Friday, August 27, 2010

Microvision: Announces Second Quarter 2010 Results

Press Release
August 05, 2010
04:00 PM Eastern Daylight Time

Quarterly Revenue Grows to $2.1 Million and Backlog to $20.1 Million

REDMOND, Wash.--(BUSINESS WIRE)--Microvision, Inc. (NASDAQ: MVIS), a leader in innovative ultra-miniature projection display technology, today reported its operating and financial results for the second quarter of 2010.

Operating Results
“I’m pleased to report that our ongoing investment to improve our production and supply chain capabilities resulted in a more stable and predictable flow of finished product in the second quarter,” stated Alexander Tokman, President and CEO. “We continue to see an increase in our green laser supply and smooth conversion of raw materials into finished goods. This strengthening of capacity will become increasingly important in the second half of 2010 as we plan to deliver larger volumes of PicoP®-based products to our customers to meet their strong demand.

“Our backlog grew to a record $20.1 million and includes a $3.4 million follow-on order from our initial OEM display engine customer. The demand for our PicoP-based products remains strong from both existing and new customers who are excited about the unique capabilities of our PicoP projection solution. In connection with our capacity increase during the second quarter, we have increased our global distribution points and continue to qualify additional distribution partners. Customer response to the SHOWWX™ laser pico projector has been very positive.

“Our future success will depend on our ability to anticipate consumer needs and rapidly innovate to bring new products to market leveraging the unique capabilities of our PicoP technology. With this in mind, we recently unveiled a 15-lumen, 720p HD-ready pico projector prototype. We have received a very enthusiastic response to the high resolution, brighter images from this prototype and believe that advancing our PicoP technology platform will continue to position us as a premier provider of customer-focused projection solutions,” concluded Mr. Tokman.

Financial Results
The following financial results are for the three and six months ended June 30, 2010, respectively, compared to the same period one year earlier.

Revenue was $2.1 million compared to $987,000 for the second quarter and $2.8 million, compared to $1.9 million for the first half. The company’s quarterly revenue grew from the first quarter of 2010 and year-over-year as higher volumes of PicoP-based products were shipped to customers.

Backlog was $20.1 million at June 30, 2010 compared to $854,000 at June 30, 2009. The backlog is composed almost exclusively of orders for the company’s PicoP embedded engine and its SHOWWX laser pico projector.

Operating loss was $11.1 million compared to $9.5 million for the quarter, and $20.6 million compared to $18.6 million for the first half. The increased operating loss was due to higher operating costs attributable to commercialization of the SHOWWX product.

Net loss for the quarter was $11.1 million, or $0.12 per share compared to $10.4 million, or $0.15 per share. Net loss for the six months was $20.2 million, or $0.23 per share compared to $19.3 million, or $0.28 per share.

Net cash used in operating activities for the six months was $22.3 million, compared to $16.3 million. The increase was attributable to a higher net loss and an increase in working capital requirements. The increase in working capital requirements reflected a combination of increased inventory of raw materials and subassemblies with long lead times as the company prepares to ship higher product volumes in the second half of the year to meet customer delivery requirements, and a higher accounts receivable balance due to the timing of product shipments during the quarter.

The company ended the quarter with $22.2 million in cash, cash equivalents and investment securities.

Management will discuss the company’s operating and financial results and current business operations in more detail during its conference call at 4:30 p.m. ET / 1:30 p.m. PT today.

Continues…
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Here’s the link to the full Press Release…
http://finance.yahoo.com/news/Microvision-Announces-Second-bw-2632688220.html?x=0&.v=1

Here’re some observations from the earnings report and the subsequent CC later in the evening…

Operating Results Observation:
• Improved production and supply chain capabilities resulted in a more stable and predictable flow of finished product in the second quarter. Return rates on the SHOWwx are now averaging 2.5%... well below the industry norms.

• Continue to see an increase in the synthetic Green Laser supply and smooth conversion of raw materials into finished goods.

• Strengthening of capacity in the second half of 2010 to meet strong customer demand.

• Backlog grew to a record $20.1 million and includes a $3.4 million follow-on order from the initial OEM for embedded PDEs customer.

• The demand for PicoP-based products remains strong from both existing and new customers.

• Capacity increase during the second quarter allowed Microvision to increase their global distribution points and they continue to qualify additional distribution partners.

• Customer response to the SHOWwx™ laser pico projector has been very positive.

• Microvision has received a very enthusiastic response to the high resolution, brighter images from the new 15-lumen, 720p HD-ready PicoP prototype.

The high end media product is expected to be released for the 2010 Christmas holiday shopping season and the follow-up order form this customer sort of confirms what CEO Tokman had said at the 1st Qtr CC.

• It appears Microvision sold about 5,000 SHOWwx… to arrive at the $2 million in product sales revenue.

• Green Laser Diodes are on the way. In the meantime, if done right, the synthetic Green Lasers have an embedded play… for the next 4-5 years. Here’s what CEO Tokman said in The Displayground Blog post…

“We have already begun to see availability of the first generation synthetic lasers increase. The next generation synthetic green lasers are expected to be more efficient and less expensive than their first generation cousins. We also anticipate that the direct green lasers targeted for introduction in the second half of next year may not reach desired performance and cost targets immediately. For these reasons, we believe that synthetic lasers could continue to remain a competitive alternative to direct green lasers for at least the first 4-5 years after diodes are introduced.”

• If a respectable customer places a large order, Microvision would certainly discuss with the synthetic Green Laser suppliers the possibility of increasing production.

Here’s my take on this subject…

Corning and Osram have a limited manufacturing capacity that’s capable of handling the currently forecasted product introduction volumes. However, with sufficient investment, they could expand the manufacturing capacity. This would represent up front capital cost and Microvision can't do it by itself.

Let me put it bluntly…

Assuming "Sony or Apple" places an order for 1,000,000 units spread over a year and deliverable starting say mid 2011… then Corning and Osram could invest into expanding their synthetic GL manufacturing capacity and provide the necessary product. The reason Tokman indicated a "respectable customer" is because they would be the ones to deal with the GL suppliers and guarantee the payment for this capacity increase. Having "Sony or Apple" as a customer pretty much guarantees that the order will not be cancelled just for the fun of it. I'm sure they already know the price point where it is worth upgrading manufacturing capacity… either for a large order from a "respectable customer" or a lot of small orders where the expected rate of default would still ensure a profit for the GL manufacturers.

• Microvision expects 5-7 green laser suppliers in 2011.

Financial Results Observation:
• Revenues for the 2nd Qtr were $2.1 million compared to $987,000 for the second quarter of 2009… and the growth on the year-over-year basis was from higher volumes of PicoP-based products that were actually shipped to customers.

For a company that launched laser based SHOWwx in September 2009, and announced the availability of the hottest consumer electronic product of this decade in March 2010, the Microvision management team was awfully quiet on all fronts of news with no visible signs of product promotions, marketing or sales.

With that in mind, and taking all the plausible scenarios into consideration, I was looking at $1,900,000 to $3,600,000 in recognized product revenues for the 2nd Qtr 2010.

As I said before; anything less than $1,900,000 in recognized product revenues would be the sign of poor sales… that are not necessarily held back by green laser availability. Current events and management changes taking place at Microvision pointed more to this revenue number than anything higher. With product revenues for the 2nd Qtr coming-in at $2 million and the backlog increased to $20.1 million… I’m not sure what to make of it and that is frustrating.

• Backlog was $20.1 million at June 30, 2010.

• The backlog is composed almost exclusively of orders for the PicoP embedded engine and its SHOWwx laser pico projector.

• Operating loss was $11.1 million for the 2nd Qtr.

• The increased operating loss was due to higher operating costs attributable to commercialization of the SHOWwx product.

• Net loss for the quarter was $11.1 million, or $0.12 per share compared to $10.4 million, or $0.15 per share.

• The increase in net loss was attributable to a higher net loss and an increase in working capital requirements. The increase in working capital is reflected by a combination of increased inventory of raw materials and subassemblies with long lead times─ as the company prepares to ship higher product volumes in the second half of the year, and a higher accounts receivable balance─ due to the timing of product shipments during the 2nd quarter.

• From the 2nd Qtr Income Statement; the Product Revenue was $2,015,000 with Cost of Product Revenue being $3,337,000. The costs to produce accessory pico projector units during the three months ended June 30, 2010 were substantially higher than product revenue. Cost of product revenue includes the direct and allocated indirect cost of manufacturing products sold to customers. Direct costs include labor, materials and other costs incurred directly in the manufacture of these products. Indirect costs include labor and other costs associated with operating the manufacturing capabilities and capacity.

• During the three months ended June 30, 2010, cost of product revenue included a lower of cost or market adjustment of $701,000 for inventory in stock at the end of the quarter.

• The overhead cost included in the cost of product revenue consists of the costs of procuring, inspecting and storing material, and facility and depreciation costs; and is allocated to inventory, cost of product revenue, cost of contract revenue, and research and development expense based on the level of effort supporting production or research and development activities.

• The cost of product revenue as a percentage of product revenue can fluctuate significantly from period to period, depending on the product mix and volume and the level of overhead expense.

• The company ended the 2nd Qtr with $22.2 million in cash, cash equivalents and investment securities.

My main issue with this Financial Report is NOT so much about hitting the low end of Product Revenues… but it is the negative profit margins that are frustrating.

Microvision used lots of fancy words to simply explain the inventory markdowns leading to negative profit margins… meaning that every time Microvision sells a product, it takes a small loss. Since there is no corporate guidance, and investor questions on this issue were brushed aside, this “negative margins” issue has been exploited by the opportunistic and unscrupulous short traders in relentlessly driving down the price of Microvision stock over the last few weeks… and that is very frustrating.

Continues with the next post…

Microvision: Investors Are Just Frustrated

Anant Goel