Microvision 3Q 2006 Conference Call Transcript

Microvision 3Q 2006 Earnings Conference Call Transcript.
MVIS Blog is not responsible for transcription errors or omissions.

Jeff Wilson, CFO: I'd like to welcome everyone to Microvision's third quarter 2006 financial results conference call. Participants on today's call include Alexander Tokman, President and Chief Executive Officer, and Todd McIntyre, Senior Vice President, Global Strategic Marketing and Business Development. The information in today's conference call includes forward looking statements, including statements regarding projections of future operations, product applications, development and production, future benefits of contractual arrangements, growth in demand, as well as statements containing words like believe, estimate, expect, anticipate, target, plan, will, could, would, and other similar expressions. These statements are not guarantees of future performance. Actual results could differ materially from the 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 included in our most recent Annual Report on Form 10-K filed with the Securities and Exchange Commission under the heading 'Risk factors related to the company's business,' and our other reports filed with the Comission from time to time. Except as expressly required by 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 other reasons.

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

Alexander Tokman, CEO: Thank you, Jeff. Thank you everyone for joining us today, it's an exciting time to be at Microvision. We're completing some key milestones that the company set early this year, and what's even better is that we're hitting them on all cylinders. Since the team has been formed at the end of the second quarter, and we completed formation of our board. There are five things that put a smile on my face these days. These include specifically, the first one, we're making tremendous progress on the roadmap; on proliferating our technology and business roadmap related to Integrated Photonics Module. As a result, we have completed several promising engineering designs that have the size of a small matchbox or smaller that could yield a solution to be embedded in a variety of handsets and other video output devices.

Secondly, we're receiving external validation from our partners. As you know, we have signed several strategic deals that accelerate consumer and automotive products to market. We're going to discuss these in a moment.

Number three, we're trying to do everything we can to maintain and increase the gap between us and the competition. As a result, we're entering into various strategic collaborations to maintain an increased technology gap. Fraunhofer is one of the examples.

Number four, we're streamlining the operations and managing our business to reduce operating costs continuously. Every week we look for opportunities and are implementing solutions to reduce the operating costs, while maintaining our primary focus of progressing the IPM roadmap, and that will lead to the creation of new markets and new products.

Finally, number 5, we actually started making our customers happy. This is a significant turnaround from last year, and from the first half of this year. We made very visible improvements in our product, specifically the bar code scanner, and the testimonials we get today are 180 degrees apart from what we received last year.

With this, let me focus briefly on Q3 and year-to-date operating results. Our operating results for 3rd quarter and year-to-date include several milestones that will allow us to accelerate our roadmap and commercialization of high-volume products based on the company's IPM module. These milestones include several strategic development contracts with world-leading partners that again, contribute to our goal, accelerating our time-to-market. These contracts also have contributed to rebuilding our revenue backlog for the fourth quarter and beyond. Some of the more notable accomplishments include the following:

We entered into agreement with major global Tier 1 automotive supplier to develop commercial scanned-beam heads-up display for automotive applications; we also entered into a joint development agreement with large Asian consumer electronics manufacturer to develop high-volume design for manufacturing of our proprietary IPM, which is essentially a tiny engine suitable for a variety of display applications. Potential applications as you know, for this platform include cell phone embedded tiny projection displays, ultra-miniature accessory projection displays, as well as the personal Color Eyewear and again, automotive heads-up displays. We were also awarded an almost $6M contract by General Dynamics to develop and deliver full-color, daylight-readable, see-through helmet-mounted displays for US Army. The significant accomplishments of this effort also include the fact that this effort serves strategic need for us and is consistent with the development of IPM and personal Color Eyewear applications.

On product side, we released several connectivity bundles for Flic, which is our laser bar code scanner, to provide cost-effective solutions for the growing mobility market. The software products will allow users of Flic to capture bar codes directly into a variety of business and consumer applications, based on Windows Mobile and Blackberry operating systems.

Finally, we announced a strategic development with Fraunhofer Institute of Photonic Microsystems. This augments our leading position in the MEMS space, and I believe it increases our gap versus the rest of the world. With this, I'm going to stop and I'm going to move on to financial results, and Jeff is going to present those.

Jeff Wilson: [Financial update from 3Q 2006 earnings press release]


Jeff Miller, JMG Capital: Hi guys, great news on the new OEM in Asia, I just have one question on the Lumera stock. It seems like the price has been skyrocketing over the last couple weeks. Correct me if I'm wrong, is there $5M on the notes that LMRA is pledged as collateral to, and if so, does it make sense to sell some of those shares now and lock in a pretty good price?

Jeff Wilson: The face value on the notes is $5.8M. They're due on December 15, and March 15 of next year. There is no provision in the notes for early payment of the notes and the shares are held as collateral and right now we can not sell them.

Jeff Miller: So there's no way you could go back to the noteholders and sell the stock and put it in an escrow account?

Jeff Wilson: We're in regular discussions with the noteholders, but right now there's no provision in the notes for that.

Jeff Miller: OK, thank you.

John Schneller, Knott Partners: Hi, and congratulations on the CM announcement today, that's great news. I was wondering if you could elaborate on what the nuts and bolts are of that agreement and what does this specific contract manufacturer bring to the table, is it that they now will lend OEMs a level of confidence that you guys can produce high-capacity, high-output, high-quality Integrated Photonics Modules to be put in handsets?

Alexander Tokman: That's a good question, John. You're right, that's one of the answers. Credibility is the second necessary component in addition to having a disruptive technology to create new markets, and this announcement gives us additional credibility and makes negotiations with OEMs a lot of easier, because we have an arm behind us that has expertise in producing high-volume products and taking them to market. Why this agreement has been announced in the third name? It's a common practice to establish competitive advantage. Typically, large businesses looking for exciting growth opportunities, do not disclose their intention until they feel that sufficient progress has been made and they're ready to communicate their strategy and go-to-market plan to their customers and shareholders and that's one of the reasons why this is in the third name, based on their request. We, however, attempt to balance this and our partner's interest with our need to keep you informed on our progress. We anticipate that as things progress, more communication and information will come available from our partners, and ourselves.

John Schneller: Would it be fair to ask, who will bear the brunt of the upfront capital costs, the tooling costs, manufacturing line, that kind of thing?

Alexander Tokman: Even though we haven't disclosed any details of the agreement, this agreement is structured such that we can help in terms of reducing our investment, and the investment gets picked up by our manufacturing partner.

Joel from MDB Capital: Alik and Jeff, looks like there's a lot of progress being made. I have a number of questions. Jeff, the issue of the restricted stock that's pledged as collateral on the notes, does that prevent you from marking the value to the current price on the books?

Jeff Wilson: We mark that as an unrealized gain on the books. It doesn't show up on the income statement. It'll be in the comprehensive income statement.
Joel: But it's not on the balance sheet, obviously.

Jeff Wilson: No.

Joel: Alik, you're putting together the right structure for moving the company forward. Obviously, the critical component here is not only the distribution and manufacturing, the footprint that you're working towards in the IPM; I guess my question is, can you give us an update on the actual engineering designs, and the progress of the team to perfect the new footprint? You say you have five designs, which is encouraging. Are they in operational mode, when can you demonstrate the new form factors in actual color operation. Any thoughts?

Alexander Tokman: Joel, we have several promising designs, and one of the reasons we entered into strategic agreement with world-renowned CDM is to ensure the design meets not only our performance criteria, but also the cost and reliability. The latter two components are not something that has been traditionally Microvision's core expertise and that's the reason we're relying on partners to help us to get there faster.

Joel: And obviously, this new partner will help in that regard. But, technologically, do you see any issues now as far as realizing the goal of providing an operational prototype of the new form factor?

Alex: Our progress has been steady and positive throughout the last few months, and all our efforts are focused on CES in January of next year. We expect through this development, through development with our laser manufacturing partner, to produce next generation of Integrated Photonics Module display engine that we can discuss and show, and communicate to the world. So the important milestone will be January of next year when we expect to have a good showing at the Consumer Electronics Show.

Joel: Well, we'll look forward to that, that sounds very exciting! Just a couple of other quick issues, any color on discussions with potential large mobile handset companies that might be interested in integrating the forthcoming IPM?

Alex: Yes, most of the top five world-leading manufacturers of cell phones are interested in what we have to offer, and we're in discussions with a large percentage of these players.

Joel: So it's probably reasonable to conclude we may see some developments either prior to, or maybe at CES, or shortly thereafter with some of these discussions?

Alex: I don't want to provide any guidance on this, because as you know there's a lot of factors that we can't control that determine the ultimate date, but what I can tell you is that we continue to work diligently, we have very solid progress every week. As I mentioned to you, having disruptive technology is not sufficient to be successful in this world; you have to have credibility, and we've been building credibility all year. Building blocks include clear strategy, solid execution, new team, solid financing strategy, and now additional validation, the agreement with this large Asian CDM. So all the blocks are getting put in place, and we expect progress.

Joel: Well, it certainly seems that you're tacking it out on many different fronts, and we'll look forward to seeing continued progress. Thank you very much, gentlemen.

Joe Dubrof, Morgan Stanley: Hi, good afternoon. It's my understanding that a lot of this technology is dependent on the green laser that you have contracted for development with an outside firm. Can you give us any idea on the progress that you guys are making towards the miniaturization of green laser?

Alex: Since we signed the agreement with the laser manufacturer, we put together a cross-functional, cross-business program team in place. We're monitoring progress on a weekly basis. So far the progress is to our target, we feel good about what we've achieved so far, and completion of this program is one of the enablers to have a successful CES.

Joe: So you obviously are expecting the completion of this program sometime between here and January.

Alex: That's the target. And, one important caveat: This is only one of the three green laser manufacturers that we've been actively working with.

Joe: Great. Thanks! Keep up the good work on the progress.

Gil Fasenek, Stern Financial Services: I was wondering if you could comment about Ethicon Endo-Surgery. We haven't heard anything about that project. Is it dead, is anything going on there? Thank you.

Alex: We completed our deliverables, our technical and programmatic deliverables for Phase I of the Ethicon project. We delivered the prototypes, currently Ethicon is taking time to develop a business case and probe their go-to-market strategy before they come back to us and tell us what the next steps are.

Art, Merrill Lynch: Good afternoon, Alik and congratulations on this news! Most of my questions were asked, and I appreciated your answers on them. Can you detail out what we can expect going forward in terms of some future milestones you hope to be able to hit?

Alex: I'm going to try to answer this question without giving too much guidance; our legal guy is looking at me right now [Laughter]. All I can tell you is, you're going to see positive progress starting in the fourth quarter, and going into 2007. Each of these milestones will be building blocks on our path to become, hopefully, a technology juggernaut in a few years. And each one of these milestones, and each announcement that you will hear will be very synergetic with our ultimate goal, and our ultimate goal is very simple: to accelerate our roadmap to commercial introduction of high-volume products, while maintaining and reducing our operating costs. So everything we're going to do is going to be focused on this objective, and everything you're going to hear from us going forward -- and you're going to hear some good news within this quarter, and then first quarter of next year, that will help build the value of the company, and make all of you as excited as we are internally.

Art: Excellent, thank you very much.

Larry: Alex, I disagree with the previous questioners, I think the most important factor is money. Let's assume for a moment that you felt the outlook for Lumera was sufficiently good that you wouldn't want to sell the stock. What about raising some more money with some of your partners, or some legitimate, honest, non-scuzbag financiers, who might want to be interested in the product from the long-term?

Alex: Larry, tell us what you really think [Laughter]. This is a fair question. I can tell you, in the first half when we developed a new business strategy and business plan, we also developed a new financing strategy, that is consistent with the business strategy to ensure long-term success for the company. As a result, we're continuously reviewing and assessing all of our available financing options -- and some of them include everything that you just mentioned. In terms of operating cash burn, we are always and we will be always concerned about the burn rate. And as I mentioned to you earlier, we're continuously looking for opportunities and implementing solutions, real-time, which is something that you can not see yet, to reduce operating cost while focusing again on our primary goal of progressing the IPM roadmap that leads to the creation of new markets and new products.

Jeff Wilson: On the last financing that we did, one of our goals was to bring in some high quality institutional investors, and I think we succeeded in doing that. So, we have been bringing up the investor base.

Larry: I heard you on reducing operating costs, but I didn't hear you on where you're going to get your next money. You've got the sale of Lumera, which would retire your debt, and that could be as early as March 2007. But for continuing operations, I'm most interested in what sort of sound, fundamental, interested investors you can get. People who care about the business more than about themselves.

Alex: Larry, the whole premise of our strategy is to bring fundamental institutional investors to the table. This is why we're cleaning the balance sheet, this is why we're hitting on the milestones, this is why we're building credibility. There's not a lot of ways to bring fundamental investors but to say what you're going to do and then to do it. You just have to be patient and wait to see when good news comes.

John Schneller, Knott Partners: Hi -- hopefully I'm in the category of legitimate institutional investors -- for the gentleman who asked that question before. [Laughter.] I have a question on the power consumption requirement of the IPM. I think the goal was to get to 1 1/2 watts, is that correct?

Alex: We're consistently given the message that 1 ½ W and below is what you need to be successful in the cell phone market.

John: In terms of where you would be sometime mid-07, do you feel comfortable that you can get there, or are you already there?

Alex: John, we set these targets and we're executing upon these targets. Having a design that gives you the right level of performance but doesn't meet size, power and cost would be a failure – and this is one of the reasons why we entered into agreement with consumer electronics manufacturer. We're going to continue on this path, and you're going to see more positive announcements from us to ensure that what we have next year is going to meet the most stringent requirements imposed on us by cell phone manufacturers.

John: In terms of the green laser, I would assume that the three companies that are racing towards their goals, the assumption is that they can make it. Is it a question that they can't get the cost down to effectively mass market it?

Alex: They're concerned about three things: size, power and cost. Based on the progress we've seen, they've made, the size has been addressed, the power has been addressed, the cost obvisouly is going to be a function of the business case and right now they're very excited about our specific business case. Recall that green lasers were initiated based on the pull from rear-projection television industry. Now all three manufacturers realize that Microvision's applications dwarf in numbers the RPTV prospective market and they're very excited about being part of our solution. So this gives them additional incentive to focus on smaller, lower power version, and more cost effective to be part of the cell phone.

John: Great. Thank you.And just one other comment on the financing front for the gentleman, if he's still on the phone, I would offer that the company's management has been very generous with their time with a number of Wall Street institutions to make some time to get in front of them. So they're definitely talking to quality institutions.

Joe, MDB Capital: Alik and Jeff, from a housecleaning perspective, encouraged by SG&A expenses declining, R&D is up a little bit, but considering the major role it's playing in getting IPM out, I don't see a major problem there. Going forward, do you expect to see similar op expenses into the 4th quarter, and secondly, of the $6.8M backlog, is there any guidance or color you could give us as to how the topline dynamics are going to play out in the 4th quarter? Thanks.

Jeff Wilson: Revenue for the 4th quarter, we've given guidance for the year. So I think if you take a look at that with where we're at now, that gives you some feel for where we're thinking we're going to be for the 4th quarter. On the expense front, one of the nuances that we have, our total pool of R&D expenses, those people work on revenue projects and internally funded projects. So you almost have to take cost of contract revenue, cost of R&D, add them together to get total R&D spend. I expect us to be fairly consistent over time, some lumpiness but fairly consistent. I would not expect SG&A certainly not to go up over the next several quarters.

Alexander Tokman: Again, this is a pretty exciting time to be here, I hope you're going to feel this as much as we do. The third quarter of this year stands, in my opinion, as one of the most important quarters in the history of the company, because we've crossed several fundamental barriers to our long-term success -- and I believe the world is beginning to see the dividends of the turnaround strategy, and the hard work that the team put in place in the first half of this year.

The five things I was talking about, progressing on IPM roadmap, recieving external validation through the strategic contracts, maintaining technology lead and increasing the gap, streamlining the operations and managing the business to reduce costs, and finally, making our customers happy is again, what puts a smile on my face, and soon it will put a smile on your face.

Winning is contagious, and what pleases me the most is that not only we are delivering on key milestones, but it's the manner in which we're doing it. Since the team and board were formed at the end of Q2, we've been hitting on all cylinders. I can tell you honestly that the third quarter is when we start hitting on all cylinders, because in the second quarter we completed formation of the management team and the board.

Everyone feels urgency and feels ownership, and that's the biggest difference. I look forward to reporting more good news to you regarding our progress towards the ultimate goal of accelerating commercialization path to exciting high-volume products, and we'll continually look for opportunities, implementing solutions to reduce the operating costs. I think our goal is very clear, and what we're doing internally, there's a lot of lag between what you're going to see and what we've done internally but expect to see a lot more good news coming out of Microvision.


  1. Ben,

    Thank you for the transcript. I'm glad you didn't let that new "daytime job" of yours interfere with your full-time blogger duties!


  2. thx a lot for the transcript. in deed exiting times lay ahead of us. to be an employee of mvis must be even more thrilling. i really envy your job. :)



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