eMagin Corp (EMAN)

[MELBENZ2020]

Earnings Call Transcript -eMagin Corporation (EMAN) CEO Andrew Sculley on Q1 2020 Results

May 14, 2020 11:40 AM ET|
1 comment |
About: eMagin Corporation (EMAN)

https://seekingalpha.com/article/4347536-emagin-corporation-eman-ceo-andrew-sculley-on-q1-2020-results-earnings-call-transcript?page=2

Our revenue for the first quarter increased 10% year-over-year and exceeded our prior expectations. As you'll recall, during our fourth quarter 2019 conference call, we warned of a potential year-over-year decrease in revenue. The increase relative to our prior outlook was due to the additional contract work, designing a display for a Tier 1 customer in the consumer space who is also evaluating our Direct Patterning or dPd technology. We are enabling new differentiated features through our advanced backplane and OLED architecture designs and expect that work on this project will continue through the year.

Our technological leadership and high brightness and resolution is driving increased interest across our end markets for our displays. Our efforts are supported by a highly experienced team with industry leading expertise. We have already achieved full color brightness of 7500 candelas per meter square or nits, which is higher than any competitor. We are on track to achieve 10,000 candela per meter square by the fourth quarter of this year and expect to reach 28,000 candela meter square for production of full color displays by 2023. This is 5 to 10 times higher than any competitor.

Our military R&D contract work was also up in Q1 and we are very well positioned to further support this opportunity. We are seeing an increasing trend towards the use of digital visual systems for soldiers which are essentially AR/VR systems. We are providing displays for head mounted display systems or HMD systems that are connected to sensors mounted outside the military aircraft, which give the pilots the ability to see the world outside, as well as displaying targeting data, status of the aircraft systems, and visual and infrared views of the outside. Similarly, HMD systems are being used by soldiers on the ground to see outside their armored vehicles to navigate difficult terrain and find targets when needed.

We had several notable highlights in the military end market during the quarter. For the military display sales, we ship product under both the enhanced night vision goggles binocular program, as well as the F-35 helmet mounted display system. In addition, we recently completed the improved design of the backplane wafer for the next generation F-35 HMD systems and expect to begin shipping displays with this design later this year.

We received an order for a custom display assembly for a major U.S. Army helicopter upgrade program where we are replacing another display. Deliveries for this program are expected to begin by fourth quarter and run until 2022. We also finalized the design of a new custom display for a new U.S. helicopter helmet program and had delivered the prototypes. This is expected to be a multi-year program with the first displays shipped in Q2.

Finally, we received an order for a European military customer for high brightness displays to be used in fire control system for a shoulder fired weapon. The deliveries under this program started in March and will continue through 2022. We believe that we have a competitive advantage with our U.S. based design and manufacturing, including our in-house backplane design, our continuously improving high brightness monochrome and full color displays, and our next generation full color dPd technology.

Trends are also positive in our industrial and medical markets. In the industrial market we supplied displays for thermal systems used in firefighting and law enforcement. For the medical market, we continue to sell displays for the veterinary market for ultrasound goggles. This is primarily used on larger animals when the vet goes to see them. We are also shipping displays for cataract operating systems to an existing customer and supplying displays for functional magnetic resonance imaging systems to another. Finally, we ship displays for LASIK operating systems to four existing customers and received an order for an augmented reality vision testing system.

We are continuing with our yield improvement initiatives and continue to make upgrades to our production processes. We expect to continue these improvements over this year. Our Direct Patterning equipment has been upgraded and installation is complete. We are in the process of qualifying the equipment and validating the process. Progress has been very good, despite vendor delays due to the corona virus. We are expecting to fabricate full color displays in the second quarter.

In summary, we believe we are extremely well positioned in our markets as additional interest develops for our high brightness, OLED displays and customers look to leverage AR/VR to enhance their capabilities. As we said in the release issued this morning, we do expect some sequential revenue improvement in the second quarter over the first quarter. With that, I'll turn it back over to Mark.

Mark Koch

Thank you, Andrew. Before I discuss our first quarter 2020 results for the period ended March 31, 2020, I'd like to provide you with a few key financial takeaways from the quarter. First, I will comment on some revenue trends. Total revenue of 6.7 million reported in the first quarter, was approximately 600,000 above our expectation due to a display designed project for a Tier 1 customer in the consumer sector. In regard to second quarter 2020, we expect total revenue to be sequentially higher than the first quarter.

Next, the benefit of our cost saving actions were reflected in the decline of our operating expenses as a percentage of revenue from 58% in the first quarter of 2019 to 41% in the first quarter of 2020. Finally, in regard to total backlog, our backlog of 13.3 million of OLED [ph] shippable within one year represented both a sequential and year-over-year increase of approximately 14%, compared to 11.7 million at the end of fourth quarter 2019 and 24% above the backlog of 10.7 million at first quarter 2019 due to increased bookings during the quarter.

Total revenue for the first quarter of 2020 was 6.7 million, an increase of 0.6 million or 10% from revenues of 6.1 million reported in the prior year period and a slight decrease of 0.6 million from the fourth quarter of 2019. Product revenues representing over 80% of total revenue were 5.6 million in the first quarter of 2020 compared to 5.5 million reported in the first quarter of 2019. Contract revenues were at 1.1 million, compared to approximately 0.6 million recorded in the prior year with the increase primarily due to the previously mentioned Tier 1 customer project in the consumer space.

Gross margin for the first quarter was 21% on gross profit of 1.4 million compared to a gross margin of 22% on gross profit of 1.3 million in the first quarter 2019. The decrease in gross margin in first quarter 2020 was due to lower production volumes and some yield losses due to delayed response times from equipment maintenance providers related to COVID-19 travel restrictions. Operating expenses for the first quarter of 2020, including R&D expenses were 2.8 billion compared to 3.5 million reported in the prior year period or 41% of sales in the first quarter 2020, compared to 58% recorded in the prior year period. The decrease year-over-year reflects several items, including lower R&D expenses reflecting R&D activity charged to contracts and a focus on production and yield improvement projects, the decrease in SGA expenses year-over-year due to a reduction in non-cash stock compensation for Board of Directors, and lower salary and discretionary expenses year-over-year.

First quarter 2020 results would also reflect the impact of a 20% reduction in senior management compensation implemented in October 2019. In general, our losses were lower year-over-year. We reported an operating loss of 1.3 million in the first quarter 2020 compared to an operating loss of 2.2 million in the prior year period. Our net loss for first quarter 2020 was 1.4 million or $0.03 per share, compared to a loss of 1.4 million or $0.03 per share in the prior year period. The reported loss in first quarter 2019 includes a 0.8 million non-cash gain related to the decrease in fair value of a warrant liability. Adjusted EBITDA for the first quarter was a loss of 0.8 million compared to 1.5 million loss in the prior year period.

Next, I will discuss our liquidity. At March 31, 2020 the company had cash and cash equivalents of 3.1 million compared to 3.5 million at December 31, 2019 and had working capital of 9.2 million. Borrowings availability under the ABL facility were 2.2 million and 0.9 million at March 31, 2020 compared to 2.9 million in borrowings and 1.5 million of availability under the ABL as of December 31, 2019. In November, eMagin entered into an At the Market sales agreement with H.C. Wainwright & Company for the sale of common stock. During the quarter we raised 1.5 million under our ATM facility.

Operator, we will now open the line for questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions]. And today's first question comes from Kevin Dede with H.C. Wainwright. Please go ahead, sir.

Kevin Dede

Good morning gentlemen, thanks for taking my question.

Mark Koch

Good morning, Kevin.

Kevin Dede

Andrew, could you go over the helicopter helmets. I got that there were two and I'm a little confused by that. Could you give us a little more color on that and maybe the size of the deals?

Andrew G. Sculley

I can't give you the size of deals, I apologize because of our restrictions, but there are two. The one is we actually got prior and that's the one that I spoke of first. The second one is new. Now, the good news about helicopter programs is there are a lot of helicopters. So once we get in one, as you see, we got in the second one and now many more of them can go. The other thing is obviously that since the first one I mentioned we're replacing a display that already exists, that means all the helicopters will have our display. So it's a reasonable sized program. And remember, on the one I said we'll go through 2020 to start now essentially and the other one has been going for a short time. So two helicopter programs and you can name two helicopters, I'm sure, very easily. So there are many different helicopter programs. It's very good for us.

Oh, one other thing I should say, when you look at military aircraft, whether it's fixed wing like the F-35 or helicopters, you say, what do they need? And this is why we're there. They need high brightness. They're starting off with monochrome green because they need above 25,000 nits and we are there today. And it is notable that I haven't heard anyone else make a monochrome green at 28,000 nits which is what the military youth needs. So we're in very good shape. And in the future they want color, and there's no other company that has even mentioned a roadmap to get to 28,000 nits in color and we have done that. And I might add one other thing here is that we get there by direct patterning.

Today, we get at the end of this year we'll be at 10,000 nits. We do that by direct patterning. And you've probably heard other companies say that they're going to use tandem architecture and just so you know, that's two OLED stacks on top of each other as a tandem architecture. And we're getting past what anybody has talked about with direct patterning. However, it is good to note that using tandem architecture we will start ahead at 10,000 nits and we can go much higher with tandem architectures or double stacks as others call it. And the other good advantage there is, it's harder to do or less efficient to do on white as it is on individual colors like red, green, and blue which is what we use for direct patterning. So we start ahead, we use tandem architecture with more efficiency, and we stay ahead, that's how we get to 28,000 nits.

Kevin Dede

Okay, yeah Andrew, just to stop you there, just to make sure I understand, 25 20K or 28K nits, you said 2023 and your intention is to use a double stack?

Andrew G. Sculley

Well, I'm just saying that there are many ways to get there and that is one way to get there as an example. My point was that we are ahead today. We've demonstrated, literally shown the display at the 7,500. We're predicting 10,000 at the end of the year and there are many paths forward. And that's what we're planning. And I just wanted to mention the tandem architecture that we can use that with our displays as well. And another note, just so that I didn't confuse anyone, that that 28,000 nit, we can go beyond that with monochrome green today. And that's just the single OLED layer.

Kevin Dede

Okay, can you name the specific helicopters for which you have those helmet contracts?

Andrew G. Sculley

I could but they would kill me. No, I mean, the specific helicopters would lead to the companies which would lead to breaking our NDA. So no, I'm very cautious about this sort of thing.

Kevin Dede

Fair enough. Mark, can you just offer a little insight on the margin trend, it seems like things so far from the fourth quarter, I just want to make sure I understand what's going on?

Mark Koch

Yeah Kevin, as we're about to announce in our Q, we did have some limited impacts related to COVID. So one piece of equipment toward the end of the quarter, it broke and due to travel restrictions or vendor was unable to service it and it lowered the volume, display volume we normally put out in the quarter, which you'll given our costs, and our sort of the ability to produce finished goods and capitalized those costs into inventory, that decreased our margin because those costs fell to the bottom line instead of being put onto the balance sheet.

Kevin Dede

Can you give us some insight on where that piece of equipment is now and where you think your volume is given your expectations to see a sequential increase in sales?

Mark Koch

Yeah, that equipment is back to normal. We have gotten it worked out. You know, we are expecting, we've said in our release our Q2 sales to be better than Q1. We're not giving specific guidance but, I mean, the other thing I have noticed, we're in a very good position in terms of at the quarter actual shippable open orders were in kind of a higher position than normal. So we feel good about making that statement for Q2. We do have a strong backlog and a good portion of orders scheduled for the ensuing quarters of the year.

Kevin Dede

Okay. Last question for me, Andrew, just a little more detail on the development project that you announced, it seems to me this is a new one and I was just wondering how many projects you have that are consumer facing at this point in the AR and VR sector?

Andrew G. Sculley

Well, we -- this one is new. We have -- this is going to be a significant project for us because it's a new backplane design as well as we're putting in the idea that we have had for a little while now and that's a very big plus. And we will get the full list to where it needs to be. We're working on that anyway, and it has to be set [ph], we're going to be at 10,000 nits at the end of the year. So it's a very important project for us. Now, how many are we working on? We still have something to do on another one but we want to get to that and we require these upgrades to the direct patterning, it would be a significant improvement for us. So we're delighted to have that again done and we've made many upgrades now and this is the last one we need. So we do need to get this direct patterning going and as we said, it will be in the second quarter. We'll be running some and we'll finish some work on the other project.

Kevin Dede

Okay, thanks very much gentlemen. Appreciate you taking my questions.

Andrew G. Sculley

Thank you, Kevin. It's good to talk to you. Stay safe please.

Kevin Dede

Of course, you too. Thank you.

Andrew G. Sculley

Thanks.

Operator

[Operator Instructions]. And our next question today comes from Mike Wells [ph], Private Investor. Please go ahead.

Unidentified Analyst

Good morning Andrew and Mark.

Andrew G. Sculley

Good morning, Michael.

Unidentified Analyst

Just a few questions here for me this morning. First one, I've been reading some articles in the news recently about the Department of Defense kind of encouraging primes to work with smaller companies in the supply chain as needed here, COVID related. Could you talk at all about your experience with that if any of your big customers are reaching out to you, offering support over the last couple of months here, and maybe what that might look like?

Andrew G. Sculley

In our case, we are a supplier to prime contractors in the U.S. and around the world. In fact, half our displays or a little more than half go outside the U.S. So the prime contractors in the U.S. we did receive many letters confirming that we are an essential business and they asked us to keep going. We are operating very normally with them, we are supplying displays, they are very happy with what we're doing. So we were operating normally.

Unidentified Analyst

Okay, so it sounds like you're getting the support that you need out of those customers?

Andrew G. Sculley

Oh yes, they are very good for us.

Unidentified Analyst

Okay, sounds good. I'm just interested in some general comments on this next one here. I've seen some increased M&A speculation in the sector recently here with some other AR/VR companies looking for buyers and also kind of noting the deal that Facebook did with the display maker to try to capture exclusive use of that technology. Just kind of curious if you think that we may be at an inflection point here, that we might start to see more of that over the next year or so or just kind of general thoughts on that?

Andrew G. Sculley

I think the important thing from our point of view is that there are a number of companies going back even to 2017. We announced the licensing and development agreement so there is a company already planning for their next generation headset and this company has to get it perfect unlike others we've seen. So that exists and certainly the new contract that we have suggests that because we have high brightness and we have capability in the design, and I'll give you an example of that in a second, we have capability in the design that's why companies are coming to talk to us. So exclusive is one thing that would just require a cost. Obviously, we talk about that, but we're not looking for exclusivity at this time. And I mentioned one advantage we have in the backplane design, we didn't design. This was a 4K display, 4K by 4K essentially, that's the resolution, 4000 pixels by almost 4000 pixels in the other direction. And that requires something special in the design and special by the foundry that makes the wafers and most importantly, special by the people here in eMagin because you have to do something that's called stitching. And if you get that wrong, you're going to see a straight line bend a little bit and our eyes are very sensitive to that.

So when we first did that display, we still have a few more things to do on it. We showed it at the Society of Information display last year, we were allowed by the company that paid us to design it to show many other people because they are interested in spurring the market. And this one company saw it and said, wow, you guys can do this. And that's why we kicked off the design. So it's certainly more companies talking to us is a very good thing and when we are allowed to show the displays, that's also a good thing. It generates interest.

Unidentified Analyst

Okay, sounds good. Last one from me, your stock has seen tremendous volume over the last week or so and thinking maybe you might break a record today with the number of listeners to this call here this morning. Just curious what would you tell these new investors about your aspirations as a company over the next two to three years, maybe what you think that you can become here over that time?

Andrew G. Sculley

So it is very good question. Thank you. Today, we are a leader in OLED and it really -- even though we're mostly military, that's AR/VR. They were the first movers in this. So AR/VR has been very important to us and we'll continue to be very important. And the one thing that everyone needs in AR/VR is the brightness capability. And we have obviously given -- we're doing work in helicopter programs right now and supplying and doing work with design in the aircraft, fixed wing aircraft. I think that you can see that we are the company that can do this in OLED. We are the microdisplay company using OLED that can really do this. And if I go to the consumer market, I think you can see that given we've had three different things I've talked about, two designs and one development and licensing agreement, I think the consumer world thinks that our technology is the way to go. We are the only company who mentioned 10,000 nits and that's by the end of this year so that's very important to them.

And just one other thing so that you understand how difficult this high brightness is, I'll give the military example, because it is very easy to understand. On the military side they want 28,000 nits, but they also want 1 nit because when it's nighttime and I'm only looking at thermal images, I want it to be very low and it has to have that high contrast over that entire range. From my knowledge we're the only company that talks about that and has been successful designing that type of structure. So our aspiration is to continue building the military and aviation industry and to continue working in the consumer industry, and that a licensing agreement like we have in 2017, additional ones of those are very important to us.

Unidentified Analyst

Thanks for that. Just curious on what you see the COVID impact for the consumer market, I think we've talked on previous calls about a timeline that's been out there in the news in that 2022 to 2023 area. Do you think that that still is a reasonable expectation or could that conceivably be accelerated by this virus or what are your thoughts on that?

Andrew G. Sculley

Well, it is interesting. I know some are working on the use of VR for and I've given this example before, I'll just give a working example, if I'm sitting at the office and I'm a stock trader or something like that, I may have six screens in front of me because I need to see a lot of information and I can look at one or the other. So there is a thought that you could do that same thing with a VR headset only instead of six screens it's continuous. I can look down, I can look all the way to my right or left, and I can see information. I can also do work on that using to my right I have Excel files, which I can or pictures which I can put in a PowerPoint which is in the center. So there is talk of that and if we continue to work at home, that would make it very convenient instead of requiring me to have six screens on my dining room table I'm much better off with a VR headset. So we haven't heard acceleration or anything like that, but it is reasonable that that could occur. We certainly we know that there are companies that are -- want the development efforts that we're doing done. And they're pushing us and funding us to get this done.

Unidentified Analyst

Excellent, well appreciate you taking the questions and glad to hear that everyone at eMagin is doing well here.

Andrew G. Sculley

Yeah, we actually are. And just again to emphasize, we do what is necessary and actually, I'm very impressed. We've been very successful in keeping ourselves healthy.

Unidentified Analyst

That's great. Thanks again, Andrew.

Andrew G. Sculley

Thank you.

Operator

And our next question is from John Pearson with Retail. Please go ahead.

Unidentified Analyst

Hello Mark and Andrew, thanks for taking my call.

Mark Koch

Hi, John.

Unidentified Analyst

Hi. A little bit ago, you mentioned about the stitching and my question about that is, is that different than what we've heard in the past where you -- I think you described like a tiling of displays kind of next to each other, some of your I think it was maybe [indiscernible] photonics maybe they were doing some tiling, is this stitching along the same lines or a completely different.

Andrew G. Sculley

No, completely different. In this case it's a little bit technical in order to -- in order to do the very fine patterning that we need in one display we have to do two different things to stitch twice. That's a very crude example. And it's really related to equipment. The equipment steppers that one has, you need two shots in order to make one display as an example, could be more than two. Yes, it's monolithic display, one display is all we're talking about. So the display comes out, it looks like one display, but it's higher resolution, a little bigger. Tiling displays means putting two to two or three or six displays together. We'd like to avoid that.

Unidentified Analyst

Okay, great, thank you. Would you give us an update as far as the competitive landscape goes, you've talked in the past a little bit about how you think the LED markets are pretty far out in the future and you guys seem to have this window of opportunity here. Is your stand -- from your viewpoint has that largely remained the same or is there any differences there?

Andrew G. Sculley

It has remained the same. And I will just, you know we talked to many people in the industry, industry being display industry. So we talk to people about micro LEDs and certainly the one comment I heard before the COVID kept me in place here is that the cost is very high. So it's hard to get the cost down and it's also hard to get very densely packed pixels and have the efficiency very high. So you need to make very small pixels. So those are the two things that are keeping it many years out. And certainly on the cost side, our OLED will be competitive for a very long time.

Unidentified Analyst

Okay, great. Thank you.

Andrew G. Sculley

You're welcome.

Operator

Now ladies and gentlemen, this concludes the question-and-answer session. I would like to turn the conference back over to the management team for any final remarks.

Andrew G. Sculley

Well, thank you all. We're just -- we are proud to be supporting our military as well as the first responders and medical customers we have with our products. None of this could happen without the hard work and dedication of our employees. And again, I thank them for their participation during these difficult times, as well as the ongoing support of our customers and suppliers we have mentioned. So I want to thank them very much and as I mentioned, we're all staying healthy and wearing masks etcetera, etcetera. So the team here at eMagin it is an honor for me to be a part of it. I thank the team and I thank you all for participating in today's conference call. Thank you very much.

Operator

Thank you. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.