Kopin Corporation (KOPN) Q3 2013 Earnings Report, Transcript and Summary

Good morning, and welcome to the Kopin Corporation's Third Quarter 2013 Financial Results Conference Call. 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 You may access an archived version of the call on Kopin's website at www.kopin.com.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 C.C. Fan; and Chief Financial Officer, Mr. Richard Sneider. Please go ahead, sir.

Thank you. Good morning, everyone, and thank you for joining us this morning. John will begin today's call with a discussion of our strategy, technology and market, and I will go through the fiscal third quarter 2013 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 Thursday, October 31, 2013, we will 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 looking-forward statements. Potential risks include, but are not limited to, demand for our products, operating results for 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 the call over to John.

Thank you, Rich. Good morning, everyone, and thanks for joining us. Rich will discuss our financial results with you in a moment. But for now, I would like to give you an update on our business. This morning, I'm calling in from Asia, visiting with some of our important partners. What I've seen over the past few quarters, coupled with the conversations I'm having out here, is very encouraging. We have received a lot of positive feedbacks from current and perspective partners and customers and we do expect the strong momentum in the wearable computer market to accelerate going forward. And we continue to be very confident in our business model of establishing Kopin as the preeminent developer of critical components, reference systems and total system solutions for the wearable space. Since we announced our transitioning to the wearable computing space nearly 9 months ago, I am extremely pleased with our progress and the overall market trends. We are seeing what we anticipated in terms of the increased interest by both potential partners and customers. We are well aware that our investors would like us to know or to announce that we're -- would like to know who we are working with and what types of projects we're working on. The fact is, that our partners require very strict confidence. This reminds me of when we first introduced our commercial display and our shareholders were asking who we're working with. And we have to wait until the products were launched before we could make announcements. Of course, later on, our shareholders learned our initial commercial display customers were JVC, Panasonic and Samsung. Then the pattern repeated with our military display launch and, of course, they learned -- people know our partners were BAE, DRS and Raytheon. Again, they are the…

Thank you, John. Beginning with the top line, total revenues for the third quarter of 2013 were $5 million compared with $8.2 million for the third quarter of 2012, primarily reflecting the decline in sales of display products for military applications. Before we go to operating results, it' important to remember that our expense structure is not tied to the current quarterly revenues or fiscal year revenue projections, but to our longer-term goals. Cost of goods sold for the third quarter was 95% of product revenues compared with 66% for the third quarter of last year. The increase reflects a decrease in the sale of our display products for military applications, normal price declines and lower manufacturing utilizations. R&D expense in the third quarter of 2013 was $5.6 million compared with $4.7 million for the third quarter of 2012. The increase reflects an increase in our investments in wearable technologies. SG&A increased from $4.7 million in the third quarter of 2012 to $5 million in the third quarter of this year. The increase in SG&A for the 3 months in 2013 versus the corresponding period in the prior year is primarily related to an increase of approximately $200,000 in compensation costs and approximately $200,000 of patent amortization and other patent-related expenses. Other income expense net is primarily composed of $360,000 of interest and other income, a $1.9 million gain in the sale of investments and approximately $800,000 in foreign currency losses. Turning to the bottom line, our net loss for the quarter was $8.8 million, or $0.14 per diluted share, compared with a net loss of $6.7 million, or $0.11 per share, for the third quarter of 2012. With cash equivalents and marketable securities totaling $122.7 million at September 28, 2013, and no long-term debt, we are well-positioned to execute our strategy. Year-to-date, we've spent approximately $6 million under our stock repurchase program and approximately $500,000 on capital expenditures. Third quarter and year-to-date amounts for depreciation, amortization and stock compensation expenses are included in a table attached to the Q3 press release. And now for the guidance. We continue to expect full year revenues in the range of $18 million to $22 million. We also continue to expect the consolidated loss in range of $28 million to $33 million for 2013. This guidance excludes the income from discontinued operations net of tax. Excluding the expected working capital, our stock buyback program and other investing and financing activity, we estimate we will use between $30 million to $35 million to fund operations for 2013. And now with that, I'll turn the call back over to John.

Thank you, Rich. Demand is growing for wearable computing products. And I want to assure investors that Kopin is not standing still waiting for the wave to hit. We're in active discussions with a number of world-leading technological companies who are looking to us to accelerate and enable their interest in the wearable computing space. We're not in a position to make any announcements today, but we're committed to keep you informed as quickly as we are able to. Kopin has been a slot leader for many years in exactly the areas that we're making wearable a reality. Our combinations patent, partnerships, critical components, strong financial position and talented people bolster our excellent reputation and uniquely position us to ride the wave which, undeniably, is growing as we speak. We look forward to ongoing discussions with you in the coming months. And now, operator, please open the line for questions.

[Operator Instructions] Our first question today is coming from Matt Robison from Wunderlich Securities.

John, can you talk a little bit about the number of companies you're working with these days to kind of a geographic -- where they are geographically? And then maybe, how many do you think will have the products, as you mentioned, in the next year?

The question is how many companies we are working with and how spread out, globally, as well at how many products are coming up? It's an interesting question. Obviously, we're working with companies in Asia, since I'm in Asia. We're also very actively working with companies in the United States, as well as in Europe. And with regard to products, we have to be very careful what we can describe. But it's very clear, there would be products coming out next year by very established companies.

Should we think that there'll be 1 or 2 mid-year or what is... .

Well, I think what is important is not how many, but who are introducing them. And...

Well, you're not going to tell us that though but you might be able to tell us how many products could possibly come out?

Yes. I think the important was -- I'm sorry, maybe he's calling us through such a long distance, so the thing gets scrambled. But I think there will be a significant number of very interesting product coming out by significant companies. I think this is a very interesting time.

And your Android product, something that's basically on track with the schedule you've been talking about since January. What will be -- how is the target market shaping up for that?

Yes. I think the Android market we develop, of course, as to convert the Golden-i, which is Window-based into Android, that was primarily our purpose that we'll develop the Android and it's on target to get the Android platform. But it so happened that during that year that we're developing Android, it gets bigger and bigger market share, so we believe that Android platform will be useful for other application other than just go on iPad platform.

Is this the -- is there a subsequent version coming out later in 2014 as more of a prosumer type of product?

I'm not at liberty to describe that, but it's an interesting product also. Yes.

And Rich, you said that $1.9 million came from a sale of an investment and offset by $800,000 for forex loss. Is that right?

That's correct. That's the sale of 2 investments.

And did you say you used $30 million to $35 million in cash this year.

That's what we're projecting. That's the range we're projecting.

What was the cash flow associated with operations, your cash burn from operations, in the third quarter?

Well, if you went and looked at the cash flow statement, you'll see 13 -- $12.8 million would be the number of cash flow from operations. If you took kind of an operating income, added back depreciation and stock comp, all that good stuff, you'd be looking at an $8 million number. One includes the flows of working capital, one doesn't. That's how you want to look at it.

Our next question today is coming from Rajvindra Gill from Needham & Company. Rajvindra S. Gill - Needham & Company, LLC, Research Division: I was just wondering if you could maybe describe the competitive landscape and what's your views on Google Glass and some of the other newer products that attempt to get into this space.

Okay, let me take a stab at it. Of course, Google Glass is so prominent in the market and it's actually a very interesting product, a very good product. It's not in the product [ph] yet, and I think for everybody within wearable space, we are cheering for Google to be successful. So I think that's the question on the Google Glass, what was your other question now, Rajvi? Rajvindra S. Gill - Needham & Company, LLC, Research Division: I'm just wondering, this technology is kind of in its infancy.

Oh, you're talking about the competitive landscape. Rajvindra S. Gill - Needham & Company, LLC, Research Division: Are there -- do you see -- there's Himax that's working with Google, but they're microdisplays and I was just wondering what your view is on that and just how you are going to position yourself in the market?

Well, of course, I'm speaking probably a little bit slightly biased. To be successful -- we're actually doing a lot more than just display, okay. Displays, of course, is 1 of our early core competencies, but I think it's very important to be able to support our customers, our partners and the rest of the systems to go through the whole spectrum of the stuff, displays, the ASICs, the backlights, the optics, the ergonomics and software and so on and so on. In that space, of course, Google is there, but we have a few real competitors that can provide such a solution base at this point. Rajvindra S. Gill - Needham & Company, LLC, Research Division: Okay. And just on -- any, Rich, the thought from the military business during the defense spending in the procurement cycles there?

Well, again, I can only tell you what's in the budget. And so we are going through a round of investment right now. And so as many of you know, we were the sole supplier for thermal weapons sights for a number of years for the U.S. military, but that business has declined not just because of the fact that the war efforts are hopefully winding down, but because of the new generation of sights. The fact of the matter is the soldier never liked the fact that they had to switch from their day sight to their night sight and because they're highly calibrated and so on and so forth. So there's always a trend towards moving to a single sight and a sight they can do much more. Today, the way a sniper works, for instance, is he's using the sight and he has someone giving him the readings of the distance, humidity and wind conditions, a host of factors. And the government wants all of that implemented into a solution. So we're working diligently on a number of the programs that we expect some awards in next year. And again, if you believe the government rollout starts happening in the latter half of next year, and then picks up in 2015. And without going through a bunch of technical reasons, our display is very uniquely situated to support what they're trying to create.

Thank you. That does conclude our question-and-answer session. I'd like to turn the floor back over to management for any further or closing comments.

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

Thank you. That does conclude today's teleconference. You may disconnect your lines at this time, and have a wonderful day. We thank you for your participation today.

Thank you, operator.