Kopin Corporation (NASDAQ:KOPN) Q4 2023 Earnings Call Transcript

Kopin Corporation (NASDAQ:KOPN) Q4 2023 Earnings Call Transcript March 14, 2024

Kopin Corporation misses on earnings expectations. Reported EPS is $-0.06 EPS, expectations were $-0.03. Kopin Corporation isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good afternoon, everyone. Welcome to the Kopin Corporation Fourth Quarter and Full Year 2023 Earnings Conference Call. [Operator Instructions] Now, at this time, I will turn things over to Mr. Quinn Callahan [ph], Investor Relations. Please go ahead, sir.

Quinn Callahan: Thank you. Good afternoon, everyone. Before we get started, I’d like to remind everyone that during today’s call taking place on Thursday, March 14, 2023, 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 forward-looking statements. Potential risks include, but are not limited to, demand for our products, operating results of 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.

Although the company believes that the assumptions underlying these statements are reasonable, any of them can be proven inaccurate and there could be no assurances that the results will be realized. The company undertakes no obligation to update the forward-looking statements made during today’s call. In addition, references maybe made to certain non-generally accepted accounting principles or non-GAAP measures for which you should refer to the appropriate disclaimers and reconciliation in the company’s SEC filings and press releases. Kopin Corporation’s Chief Executive Officer, Michael Murray will begin today’s call with an overview of Kopin’s progress within the company’s strategy. Following Michael, Kopin’s CFO, Richard Sneider, will review the company’s fourth quarter and full year 2023 results.

I would now like to turn the conference over to Michael Murray.

Michael Murray: Thank you, Quinn. Good afternoon, everyone and welcome to our fourth quarter and full year 2023 earnings call. I am very proud of the significant progress we have accomplished this past year on our transformation plan and achieving our fifth consecutive positive book-to-bill quarter, enabling over $55 million in backlog for 2024. As mentioned on our third quarter results call, we were expecting a new configuration weapon site order in late December, which would significantly increase our demand for the year. And if received, we would need to take actions within the quarter to prepare the plant for such an increase in demand. Based on our understanding that our recently announced $20.5 million order would be received in early 2024, we took the decision to extend our holiday shutdown period which impacted Q4 revenues so that we could install new automation equipment, retool and clean the plant to accommodate the anticipated significant increase in production and to improve production flow for long-term profitability.

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Q&A Session

Rich will provide more information on the quarter results shortly. During my first earnings call as CEO last March, I referenced our strategic initiatives for long-term success. And I’ll update each of these initiatives briefly and in more detail and in our upcoming shareholder letter. Turning to our first strategic initiative, building the backlog, during the fourth quarter of 2023, we booked follow-on orders of approximately $6 million for our thermal weapon IP assemblies as well as several smaller orders which resulted in a book-to-bill of approximately 1.2 to 1 for the fourth quarter, as mentioned, our fifth consecutive positive book-to-bill quarter. The $6 million order was a follow-on and the $20.5 million order is a new configuration that we received this quarter and represent a significant increase in year-over-year volume in future revenue and brings our current backlog level to $55 million.

We believe this is a record level of orders for the last 10 years. Furthermore, we do anticipate additional follow-on orders for both of these products and other products as well in 2024. Based just on this current demand, Kopin will potentially ship triple the volume of weapon sites within the calendar year of 2024. We also continue to acquire inventory into the first quarter to service these larger contracts that will go into production in 2024. Now turning to our second strategic initiative focused on our fab-light strategy, we’ve also made significant progress in the fourth quarter and in 2023. As a reminder, Kopin is the only U.S. manufacturer of human-centric AR and VR application-specific optical solutions and micro displays that are used primarily to provide situational awareness for warfighters, surgeons and spatial computing device users.

You can find our solutions in weapon sites, armored vehicles, a surgeon’s head mounted display, and pilot helmet visors. To support the demanding needs of our individual markets between consumer medical, industrial and defense customers, we have taken significant steps throughout 2023 to expand our OLED and microLED technology development to partners outside of China, which are U.S. DoD approved and in regions that are NATO supportive. We will complete this transition this year. This new strategy allows Kopin to manufacture our backplane technology and deposit either LCD, OLED, microLEDs or LCOS either internally or externally for cost, security of supply and performance beneficial to the end customers. An early success factor of this strategy was announced on Wednesday this week when we announced our European U.S. DoD OLED partner was able to achieve brightness performance far higher than that of our consumer vendor, resulting in an OLED display with a lifetime brightness performance of more than 20,000 candelas per meter squared at lower power consumption, which is market leading and enabling.

Our third strategic initiative is focused upon visual acuity systems and head-mounted display technology developments. As the technology of microdisplays expands from AMLCD to OLED and now to microLED, our industry has reached an inflection point due to the size, weight, cost, usability and neurological issues with AR/VR systems that remain unsolved and are gaining adoption rates. Kopin can and will solve some of these issues. And last quarter, we announced we are working with a software – working on a software-defined AI-enabled backplane called our neural display. The neural display architecture features embedded sensor pixels within the screen focused on the user’s eyes providing immediate feedback to the AI software powering the display.

The feedback from these pixel sensors empowers the software to quickly adjust the contrast or the brightness of the display to accommodate changes in the user’s vision, neurological state and their environment. This is what we mean when we say we are providing the knobs to the users through software to allow the technology to adapt to their personal preference. The neural display will empower users to capitalize on the full capabilities of our displays. The primary benefit of this design approach our user comfort, decreased weight by removing cameras in the system, adaptive eye tracking and dynamic vision control and lower system power consumption. We believe that this new design will resolve many of the flaws inherent in AR or VR headsets on the market today in consumer and military applications alike.

This is primarily due to the ubiquitous human response to fight or flight scenarios, video-induced nausea, neck strain caused by cantilever effects of forward-facing weight and battery sizes required due to high power consumption of the current headsets. The neural display will allow for smaller and more comfortable headsets, where the user can encounter a variety of scenarios while staying engaged specifically in high stress environments found in defense and spatial computing markets. Furthermore, throughout the year and as evidenced in our recent contract awards, we have been focusing on widening our customer base and taking a greater share of our customer spending by adopting the application-specific optical solution strategy. Indeed, we will still sell individual displays and we are winning sockets from competitors who have been struggling of late, but our core competency in differentiation is in delivering a fully integrated and optimized solution for our customers’ unique application.

This is evidenced in our success delivering our CR3 module to market for our partner, HMDmd, for assisted surgery customers. The design was completed entirely by Kopin with user inputs from HMDmd. It is elegant, lightweight and brilliant to use. We continue to work on similar applications with several new customers in the head-mounted display market, specifically in spatial computing and defense applications. Recently, we demonstrated our OptiVISOR heads up display with Wilcox, which we expect it to be a new source of revenue for the company. We expect to announce more of these fully integrated systems and new customers to Kopin shortly, while we continue to drive innovation and research into our advanced display architectures as well that are also being successfully funded, like the recent award from the Navy as an example.

As the military adopts more integrated visual acuity systems, Kopin is uniquely positioned as the only U.S. owned micro display manufacturer that produces four different types of micro displays, a fully integrated optical design capability, associated drive electronics capability, and now a software-defined AI enabled architecture. Throughout 2022, we have been working with our government and military events research labs to create technology roadmaps and funding projects, which will increase our technology readiness level and mature our technology to intersect next generation technology integration and insertion efforts. We expect to announce more progress on these initiatives throughout 2024. Now set in the past 2023, we were focusing on improving our on-time in-full or OTIF rate and delight our customers.

Throughout the year, we have continually improved in the strategic initiative area and have moved from a 63% on-time in-full rate to 84 across the company in under 1 year, indeed, a tremendous improvement, but there is still more to accomplish. And we remain focused on reaching and surpassing our goals in this critical area. Now, complementary to our on-time in-full initiative, returning the operation to a cash breakeven level as the milestone of our transformation, we came very close both in the second and third quarters when expenses related with a lawsuit and non-cash expenses are removed. We achieved this milestone by improving margins and closely scrutinizing R&D and SG&A spending with continued efforts on what we can control and deliver solid margins and growth our investors look for.

We have the contracts in place to return to revenue growth in 2024 and expect growth of 20% or greater this year and our goal remains to become a more profitable company this year. Lastly, most importantly, our OneKopin cultural initiative and talent strategy made a significant progress this year. Due to the hard work of our Board of Directors, the leadership team and all of our Kopin team members, we were able to retain the best talent within Kopin, attract new talent with the skill sets we require for growth and refocus the company into an organization focused on execution. We celebrated our new direction, our new organization and strategy this quarter with the announcement of our new brands, our new logo and website. Our team at Kopin continues to improve, win and grow.

And it will be the talented people of Kopin that continue to execute on these initiatives this year. I’ll now turn the call over to Rich, our CFO to review our results in further detail. Over to you, Rich.

Richard Sneider: Thank you, Michael. Turning to our financial results for the fourth quarter, total revenues from Q4 2023 were $8.6 million versus $12.2 million for the prior year, a 30% decrease year-over-year. Product revenue for the fourth quarter ended December 30, 2023 were $6.8 million compared to $8.7 million for the fourth quarter ended December 31, 2022. The decrease in product revenues was a result of lower defense and industrial product revenue, which decreased by $1.6 million respectively year-over-year. The lower defense revenues were in part due to planned refurbishing of the cleanroom during the last weeks of December, we discussed in our third quarter financial performance call. The lower industrial revenues is a trend we saw throughout 2023 due to weakness in the Chinese market.

In the fourth quarter of 2023 funded research and development revenues decreased by $1.6 million or 47% due to the completion of several programs. Cost of revenues for the fourth quarter of 2023 were $7.2 million or 106% of net product revenues compared to $8.9 million or 103% of net product revenues for the fourth quarter of 2022. Negative gross margin was partly associated with the cleanroom refurbishment. In addition, we wrote off approximately $400,000 of raw materials, we believe would have low yield if we use them in production. Further Q4 2023 cost of sales includes $445,000 of non-cash stock compensation as compared to $25,000 for the fourth quarter of 2022. Excluding the impacts of these items, cost of sales as a percentage of product revenues would have been 94% for Q4 2023 versus 103% for Q4 of 2022.

R&D expenses for the fourth quarter of ‘23 were $2.2 million compared to $4.7 million for the fourth quarter of 2022, a 52% decrease year-over-year. The decrease in R&D expense is attributable to a decrease in funded research development expense as certain programs were completed and lower internal expenses related to OLED development. SG&A expenses were $5.9 million in the fourth quarter of ‘23 compared to $4.9 million in the fourth quarter 2022. The increase was primarily due to legal fees associated with our pending litigation. Turning to the bottom line, net loss attributable to Kopin for the fourth quarter of ’23 was $6.5 million or $0.06 per share compared with a net loss attributable to Kopin of $6.2 million or 7% – or $0.07 per share for the fourth quarter of 2022.

During the year ended December 30, 2023, total revenue for the year ended December 30, ‘23 were $40.4 million compared to $47.4 million for the year ended December 31, 2022. Product revenues for the year ended December 30 ‘23 were $25.9 million compared with $32.4 million for the year ended December 31, 2022. The decrease in product revenues was a result of lower defense industrial consumer product revenues, which decreased by $2.2 million, $3.4 million and $900,000 respectively year-over-year. Revenues from the sales of products for defense declined due to lower revenues from thermal weapon site applications, which were partially offset by higher revenues from avionic applications. Revenues for industrial applications declined due to lower revenues for products with 3D automated optical inspection due to continued weakness in the Chinese 3D automated test market and lower revenues from industrial headset applications.

Consumers revenues declined in ‘23 compared to 2022 due to lower sales of OLED displays for consumer applications. In the full year, 2023 funded research and development revenues decreased $900,000 or 6% due to decreased funding for new display technology development in the U.S. programs and OLED development costs, which were partially offset by increased funding for armored vehicle targeting and medical headset development. Cost of product revenues for 2023 were $25 million or 96% of product revenues compared to $32.6 million or 100% of product revenues in the prior year. Cost of product revenues decreased as a percentage of revenues in 2023 as compared to 2022 primarily due to an increase of higher margin products for defense applications in ‘23 versus 2022 and lower sales of lower margin products for defense applications in ‘23 versus 2022.

2023 cost of sales includes $1.2 million of non-cash stock compensation as compared to $95,000 for 2022. Excluding the non-cash stock compensation cost of sales, as a percentage of product revenues would have been 92% for Q4 2023 versus 100% for 2022. R&D expenses for ‘23 were $10.8 million compared to $18.7 million for 2022, a 42% decrease year-over-year. The decrease in R&D expense as compared to prior year was seen in both funded and internal R&D. Funded R&D expenses were $7.2 million for ‘23 as compared to $10.3 million for 2022, a 30% decrease primarily due to completion of contracts for defense programs awarded prior to ‘23. Internal R&D expenses were $3.6 million for ‘23 compared to $8.4 million for 2022, a 57% decrease primarily to a decrease in OLED development costs.

SG&A expenses were $21.8 million for ‘23 compared to $18 million for 2022. SG&A for ‘23 increased compared to ‘22 primarily due to an increase of approximately $5 million in legal and professional, $1 million in non-cash stock-based compensation partially offset by $1.3 million decrease in compensation and other benefits. Net loss attributable to Kopin Corporation for ‘23 was $19.7 million or $0.18 per share compared with a net loss attributable to Kopin of $19.3 million or $0.21 per share for 2022. Net cash used in operating activities for ‘23 was approximately $15.3 million. Kopin’s cash and equivalents and marketable securities were $17.9 million at December 30 compared to $12.6 million at December 31, 2022. The amounts discussed above are based on our current estimates and listeners should review our Form 10-K for the year ended December 30, 2023 for any possible changes and of course, additional disclosures.

And with that, I’ll turn it over to Michael for closing remarks and then we’ll take your questions.

Michael Murray: Thanks very much, Rich. As evidenced in our fourth quarter and full year results, our focus continues to be on strengthening our record order book, pushing on time and full rates, higher cost controls, and making sure that the strategic investments in products and people, which in the aggregate will improve cash flow, and provide long-term sustainable, profitable growth. We’ve also been working hard on our brand, external marketing, and website development efforts, we’re ecstatic to announce that we’ve recently launched a new website and identity. Looking forward, we are fortunate to have world leading market making customers, we’re supporting customer during this transformation. We have a unique strategy that distances ourselves from commodity competition, tremendous products and capabilities that new and existing customers value.

As we continue to advance and move up the value chain and gain more share of our customer systems and spending. We are carefully selecting new strategic partners to work with and remain focused on new opportunities and development projects, which support our strategic plan, along with opening the aperture to non-organic growth opportunities as well. To this end, and due to our application specific optical solution strategy, our qualified opportunity pipeline has grown exponentially in the past few quarters due to the recent geopolitical issues, and increased sovereign and foreign NATO spending. We expect several new customers, partners and project towards an announcements soon, which will not only add to our order book, but will fuel larger returns in the future as these new projects move into full rate production.

Perhaps the most culturally important transformation is that Kopin remains focused on invention and innovation, but with more focus on cost controls and return on our investments. These new inventions discussed today will help drive our innovations that solve our customers most difficult technical problems, and serve as the bedrock of our business and fuel our long-term sustainable growth for our employees, our customers, and stakeholders. Thank you everyone for your time today. And for showing interest in Kopin. I’d like to thank our employees, customers and stakeholders for their continued hard work, support and dedication. And with that, operator, we’ll open it up for a few questions.

Operator: Certainly, thank you, Mr. Murray. [Operator Instructions]. We will go first this afternoon to Matt Sheerin at Stifel.

Matt Sheerin: Yes, thank you. Good afternoon. Couple of questions for me. One, Michael, you talked in your outlook and in the release about expectations for double digit growth this year. And you also talked about that $55 million in backlog. How should we think about how that plays out? Obviously, you were down for various reasons this quarter. And, do we expect to see that growth year-over-year begin in Q1? Or is it going to be more back end loaded? And of that $55 million of backlog, that doesn’t necessarily mean that’s going to be shipping in this year? Right. And some of that could be pushed out.

Michael Murray: Yes, great question, Matt. So firstly, we see the back half of this year being exciting growth for the company in Q1 right now where we sit is we’re actively purchasing materials for those orders. So as we get materials, as we start building based on our 606 accounting methods, we’ll be able to achieve higher growth rates and revenue rates along with that as we progress. So I think you’re going to see an escalated revenue growth, quarter-over-quarter, our customers are pulling demand to the left, meaning they will take earlier deliveries. And our goal is to ship everything we’ve gotten backlog in 2024 whether or not we’re able to do that as a function of getting the parts in here. But I’m pleased to say that our hiring is going quite well in terms of production. And we took a really tough decision in Q4 to take those couple of days to realign the fabs so that we can grow. So that’s why we took that decision in Q4 versus this year.

Matt Sheerin: So obviously you do expect Q1 to be up year-over-year of that?

Michael Murray: Above a Q4 sequentially.

Matt Sheerin: Okay, but year-over-year, it’ll still be down in other words, right? Because you’re at 10 points haven’t really…

Michael Murray: Yes.

Matt Sheerin: Okay. Okay, so to get to that, so you’re looking at, you were talking like the high teens plus growth in the second half basically to get those numbers right. Yes. Okay, and then on gross margin. I know there were a lot of moving parts. I love here to clarify on that what was the raw material right off all of out in, given that you’re in sounds like you’re in the build mode in Q1. So should we expect gross margins should be depressed, in other words below where they were in your Q2 and Q3, which is in the mid-40s?

Richard Sneider: Yes, so as it relates to the $400,000 material right off, we are working hard. As you saw, when you pulled out of non-cash charges, we did a pretty good job, both in Q4 and year-over-year in improving gross margins. And we want to maintain that track. And as Michael said, it’s all about materials for us. And so, we’re asking our vendors to step up, there’s certain components, which are very sophisticated in our product. And every now and again, when they try to increase and ramp up, we got a lot of it that a lot of material. Not a lot, a lot, not a lot of material, that it just doesn’t pass inspection. And so, sometimes you’ll look at and you say, well, maybe it’ll work, maybe it won’t. But we’re just making.

As Michael mentioned, we put a lot of quality programs in the stop that stuff from getting in the line, before we spent a lot of money manufacturing product that ultimately may or may not pass. And so that’s what we did, we had $4,000 material, we looked at it, and we said, okay, we’re not really sure that we put this stuff through the line, it’s going to get there. And so we made the decision just to write it off. We work with the vendors, sometimes they give us credit, sometimes they don’t, it’s an ongoing issue. And so that’s just going to continue probably through the first half of the year. And that’s why honestly, we’re being somewhat cautious about guidance for the first half of the year on growth. Because we really need to see our vendors step up and provide the materials.

If we’re successful, then we’ll do better. But we’re taking a conservative approach right now.

Matt Sheerin: Okay, understood. So it’s another word as you expect growth. So when should we be modeling gross margins and the first half, like below 40%?

Richard Sneider: Yes.

Matt Sheerin: Yes. Okay. And that just goes back to the – I mean, I guess, question of profitability. Michael, I know last year, you talked about entering fiscal ‘24 cash flow breakeven EBITDA breakeven, and obviously, you’re going to be below that for the next couple of quarters. So I guess the question is, what confidence that you have that you can get to that those profitability goals by the second half?

Michael Murray: It was a function of scrap and revenue. So an absorption rate on the FAB. So as we build more through the FAB, we’re able to keep that absorption rate high. And that’s what will drop through the bottom line. So one of the early success factors that I see and why I am confident that we’ll achieve that goal this year is, we are touching more on inbound inspection, which is great news, the problem that that creates, though, if we order 100 lenses as an example, and 10 of them are returned to the vendor for quality issues, that leaves us 90 to build. So we went through those tribulations last year, quarter three and quarter four. And now we’re adjusting our models and ordering appropriately based on the new quality levels that we’re seeing.

So that’s number one. Number two, the volumes that we’re now seeing on the thermal weapon site will allow us to increase our absorption rate on the FAB and get to that breakeven point where we then start to drop more down the bottom line. So we see that time being Q3, Q4, but we really got to hustle and get the product in here and get moving.

Matt Sheerin: Got it. Okay. Thanks very much.

Michael Murray: Yes, the other thing, Matt, I would add is the litigation goes to trial in days, roughly, and so we would expect it to be over by middle of April. And that has been a substantial cash drain.

Operator: Thank you. We go next now to Glenn Mattson at Ladenburg.

Glenn Mattson: Yes. Hi. Congrats on the business momentum and the backlog builds and everything. Rich, speaking on the trial that you just mentioned the – can you quantify what do you expect the expense to be? And I guess it’ll be partial, will all be Q1, I don’t know how long the trial is expected to last that kind of thing, just your general sense for how we model out that portion of the expense line.

Richard Sneider: Trials starts March 20. We’re told it’s a 4-week trial. So 3rd week in April, it’s over. And it will be several million dollars.

Michael Murray: It all has to come back to Matt’s question. One of the perturbations to the business has been that ongoing litigation and we did take a significant amount of cost in Q4, expecting that this would have gone to trial or at least, was prepping to trial when there was a COVID issue in the courts. So that was an unforeseen issue that quite frankly, just cost us more cash.

Glenn Mattson: Great. On the general, the other backdrop that you talked about on the business side, Michael, you mentioned the backlog and the order flow that you’ve gotten recently, but also that there could be some further follow-ons to some of these orders that you’re doing now and some potential kind of bigger things as well. Can you just kind of help quantify what are the some of the two like – one or two or three like biggest opportunities. Just remind us what’s out there, maybe it’s like the armored vehicle programmer or something else that just kind of frame how to think about – what that could mean for this year and for ‘24 and ‘25 potentially as they as this stuff comes through.

Michael Murray: Sure. So to quantify it as best I can, the thermal weapon site program is really actually hitting full rate production now. It’s, it was ongoing for a few years and I think it’s hitting its stride now. And those retrofits and upgrades are happening at the army level. Furthermore, there were some recent new weapons selections that if you google hard enough, you can find them for squad weapon. What have you that are also increasing adoption rates, just simply because there’s new guns to outfit. So we’re seeing the benefit from that. Moreover, I mentioned, NATO and NATO spending, if you do the math around new countries joining NATO, sovereign and foreign spending, that is going on, we will be beneficiaries of that. I believe hard to quantify when and where and how.

[indiscernible]: So that’s on track. We’re on track with that program order, which is great news. We also have our avionics customer that is transitioning over to OLED and we’re expecting that to happen this year as well, which will be additional orders on a Kopin. So just sit here in March with $55 million of backlog personally a year ago, I wouldn’t say we would get this far, but its tremendous effort and tremendous results by the team.

Richard Sneider: Yes. The only thing I would add is that there are also a couple of other significant programs that are in process. If our government ever becomes functional, and can pass a budget and get through this.

Michael Murray: In the frame that it’s we’re looking anywhere between $8.4 million to $15 million, potentially even $20 million. If once the government gets back working and has some resolutions that have passed once the government works So, we’re expecting those to happen and my view is that we’ll have several new customer contracts that we’ll be able to announce here shortly. So, yes, hope that answers your question, right.

Glenn Mattson: Yes, yes. No, definitely in the very helpful to formulate. And just last one for me. So during the current quarter Q1 is when the Vision Pro launched or whatever. Can you just give a sense of like if that’s spurring a lot of more conversations on the – you talked a little bit about kind of some technology you’re developing for VR display type stuff, but some of that might be further out. But just perhaps there’s been a maybe an uptick, but it’s worth talking about in the – in that space. Since the success of the Vision Pro. Thanks.