KOPIN CORP Q3 FY2024 earnings call

• Progress on transformation plan with over $75 million in orders for 2024 and beyond, potentially the highest annual order total in company history.
• Defense products saw 109% year-over-year revenue increase, with new customers placing development orders and achieving production qualification milestones for displays.
• Industrial market secured a $1.5 million follow-on contract for a thermal imaging system in firefighters' masks.
• 3D AOI launched the R-15 microdisplay system and received a production order for a 2K SLM system.
• Medical market had a production order for the CR3 wearable surgical monitor and introduced advanced SLMs for biomedical research.
• Partnerships like with Wilcox Industries on the FUSION CLAW and showcase of neural display technology at AUSA.
• Expanded North American Business Development team with new hires and retained a consultant for consumer applications.

In the third quarter, Kopin achieved $13.3 million in revenue, a 26% increase over Q3 2023. Defense products delivered $10.4 million in revenue, a 109% year-over-year increase. The industrial market secured a $1.5 million follow-on contract for a near eye thermal imaging system integrated into firefighters' masks. The 3D AOI segment launched the next generation SXGA FLCoS microdisplay system R-15, with Mirtec securing the first purchase order, and received a production order for a high resolution 4 megapixel 2K SLM system. In the medical market, there was a production order for the CR3 wearable surgical monitor and introduction of proprietary high resolution fast Spatial Light Modulators for biomedical research. Defense revenue contribution was significant due to the year-over-year growth, while other segments contributed through specific contracts and product launches.

• Anticipate financial trajectory for 2025 and beyond to be favorable due to market dynamics, geopolitical factors, and new administration tailwinds.
• Book-to-bill for the year remains ahead of schedule and positive, despite Q3 being slightly below 1 to 1.
• Expect new partnerships and progress to fuel full rate production and larger future returns.

• Potential differences between forward-looking statements and actual results due to risks like demand for products, operating results of subsidiaries, market conditions, etc.
• Legal expenses related to the Blue Radios matter, with expected normalization but uncertainty around appeals process.
• Uncertainties in supply chain security requirements and potential tariffs under the new administration.

Q: Hey guys, thanks for taking my questions and congrats on the strong results. Michael, want to dig in a little bit on the international market? You noted some nice traction there. Just curious where you're seeing that and I guess relatedly, is your sales infrastructure to address the international market fully built out at this point?

A: So international, I think is a growth opportunity for us Jason, thanks for the question. Right now the international business is actually, I'd say less than 5% of our total revenue this year. We do exceed see that exceeding our expectations next year and the year after just simply because of geopolitical issues in Israel, Ukraine and some other hotspots that currently need the technology that we have. We also see the perturbation of NATO requesting and demanding 2% of GDP actually be spent. So I think as we move forward, international business for us in defense specifically is going to grow exponentially. Moreover, we also see interesting trends in the medical side of the business with future potential medical customers globally here, looking at the CR3 module as well as those displays for high end microscopes as we talked about. So overall, I think international is going to grow for us. And that's the pivot that we made with the three day AOI team, which resides mostly in Europe. But we're not fully built out for international sales just yet. We expect to make some small investments and augmentations, if you will, to service that business next year in the future.

Q: Okay, that's helpful. And then I know you noted kind of a strong book-to-build year to date. Just curious what that number was for Q3.

A: Q3, it was slightly below 1 to 1.

Q: Obviously it's early, but we'd just love to hear your thoughts on how your business might be potentially impacted with the change in administration.

A: Sure. So I think firstly I think the new administration, based on what we understand today, which is early, is going to be good for Kopin in the long run, mainly because of the strong emphasis on NATO to spend 2% of GDP, which was the previous administration's big focus. And I think that's going to continue, number one. Number two, I see the budget process, including plus up requirements for defense spending in the United States. So I think that's the second tailwind that we see and then the third tailwind that we see with the new administration is just the ability for smaller companies, small cap companies like Kopin, to grow. And I think that's a big focus of the new administration. So pound for pound, we see this as a positive for Kopin.

Q: Hey, good morning guys. This is Victor on from Matt Sheeran. Just a question on revenue in the quarter is a bit better than we had expected of that kind of mid-single digit sequential growth. Was that a function of pulling orders from Q4 or was that just your ability to ramp new programs in the quarter?

A: It was a combination of product mix and our ability to produce. Remember, we're on 606. So essentially our revenues are not based on shipment, they're really based on percent completion. So to the extent the supply chain is flowing nicely, it allows us to get ahead and build product. And so the supply chain worked very well this quarter. And also we had a favorable product mix. Some of the smaller orders that you see actually have much bigger gross margins and are much more profitable.

Q: I think last quarter you talked about growing gross margins sequentially through the year. You guys saw a nice bump here in Q3. Can we continue -- can we expect that to continue going to Q4?

A: That's the plan.

Q: Thanks, gentlemen, for having me on. I'm Michael Rich. Michael, would you mind diving into the neural display a little bit more? I mean, you spoke to specific interests, both on DoD and the consumer side. You've got a new consumer applications consultant. I know it's early, I get it. But if you could give us a little more color there. We see that as an exciting opportunity for Kopin.

A: Sure. From a standpoint of neural display, we see the market going basically repeating history. If you look at original cell phones as an example, they were built with individual components, not much integration. And then overtime, ICs won the day, integrated circuits won the day. We see that same sort of trend with spatial computing devices or AR VR goggles that sensor fusion systems or integrated circuits need to drive that innovation. And neural display is a great example of that. It removes six cameras from some of the spatial computing devices. Six cameras is very costly, very high power, and creates a lot of weight on the nose. So we think neural display has a tremendous value proposition in both consumer and medical, as well as, obviously, defense. On the consumer side of things, we think all the consumer companies at this point and AR VR are back to the drawing board, which is good news for us because we're farther down the path with neural display. I can't talk about some of the things we're working on because they are under NDA at this point, but we are making pretty substantial progress thus far.

Q: Has the company decided on whether it might or might not offer a demo of it at CES? I know that had or was being considered at some point.

A: We're still trying. It's up for debate. We're struggling with it, quite frankly, to get a better image quality out of it. And we still have a pretty strong plan to make it to CES within the neural display as an actual display running our Software and the AI. As you can imagine, in the last 18 months, that's been a Herculean lift for our engineering teams. So still, TBD, where that's the plan, but we are struggling with it.

Q: Regarding. I think it was Victor's question on the change in the administration. I'm wondering if you looked sort of the next layer of the [Indiscernible] and your supply chain and the potential for tariffs to impact that. How might you be hedging yourself?

A: Great question. Thankfully, one of the first strategic initiatives that we had, Kevin, was our fab-light model and the concern around our Chinese OLED deposition supply chain. I'm very pleased to report that we've moved our sensitive USD DoD applications to a new provider that is U.S. DoD approved. The vast majority of our components will have a dual source. U.S. DOD as well as our Chinese deposition partner specific to OLED moving forward will be complete that transition this quarter. So very pleased and proud of the team for their progress. And more importantly, we're actually seeing better quality results and better performance out of our new partner on our OLED displays. So tremendous progress in that area. And it was very timely that we took that decision when I came in a couple of years ago. So that strategy is now proving positive for us.

Q: On backlog, Michael, help me with some of the numbers you mentioned. I think, in your prepared remarks a $75 million order number, which I think is up from $55 million when you last talked about the June quarter. I'm wondering if I'm in the right ballpark on those and what drove the big increase.

A: You're exactly right. From Q2, we were sitting with 55 million of purchase orders in the calendar year at that point, our expectations, due to several negotiations that are ongoing, that we'll receive in the realm of 20 million of new orders for this quarter. We might see a little bit of creep over the Christmas holiday into Q1 but my sense is right now the negotiations should land us with those orders in Q4.

Q: Is there any more insight or should we look to pretty much what you focused on mostly DoD, foreign and domestic and medical.

A: I think that's accurate. What we're expecting this quarter is some influx of thermal weapons site orders for production next year as well as our helmet based programs for rotary wing and fixed wing applications. So we're expecting orders that customer for the fixed wing. We already mentioned earlier in the call we're expecting orders for carry on production. The rotary wing customer is Elbit and they are otherwise engaged as you can imagine Kevin in Israel at the moment. So we've been expecting those orders for quite some time and we are seeing light at the end of the tunnel to receive those orders for our rotary wing applications this quarter.

Q: Understand that the that Judge Kaine is going to consider the ruling in Massachusetts and I was wondering number one and whether or not you have any insight on how that might be going. And number two Rich [ph] talked to I think 1.2 million and 1.5 million in litigation related expense I think in the September quarter this year and last but I got confused on which one was which and what would you expect that litigation expense to fall to in December, the December quarter.

A: So 1.5 is 24, 1.2 is 23. When that's going to happen we don't know. It's all dependent on when the judge ultimately puts out an opinion. Otherwise we run about 150 to 200,000 a quarter in legal expenses between patents and just normal public company stuff and we do not have any visibility into when Judge Kaine in Colorado will render his opinion.