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

Kevin Dede - Rodman Henry James - State of Michigan.

Welcome to the First Quarter 2017 MicroVision Inc. Financial and Operating Results Conference Call. My name is Sylvia and I will 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. [Operator Instructions] Please note that this conference is being recorded.

I will now turn the call over to Dawn Goetter. Dawn, you may begin..

Thank, Sylvia. I'd like to welcome everyone to MicroVision's first quarter 2017 financial and operating results conference call. In addition to me, participants on today's call include Alexander 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 products 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, plans, 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 reasons.

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; 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..

Thanks, Dawn. Good morning. Thank you for joining us for a discussion of MicroVision's First Quarter 2017 business results. We made phenomenal progress in the first four months of the year.

First, we successfully unveiled three new engine demonstrators at CES in January; second, we followed up in March with a $6.7 million purchase order from an Asian smartphone maker for the first small form factor display engine; and third in April, we followed up with a home-run-like opportunity that begins as the $24 million contract with a major technology company for high resolution display application, with the potential for significantly higher revenue coming from sale of MicroVision components following the completion of the development contract.

Let's start with the important announcement we made last week. We have signed a significant $24 million contract with a leading technology company to develop a high resolution laser beam scanning, LBS, display system and to produce MicroVision's specific components for this system. The $24 million contract has two components.

First, $14 million in development fees for work that is expected to stand approximately 21 months; and second, a $10 million upfront payment that is expected to be applied to future component sales.

Once the development portion is completed, MicroVision would be providing a new generation of MEMS, ASICS and related firmware for the high resolution display system. This could add significant product revenue for us starting in 2019. The technology company would produce a high resolution LBS engine to be incorporated inside its end product.

Further details on the milestone time and amounts related to the milestones quantity of components and other details of the contract are not being made public. We need to comply with the confidentiality terms of the development contract and the request of our partner and cannot provide any additional information about this agreement.

This is a big win for us and we believe that our systems expertise and the ability of our patented LBS technology to create a display that produces high resolution images from a low-power tiny engine were key contributors to win in this business.

We're very excited about this newly announced contract because it could be a significant opportunity because of confluence of three critical factors - first, a major technology company with clear goal to market plan; second, a large market opportunity; third, a differentiated MicroVision platform technology.

Also important to point out that this contract revenue is incremental to the anticipated engine revenue. The new opportunity requires us to take accelerated steps to staff this large scale development program.

It will require combination of tapping into the existing engineering talent applied to current programs as well as add in new hires that were not part of our original budget. More on this in a moment. It gives us perfect segue into engine programs update next.

Minimizing the impact on the critical engine programs while absorbing the impact of the new contract is very important to us. Consequently, we have completed the following actions. First, we estimated a need for additional 20s [ph] in years in order to execute on the large contract and on our existing programs.

We commence the hiring process already and although we expect in short term resource constraint, we believe we can manage it. Our assessment of the potential impact on the key engine programs due to the near-term resource constraint is as follows. There is no anticipated impact on the small form factory display engine. This is our engine number one.

Samples have been shipped per schedule and we are on-track to be mass production-ready in the second quarter for original schedule. We received our first purchase order for $6.7 million for this engine from an Asian smartphone maker and expect to commence the delivery in the third quarter of this year.

This engine will help brightness of 45 lumen for most video content and the small size and low power consumption which make it well-suited for a smartphone application. We're also able to design an electronics board specific to this OEM smartphone design and this added flexibility of our engine helped us to win this customer business.

We are excited to see this product come to market. As we have discussed over the past several years, consumers increasingly rely on their smartphones for video consumption, having the ability to create a big screen experience to watch movies or other form of video content is a valuable feature of products in the mobile video age.

Moving on to other engine programs. Due to the immediate requirements of the new $24 million development program, we are adjusting our staffing on the second and third engine programs to accommodate and as a result, schedule for these engines will shift by approximately a quarter.

We anticipate the samples of the interactive display engine, our engine number two to be available in the third quarter of this year with the goal to be mass production-ready by the end of the year. We estimated the samples of the 3D only LIDAR engine, our engine number three to be available in the first quarter of '18.

So what does this all mean to our revenue guidance? The good news, we are optimistic about sales for our engine products and we are maintaining the $30 million to $60 million revenue guidance from this line of business for the period of 12 to 18 months starting from the mass production shipments of the first engine that are expected during third quarter of this year.

We also created an incremental revenue stream that starts with $40 million over similar time period and one that could result in much higher product revenue, following the completion of the development agreement from selling components and firmware to the leading technology company. This obviously would be additive to our anticipated engine revenue.

With this, let's now shift to Steve to review the financials..

Thank you, Alex. In the first quarter, we received an order for nearly $6.7 million for our first engine product. That order will begin shipping in Q3. As a result, our revenue until Q3 will come mostly from royalties and/or recontracts. First quarter revenue was $792,000, comprised of $535,000 of royalty revenue and $257,000 of contract revenue.

The contract revenue is mostly related to one of the development contracts we signed last year that was completed in January. The $792,000 in revenue is lower than the $3.7 million of revenue in Q1 of last year and $2.9 million of revenue last quarter due to there being no product revenue in Q1.

In Q1 of last year, we had $3.2 million of product revenue and in Q4, we had $2.5 million. Most of this was related to Sony. The lower revenue resulted in lower gross profit in the quarter. Gross profit came in at$254,000. The gross margin is higher than Q1 of 2016 and Q4 because most of the revenue of this quarter came from royalties.

Q1 operating expenses were $5.9 million, compared to $5.8 million in Q4 of 2016 and $4.7 million in Q1 of 2016. The increase of $1.2 million over Q1 of last year is mainly due to an increase of around $600,000 in ASIC design and other materials; $350,000 is due to an increase in legal fees, mostly related for work on commercial agreements.

In approximately $200,000 is due to an increase in compensation and benefits. Our first quarter 2017 net loss was $5.6 million or $0.08 per share compared to $5.4 million or $0.09 per share in Q4 last year. The net loss in Q1 of 2016 was $3.6 million or $0.07 per share.

Cash used in operating activities was $6.7 million and compares to $4 million used in Q4 and $3 million used in Q1 of 2016. The increase in cash usage from last quarter is mostly driven by a decrease in cash receipts from customers. In Q4, we completed our Sony shipments and collected the payment in the same quarter.

Also contributing to the cash usage was an increase in inventory of around $800,000. The increase in cash usage over Q1 of last year is due to an increase in our loss of $2.1 million and an increase in inventory of $700,000 and a decrease in accounts receivable collections of $600,000.

As Alex discussed, in April we signed an agreement with a leading technology company. The agreement specifies $24 million in payments to MicroVision. We expect to receive the $10 million upfront fee in the second quarter. Additionally, we expect to receive $14 million more in non-refundable development fees.

These development fees are expected to be received in 2017 and 2018 and are contingent on many various milestones. We are still analyzing how the revenue from this agreement will be recognized. However, we do expect that the $10 million payment will initially be recorded on the balance sheet in the liability section.

We didn't do any financing activity in the quarter. Cash and cash equivalents on hand on March 31 were $7.7 million.

Backlog at the end of the quarter was $8.5 million, $6.7 million related to our first engine order and the balance related to development agreements signed last year, the $24 million agreement signed in April and is not included in is March backlog.

We often get questions on these calls about non-cash items, so let me tell you that in Q1, non-cash compensation was $310,000 and depreciation and amortization was $114,000. That concludes the financial results. We'll now open the call for questions..

Thank you. [Operator Instructions] And the first question comes from Glen Manson from [indiscernible]..

Hi. Good morning, everybody. Thanks. A lot of information there. A couple of model questions, Steve.

The additional engineers, what has that expense kind of flow through as far as how quickly you can hire men and what level of expense for the rest of the year?.

Well, we don't have the exact amount on how much those end up costing. They'll start coming in in the second quarter and build over the third quarter. We won't build a higher [indiscernible] in one fell swoop..

Okay. And not sure on the magnitude of the expense yet.

How about for the product revenue in Q2, do you get some revenue for the sample from the first new engine? Or is that a similar type of product revenue outlook for Q2?.

It would be similar outlook. Like I said in the comments, until we get into the shipping that $6.7 million, the revenue is primarily going to come from the royalties in that area..

And just keep in mind, Glen, keep in mind that we still investigated the content practices for revenue recognition on this new contract and we don't yet know how much if any will be in the second quarter..

That's the recurring part, the $14 million, you mean, over 21 months?.

Yes..

Yes, that's right..

Okay.

So that might begin in Q2 or possibly Q3?.

We're still looking through the guidance and wouldn't make any conclusions about when that revenue will show up. We'll certainly have an update next quarter..

Okay. I guess that's helpful. As far as the push out of the engines, I guess everything shifted out one quarter, which is fine and then the $10 million upfront payment that you talked about, you're not sure if you'll be able to book it out as revenue, I think is what I hear.

But it will hit the balance sheet - in other words, it will bolster the cash balance for a period of time as well, right?.

Right. We expect to receive the $10 million payment in the second quarter. When you receive a cash payment like this, deferred revenue, prepayment, those kinds of things were recorded in the liability section of the balance sheet. That's what we mean by those comments..

Right. Go ahead..

No, finish your question..

I guess I was just going to kind of see if I could get you to talk more about that contract. I understand there is limitation and clearly, the customers committed given that they've made this large upfront payment. But I guess the timing of the program, sometimes it gets signed and then it gets kicked out for some period of time or whatever.

You're very comfortable that they're committed to getting the product to market over a certain period of time and that will be the driving force?.

We would not have done this if we didn't believe that. We're not doing it for $14 million development fees - we're doing it for what's going to happen after. Absolutely.

And then the regarding the question that you asked previously, we have some immediate milestones on this contract and this is one of the reasons we have to pull some people of the existing programs to make sure we hit the milestones or we hire in the new people to [indiscernible] the existing programs.

The good news is that for everybody, despite the fact that we estimated about one quarter shift in engine two and three, we maintain in the revenue guidance..

Right, that sounds great.

Beyond these two significant deals, Alex, can you talk a little bit about the color of the deal activity you're seeing? The level of excitement in the marketplace for these new products?.

We see a lot of interesting activities in Asia. Honestly, the first purchase order for the first Indian represents about 20% of our goals. So we obviously have pipeline of new opportunities that we're excited about and hopefully we will share this new information with you soon..

Okay. Great, guys. Talk soon..

Our next question comes from Kevin Dede from Rodman..

Good morning, Alex, Steve, Dawn. Thanks so much for taking question.

Alex, could you try to help us frame, the development projects that you're working on now? The two or three, maybe three, I think it is that you've spoken to over the past two earnings calls? And just sort of the range of projects that they encompass and maybe help us characterize where this new one sits.

There's just some confusion in my mind regarding the breadth of customers that you're addressing..

Okay, Kevin. Let me try. The two previously announced and the reprograms we are on track and delivering on our commitments, we believe we're going to get it done this year as promised. Regarding this new one, again, everything that we were able to say, we already stated.

Aside from where we have disclosed to-date, we are restricted by confidentiality obligation and can't provide any further details..

Okay, fair enough.

Could you review your current head count and how the new 20 heads relate to that on the engineering side?.

Yes. In a nutshell, we have approximately about 80 people in a company approximately. So this would be 20% increase approximate. And again, as Steve pointed out, it's not going to happen immediately. It's going to be three to six months hiring process and our goal is to get the right critical mass on board to execute on all important programs..

Okay. You're confident regarding your current guidance. I'm wondering if you can speak a little bit to the other engines that you showed at CES. The fact that they may be pushed back a quarter or that's your plan at this point, is to push it back a quarter.

I'm just wondering, you can speak to what sort of interest you've seen in developing those engines and how that might relate to some of the other development work that you're doing..

Okay, fair. Engine number one, we already discussed, we developed and we have a good pipeline. We have so much opportunities, some are closer than others and hopefully we will be able to update you on this. The engine number two and three, we used demonstrators to assemble.

So obviously have not been available based on our schedule and guidance, but we use what we have to develop, to create demand and assess the market's reaction.

So far we've been very pleased to see what was response to engine number two because we had a couple of demonstrators that we have been able to show around the world and we're just excited about engine number two interactive display expected to be huge application. We want to get this engine out to market this year. That's our goal.

Engine number three, 3D sensing LIDAR, this application obviously generated a lot of interest as well and our goal is again to get it out in Q1 and start generating momentum as well. If you look at the time line, we think the most of the revenue from our guidance will come from engines one and two.

Hopefully there will be some contribution from number three, but all three have different use cases. All three have different customers and all three which is great for us are based on the same platform blocks we've basically use in different puzzles to create a different application which is good for you and good for us.

We focus in our platform, it's extendable and it's flexible and this is why we can do it with 80 people and not 160..

Okay, that's very helpful. Could you give us just some insight on what you think Sony is seeing and sort of the end market.

I guess the end market demand, or color on the projection engine that they've developed?.

Sure, Kevin. Since we announced the new line of engines, all our sales marketing and business development resources have been focused on creating opportunities for our own products, not Sony's.

But fundamentally, what we know is we have fulfilled all component order to them at the end of last year to date to our knowledge which we have shifted more component that they saw engines where they still have some inventory, but we're collecting the royalty. As Steve just provided an update, we're collecting the royalties from Sony every quarter.

We expect for this to continue. In terms of near term orders, we don't expect right now and in near term orders from Sony, but we will support them as necessary and we can easily support them and our engine programs and the new development contract..

Okay.

Can we go back to the legacy development projects that you've got capitalized on the balance sheet? Can you just speak to the time line there and how long it might be to recognize everything that you have in deferred now?.

The two entering programs that we described, Phase I and Phase II, we expect to deliver and recognize everything this year..

Okay. Okay, gentlemen. Thanks very much. Appreciate your kinder in taking my questions..

Our next question comes from Henry James from State of Michigan..

Good morning, gentlemen. Congratulations on this signing of this latest contract.

I was wondering if you can tell me, will there be any royalty or licensing revenue associated with this opportunity?.

Henry, at this point in time, as much as we want to explain at this point in time, aside from what we have disclosed. We're restricted by confidentiality obligation and cannot provide any further detail.

We give the indications on the length of the [indiscernible] contract 21 months, $14 million will be NRE and $10 million is upfront payment for future component sales. At this point in time, we can't say anything in addition to this..

Okay. I don't know, maybe you can frame this sort of contract for us? Sort of in the history of MicroVision. I know you call it a home run opportunity.

Is this sort of a company-maker?.

It could be. It definitely could be and again, we were excited about this not because of $14 million NRE or $10 million upfront payment. We're excited about what we believe is going to happen after this. This is why we're doing this project..

Okay. I guess you've gotten to $6.7 million for the small form factor and I guess you alluded to a pipeline for building your $30 million to $60 million revenue opportunity and I guess you're excited about engine number two.

Do you still see other opportunities for engine number one?.

Absolutely. Because engine number one samples have been available since the beginning of the year. This is where we spend most of our sales and business development activities because we actually have physical samples [indiscernible] customers to make quick decisions and determine what to do with their product.

So yes, we expect additional orders for engine number one..

Okay. And then sort of in general or the market, there seems to be a lot of excitement for 3D sensing these days and also perhaps on smartphone and I'm hearing opportunities like facial recognition.

Is that something that your technology would be applicable for?.

Our 3D LIDAR time of flight technology are applicable for this as well as other applications including industrial robotics, consumer and obviously automotive. The difference being that the range of the sensing and detection, the platform is going to be similar. It just needs to be optimized for different type of application..

Okay. And lastly, I know historically, we've thought about your technology with respect to display and projection maybe more so than sensing an imaging. I don't know if you could speak to your patent portfolio with respect to sensing and imaging.

Do you think you'll have a foundation in terms of IP in that area as well?.

We believe so. To be honest with you, it's very simple. You're absolutely right. We start with the display because at that time, we saw three primary applications - PICO projection, head-up displays and augmented realities were the three primary applications as far as display is concerned.

What we made technology also extendable into 3D sensing's phase, we start investing in it as early as 2011 actually to create the time-of-flight feature because we anticipated that gesture recognition is going to be a big market even at that time.

What we did not know at that time, that autonomous vehicles and advanced driver assistance systems becomes so huge. The beautiful part about what we start investing in 2011 to get to this point is actually applicable to the autonomous vehicles and advanced driver assistance systems.

So yes, for everybody who are not techno-geeks, for us to go from display to 3D sensing, we simply replace visible light lasers with the invisible light lasers such as infrared and this is how we get 3D sensing..

Okay. All right, thank you very much..

Our follow-in question comes from Kenneth [indiscernible]..

Good morning, gentlemen. Another question about the hiring, it seems like everyone says it's impossible to hire engineers and also we have integration issues with the lead government. So that would be one question. The second thing would be the company has quite a good balance sheet.

Is there some idea that the company would have to raise money through a debt offering or something this year? You're doing so much development..

We'll double-team this question. First, on the engineers, you're right. We live in pretty competitive area. We have a lot of neighbors that aged in similar resources. We've been fortunate that our attrition rate is well below the averages in this area because people really like what they are doing and understand what the end destination is.

So we've been fortunate of this. It will not be easy. It's going to take us three to six months to get that critical mass on board, but we feel confident we're going to get it done.

I'll let Steve to chime in as well, but regarding the cash, you just heard him saying that we expect to get $10 million in the second quarter, so we have all that options to consider..

We don't comment on our possible financial plans that would reiterate that there is significant payment to company from this development agreement..

Okay, thank you very much..

Our next question comes from Mark Brown [ph]..

Thanks for taking my call. On this $10 million upfront fee payment, it sounds like that has to be paid back once you start providing engines.

Can you explain a little bit about how that's going to work?.

Well, again, what we can say have been stated. So this is $10 million upfront payment for future component on sales and as Steve mentioned, it's going to be on our liability on the balance sheet. At this point, that's all we can say..

Noted, thank you..

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

Thank you. Let's wrap this. We had a phenomenal first four months of the year. First, we're successful in the three new engine demonstrators at CES in January. Second, we followed up in March with the $6.7 million purchase order from an Asian smartphone maker.

Third, recently in April, we followed up with a $24 million contract with a major technology company for a higher resolution display application. These are obvious growth indicators and we began an accelerated hiring process to bring approximately 20 people on board to execute on the existing and new growth programs.

Needless to say, we are very excited about MicroVision's future and hopefully you can see the momentum, you can see the excitement and I just want to thank you on behalf of Dawn, Steve and the rest of my MicroVision teammates. I want to thank you for your continued support and for joining us this morning..

Thank you. Ladies and gentlemen, this concludes today's conference. Thank you for participating. You may now disconnect..