Tuesday, October 27, 2009

Microvision: 3rd Qtr 2009 Earnings Conference Call – Part 1

The 3rd Quarter earnings were reported after the market close and the conference call took place right after that on October 22nd, 2009.

First, let’s look at the earnings report in Part 1 of this post…
Microvision Reports Third Quarter 2009 Results

Commercial Product Launch and Beginning of Shipments of SHOWWX, World’s First Laser Pico Projector, Highlight Quarter
Press Release
Source: Microvision, Inc.
On 4:01 pm EDT, Thursday October 22, 2009

REDMOND, Wash.--(BUSINESS WIRE)--Microvision, Inc. (NASDAQ:MVIS - News), a global leader in innovative ultra-miniature projection display and image capture products for mobility applications, today reported operating and financial results for the third quarter of 2009.

Operating Results
“The third quarter of 2009 was a very rewarding and in many ways historical quarter for Microvision as we reached three important corporate milestones for commercialization of our PicoP® technology” said Alexander Tokman, Microvision’s President and CEO. “We launched our first PicoP technology based product, SHOWWXTM the world’s first laser pico projector; received our first purchase order to distribute the SHOWWX; and secured our first global OEM to private label the accessory product. We began shipping SHOWWX laser pico projectors in September and our plan is to increase volume each month to meet customer demand.”

Microvision’s Asian distribution partner, Mint Technology, through its parent company Mint Wireless Limited (ASX: MNW - News), issued a press release on October 22 (see Mint press release) revealing that the global OEM that will private label Microvision’s laser pico projector is Uniden Corporation of Japan. Microvision had previously announced on a no-name basis the purchase order from Mint Technology (see September 30 Microvision press release) and the purchase order for Uniden to private label Microvision’s PicoP display engine-based accessory laser pico projector (see October 8 Microvision press release).

Other notable results and acknowledgements for the third quarter included:

• Certifying the SHOWWX Laser Pico Projector as a Made for iPod® product

• Signing a long-term agreement with OSRAM Opto Semiconductors GmbH for supply of green and blue lasers to further strengthen supply chain capabilities.

• Receiving $1.0 million subcontract award from Lockheed Martin to support DARPA’s Urban Leader Tactical Response, Awareness & Visualization (ULTRA-Vis) program, an advanced technology development initiative to build a soldier worn system. This contract is important to Microvision’s long-term strategic roadmap, as it provides the opportunity to advance the company’s technology for a variety of military and commercial full-color eyewear applications. Under the subcontract Microvision is developing a daylight-readable, see-through, low-profile, ergonomic eyewear display based on its ultra-miniature PicoP display engine and proprietary thin, clear Substrate Guided Relay (SGR) Optics.

• Identified for the first time by the Patent Board™ as one of the "Top 50 Movers” in the Electronics and Instruments industry. The Patent Board is a leading business-based patent advisor to Fortune 500 companies, emerging technology companies, law firms, investment banks, governments and universities. The Patent Board utilizes proprietary data, tools, analytics and technology to leverage patent-based Intellectual Property as an asset class.

• Identified by a Pacific Northwest business publication as one of “Washington’s Top 100 Companies to Work For in 2009”

Financial Results
For the nine months ended September 30, 2009, the company reported revenue of $2.9 million compared to $5.1 million for the same period in 2008 and for the three months ended September 30, 2009, the company reported revenue of $ 924,000 compared to $894,000 for the same period 2008. As of September 30, 2009, the backlog totaled $2.0 million compared to $647,000 at September 30, 2008. The decrease in revenue is primarily attributed to lower backlog at the beginning of 2009, which is a result of the company's strategy to focus most of its resources on commercializing PicoP products.

Continued…
Here’s the link to the full report…
http://finance.yahoo.com/news/Microvision-Reports-Third-bw-1249636338.html?x=0&.v=1

Next, let’s review the earnings report for “Operating Results” and then we’ll focus on the “Financial Results” later…

Review: Operating Results
Microvision reached three [actually four] corporate milestones for commercialization of its PicoP display technology…

• Launched the first PicoP display technology based product SHOWwx, the world’s first laser PicoP projector.

• Received the first purchase order to distribute the SHOWwx from Mint Wireless…for distribution into the Asia-Pacific region.

• Secured the first global consumer electronics OEM [Uniden] to private label the accessory product SHOWwx...  for OEM sales and marketing into the Asia-Pacific region.

• Began shipping SHOWwx laser PicoP projectors in September and plans to increase volume each month to meet customer demand.

We are truly at the turning point in the history of Microvision, that some may call the “validation” phase. Because, that’s what the commercial release and the two purchase orders from global consumer electronic OEMs represent as …

• Validation of Microvision’s laser based PicoP display technology, its quality, its reliability, and a viable commercial fabrication & production milestone.”

• Validation of performance and quality of PicoP display engine at the core of the world’s first laser based PicoP projector SHOWwx.

• Validation of Corning's green laser technology, its reliability, and a viable commercial fabrication & production milestone.

• Validation of technical and performance superiority of laser based PicoP projector as compared to other two technologies on the market… DLP from Texas Instruments and LcoS for 3M.

• Validation of consumer preference for Microvision’s PicoP projector: wide screen, high definition, longer battery life, 2D video with fast refresh without motion blur, small physical size and always in focus images for all of video [static, streaming, and broadcast] communications.

• Validation of acceptable safety standard for laser based PicoP projectors in consumer use and adoption.

• Validation of speckle as a non-issue and as virtually non-existent with Microvision’s laser based PicoP display engine.

• Validation of fundamental design flaws of Microvision competitors: low resolution images, faded colors, short battery runs, longer throw distance, and requiring constant manual focus adjustments.

• Validation of Microvision as a product company rather than just a R&D house with 115 issued patents and with many more on file.

There is no need to create the wheel again, so here’s the link to my post on “validation” and the unfolding financial opportunity of a lifetime…
http://mirro7.blogspot.com/2009/10/microvision-opportunity-of-lifetime-in_8814.html

Microvision’s press release also confirmed the early morning news from Reuters that…

• The Asian-Pacific region distribution partner was indeed Mint Technology, through its parent company Mint Wireless Limited, and that Microvision received a purchase order from Mint Technology. Read more: http://www.mint-trading.com/default.asp

• The Asia-Pacific region global consumer electronics OEM was indeed Uniden of Japan, through the efforts of regional distributor Mint Technology, and that Microvision received a purchase order from Uniden to private label the PicoP display engine-based accessory laser pico projector. Read more: http://www.uniden.com.au/australia/oc_our_company.asp

Obviously, Microvision investors didn’t like the names in the news and the stock price plunged to $4.66 early in the morning to make the low of the day [from $5.28] and closed the day at $5.07. Then at the conference call, after the market close, Alex Tokman, CEO of Microvision, decidedly tried to dodge the questions regarding green laser supply from Corning. I don’t think the investors liked the [wishy-washy] answers on green laser supply issue either. And that, in my opinion, set the stage for further decline in MVIS stock price that came about the next day on Friday… when the stock went down further and closed the day at $4.39.

The stock price action before and after the conference call [CC] is not surprising when you consider…

• Many MVIS investors were expecting global consumer electronics firms like Sony or LG Electronics as the OEM partner of Microvision that was announced on October 8th, 2009… without naming any names at the time. Many of us and that include me, speculated on the OEM partner’s name and wrote pages to arrive at the conclusion that it could be either Sony or LG Electronics. When we finally heard the name “Uniden Corporation”, we were disappointed… because most of us are not familiar with Uniden as a household name in the US.

• Also the undisclosed name, of the Asian distributor [from October 8th press release], was finally disclosed as “Mint Technology” at the same time the OEM’s name "Uniden" became a public knowledge. Again, some of us were disappointed because we were expecting some big name global distributor… and not some company called “Mint” from Asia.

Considering the above, a first blush knee jerk action best describes the investor response to the news… about Mint Technology and Uniden Corporation… and lack of clearly understanding the comments made by Alex Tokman, on green laser supplies for 2009 and 2010.

In my humble opinion, the investor selling on the news is reactionary; essentially prompted by lack of information about the two big name companies from the Asia-Pacific region. Let’s first talk about Mint Wireless and Uniden, and then we will discuss the CEO comments on green laser supply issue. The price of MVIS stock will take care of itself when we are better informed and had some time to digest information.

Here’s the link to my post on this very topic…
http://mirro7.blogspot.com/2009/10/microvision-asia-pacific-region.html

Now let’s talk about “Other notable results and acknowledgements for the third quarter”… as stated in the press release…

• “Certifying the SHOWwx Laser Pico Projector as a Made for iPod® product”

What Alex Tokman said at the CC later in the evening, says it all…

“Many of you who don't know, our pico projector is a very simple plug and play device for people on the go who want to spontaneously view and share multimedia applications and programs such as mobile television, movies, photos, user generated content. Users can seamlessly plug the projector into their iPod devices, portable media players, and other mobile devices. Which brings me to our next topic, not every product can have “Made for iPod” logo on it. This logo indicates that our projector has specifically designed to work with iPod products. Microvision has gone through five steps process and certified that SHOWwx has been made in accordance with the high standards of quality and performance. Why is this important? According to media sources, there are more than 220 million iPods sold to-date. The preliminary feedback we have received from prospective users has been very positive. They recognize the value of the unique competitive advantages of the PicoP tech including the thin form factor high resolution infinite focus and long battery life. As an example, very recently we have completed our participation in a trade show in Japan called CEATEC where multiple companies have showcased their new projectors. Engadget reports has provided some of the coverage of what they've seen at the show. And I'm going to read you a quote from one of their take-away.

"We stopped at Microvision booth at CEATEC in order to take a look at what makes the world's first laser based pico projector so special and we can honestly say that the picture was pretty stunning."

Here’s the link engadget report…
http://www.engadget.com/2009/10/06/video-microvisions-laser-based-show-wx-pico-projector-shines-a/

Now consider the value of this marketing strategy in the short term, while the supply is constrained…

Microvision is targeting their laser PicoP projector SHOWwx into a 220 million unit strong iPod market with a certification “Made for iPod” product family [that includes iPhones]. Selling directly, or thru a distributor is lot better margin wise than it would be if Apple were to private label it under its own Apple logo.

Some day, when the supply is not constrained and millions of PicoP display engines can be mass produced to attract Apple, we may see Apple as the next global consumer electronic OEM for the American region… with a global reach

• “Signing a long-term agreement with OSRAM Opto Semiconductors GmbH for supply of green and blue lasers to further strengthen supply chain capabilities.”

Osram is coming on board with more production quantities of green laser becoming available in the fourth quarter 2009. Hopefully, that will ease-up some green laser supply issues facing Microvision at the present time. Osram green laser are better, cheaper to make and have better yields due to their simpler design as compared to Corning. Microvision has signed a multi-year supply agreement with Osram... which essentially guarantees all of Osram production of green laser going into the production of PicoP display engines.

The availability and quality of green lasers will be crucial not only to the viability of Microvision’s PicoP display technology… but also to its financial success as a growth company. In 2010, there will be six companies making green lasers for the Pico projector market. The most recent news about Japan’s QD lasers only reinforces my belief that Microvision will be a huge financial success.

Here’s the link to QD laser news…
http://www.pcworld.com/article/173455/green_laser_developed_for_microprojectors.html

• “Receiving $1.0 million subcontract award from Lockheed Martin to support DARPA’s Urban Leader Tactical Response, Awareness & Visualization (ULTRA-Vis) program, an advanced technology development initiative to build a soldier worn system. This contract is important to Microvision’s long-term strategic roadmap, as it provides the opportunity to advance the company’s technology for a variety of military and commercial full-color eyewear applications. Under the subcontract Microvision is developing a daylight-readable, see-through, low-profile, ergonomic eyewear display based on its ultra-miniature PicoP display engine and proprietary thin, clear Substrate Guided Relay (SGR) Optics.”

Contract like this not only provide current revenue, but also help fund future R&D effort to enhance, for one example, the resolution and brightness of PicoP display engine for next generation projectors.

• “Identified for the first time by the Patent Board™ as one of the "Top 50 Movers” in the Electronics and Instruments industry. The Patent Board is a leading business-based patent advisor to Fortune 500 companies, emerging technology companies, law firms, investment banks, governments and universities. The Patent Board utilizes proprietary data, tools, analytics and technology to leverage patent-based Intellectual Property as an asset class.”

Microvision is positioning itself thru patents and IP to be a major player in the image community. He (Alex) said: “Microvision is not going to be a small component provider that can be marginalized by bigger players.”

Alex sees Microvision as an INTEL type company. He is going to make the company a major player in the image industry. That may very well explain the “Image by PicoP” as the slogan chosen for the world’s first laser based PicoP projector SHOWwx.

Again, no need to create the wheel.  Please read my three part post on the subject…
http://mirro7.blogspot.com/2009/10/microvision-protect-your-intellectual.html

• “Identified by a Pacific Northwest business publication as one of “Washington’s Top 100 Companies to Work For in 2009”

Well, that’s good to know. It’s always a good sign when the company is able to hire and retain key employees during its growth phase… like Microvision is at this stage of commercial product launch.

Now let’s look at the “Financial Results”…

Review: Financial Results
“… and for the three months ended September 30, 2009, the company reported revenue of $ 924,000 compared to $894,000 for the same period 2008.”

“…, the backlog totaled $2.0 million compared to $647,000 at September 30, 2008. The decrease in revenue is primarily attributed to lower backlog at the beginning of 2009,”

Digging into the earnings report for 2nd Qtr and 3rd Qtr 2009, in simple terms, it means…

• Microvision sold lot less ROV scanners and a very few, if any, PEKs in the 3rd Qtr 2009.  And obviously, there were no sales of SHOWwx in the 3rd Qtr 2009… because POs did not show-up until October 8th, 2009.

• In 2nd Qtr 2009, the product sales were $174,000 and cost of product revenue was $543,000. In 3rd Qtr 2009, the product sales were $107,000 and cost of product revenue was $720,000. How do you reconcile the loss?  Well, I can guess, by looking at the product & development contracts backlog of approximately $2,000,000.

Here’s the analysis and the way I arrived at the numbers…
-- Total 3rd Qtr Backlog: $2,000,000
-- Estimated Development Contracts Backlog: $820,000
-- Estimated ROV Scanner Backlog: $100,000
-- SHOWwx Projectors Backlog: $0 … Purchase Orders from Asia-Pacific Region came-in on October 8th, 2009.
-- Net Product Backlog [net of ROV Scanners]: $1,080,000 [2,000,000 - 820,000 – 100,000 = 1,080,000]
-- PicoP Evaluation Kit [PEK] Sold at: $5,000 each
-- Number of PEKs Sold on Backorder: 216 … give or take a few

• “The company reported an operating loss for the nine months ended September 30, 2009 of $27.9 million compared to $25.3 million for the same period in 2008 and $9.3 million, for the quarter ended September 30, 2009 compared to $9.0 million for the same period in 2008.”

Looks like, the operating loss for the 3rd Qtr was $300,000 more as compared to the 2nd Qtr. That’s reasonable considering the commercial product launch.

• “The company reported a net loss of $30.8 million, or $0.43 per share, for the nine months ended September 30, 2009 compared to $22.7 million, or $0.38 per share for the same period in 2008 and $11.5 million, or $0.15 per share, for the quarter ended September 30, 2009 compared to $8.4 million, or $0.13 per share for the quarter ended September 30, 2008. The net loss for the three and nine months ended September 30, 2009 included a non cash loss on derivative instruments of $2.2 million and $3.0 million, respectively, compared to a gain of $585,000 and $2.0 million for the same periods in 2008. The loss on derivative instruments is due to the change in the value of the warrants to purchase the company’s common stock that were issued in connection with the company’s financing transactions.”

The net loss for the 3rd Qtr was $11.5 million as compared to $8.4 million for the 2nd Qtr. The net loss figure takes the “operating loss” of $9.3 million for the 3rd Qtr and adds [or subtracts] the gain [or loss] on derivative instruments [like options & warrants]. It’s not a real dollars loss until the derivative instrument is exercised. Consider this additional loss of $2.2 million as the “net” value of options or warrants owned [or issued] by the company. In 3rd Qtr, Microvision issued warrants to institutional investors and those warrants went up in value as the MVIS stock went up in value during that period.

• “Net cash used in operating activities was $23.4 million for the nine months ended September 30, 2009 compared to $22.3 million for the same period in 2008. Net cash used in operating activities was $7.1 million for the quarter ended September 30, 2009 compared to $7.6 million for the second quarter of 2009. The reduction in the quarterly cash burn was primarily a result of cost reduction efforts the company implemented in the first quarter of 2009. The net cash burn for the third quarter was partially offset by the receipt of $1.5 million for the exercise of investor warrants, and $300,000 for other investing and financing activities resulting in a net cash usage of $5.9 million for the third quarter of 2009. The company ended the quarter with $20.5 million in cash, cash equivalents, and investment securities.”

Here, two important things are worth noting…
  • The net cash burn for the 3rd Qtr was $7.1 million and was $0.5 million less than the 2nd Qtr. However, the net cash usage in the 3rd Qtr was $5.9 million… as a result of cash received from warrants exercised and other investing and financing activities.
  • At the end of 3rd Qtr, Microvision had $20.5 million in cash, cash equivalents, and investment securities.
Well, that’s about all the information I see worth looking into, in an effort to make some sense from the 3rd Qtr “Operating Results” and “Financial Results”.

Stay tuned for Part 2… where we will discuss the Earnings Conference Call and see where that takes us in this journey to “Image by PicoP” ubiquity.

Anant Goel
http://www.wealthbyoptions.com/