Tuesday, March 23, 2010

Microvision: Breakeven Expected at the End of 1st Qtr 2011

For the first time in a long time I’m very confident that Microvision could have the breakeven operation by the end of 1st Qtr of 2011. And that’s much earlier than that projected by Oppenheimer in their recent report update of February 2010.

I have followed this company for nearly 12 years... but did not start investing in it until 2007, because they did not have a plan for building revenue until they brought on Alex Tokman. Microvision had all the symptoms of being an interesting science project with very little else to do with monetizing the technology… but all that changed after the 2006 re-organization when Tokman was appointed as the CEO. Many of you would agree that he is not there to build a science experiment… he is there to build a solid business based on solid technology, wrapped up as tightly in IP as a 200+ patent portfolio would allow.

The reason I mention Oppenheimer report as the point of reference… because, it is perhaps the most comprehensive and in-depth analysis of Microvision’s business and financial model by an institutional analyst. Even though I don’t agree with their projections of Microvision revenues and profit margins, I don’t see any reason to pick a fight over numbers that none of us can be hundred percent sure… one way or the other.

One more thing…
Recently, someone suggested “brevity as a virtue”. So, from now on, unless I’m writing the next chapter to my book, I plan on presenting my findings, research, analysis and conclusions in this very virtuous manner... that is, as briefly as possible.

So, here we go...
There is confluence of evidence that Microvision has launched its laser based PicoP projector SHOWwx in the US market on March 8th, 2010. It is also evident that SHOWwx is being sold in the US; directly from Microvision website...

http://www.microvision.com/displayground/
http://www.microvision.com/pico_projector_displays/index.html

Now, the next question is about profit margins, revenues and the timeline for operational “breakeven”... where the operating profits sustain the operating cost on a monthly basis.

Looking at all the available information─ the annual report, the latest earnings report and the Q&A from the most recent earnings conference call ─ my analysis shows the breakeven Qtr as Q1 of 2011.

Here’s why…

First Qtr of 2011

Total Revenue: $30.95 million
  • Contract Revenue: $955,000… based on 4th Qtr 2009 and projected at 15% per Qtr growth
  • Product Revenue: $30,000,000… based on 60,000 SHOWwx sold in Q1, 2011 at $500 bundled price with VGA doc.
Cost of Revenue: $18.487 million
  • Cost of Contract Revenue: $487,000
  • Cost of Product Revenue: $18,000,000… COG at 60% [40% margins with green laser cost at $90 or less]. Assumes direct & affiliate on-line store sales.
Gross Profit: $12.469 million

Total Operating Expenses: $11.975 million

  • Research & Development: $7.806 million… based on 4th Qtr 2009 and projected at 1% growth.
  • Sales, General & Admin: $4.169 million…based on 4th Qtr 2009 and projected at 2% growth.
  • Others: $0
Operating Income (Loss): $494,000

Net Income from Continuing Operations: $500,000

  • Other Income/Expenses Net: $0
  • Earnings before Interest & Taxes: $494,000
  • Interest Income: $24,000
  • Interest Expenses: $18,000
Income before Tax: $$500,000

Income Tax Expenses: $0

Minority Interest/Other Expenses: $0

Total Non Recurring Events: $0

  • Discontinued Operations: $0
  • Extraordinary Items: $0
  • Effect of Accounting Changes: $0
  • Other Items: $0
Net Income (Loss): $500,000

Net Income Applicable to Common: $500,000

Shares Outstanding: 90.136 million… includes 5 million share worth additional funding in August 2010 and the rest for stock options.

Earnings Per Share: $0.006

I am not going to attempt to persuade you; towards my way of thinking. However, I just feel that this is a very different point in time for Microvision, where a real product has been launched… and that will change the way information and entertainment is displayed in the mobile world. There are other companies that are getting these pico products out there... but, I see their product introduction to the market as the “teaser horses".  And as “Sam” from the Yahoo Message Board says…

“... if you know anything about horse breeding; you do not want to come back as a teaser horse.  Sure you get into the breeding shed, but even if the mare accepts the jump; poor Picho still loses out as he's fitted with a leather apron to ensure that his efforts, in advance of the waiting stud, remain chaste.”

Is Microvision the "stud" of the stable? 

Well, we just have to wait and see when we get our hands on that SHOWwx on order!

When all is said and done, in the end, I see Microvision’s laser PDEs to dominate pico projection technology… and I have seen nothing from any of the other companies that would dissuade me from this view.

Do the delays frustrate the heck out of me?
Yes!

Do I wish I had my own SHOWwx months ago to use in presentations...and gift them to my friends and family?
Yes!

As far as missed deadlines go, the biggest issue was Corning misguided judgment that they would have green lasers in quantity 2 years ago… a major failure in projecting the production timeline. I, for one did not drain my brain worrying about the exact definition of the end of summer launch in 2009. I have seen new product releases before and I am well aware that if there is a situation where Murphy's Law might apply… then the September 2009 launch was one of them.

I’m very encouraged that Corning has finally overcome the G-1000 green laser production issues… and the second generation G-2000 is coming along nicely for production in Q4 of 2010. I am also very encouraged that OSRAM is making good progress and has started shipping small quantities of green laser to Microvision. It will not surprise me at all, if Microvision were to announce the Osram shipping good news any day soon.

If Osram (and Corning) can overcome the last mile quality production hurdles, we will see validation in a cell phone… with product available in the market by early 2011. Frankly, I do not care who is or was first to market. I think we will see some announcements before the end of April/May this year to help support the stock price and perhaps even push up the pps to next level… in the $5 to $6 range.

Some of you may think that my analysis is somewhat pessimistic… while the others may consider it way too optimistic.  I can understand your rationale… because to this day, I still battle with my optimism and pessimism on a daily basis.

I would not say that the current stock pps is so great that it represents the exuberance of the year 2000… the Dot.com era. Nor does it represent the enthusiasm of a long waited product validation and launch. The current price, I believe, is based on a combination of facts that are still not very clear and people hedging bets that they will reap a significant reward by investing at lower levels. The volume has been up and I cannot detect any significant profit taking at this point. The MVIS story has substance in product and potential for the long term investors.

Obviously there are several companies that have committed to MVIS in the form of contracts to distribute the SHOWwx.  I would find it hard to believe that these companies would make such a commitment without some degree of due diligence in both the supply and demand equation. Without going into details, let me say that I do not think a price of $550 for SHOWwx is too much… although it is a lot.

Profit from the SHOWwx is a short term cash flow gig and has never been the driving factor for the company's long term goal. We all know that the embedded PicoP─ in all things digital─ is the “holy grail”. However, that thinking may be changing considering the fact that SHOWwx does have many may applications and once second generation green laser production is up and the cost goes down the SHOWwx could be very profitable… especially when it is sold directly from the company’s on-line store.

I strongly believe that Microvision could be on its way to breakeven operation… as early as at the end of Q1 of 2011.

Anant Goel
PS: Thanks to "Sam" from YMB for letting me use some of his words and quotes.

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