Dawn Goetter - Marketing Communications Alex Tokman - CEO Stephen Holt - CFO.

Nick Altamann - Northland Capital Henry James - State of Michigan.

Welcome to the Q4 and Full Year 2016 MicroVision Inc. Financial and Operating Results Conference Call. My name is John 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.

Now I'll turn the call over to Dawn Goetter..

Thank you. I'd like to welcome everyone to MicroVision's fourth quarter and full year 2016 financial and operating results conference call. In addition to me, participants on today's call include Alex Tokman, President and Chief Executive Officer and Stephen Holt, Chief Financial Officer.

The information in today's conference call may include forward-looking statements, including statements regarding benefits under existing contracts and the negotiation of future agreements; our competitive advantages; progress with prospective customers; projections of future operations and financial results; product development, applications and benefits; availability and supply of product and key components; market opportunities and growth in demand; plans to manage cash used in operations, as well as statements containing words like believes, goals, paths, expects, plan, will, could, would and other similar expressions.

These statements are not guarantees of future performance. Actual results could differ materially from the future results implied or expressed in the forward-looking statements.

Additional information concerning factors that could cause actual results to differ materially from those in the forward-looking statements are included in our most recent Annual Report on Form 10-K filed with the Securities and Exchange Commission under the heading Risk Factors Relating to the Company's Business and our other reports filed with the commission from time-to-time.

Except as expressly required by the Federal Securities laws, we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, changes in circumstances or any other reason.

The financial numbers presented on the call today by Steve are included in our press release and in an 8-K filed today; both are available from the investor page of our Web site. The agenda for today's call will be as follows. Alex will report on the operation results. Steve will then report the financial results. Alex will give an outlook for 2017.

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 a discussion of MicroVision's 2016 business results and 2017 objectives. 2016 was a special year for MicroVision, placing us in a great position for growth over the next two years. Our most important accomplishments for the year were, first, significantly growing the year-over-year revenue.

Second, completing several critical technology programs and translating them into near term MicroVision engine products.

Third, entering into strategic development agreements with two healthcare technology companies for exciting emerging augmented reality and autonomous vehicles applications, and finally, entering into a strategic co-marketing agreement with one of the world's leading semiconductor Company's STMicroelectronics.

Let me recap each starting with revenue, we increased year-over-year revenue by over 60% nearing the upper end of our guidance given at the beginning of 2016. This goal was achieved primarily on the strength of one customer, Sony. You will hear shortly we are expecting to broaden our customer base in 2017 to include multiple OEMs and ODMs.

We also completed several strategic technology feasibility programs focused on beyond projection applications and announce a line-up of three new engines focused on projection, interactive display and LIDAR applications.

Engine number one is a small form factor, high definition display engine for obligations were form factor and flexibility of product design are required Engine number two is an interactive display engine that integrates display function with 3D sensing function to allow the user to interact with projected images.

And finally engine number three, is a mid-range LIDAR engine for autonomous industrial products and robotics. We entered into several strategic agreements in new markets to build a pipeline of opportunities beyond the three engine products I just mentioned.

One is a development contract with a top-tier technology company for the 3D sensing ADAS application, ADAS tends for Advanced Driver Assistance Systems. The other is also a development contract with a different top-tier technology company for an augmented and virtual reality application.

And finally in November, we signed a strategic co-marketing agreement which one of the top semiconductor companies ST Micro to create and proliferate MicroVision and ST LBS solutions globally. This solution supports a broad range of products that includes interactive pico projection, augmented and virtual reality head up displays and 3D sensing.

MicroVision had demonstration systems in ST’s customer suites at the CES in Las Vegas in January and in ST’s booth at Mobile World Congress in Barcelona last week. We were able to realize these successes in ’16 through persistent execution of our business strength [ph].

After Steve recaps the 2016 financials, I will come back and talk our 2017 plans and aspirations.

Steve?.

Thank you, Alex. In 2016, we achieved results we’re very proud. As Alex mentioned, our revenue growth in 2016 was significant. Our 14.8 million of revenue was a 61% increase over 2015.

Additionally, and more importantly or perhaps more importantly in 2016, we greatly reduced the cost of producing our MEMS and saw margins increased to 30%, may get into some of the details. Fourth quarter total revenue was 2.9 million, comprised of 2.5 million of product revenue, 321,000 of royalty revenue and 37,000 of contract revenue.

This was a 57% increase over revenue in Q4 of 2015. The 2.9 million of Q4 revenue is lower than the 3.6 million, we had in Q3 during the fourth quarter, we shipped the last for the Sony orders, we’d received in 2015 and as a result our production and revenue in Q4 was lower than Q3.

Total year revenue was 14.8 million, which was toward the upper end of the guidance we gave early last year. The 14.8 million was composed 12.8 million of product revenue, 1.8 million of royalty and 100,000 of contract revenue. The product revenue was nearly double, our 2015 product revenue. We’ll now move on the gross margin.

2016 gross margin was 30%, eight points better than in 2015. Gross margin for the quarter was 17%, the 17% Q4 margin is lower than Q3's margins due to lower volumes. As we've discussed before, in 2016 we strengthened our operations team under experienced leadership and we are very pleased what they are able to achieve during the year.

Throughout the year we experienced steady and consistent improvement in manufacturing yields and reductions in variable costs. Even in the fourth quarter when production volumes were significantly lower, yields remained high and our per unit variable costs were the lowest of the year.

We believe the operations team and their experience will be the significant asset as we launch our engine business this year. Moving on to other results, Q4 operating expenses were $5.8 million compared to $5.3 million in operating expenses in Q3 and $4.7 in Q4 of last year.

The increase is mostly due to an increase in spending on ASIC design work in engineering services, increases in salary and benefits costs and increased headcount. Operating expenses for the entire year were $20.8 million in compare to $16.6 million in 2015.

The increase for the year was driven by the same reasons as mentioned for the fourth quarter increased ASIC design work, increased salary and benefit cost and increased headcount. Headcount increased in 2016 by 13 people, we added 7 in operations, 3 in engineering and we also added one each in IT, sales and accounting.

Our fourth quarter 2016 net loss was $5.4 million or $0.09 per share compared to the Q4, 2015 net loss of $4.3 million or $0.09 per share. For 2016, the net loss was $16.5 million or $0.32 per share, the net loss from 2015 was $14.5 million or $0.31 per share.

Q4 cash used in operations was $4 million, Q3 cash used in operations was $3.8 million and in Q4, 2015 cash used in operations was $3.7 million. Cash used in operations for 2016 was $14.8 million, cash used in operations in 2015 was $5.8 million which reflects the $8 million license fee we received that year.

Cash and equivalence on hand on December 31, were $15 million and reflect the proceeds we raised from the two financing transactions we announced in the quarter. We had backlog of $942,000 at December 31, all of which is related to the Augmented Reality and Automated Driver Assistance System's contracts we announced last November.

As Alex will discuss in a minute, we are working on building our product backlog with orders for our new engine. That concludes the financial results. We will now go back to Alex for discussion of 2017..

Thank you, Steve. Let's now talk about what lies ahead. Our 2017 objectives build on the progress we made in 2016, first, to significantly grow revenue for the third consecutive year and second to advance strategic opportunities in the emerging growth markets beyond projection. Let's examine each one starting with for revenue.

We anticipate another year of significant revenue growth in 2017. Although, we’re not given revenue guidance for this year. At this time, we announced plans to begin selling our new LBS engine starting second quarter of this year.

We anticipate the revenue from this line of business to be in the range up $30 million $60 million in the 12 to 18 months following the mass production shipment of the first engine. We expect that 2017 revenue from these new products to be weighted towards the second half of the year.

And as I mentioned this revenue does not include other sources, development contracts and others. So far, although we gave indicators, have been and are very consistence, was what we have stated.

We began shipping samples of the first engine in December, we successfully showcase three new engines demonstrators at CES 2017, we selected and excellent high volume manufacturing partner, who produces products for multiple Fortune Global 100 companies to produce these engines on our behalf.

We’re on schedule to be mass production ready with the first engine in the second quarter of 2017 and we have begun development customers for the new engine opportunities and we’re expecting orders for the first engine in the near future. Let me now shift to strategic initiatives. Let’s starts with an update from what we shared with you in November.

First, I’m pleased to tell you that in January 2017, we delivered the Augmented Reality proof-of-concept demonstrator under the Phase I agreement to one of the top-tier technology companies and we have signed since then Phase II for on-contract with them, which is expected to be complete this year.

It’s about $900,000 and it’s not included in the 2016 backlog that Steve just mentioned. Our technology offers inherent display and optical advantages for augmented and virtual reality applications.

Images are scanned directly and safely into the user's eye creating a large field-of-view, high definition, virtual, see-through images with the small form factor lower power consumption and very low lag and persistence.

Switching to ADAS and 3D sensing, we are also on tract to deliver this year a proof-of-concept demonstrator to another top-tier technology company for ADAS application.

MicroVision PicoP scanning technology ability to create a slim, power efficient, scanning engine that can capture 3D data, while projecting HD information simultaneously is one of the main reasons we believe, we will be comparative in this segment.

The other one is that we offer extremely low persistence in lag performances, which are important for example, for autonomous vehicles, because they require a superfast and accurate response to their environment. Let me put a wrap on the strategic development agreement discussion.

The combined value of these three contracts is approximately $1.8 million, but the real revenue opportunity lies in the potential to be designed into the future products in two markets that have the opportunity for very high growth.

If we deliver both of these initial phases, are successful, and these companies choose to pursue these products, these relationships could result in additional material agreements that could lead to more near term revenue and to our technology being in these customers' products. Final word before we begin the Q&A session.

We believe strongly that the actions we're taken and the programs I just outlined will create significant value for shareholders. Let's now open for questions. .

Thank you and I'll begin the Question-and-Answer Session. [Operator Instructions]. And our first question is from Mike Latimore from Northland Capital. .

Yeah, hey guys this is Nick Altamann on for Mike, thanks for taking my questions. Just staying on the topic of 2017, what are gross margins going to look like this year.

And then just kind of a follow up to that, how much revenue from Sony are you guys expecting this year?.

On the margin question, we expect that the engine business is going to have margins in the 20% to 25% range once we start ramping up production. Ultimately it will depend on the volumes that we get in 2017 so we don't have any specific for '17, but we see that engine business in that 20% to 25% range..

Regarding Sony, we have fulfilled all open component orders there is to Sony in systems, to date we believe we have shipped more components than they have sold engines at this point in time. And we expect to continue to receive the royalty from Sony and the deferred revenue from the [indiscernible] license fee.

And we are on standby to be able to support them at any time they need us and they need additional components. .

Got it, okay.

And then just another one if I could, what is revenue breakeven for the year?.

Well, breakeven is obviously going to be a function of what the product mix and the margin is, and as well as what the OpEx is at that point in time. So it's a little pretty mature for us to be specific on that, and that we're just launching the engine business and the royalties and the margins on that need to develop in '17..

Okay, fair enough. Thanks guys..

The next question is from Glenn -- from Landenberg Thurman..

On the Q3 call I believe you mentioned something about the -- just directionally you talked about product revenue in Q1 being as well as possibly a few hundred thousand dollars or something.

Is that still the thought process or it just kind of the cadence of revenue growth throughout the year?.

What we said it could be as well as couple of hundred thousand, could be higher. We're sticking with the same guidance, we will update on this in a couple of months..

Okay, great.

And then so I just curious a little bit, excuse me, I guess could you talk about your confidence? And there is a significant ramp in order to get to revenue growth in '17, so you must have some confidence on some near-term orders, maybe a little color on what gives you such confidence and maybe, if you feel comfortably yet about, talking about just exactly what kind of end products you see been relevant early on?.

Sure Glenn [ph]. Basically, the new line-up of engines we announced in November are targeted at wide variety of OEMs and ODMs customers for multiple applications.

So these are the things that we heard over the past about 18 months, when customers, when we helped Sony to bring on customers for their engine, we heard people asking for certain features that we’re not available at this time, which gave us essentially an initial start to start preparing and development features that we thought were valuable for multiple customers.

As a result, we felt we were ready to announce to the world, we’re going to introduce three new engines and we started shipping the samples of the first engine in December. So we are right now about two months into this process, because remember we announced in second part of December.

So January and February, our samples were now in hands of customers, they’re going through their normal evaluation processes. The initial feedback, we believe, we’re going to increase backlog this year and we’re going to hit our significant revenue growth target for the year..

Okay. Great. And then I guess last thing would be on the, congratulations on moving into the Second Phase of this proof-of-concept, which is, I believe for the Augmented Reality, trial. And so, is that -- can you talk a little bit more about how long of processes is that, how many more Phases is there.

If you’ve hit your marks in this Phase, what’s the next step going forward?.

These agreements are important because again before you get to actual product, you have to go through the fusibility Phases.

Depended on the customer it differs, sometimes you have to go through several phases before they design you into a product sometimes you go up for one phase it differs, so we can't comment on specifics, but what we can tell you is that, because we believe, let's start with augmented reality. We delivered, provide our deliverables in early this year.

We immediately received the feedback and they liked what they’ve seen and we immediately signed a full on phase. So we personally believe that augmented reality and the autonomous vehicles will be not only hard market, but also important growth segments for us.

And we believe that what we've done, what we started last year is going to move us closure to our goal basically to be designed in one of these products in the future..

Okay. Great. And thanks for the color and congrats on results..

Next question from Henry James from State of Michigan..

I think later in the year last year, you guys had talked about a potential major regional player that was going to be a potential customer of Sony.

Maybe you can talk about what the status of that is?.

Yes, Henry. We can tell is we obviously introduced that specific player to Sony. We’ve done all the necessary work to basically get them [indiscernible] up and be ready to negotiate with Sony from that point on.

Our contributions have diminished because now it’s basically is a negotiation between Sony and the regional player and because this is not our engine we cannot really comment until Sony comments further on this matter.

It will be different with our engines because if even had discussions with future customers, potential customers we'll be able to provide a lot more color, because it's our engine and we can discuss it. But because last year we still were dealing with Sony's product, it's not our place to discuss the details..

Okay. And also last year you signed a royalty agreement with the Taiwanese ODM.

Could you tell us what the term of that is and what the outlook for a near term revenue from that might be?.

We're happy that it's just a -- probably it was a confirmation for everybody to show that we have multiple revenue sources anticipated. This was one of the examples, where basically a company has a purchased somebody else's technology but needed the license from us to sale products in different regions.

We obviously, we're not going to single out that specific customer, but what we can tell you is, just basically it supports our business model and thesis that our revenue will come from diverse sources ranging from royalty only, examples such as this one to selling components and collection royalty such as Sony and Sharp or selling engines such as what we're going to start doing this year.

.

Okay. And one final question you talked about your developments with respect to Augmented Reality.

There was a Tweet back few weeks ago from Meda and someone had asked about ability for laser-based scanning to be used in augmented reality, and they responded that the power requirements were too high, but they thought laser based scanning would work much better in -- sort of autonomous vehicles.

Do you have any response to that?.

All I can tell you Henry -- I can't comment on what Meda stated, all I can tell you is that world's leading technology companies who are interested and Augmented and Virtual Reality are interested in laser-based MEMS scanning technology..

Okay.

And maybe you could talk about, do you feel like there is room to grow I guess in terms of reducing the power required for laser-based scanning?.

We already have multiple advantages over the out cost and DLP and other display technologies today. But absolutely, the success of augmented reality -- virtual reality market relies on something that is economic, easy-to-put on and doesn't put too much pressure in terms of weight and heat on your brains.

So absolutely we're working on techniques to reduce further power consumption. But I can tell you today, the laser beam scanning technology is the lowest power consumption technology based on everything that we know today..

Okay. And, okay, alright. I'll let someone else in, thank you..

Our next question is from Tom [indiscernible], from private investor. .

Hey Alex, congratulations on your developments. My question is leaning towards technology, with all the different platforms that are out there trying to solve the same problem both for projection and for being able to do things like perceive the actual workspace in front you.

Where do you feel you stand in this solution based? In other words, are you competitive? Do you see any technology that is causing concern that maybe there is a technology that is much more efficient or better than what you stand for? Can you give me a little idea of the competitive landscape out there?.

Sure. So, if you look at different segments, the differentiation varies dependent on the application. So we pursue -- we're focusing primarily on four primary applications, you have the pico projection or we call it now interactive pico projection.

There is the obviously, Augmented Reality, there is the 3D sensing for autonomous vehicles and robotics and finally heads up display. If you look at each one, you need differentiate attributes to be successful. So in pico projection or interactive pico projection, we’re excited about this, but simple reason.

Not only, we have already proven that we are the lowest power consumption technology that can produce high-definition images. We can combine that feature with 3D sensing to provide users visibility to interact with these images.

Not a lot of companies can do this, for most companies you need to have a display technology separately and then 3D sensing is added separately inside the product to create this feature. We will do this in one tiny integrated system, so that’s number one. If you shift to the, for example Augmented Reality.

What is important for Augmented Reality and why most of the systems to date have failed and not succeeded.

Because no-one have been able to balance the form factor with the large field-of-view to create high-definition images that are produced with low power consumption, known has done this and if you've seen what happened, Google has attempted, a valiant at creating something focusing on our ergonomics, but the use case did not work out, because just the image wasn’t good enough, and there is variety of limitations.

So what do we have for augmented and virtual reality? What we have, we believe produces the high definition images with one of the lowest power consumptions, and it could be created in small enough form factor to improve the economics of such device..

I’m sorry.

Is latent fee still an issue with that whole technology, do you still have an advantage?.

Absolutely, absolutely. Latency and lag are the two characters is the essential to be addressed for full Augmented Reality, Virtual Reality and the autonomous vehicles.

Because in one case for augmented virtual reality, the lag and -- minimum lag and persistence ensures that you will not develop headaches while using this technology for extended periods of time. For autonomous vehicles and robotics, you need low lag and persistence.

So you can detect a set of scenery or scenery around the object and quickly made the right decisions, when everything is moving around to you, so absolutely. Shifting to 3D sensing now, where do we have advantages there.

Our biggest advantage there in addition to lag and persistence, is the fact that we can create 3D sensing system and by changing lasers and laser wave length, we can extract different things out of the environment that no one else can. And this gives us power and creates flexibility to basically optimize systems for different types of applications.

So notice, each one has its own merits and we believe we have differentiation in each one of these segments and that’s one of the reasons we have these in development contracts and that's one of the reasons we believe we're going to be successful with new engines, particularly the interactive display engine that we are very high on..

Yeah, because these products potentially to be such high volume, I mean in your long-term planning looking three years out, do you see capabilities that if some of these projects take off that you could handle in volumes north of $100 million per year, I mean is that realistic in your projections of capabilities?.

We believe there is nothing on the supply side that could limit us on volume any longer. Right now we can scale all MicroVision related components pre-readily. Assuming we have a case we have a high-volume manufacturing partner who produces tens of millions of products for many Fortune Global 100 companies, so we have no issue there.

And then basically it's all dependent on the business case, if a customer comes in with a volume, I think it's a good problem to solve and we should be able to solve..

So in other words, going forward your mix could be a combination of both inhouse manufacturing as well as just getting licensing from another partner, just producing products using your technology..

That's correct, we believe as we will move forward our mix and this is why it's difficult for us to predict the specifics. Because we expect that our revenue will consists primarily from sale of new engines and also sale of components and licenses into high volume products..

Okay. turning to just two other issues.

Number one, any issues at all with the green lasers now and where is your pricing compared to the reds and the blues?.

Listen, the laser is just completely not an issue any longer. Three lasers today cost less than 5% of what green laser costed us five years ago..

Okay. And then the other question I have, pretending to HUD it appears that STMicro could be a nice catalyst for being able to get this technology to moving forward.

Do you see STMicro as being a strong competitor in that field of HUD with the other competitors out there?.

Well STMicro is actually our partner, yes. Since we announced the strategic relationships with them, obviously their manufacturing our MEMS, we said this earlier.

We believe we have a very productive relationship with STMicro to pursue these markets together, because both ST and MicroVision will benefit by combining its respective strengths on this case it's a high-volume manufacturing of semiconductor and fabrication capabilities. And we bring the systems knowledge and applications knowledge.

So basically, that's why we created this partnership, so we can pursue these opportunities together and not compete against each other. .

And STMicro would be the lead in those negotiations or those technology talks, would that be correct?.

No, we actually double-team in this. It depends, if certain customers that they're closer with they introduce us, if certain customers that we are closer with we bring them as a support mechanism, so it depends on the customer. .

Awesome. Thanks for all your efforts it's been a long road, but it appears as though this technology is finally ready for the market and the market is ready for it. So thanks for all your efforts..

Next question is from Henry James from the State of Michigan. .

Yes I just had a little bit of a follow up with respect to Augmented Reality. I believe you mentioned that, what you were doing was scanning directly into the eye and I was wondering are there advantages to say scanning directly into the eye as opposed to sort of a near eye display in terms of field-of-view..

Henry everything that we know today, we believe that because we're using MEMS based laser scanning technology that requires few optical intermediate players, we can create a larger field-of-view by simply moving our mirror at certain angles without requiring to have special optics to than move the signal into the person’s eye.

Just by the definition, this is our biggest inherent advantage, is the fact that we don’t need extensive optical solution to create this system and that’s what one of the limitation of L-costs and the LED systems is the fact that when you use LED, you need to propagate the light than you need to collect this light with optics to point into the tiny area.

With that, the laser beam that is scanned at a very high duty -- low duty cycle allows you to concentrate energy into the small area safely and reliably..

All right. Thank you. .

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

Look, what can I say, 2016 was a pivotal year for us and we are optimistic we’re going to have and ever better 2017. Our goal for 2017 is to again achieve significant revenue growth, we have delivered on the same goal through persistent execution of our business fund in 2015 and 2016 and we anticipate doing exactly the same thing in 2017.

For the near-term, we plan to introduce a diverse line-up of LBS engines in 2017 and 2018 to empower products were interaction with the information is just as important as given it. And we anticipate revenue between $30 million to $60 million in the 12 to 18 months following the mass production shipments of the first engine.

For the longer term, we’re advancing our laser beam scanning technology to meet the requirements of emerging application such as autonomous vehicles and Virtual and Augment Reality.

We have development underway, which two leading technology companies for these applications and we are optimistic that our deliverables could lead to additional opportunities. At this point on behalf of all my MicroVision team mates I want to thank you for your continued support and thank you for joining us this morning..

Thank you, ladies and gentlemen. This concludes today’s conference. Thank you for participating. You may now disconnect..