being received? That's it for me.

John C. C. Fan

Yes, I mean, I just -- obviously, I just came back from the Asia trip. It was actually a quite extended trip. I went to quite a few countries. And overall, the response is actually much better than even we anticipated. Looks like almost every company, electronic companies or smartphone companies, are organizing for wearable. And the reason is actually quite interesting. I did not bring the script today, but what is happening is that people now believe the smartphone -- although smartphones are very good, but they will probably begin to be located in the bag or the suitcase or the briefcase. And then many of the functions of smartphone will be broken up into wearables specifically for certain applications. And it's true for every generation of computers, mainframe to mini computers to PC to smartphone, which is really a small computer. They think functions are going to be breaking up. So this is a huge change, and every company is lining up. They think this is happening. It cannot be stopped. And they also recognize Kopin is well in the lead because we've been there for so long since military days, and we have products which are very differentiable. So I came back very excited about it. Everything seems to be lining up for us now.

Operator

Our next question comes from the line of Beth Lilly with GAMCO.

Elizabeth Murphy Lilly - Gabelli Fund, LDC

I wanted to just get a little more granularity into as you talk about the end of 2014 launching products, are we -- can you talk about kind of what that will look like in terms of trade shows? Will we start to see those at trade shows, or is this going to be end-of-the-year launching? I mean, give us some visibility into the pipeline.

John C. C. Fan

The -- it's a good question. I think, of course, I want to make it clear that we do not make the final device product. Our customers do. We make component -- critical components, such as the optical engines, audio engines. So our plan is to launch this product. Certainly, you will see that in the CES show. And our customers, many of -- some of our customers will also launch their devices around that time. So I think it is going to be located towards the CES show, which is January next year. So we are talking about maybe 5 months away.

Elizabeth Murphy Lilly - Gabelli Fund, LDC

Okay. And then from there, will we start to see your revenues ramp up pretty quickly on the wearable side?

John C. C. Fan

As Rich talked about, our wearable revenue already started ramping up, but I think you will see a much faster uptick in 2015 once the partners release.

Elizabeth Murphy Lilly - Gabelli Fund, LDC

Yes. Okay, and the other question I want to ask is in terms of your financial model, if we go out to 2016, 2017, is that when -- is that kind of what you're targeting to be breakeven period, or will you get there quicker?

Richard A. Sneider

We haven't given any guidance for '15 or '16 at this point in time.

Operator

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

John C. C. Fan

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

Operator

Thank you. This concludes today's teleconference. You may disconnect your lines at this time, and thank you for your participation.

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