Dawn Goetter - Director, Communications Alexander Tokman - President and CEO Stephen Holt - CFO.

Nick Altmann - Northland Capital Markets Kevin Dede - Rodman & Renshaw.

Welcome to the Q3 2016 MicroVision Incorporated Financial and Operating Results Conference Call. My name is Richard and I'll be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note that this conference is being recorded.

I'll now turn the call over to Ms. Dawn Goetter, Director of Communications. Ms. Gotter, you may begin..

Alex will report on the operation results. Steve will then report the financial results. There will be a question-and-answer session and then Alex will conclude the call with some final remarks. I now would like to turn the call over to Alex Tokman..

Thank you, Dawn. Good morning. Thank you for joining us for the discussion of MicroVision's third quarter 2016 business results. Today we have lots of exciting news to discuss with you.

First, strong third quarter and nine months financial results; second, we’re announcing a new line of laser beam scanning or you’re going to hear it as LBS engines, we’ll be launching starting early next year; and third, new strategic contracts we signed recently with world leading technology companies, one for advanced driver assistance systems also known as ADAS used in autonomous vehicles and the other for augmented reality applications.

Let’s begin with the Q3 financial results. We expect to hit the upper half of our revenue guidance and close 2016 somewhere around 60% higher than the year prior. Steve will provide more details on granularity. Year-over-year revenue for the third quarter is up 67% and year-to-date is up by 61%.

After a solid revenue growth in 2016, we plan to add to it in 2017 by launching our own line of LBS engines, let me tell you more about it. As we helped Sony to build a funnel of OEM customers for their engine over the past year, we identified customer demand for features and markets with Sony solution and roadmap to not address today.

Specifically gesture recognition and ability to interact with projected information and applications requiring a smaller engine size. So we acted quickly and begun investing in 2016 in to the development of new LBS engines to address the specific market needs.

First, a small form factor, high definition display engine for applications for size and flexibility of products designed are important. Second, an interactive touch engine that integrates display and 3D sensing functions to allow the user to interact with projected images.

And finally the third, a mid-range glider which stands for - essentially LiDAR is Laser Light Radar, 3D sensing engine for industrial products and robotics. As of today, we are working with new high volume manufacturing partner to produce these engines for us, one who makes well known products for major electronics brands.

We expect to launch these new engines as follows; our first engine has been already designed and samples are being built this month to be available to customers for sampling next month. This engine is targeted for production in early Q2 of 2017.

Our second engine features interactive touch, samples of this product should be available in Q2 2017, and should be ready for production in Q3 of 2017. Samples of third engine for mid-range LiDAR applications should be available in the second half of 2017 and it should be ready for production in the first half of 2018.

We are creating demonstrators based on our three new offerings and plan to showcase them at CES in January. We expect the revenue from the new engines to significantly add to the revenue from component sales and royalties from our existing customers.

In fact, we anticipate that sales of new engines could contribute between 30 million to 60 million within the first 12-18 months following the availability of the first mass product units. The potential benefits of offering LBS engines are compelling.

First, these engines will target new attractive consumer and industrial market segments such as interactive Pico projections and 3D sensing LiDAR that are sort out by OEMs. Second, we’ll make it easy for those OEMs who want to make products with MicroVision’s technology without the long lead times and investments related to making their own engines.

Third, we are creating a near term new revenue source from multiple customers in addition to Sony and Sharp. Fourth and final benefit is that we are heavily leveraging MicroVision’s LBS platform among these engines by sharing prior and current investments in to expensive long lead components such as MEMS and ASICs.

So you could see there are many benefits from doing this and we are excited about this. Of course, we will continue to support our existing customers and vertically integrated OEMs and ODMs who may prefer to license our technology and built engines with MicroVision’s components. With that, let me now discuss status with Sony’s customers.

We believe Sony is very committed to this market and we continue to assist their sales and marketing team in adding OEM customers to their sales funnel. One of Sony’s product business units recently launched a refresh of the original MPCL1 product which has been a best-selling Pico projector on Amazon.

Other new small projector products we previously discussed such as ViewSmart and Celluon’s Picobit are appearing in the market. However, several new OEM products using Sony’s engines that were expected to enter the market in to 2016 have been slower to launch than originally expected, including a major regional brand we discussed last quarter.

These product launch delays by OEMs relate to a variety of product readiness and business issues between Sony and its customers.

We are disappointed obviously that it has taken them longer than anticipate, but we remain enthusiastic about our near-term growth prospects from the Sony engine, and we view Sony obviously as an important customer and very close partner.

As we look to expand our customer relationships and extend our technology to applications beyond Pico projection, we are very excited to announce that we have signed two agreements in the autonomous vehicle and augmented reality spaces with world leading technology companies.

Under one of these contracts, we will deliver a proof of concept prototype, our 3D sensing solution for Advanced Driver Assistance Systems for autonomous vehicle. Under the second contract, we will deliver a proof of concept prototype display for augmented reality application.

The combined value of these contracts is nearly $1 million and both are expected to be completed in 2017. But this is important but, the real revenue opportunity lies in the potential to be designed in to the future products in two markets that have the opportunity for very high growth.

If the deliverables of the first phases are successful, these relationships could result in additional agreements that could lead to more near term revenue and to our technology being in these customers products.

We are looking forward to move ahead with the plans and programs I just outlined to you and we believe the actions we are taking will create significant value for all of you. Before moving on to the financial results, I also want to address some misinformation and opinions circulation out there.

Questions have been raised very simply and incorrect assertions were made over what products we are targeting for embedded projectors, our IP protection and laser safety of our devices or technology. Let me clarify those points.

Regarding our strategy for what products are being targeted for engines with our technology, an embedded smartphone is certainly high on that list, no questions about it. The Qualper phone out of China that we have discussed on previous calls is a perfect example of how a display engine with our technology can be integrated in to a smartphone.

No one has a smartphone with non-MicroVision laser projection technology available today. We believe ours is the only technology with the product that is available for sale at this time.

That leaves us to the second point of IP protection for LBS systems, and whether companies that have made announcements of engines and other products using LBS technology are infringing on our patents. At this time we are not aware of any product being sold using LBS engines other than those licensed by MicroVision.

Various announcements made by companies of their intention to sell products or showing concept devices and other promotional activities are not activities that trigger IP discussions.

To date two major consumer electronics companies Sony and Sharp have publicly recognized the benefit of our technology and the value and validity of our IP by entering in to licensing agreements with us. We are confident in our IP position for LBS systems and we will vigorously enforce our rights if and when it becomes necessary.

A final point that we’ve been getting a lot of inquiries about is laser safety, in particular on selling products with Sony engine in Europe. Using laser safety to combat LBS technology is an old tactic from our competition.

The standards are very clear and we believe selling products with Sony LBS engine in Europe is permissible under current standards as long as the guidelines on marketing for children are observed and the products are properly labeled.

We hope that this removes any confusion that may have been created by recent misinformation and hopefully it removes any ambiguity that exists today. Now let me hand it over to Steve for financial updates. .

Thank you Alex. We had some nice results in the quarter, we increased revenues 67% over Q3 of last year, and in the third quarter we recognize 3.6 million of product revenue which set a new high for the company.

Third quarter total revenue was 4 million; comprised of 3.6 million of product revenue, 331,000 of royalty revenue; and 52,000 of contract revenue. Last quarter, revenue was 4.2 million consisting of 3.5 million in product revenue and 600,000 of royalty revenue.

So in Q3 we recognized about 100,000 more product revenues, but royalty revenue decreased about 300,000. This decrease in royalty revenue is due to fewer display engines being shipped by Sony versus the prior quarter. The decrease in royalty revenue also had an impact on gross margin. Our gross margin Q3 was 30% down eight points from last quarter.

Of the 8% decrease in gross margin, 4% was due to the royalty revenue reduction, 3% was due to scrap and scrap material at a secondary supplier we were developing, and 1% was due to a shift in product mix. We shipped more MEMS and fewer ASICs in the quarter and ASICs today had a higher margin than MEMS.

I do want to make it clear that the actual cost for MicroVision to produce MEMS decreased on a per unit basis in Q3 from Q2. And we are pleased that we continue to make strides to reduce the cost on the product that generates the vast majority of our revenue today.

Backlog at the end of the quarter was $2.3 million, 1.4 million related to Sony product orders and 931,000 related to the development agreements that Alex mentioned. On the backlog, the lower royalty revenue indicates that there was less sell-through of Sony display engine in the quarter.

The result is that Sony has adequate inventory of MicroVision MEMS today and therefore they have not yet placed a follow-on order from MEMS. While a follow-on order can happen at any time, we think that it is unlikely we’ll see a follow-on order in the fourth quarter. This means that in Q4, we will ship all remaining Sony orders.

Given lead times for product orders, if we don’t see a new Sony order for MEMS in the fourth quarter, there will likely be very little Sony product revenue in the first quarter. This could result in revenue in Q1 2017 as low as a few hundred thousand.

However, due to the launch of the engine business and other potential customer interests, we believe that Q1 revenue will be much higher.

We expect in the year with total revenue of 14.5 to 15 million which represents the upper half of the revenue guidance we gave for this year, it’s still too early for us to give specific revenue guidance for 2017, but we do want to communicate that we believe 2017 will be a year of significant revenue growth.

As Alex mentioned earlier, MicroVision anticipates that demand for our engines could result in revenues ranging from $30 million to $60 million in the 12 to 18 months following the availability of the first production units.

We should also mention that we believe our gross margin on the new LBS business, should initially be in the low to mid-20% range, with our goal to improve it overtime. We still expect to target 40% on the MEMS and royalty portion of the business.

Moving on to other Q3 results, Q3 operating expenses were 5.3 million compared to 5.1 million in operating expenses in Q2 and 4.1 million in Q3 of last year. The increase is mostly due to an increase in purchased engineering services and increases in salary and benefit costs. Headcount has increased in 2016.

As per the three quarters of the year, headcount has increased by total of 11 people, six in operations, two in engineering, and three in SG&A, two of whom were replacements for people who left the company in later part of 2015.

Our third quarter 2016 net loss was 4.1 million or $0.08 per share, compared to a loss of 3.5 million or $0.07 per share last quarter. The net loss in Q3 of 2015 was 3.5 million or $0.07 per share. Cash used in operations was 3.8 million; Q2 cash used in operations was 4.1 million.

The decrease in cash usage this quarter is primarily due to less cash used in working capital during the quarter with most of the change in accounts receivable. In Q3 of 2015, cash used in operations was 3.6 million. And finally, cash and equivalents on hand on September 30 were 5.8 million. That concludes the financial results.

We will now open the call for questions. .

[Operator Instructions] Your first question online comes from Mr. Mike Latimore from Northland Securities. Please go ahead. .

This is Nick Altmann on for Mike. Thanks for taking my questions here.

Can you guys just talk a little bit more about the visibility that you have for 2017, and then I guess specifically do you guys think the LBS engines will be the majority of revenue in 2017?.

These are good questions. What we discussed today, we are comfortable with. Basically we believe we’re going to have two primary sources of revenue, one is coming from Sony, the other one is coming from the new line of LBS engines.

As Steve said we have not given 2017 guidance here because we’re going to finish 2016, but we expect the next year to be a year of significant growth and we expect when we communicate in early 2017 what we’re going to do specifically for ’17 is we may additional information. .

And then you guys talked about, you’ve hired or headcount is gone up by 11 year-to-date.

Can we expect an increase in headcount going forward to support the new initiatives that you guys laid out?.

Yeah, we see a few more headcount mostly as we finish building out the sales team for the engine business, and maybe one or two more in operations, but not too much more, we are pretty much getting near the end. .

But relative increases that Steve described that were included in the 11 are applied to the new LBS engine line since the beginning of the year. .

And then I guess last question, do you guys have a production contract in place to support the revenue guidance or will they follow completion of the services contract?.

Remember we mentioned we enlisted, we engaged with high volume manufacturing partner who is today delivering millions of products to consumer electronic brands and we are right now in engine development phases with them. So we expect our capacity to support the 30 million to 60 million growth, we expect in the first 12 to 18 months of introductions. .

Our next question comes from Mr. Kevin Dede from Rodman. Please go ahead. .

Thanks for all the detail, obviously lots going on. So I was hoping we might just kind of review again to make sure I have it straight. The two big contracts that you feel could end up driving that 30 million to 60 million is - am I right in understanding that those of the two development contracts that you announced with this release or --..

Kevin we announced several things. We announced that we’re creating and launching new line of engines that we expect to contribute to our top line between 30 million to 60 million from the first 12 to 18 months of introduction that’s number one.

Second, we also announced today that we signed two strategic development agreement with leading technology companies, one for augmented reality and the other one is for autonomous vehicles applications. When we talk about the significant revenue growth in 2017, majority of that revenue we expect to come from the new engines and Sony.

However, we expect the contracts that we are signing, we have signed and we hope to be continued for the next phases to contribute some. But majority of the revenue will come from products, our products being engines and components we sell to our customers Sony and Sharp. .

That helps Alex, yeah thanks. So just to review the timing again, the three engines are the smaller form factor, the interactive engines and the LiDAR engines.

Now just to make sure I understand the timing correctly, you’ll need all three of those out and then take the next 12 to 18 months beyond the release of the third one, right? But you’re not really thinking happens until the end of 2017, is that a fair way to look at it. .

When we say 12 to 18 months since first months production, we are talking about since the first engine comes to market, which right now we’re targeting early Q2. Timeline for 12 to 18 months starts from the launch of the first engine, not all the three engines have to be in the market. .

Well I apologize Alex that didn’t saturate through very clearly. So I’m glad that we got that clarified. Congrats on all of that.

But I guess where I am still a little shaky is that the time from the signing of the contract for the development of the AR and the ADAS deals and the time that you expect those products to get to market still seems pretty long.

So can you help me understand what’s going on through that?.

Absolutely. So, we enter in to phase one with each of these companies. Our goal is to deliver a proof of concept prototypes that they did need to test and evaluate and ensure that we can meet their requirements.

If that phase is successful, this could result in to extended development efforts with a much higher NREs that would lead to commercialization and has been inside their products.

We are in the first phase, first phases will be delivered next year, they’re going to evaluate, they’re going to come back to us and tell us yea or nay, and if its yea, it could be much more significant the development contract leading to commercialization of our technology inside their products past 2017.

It’s not going to 2017 product revenue, but it could be 2017 NRE revenue..

Okay, that’s fair. Then the development of the other three engines, right the small form factor, the LiDAR one, and the interactive engine. Now those three you’ll get to market on your own without --..

Correct. What (inaudible) the high volume manufacturing partner who has done it for other major brands, so we feel comfortable that we have someone who can produce high volume engines with high quality, consistent with our customers’ expectations..

Okay, so is that agreement in place?.

This agreement is being negotiated with specific details, but the work already has begun. The joint development work has begun already. .

Right. And I understand the smaller form factor is very, very close.

Do you think we’ll be able to see that in product at CES?.

We’re going to show three demonstration products, one is based on a small form factor engine, the other one is based on this interactive touch solution, and finally we’re going to show another demonstration showcasing the mid-range LiDAR capabilities.

So actually, yes, we intended to display this and show it to customers and discuss opportunities at CES..

Okay.

So the mid-range LiDAR is not what you’d use in ADAS right, you’d use a longer range?.

ADAS requires longer range, but the fundamental system is the same. It requires optimization so the ADAS application requires something to go to further out ranges and it requires certain enhancements that need to be made.

The mid-range LiDAR system is very close to the interactive Pico projection system and therefore we can use the same platform and create two separate applications, one for consumers to interactivity, the other one is for ranging and sensing objects if you need autonomous operation for robots and industrial vehicles or other devices. .

Okay. Do you have a good feeling for the actual product in the use of the three LBS engines that you’re developing i.e. number one a smaller form factor.

I’m just thinking about what they’ll look like in the end market?.

Remember why we’re doing it. We’re doing it because for the past year and a half we’ve helping Sony sales and marketing team to create demand for Sony’s engine. That’s where we spend most of our efforts.

What we realized for all this effort that we had to dismiss a group of customers who needed either smaller engine or wanted interactivity or industrial customers who wanted just 3D sensing only feature and did want a display. So we obviously compiled this information, and we still - actually we’re helping Sony to add customers to their funnel.

But we also realize there’s a huge unmet opportunity with customers who want other things that what Sony can offer today. So that’s when we decided to introduce these products. .

Last question from me, before I hop back in to the queue, can you just discuss some of the details behind the Lincoln Park deal, and how you have access to that capital and how we should expect to see it?.

Yeah, the Lincoln Park deal allows us to sell 150,000 shares every other day to them at a discount to the market price, and whenever we chose to do it, it’s at our choice. And the stock price needs to be above $1 for us to be able to do that. And the amount that Lincoln Park has committed to buy at this point is an additional 15 million..

Right, so that 15 million and what are those capital for you? Is that the way to look at it, and not 15 million shares?.

That’s right $15 million worth. .

What happens or how do you think about that should the stock price drop below $1..

Sorry, you cut out there Kevin..

This is really the last question from me.

How will you negotiate operations and cash used should your stock price below $1?.

Well, we are always continuing evaluating what our options are for raising funds, and if it becomes necessary for us to raise funds or we’re confident whether we’ll be able to find them. So that’s what you could say about that. .

Our next question online comes from Mr. Henry James from the State of Michigan. Please go ahead. .

The first thing that I would like to talk about is that sort of the ongoing products, some of the products I guess that were expected to be released but have been delayed.

I know we’ve had a refresh of one product and I was wondering if you could just speak to the potential or sort of improvement in the base technology of these new products that we see, sort of particularly interested in increases lumens.

Is that something that you think is still something we should look for, and if you could maybe just speak to your sort of confidence in the ability of the technology to sort of increase lumens for one?.

Absolutely Henry, one of the things - so two questions if I think, the product launch is the way to mention and then what do we do to increase the brightness, what’s up with this. There is no specific guidance; some of these delays have been pushed from Q4 in to first half of the customers.

Sony’s customers are developing products based on Sony’s engine. There are no specific patterns, there’s typically three types of conditions happen causing these delays. And again, one is OEM who develops the product in the middle of cycle determines that they want to add additional features that have nothing to do with Sony’s display engine.

And they decide to take a little extra time to add these features and therefore that timeline gets pushed. That’s one condition we see. The second condition is, there are a group of customers who are prominent headliners of Sony’s current funnel. They decide to add a feature that impacts Sony’s engine.

So they come to Sony and say listen, we want to add let’s say table top projection features, can you do it? Sony says, yeah we can do it, but it’s going to take us this time to add this.

So that’s a cause of another delay, and obviously the third cause is this commercial negotiations between Sony and their customers on their specific terms delivery, commercial terms etcetera. So we see these three reason as the primary causes for some of the shift that we described.

But we’re still enthusiastic and see some of the major brands that’s part of Sony’s funnel that intend to launch their products in the first half of 2017. But they delay their launches for the three reasons I described. So that’s one. The second question was, I think can we improve brightness? The answer is absolutely.

We already actually have done this and remember we provided all the necessary tools for Sony to increase the brightness on their engine.

We are not responsible, nor are we controlling the timing of introduction of when the brighter engine becomes available, but we know that we provided all the necessary tool for them to be successful and introduce engines with higher brightness. Our roadmap, as you can imagine, also contains the same feature.

Our goal is to continue to improve brightness while reducing the power and reducing the size. And we are pretty confident we can achieve all three and do it better than most. .

Okay. So with respect to the new engine that you’re going to release, the small form factor engine, I think it fits high definition display. Is that going to be consistent with the current high definition, are we moving to perhaps 1080p in terms of high definition. .

It would be consistent with the current display. .

Okay.

So this would just be perhaps a smaller form factor than what is currently available from Sony?.

Correct. Remember the first engine was a small form factor. So we encounter the group of customers that we had to dismiss over the past year and half is because their products require something a little bit smaller than what Sony solutions offers today. So we are going after these group of customers with this first thing. .

We’ve have no further questions at this time. I will now turn the call over to Alex Tokman for closing remarks. .

We had strong third quarter results, and I’m very pleased to have detailed our plans for new line of LBS engines planned for 2017, and our progress on strategic development contracts for advanced applications that collectively will contribute to near-term, mid-term and longer term MicroVision’s growth.

For the near term, we have shown a strong and predictable execution, with greater than 60% year-over-year revenue growth for the quarter and year-to-date.

In fact, we’re expecting to hit the upper half of our revenue guidance for ’16 and moreover we expect significant revenue growth in 2017, which would amount to a third year in a row of significant revenue growth for the company.

For the near to mid-term, we plan to introduce a diverse line up of LBS engines in 2017 starting in early Q2 to empower our products where interaction with the information is just as important as viewing it. And we expect revenue between 30 million to 60 million within the first 12 to 18 months of engines’ commercial availability.

For the longer term, we are advancing our Laser Bean Scanning technology to meet the requirements of emerging applications, such as autonomous vehicles and augmented reality.

We have development underway with two world within technology companies for these applications, and we are optimistic that our deliverables will delight them and offer additional opportunities.

So predictable execution today has hit in the upper half of the guidance, combined with compelling near to mid-term growth strategy around the new engine lines added to the existing Sony and Sharp revenue, combined with important strategic wins for high growth opportunities in augmented reality and autonomous vehicle spaces hopefully give you comfort that we are on our way.

Before we wrap this call, I on behalf of all my MicroVision team mates want to thank you for you continued support and your patience, and want you to know that this small team is Redmond is working diligently on your behalf to make all our dreams a reality. Thank you for joining us this morning. .

Thank you ladies and gentlemen, this concludes todays’ conference. Thank you for participating. You may now disconnect..