2006 Business Strategy Conference Call Notes

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Microvision Business Strategy Conference Call

Brian Heagler: Welcome, introductions. Alec Tokman, President and CEO, Steve Willey, President, Marketing and Sales for Asia, Todd McIntyre, Senior Vice President Global Strategic Marketing and Business Development, Jeff Wilson, VP of Finance. Forward looking statements disclaimer.

Tokman: Good morning everyone. We're going to break this discussion into two sections. Start with reviewing preliminary earnings, spend most of the time talking about what we're going to do going forward. Q4 2005 revenue $2.7M. Revenue decline due to Ethicon development. $400k expected to move into 2006. 4Q characterized by our improvement in our ability to ship our product. We had one of the best quarters for bar code scanners ever. We shipped 70% more bar code scanner shipments than ever before. $14.7M total revs in 2005, 37% greater than in 2004. Operating loss for the year has improved 10% if you exclude Lumera, primarily resulting from higher revenue. In terms of Ethicon, despite technical difficulties on some deliverables, we're in positive and active dialogue with the customer. We are targeting to achieve all deliverables in Q2 2006.

Elements put in place to spearhead 2006 and beyond. Portion of the 3rd quarter and most of the 4th quarter, we conducted comprehensive assesment of MVIS business strategy, operational performance, organizational effectiveness and culture. Identified several elements to put foundation in place to enable growth in 2006 and beyond. Specifically, one of the major shifts in our position moving forward. We're going to focus on proactive strategic marketing. This implies that wew want to know what is happening in market, what are addressable opportunities that we can hit. We're putting a team together to enable this. Our priority for 2006 to consist of 5 key points.

1. Grow revenue and margins on our existing products.
2. Our breakthrough technology has been the reason everyone has been excited about Microvision for many years. This year, we're going to look at all opportunities available in front of us, focus on top 3-4 opportunities to give us the most bang for the buck.
3. Reduce the burn rate. Put a plan in place to allow us to reduce net operating loss in 2006 by 30%. Quality, whether it's transactional quality, or product quality has huge impact on ability to grow. Our assesment in 2005 has shown us that we have area for improvements on product side, delivery side and ability to define the right product. Customer centricity will become hallmark for our initiative moving forward. Performed restructuring which will be executed in the next several months.

Spend time on each one of these specific priorities and provide some more detail.

1. Growing product revenue and margins. We are expecting a very good year for FLIC. In 2006, we expect to grow the revenue by a factor of two. Place mechanisms in place to improve the product's gross margin by at least 15 percentage points. Spurred by very good teamwork to develop new channels in mobility, healthcare, household and traditional markets. Efforts by R&D and Manufacturing to improve quality of the product and add necessary functionality on software and application side. Q4 2005 strongest bar code shipment quarter to date, 70% more units than any other quarter before. Expect further growth in 1Q 2006.

Nomad, many of you know that we rolled out Nomad, targeting auto segment initially. We baselined what has happened, looked at our go-to-market strategy, targeted segment selection wasn't as optimal as it should have been. As a result, at the end of 4Q05, we modified strategy to move away from feet-on-the-street, now targeting strategic accounts with opportunities for higher sales volume. We come in from the top of the organization, not from the bottom. Attain mgmt buy-in up front. Looking for 2-3 targeted applications. Once we understand what these applications are, we're working with customer through workflow to understand requirements of the product to enable these applications. Work with the customer to quantify value proposition of product in their business and what is the $$ value of ROI to end user. Develop more effective sales tools that will focus on specific market segment, specific workflow. Nomad is not solution to all, it has to be adapted to specific workflow.

On R&D side, conducted comprehensive survey of Nomad users. Identified improvements on performance and quality. Mid-2006, several design and product enhancements will be in place to enable future growth. All of these steps that we put in place, we will expect these will considerably help us by turning the volume up and improving contribution margin. In 2005, due to quality issues, gross margin on Nomad was negative. Place emphasis to turn that around and ensure that Nomad has positive contribution margin.

2. Focus on vital few OEM opportunities. Focus on largest opportunities. Automotive HUD, Personal projection display, PicoP, identifying opportunities for color eyewear for consumer and business space. Targeting an increase in R&D budget for these opportunities. Triple R&D budget for these products. Accelerate the development of modular architecture, Integrated Photonics Module, that we expect will enable exciting opportunities.

Automotive HUD. Our goal is to sign large Tier 1 OEM agreement this year. We strongly believe in merit of this product. Microvision's technology offers three key advantages that our competition can not meet. Higher contrast, order of magnitude better than anybody else's. Better visibility in demanding operating conditions. Our technology enables form factor half the size anyone else can manage. This is important as OEMs try to fit HUD into tight cabin spaces. Because of the nature of the technology, it reduces the overall cost of the installation due to unique ability to electronically align the image to different windshields. Put together cross-functional business, engineering, manufacturing and sourcing team that will spearhead this effort.

Items number 2 and 3 are the personal projection display and color eyewear. We all know that mobile devices have progressed to the point that high quality digital content can be stored, downloaded and consumed anywhere and anytime. As a result of these advances, the conventional miniature screen of a cell phone, PDA, iPod and other devices is quickly becoming a limiting factor in the consumer experience. The consumer electronics OEMs are beginning to recognize this shortcoming and are eager to resolve it and they're looking at us to help them resolve it. The next generation Picoprojector can help them resolve it.

PicoP, talking in two specific applications. One is embedded solution for general consumer. Alternative to carrying bulky projector for business and sales presentations. Showed PicoP at CES. Based on positive feedback, we commenced formal effort and now aggressively pursuing strategic OEMs in Asia, with the goal to sign at least one agreement in 2006.

Color eyewear. Next generation color eyewear will offer the alternative of wearing versus carrying this personal display. It's the ultimate goal for head worn displays. Before we attack any one of these exciting applications, we're going to do a lot of market analysis. Looking at three applications that have their own requirements from the product.

1. Transmissive color modality eyewear. Walk around with, surf the web, answer your phone messages, do some light business applications.
2. Occluded display for streaming media consumption.
3. Occluded wide field of view display for immersive gaming and simulator applications. Take the next three months to do a very rigorous review of these opportunities. Look at all strategic partners, place cross functional R&D, manufacturing and sourcing team to start accelerating this effort.

In terms of gov't contracts, continue strong relationship. In addition to delivering solutions to them, we are retiring major technology risks on MEMS-based technology products, to leverage development for other applications, including business and consumer.

Item 3 is burn rate reduction. We're targeting 30% reduction in net operating loss. Does not include impact of (FASB123R) accounting for stock options. We expect to get 30% reduction in burn rate primarily from 2 sources. We placed foundation in place to start addressing negative gross margin on products. Improve quality, reduce variable costs. Implemented processes in marketing and sales organizations to add some rigor in how we price and discount our prodcuts. The second factor to contribute to reduced operating loss is reduce operating costs. Restructuring to allow us to reduce costs.

4. Quality and customer satisfaction. Understand customer's assessment of Microvision. How do they view us, where do we need to improve. We have to improve in many areas to improve the confidence of our customers today. How we sell our products, how we support our products after we sell them, how we transact. Last year we formed a customer support team and created service engineering and customer support group to address issue escalation in the field. Support all users around the world. Concurrently, we focused the R&D team to address some of the product quality gaps in FLIC and Nomad. We believe that these measures will have significant impact on the external perception as well as our internal cost of quality in 2006. Will enable us to achieve reduction in burn rate of 30% in 2006.

5. Realignment. We will be totally externally focused rather than inside-out. Biggest impact in marketing and sales side. New Strategic Marketing group, will be headed by Todd McIntyre. To drive global platform strategy and focus on applications across all key customer segments worldwide. After we looked at the financials, we found out that we are totally US centric. If you look at the applications our exciting technology will enable, most robust markets are located outside of US. High tech markets are in Europe and Asia. W're going to place stronger business focus in Asia. Steve Willey, will assume role of President Marketing and Sales for Asia. Steve will continue to cultivate his strong ties to Asian market for consumer applications and will also drive contract and product revenue and margin in that region.

We had some inefficiencies in how sales and marketing teams had been cooperating in the past. Streamline activities in our go-to-market strategies in the Americas and Europe. Consolidate and improve focus. We just announced leader for this group, Ian Brown has been distinguished marketing and sales leader at GE Healthcare for many years, brought exciting nuclear medicine. Will be great addition to the team. Ian, Todd and Steve will spearhead marketing transformation to improve growth position and allow us to move into other segments.

Second biggest change in R&D organization. R&D is lifeblood of this organization. We hadn't had focus on R&D team. We will substantially reduce the number of R&D developments from over 30 to under 10. Focus on 5 primary ones, 2 or 3 lesser funded programs if necessary. Will institutionalize a cross functional product development, will be an essential element of our success. Manufacturing, sourcing and marketing will be involved at the onset of product definition before we scale to production. Will pay strong attention to product cost, quality and schedule requirements. If we ceate brilliant solution to address unmet need in the market but can not do it profitably, we will not do it. We will have accountability to date commitments. Meet the date commitment as well as quality and cost commitment. Strategic sourcing strategy, essential to move forward.

One of the important activities that is the development of the MVIS-inside Integrated Photonics Module. We don't know yet what is the first blockbuster application that will spearhead our rapid growth. We need to be more agile, more responsive. We need to think such that the architecture we define is modular enough, that we can adapt easily based on new market demands that could come at any time. Reorganizing R&D team to focus on systems engineering. We're going to spend the next couple of weeks reorganizing R&D team, this will serve as the foundation for the growth platform. Search for a new leader to lead this important team. Todd McIntyre will lead R&D in an acting form as we search for permanenet replacement.

We got together and decided on several things. What do we want to be when we grow up, how to take it to the next level? Several initiatives to promote quality, cross-functional collaboration, customer focus. Establish accountability by driving company's goals and objectives throughout the organization. Recognize and reward people who meet and exceed their goals. Transform mgmt culture into leadership culture. People who are inclusive leaders, people who are open to someone else's ideas. People who promote cross-functional, boundary-less society. These are fundamental changes of the reorganization and the realignment. These are necessary steps to put us on a path to achieve our vision sooner.

The vision is to become an indispensable source for illuminating information. This is a bold statement -- we want to have Microvision-inside every display and imaging system going forward.

Q&A:

Jeff Harbey, Montgomery Scott: Longtime shareholder, delighted at changes: 1. Corning announced they're developing a new green laser, expecting it to be a breakthrough for microprojectors, cell phones. Is this a competitive technology, or is this something you can incorporate into your technology? Can't see cell phone displays in the sun, Microvision opportunity?

Tokman: Great comment. Green laser has been an element that kept us away from progress in Auto HUD product development. Recently, a lot has changed in last 6 months. Huge market pull for this technology due to demand for rear projection televisions. Low cost green laser technology targeted by numerous suppliers. We have confidence in the availability of this device.

Todd McIntyre: Green laser very encouraging, we view them as complementary, not competitive in any way, encouraged that companies like Corning are jumping in to answer the call of the market, we view it as something that's a highly positive development for Microvision.

Steve Willey: Focus on scanning element within our company, basis of our IP, relying on motivation of light source suppliers. Other market demands are having suppliers fund new light sources more aggressively.

Jeff: How many Nomads?

Tokman: 300 units total in marketplace (commercial). Commercial sales were disappointing. Implement different go-to-market strategy, assess viability of the market, correct negative margins problem. At mid-year, review our progress. In 3-4 months we'll know what the potential of the product is going forward.

Jeff: Are the customers happy with it in the automotive area?

Tokman: Some mechanics like the device and use it, some people are not finding it as useful. We need buy-in from business users as well as mechanics. Device needs to be simple, easy to use and present the right information with the right level of quality. End user value proposition, also business user value proposition. Create quantifiable ROI so that when we sell the product not about how cool the technology, but if you put this on one of your guys, it will save you $70,000/year. Now everything becomes a non-issue. It's in their interest to have this product. Need to go to top of organization, get the right product and ROI. Strategic accounts focused on different businesses: heavy truck, automotive, fleet maintenance opportunities. Could potentially sell hundreds of Nomads in each of these segments. Fleshing out 2-3 applications.

Jeff: Additional financing?

Tokman: We sold some shares in LMRA. First step in financing strategy, to be non-dilutive to shareholders. Longer term opportunity to ensure that we're not in the market several times a year. The goal is to raise enough money in next round to get at least through the year, and in the meantime show the improvement in results.

Jeff: What form would you like that to be?

Jeff Wilson: Looking at several different financing alternatives right now. Evaluating best option for shareholders.

William Despard, Smith Barney: Alec, delighted that you're there. FLIC, size of market, what is size of FLIC market for next 2 years?

Tokman: Traditional barcode market evaluated at $1B+ for barcode scanners, new emerging markets in healthcare, mobility and household applications. Ultimate size has not been established. What is the addressable market. Strategic roadmap, we'll be refining until April of this year. Expect significant growth in mobility and household sales in 2006. In terms of margin, gross margin on FLIC is to get it from teens to raise it another 15 percentage points. At GE, any business with gross margin less than 40%, that's a dog, usually sold or divested. Whatever segments we develop will be high margin.

Bill: Quality issues on FLIC?

Tokman: Address quality on every direction. R&D resources, redesign the engine, internal emphasis to screen bad units to ensure that customers receive high quality units. Full redesign of the product will enable high quality, high yield solution. In the meantime, until this release goes through, we need to spend more effort to inspect units that go out.

Chris Kelson, Paragon: Question relates to Picoprojector. Given there's a working prototype, what are the remaining challenges to come to market? Technological, or convincing customer to buy it? Can it be hooked up to a video iPod? Say you're in an airplane, shine the projection onto an 8"x11" sheet of paper instead of the 2" screen.

Tokman: Extension and accessory to video device. One of the applications is to project a small screen while traveling. Where are we on the development, what are risks. We developed a demo model, not even a prototype. Demo, internal prototype, external prototype to check with customer on performance, then decision is made to go to full pre-production and production. Took it to CES, was accepted very well. Demonstration model was attached to electronics sitting under the table. Specific risks, technical performance, risk related to image quality. Artifact called speckle, high frequency noise, when you look at the image, not as smooth as it should be. Development risk, determined by availability and buy-in from strategic partner. Steve has worked with several Asian mfrs who expressed strong interest in working with us. Look at all of these opportunities and evaluate which one will give us best success to market based on what they have been proposing.

Willey: Generic accessory, wired or bluetooth, handsets, multimedia players, such as video iPod, camcorders, PDA sized handheld computers, enormous portfolio of market segments for us. Working through the technical details now. Sourcing of appropriate components, including green laser. Where we sit today, unparalleled form factor, allows us the notion of a fully embedded projector. Competitive microprojectors are 500ccs in volume, our target is well under 100ccs.

McIntyre: Green laser is a critical component. Made it our business to be familiar with suppliers of green lasers around the world. Very encouraged that there will be the sources available. Approaching this from the standpoint of a projection platform. Want to drive greatest number of common elements between HUD and PicoP to maximize leverage from technology development. Strategy based on common platform elements.

Tokman: This is very important: the PicoP application as well as MicroHUD are based on the same projection display platform. Created Strategic Marketing group to ensure commonality of the platform for different applications. Same architecture for consumer applications that enables HUD, enables PicoP.

Alan Patterson, investor: Someone with the specific responsibility to beef up the website? Make it exciting to the public? More people interested and potential buying stock?

Tokman: We actually identified this as major development effort. Created IR Communications group. One of the first task is to update the website based on renewed strategy and operating plan. Put some horsepower this month to make it a lot more attractive.

Heagler: Working on proactive communications plan. Sometime in the next 30 days expect to see significant improvement there.

Alan: Plan to get the products in movies, articles?

Heagler: We'll continue to focus on that as well.

Rod Tracy, Paulson: Very ambitious plan, I'm impressed. I like that you're focused on high margins versus being spread all over the board. Thanks again.

Joe Dubrof, Morgan Stanley: Timeframe for commercialization for PicoP?

Tokman: Determined by two factors: How quick we can get large electronics mfr on board. We're providing an engine that will go inside something larger than what we provide. Need requirements. Until we have this, we can't fully place every resource to develop this. We're not going to wait for this to happen, so we focus on Integrated Photonics Module, Microvision-inside. Modular architecture, includes several critical electronics and optical components we can develop in the meantime. This year our goal is to sign one large strategic partner for PicoP.

Joe: Restricted by lack of volume of green lasers? Market sizes big enough to attract more rapid development?

McIntrye: Market opportnity for Picoprojector is the mobile device market. Enormous market all by itself. Suppliers are pulled by interest in laser based rear projection TV. That is utilizing a variety of different means of creating a laser display. Large market, pulling these companies along. We're part of that picture. These suppliers are not dependent on just us to pull them in that direction.

Tokman: In summary, this is going to be a turnaround year for us. Lot of changes, changing our executive mgmt team, realigning organization, new building, implementing a lot of core new business processes to serve as a foundation for growth. Focused on executing on operating plan, grow revenue and reduce operating losses. The second half is going to be very critical for us. Put in place elements in the first half, we should see some results from the efforts in the second half on the product side as well as on the OEM development and product development opportunities. Thank you for joining this call, look forward to getting together on our next presentation.