2Q06 Conference Call Transcript

Microvision Conference Call 2Q06

Jeff Wilson, CFO: Introductions. Tokman, Brown, McIntyre, Madhavan, Willey. Forward looking statements disclaimer.

Alexander Tokman, CEO: Good afternoon, thanks for joining us, we’re glad to have you on the call. We’re going to break this session into 5 subsections: financial, updates on our new business strategy focused around IPM on the execution around this strategy, discussion of product updates, Flic & Nomad, jump onto organizational and board updates and then the second half, and finish with Q&A.

Wilson: [Financial update from press release.] $1.7M raised in Q3 from over allotment from recent financing.

Tokman: Let me start by saying that the first half characterized as a period of tremendous change of the organization, very encouraged by what we have accomplished in the first half despite all the monumental changes in the organization, such as implementing new strategy, new executive team, new management team, new board of directors, move to a new location, implementing new processes not previously available at Microvision. Our report card for the first half of the year is solid, and despite some revenue challenges, we’ve met most of the objectives that were articulated in February of this year. We’ve completed largest finance transaction in company’s history, raising $27.1M despite difficult capital markets. Allow us to focus on executing the strategy instead of being distracted quarter to quarter cash needs.

It’s important to understand that we hit our first half operating loss targets by rigorous management of expenses despite lower than planned first half revenue.

Our strategy revolves around the Integrated Photonics Module or IPM. We’ve allocated a large percentage of critical engineering resources to accelerate the heads-up display and embedded miniature projection display programs that are essentially at the core of our high volume product development and commercialization strategy.

As a direct result of this investment, we have developed several new IPM designs, that could substantially reduce the form factor and power consumption requirements that are critical success factors for consumer applications. We entered into development and funding agreement with a third party Laser OEM, the primary objective is to assert greater control in the development of improved green solid state lasers that would be tailored to our embedded modules targeting consumer applications.

We also secured a $900k Air Force contract, and began the definition and design effort for Color Eyewear application. On the product side, we made significant gains revitalizing the Flic product line. In February I told you that we have a nice business case for Flic, but we lacked quality and capacity. We’ve increased Flic revenue by 55% versus the same period last year. We’ve added enhanced connectivity for the very important mobility segment, targeting this segment second half of the year. Reduced Flic quality related costs by 15%. We’ve improved product and transactional quality, done some serious assessments. Lean initiatives, simplification, improve transactional quality. Executing on several projects that will cut order to fulfillment cycle from 40 days to 8 days, which represents significant gains.

On Nomad side, we’ve made a decision on long term viability of Nomad. We have concluded that although there is a demand for see-through heads-up display applications in several market segments, the current product’s ergonomics and cost structure are inhibitive to the existing segments growth and acceptance in the commercial segments. As a result we have taken steps in recent weeks to dramatically reduce expenditures for Nomad in its current configuration.

We’re establishing requirements for IPM-based color eyewear product. Existing customers will receive support as needed on a timely basis.

Let me jump into Organizational and Board updates. We executed restructuring and reorganization of the company. We’ve reconstituted BoD with three new members, with extensive experience in the areas that we need that would be very synergetic with our strategic roadmap with IPM. Skills we’re looking at include strong supply chain and operations experience, broad technology development, and financial background, Marc Onetto, Jeanette Horan, Brian Turner.

We’ve realigned marketing, sales, R&D and supply chain organization while reducing SG&A expenses by 25%. We cut the executive team size by 30%. We hired a new VP of Research & Product Development to expedite the rollout of our product development discipline. In the first half of this year, we assembled a brand new executive team. New CEO (myself), new CFO, new VP of marketing & sales Ian, new VP of strategic marketing, new VP of Asia, new head of R&D. Wayne Evans, head of HR, has made tremendous impact in a relatively short time rolling out new initiatives.

We also provided incentive to all employees by reallocating a large share of salary bonus and option pool to under VP level. Reset employee stock options and moved employee stock pool to under VP level. New validation and goal setting process for all employees that are focused and predicated on accountability and performance. We changed address to Redmond with minimal disruption to operations.

Looking to the second half -- I’m very excited about the second half. A lot of changes have been implemented in the first half to give us runway to execute in second half. Looking forward, Flic is expected to have a good second half. Our target is still to have at least 2x growth on Flic product line. On government NRE, our government strategy is expected to come to full fruition in Q3. On commercial NRE side, the first half on 2006 was focused heavily on developing a new sustainable contract revenue funnel that is consistent with our new IPM strategy that we implemented earlier this year. These efforts are expected to yield development agreements during the second half of 2006 that will lead to commercialization of high volume HUD and Picoprojector applications, that’s the goal.

We’re targeting achieving our goal of 30% burn rate reduction, dependent on achieving revenue goals and aggressive cost management. Reducing SGA by 25%. In terms of strategy, our goals are reduce burn rate and accelerating IPM product roadmap. When the time comes, any opportunities to accelerate our time to market, we will pursue very heavily and aggressively. We’re going to fund effort to accelerate the development of solid state green laser. With this, I’m going to open for questions now.


John Shilner, Knott Partners: What was the total cash burn for quarter and six month period? Alik, you expressed excitement over potential contracts for second half of this year. What are the chances for significant ramping of the contract revenue stream?

Tokman: We have several factors that are playing in our hand. There’s three things: We have strong market pull for both Picoprojection and Automotive HUD applications. As a result, we have not just an interest from the Tier1 integrators and third party OEMs, we have a strong desire to bring these markets ASAP, this desire is on our side, we have two typical barriers that need to be overcome. We are in the process of negotiating with several Tier1 OEMs to determine what exactly that path to commercialization will look like. That is why development of these agreements takes time. We are targeting specifically phased development efforts that should lead to commercialization of high volume products. As a result, once you start looking several years ahead, you need to outline all the important milestones; who’s going to do what, who’s going to carry the cost for various development and manufacturing activities. We are essentially in good position to have good announcements in 3rd quarter this year, to kickoff at least the first major efforts. We are on track in our estimation. The devil is in the details, and we’re rapidly closing on these details.

Wilson: $7.5M burn for Q2.

John: In terms of HUD with Tier1 auto suppliers?

Tokman: We are in detailed development stages with several Tier 1 integrators and the goal is to have first major announcement and commencement of the execution of HUD development in the 3rd quarter.

Art Taglione, Merrill Lynch: Good afternoon gentlemen, can you add any color -- the SG&A looks like it’s increased, can you talk about the notes outstanding and what your plans are concerning those notes?

Wilson: On SG&A there’s severance costs, and FASB 123 non-cash compensation costs, when you adjust for those costs, we’re actually down about $1/2M on SG&A through first half of the year, expecting to be down in the second half. On the notes, we’ve made the first two payments this year in cash, the next payment is due in middle of September. March and September payments combined are $3.1M.

Art: Any other visibility regarding forecasting revenue for PicoP and HUD?

Tokman: Once the agreement is established with an OEM and Tier1 integrator, it’s going to have contract value, as I mentioned, we have several developments in progress. They have slightly different contracts, different goals, and different contract values. The goal is to kick off and commence at least one of these efforts within this quarter.

Bill Despard, Smith Barney: Hi gentlemen, I noticed a new thing that cropped up, you talk about Aero in the HUD, could you comment on what kind of interest you’re seeing there?

Tokman: We obviously are looking for opportunities that have largest products between the volume and the margins. Aero HUD, we validated the business case and we were pleasantly surprised by the margins that you could gain by entering into this specific market space. We have strong interest from one of the prime integrators in developing Aero HUD. We’re in process of negotiations to establish goals and deliverables. From the market standpoint, it’s smaller market than Auto HUD, small business jets are underserved and do not have this HUD capability and its synergetic with our automotive HUD development activities. We are considering it seriously and we are fleshing out details on what it will take to bring the product to market.

Bill: Going back to general interest in OEM contracts, are the development contracts going to be along the lines of Ethicon?

Tokman: This is an excellent question. The goal is similar to what Ethicon offered, the amount of contract is dependent on the country of origin, where the OEM is located. There different practices in developing technology in Japan, Korea, or United States. Goal is to get to commercialization. Most of these contracts will be structured in phased development efforts. We’ll go through specific development milestones, a development contract followed by productization contracts that leads to commercialization. As we develop these agreements we are forcing our prospective customers to think commercialization rather than one time prototype delivery.

Bill: In looking at these contracts, would you say these are in advanced stages of discussion?

Tokman: I would say yes, they are in advanced stages. One of the things everybody has to remember is there is a trade off between the investment someone makes and the amount of exclusivity. Our job is not to limit our market to specific OEMs, or specific regions around the world. Our goal is to have a full global introduction not limited by regions or exclusivity agreements. Within this environment, we are trying to optimize what is the right ratio between exclusivity vs. upfront revenue vs. eventual product sales. We are looking at all three sides of this equation to determine the optimal overall scenario.

Bill: One more question, the green laser? Can you reiterate a little more on how much control and is this now just an engineering project, instead of science?

Tokman: The goal of recent development agreement that we initiated with the third party OEM is basically, to optimize solid state green laser for consumer applications. Today’s green lasers have been targeted for rear projection television industry, which has 90% synergy with what we need, however the form factor and power constraints are not as eminent in the rear projection television industry as it is for cell phone embedded application. So this effort was designed with the goal to optimize this solid state green laser in terms of power consumption and form factor. There has been tremendous progress over the past year. We’re very happy with the progress. We decided not to sit on the sidelines; we decided to take more active control.

Ben Averch: I just wanted to basically follow up on Bill’s question about the green laser. In terms of the timelines and oversight that you guys have to get the prototype device and evaluating that, are we still on track for product introduction in 2008 based on the availability of this component?

Tokman: We are improving our chances by actively getting engaged in the definition and development of this, so it’s consistent with all the requirements. Keep in mind; we’re navigating in a rapidly changing marketplace. Motorola just recently announced their earnings, and they grew more than any other handset provider, based on their new RAZR model, which is predicated on having the thinnest phone around. This sets specific requirements on any embedded engine that will go inside the cell phone. As we’re learning this and acquiring this information, we’re reacting to it, rather than waiting on the sidelines for something to happen naturally. We’re developing several very interesting and promising designs of IPM that would yield a very, very small form factor that would allow you to place the IPM inside a handset such as a Motorola cell phone. This is an example of how as requirements evolve, we are proactively addressing them and reacting to them.

McIntyre: I would just add that we’re making a great effort to put a supply chain in place that includes multiple suppliers. We’re encouraged there will be multiple suppliers of the green laser component. And that goes along with what Alik said that we’re taking our destiny in our own hands to ensure that we’re well positioned to be a supplier to our partners for these high volume applications.

Ron Sparks: How far off is any commercial products as far as having all the tools you need to make it and market it. You’re selling some Flics, you’re putting Nomad on hold, and you’re waiting on a green laser that works well…?

Tokman: No, actually, this is one of the changes that we’re pursuing starting this year. We are not waiting for contracts, we not waiting for external funding. We know where we want to go. We are investing heavily internally to put necessary resources in place to accelerate IPM development, this will be an engine to enable Auto HUD, Aero HUD, embedded projection display, potential accessory projection display, and Color Eyewear. We’re not waiting for anything, we’re actually proceeding. We’re waiting for development agreements in place but it doesn’t slow us down on our own development. We’re improving our position going forward.

The work is progressing and we’ve made tremendous strides in improving our focus, last year we were spread across 30 different projects. In the first half of this year, we’ve wrapped up all the legacy activities and now are focused on vital few opportunities to get us to market first, most of them except for Flic, are based on IPM engine.

Wilson: Thanks everyone for joining us on the call.

Tokman: We’re looking forward to speaking with you in three months, we expect to have progress versus today, and hopefully going to hear some good news coming first.