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Technology Stocks : THREE FIVE SYSTEM (TFS) - up from here? -- Ignore unavailable to you. Want to Upgrade?

To: Franklin M. Humphreys who wrote (1308)	4/10/1998 12:45:00 AM
From: dfloydr	Read Replies (3) \| Respond to of 3247

My notes from the conference call - all corrections appreciated. Conference call went very well. Clear, confident, no glitches. It went rather fast, but from my scratchy notes: 1. Inventories up in anticipation of work in hand. Backlog up sharply to $39mm and to build that - been ordering materials. 2. Confident revenue will be up 30% this year and next. MOT will account for 45% , HWP will account for 15%. HP $ales are down due to a) maturing programs now being second sourced and b) as volume goes up margins go down. 3. Gross margin up to 25.4% - extraordinary and surprising. Revenue dropped from 4Q97 level to 18.5 million for the 1q98 (up from 16mm 1q97) - anticipated margin pressure - did not happen. Reason - no writeoffs of unusable inventory ... all inventory is going into meeting backorders. Much tighter inventory control in place. 4. SG&A = 8%. Absolute number will go up thru the year as they ramp up production, but the percentage of revenue should decline over the year. 5. R&D 1Q98 was higher than usual at $1.7mm - balance of the year should drop back to more normal $1.2 - 1.3mm. 6. $14 mm cash and $15mm unused line of credit. No debt. 7 Capital plans. 1Q98 $1.7 mm, of which $1 mm went into micro displays. For the whole year, up to $8mm for the new China operation, $3mm for micro displays, $3mm for other (expansion in Tempe and Manilla). 8. Tempe now running three shifts, 50% new thin glass. 9. Micro Displays: installing and debuggin systems now: expect to get up to 300,00 to 400,000 light valves annual rate (carefull... notes fuzzy on this) 10. China being accelerated as demand is coming in strong. Expect temporary plant to reach 100,000 units in month of June and 1,000,000 in 4Q98. All approvals in hand. Experienced China start up team in place since March 1, equipment due 4/15 - till June seting up and training. Plant will eventually be a mirror of the Manilla plant. Permanent facility probably will be built by an Australian company - will start 4/30/98 and in production by 4Q. Permanent facility will be right next to temporary space, making swithover easy. Two things have accelerated this China program: a big order in hand: backlog threatening to swamp Manilla. 2Q98 outlays in China will be $1mm above earlier projections to get the job moving. Will hurt gross margin a bit. Expect 3Q China will break even, 4Q will be profitable but not likely up to company standard yet. Beyond that should have very favorable - positive leverage. 11. 1998 will have twice as many clients at > $1mm than in 1997. 12. Adding one sales person in Silicon Valley, 1 in midwest and 1 in pacific. 13. New Products: LCiD - starting production mid year with production building through year end. 1 firm order and 16 under evaluation. LCaD - big gains will be in 1999 - working with 15 client/prospects - average price $80-100 per unit 14. Finding we have not only to develop the technology but because of the newness, we have to help develop the product/market. 15. Industry projection for cell phones in year 2000 = 230 million units, 15% will be high end with microdisplays at say $50 to 60 per unit - that = a $2billion market, and we expect to be a big part of that market. Questions from listeners. Q. Where do you see 1998 growth coming from. A. Backlog in hand plus big order in the works/ in hand from #1 customer (MOT) Q. Why the seasonality? A. Cell phone makers and the multiperipheral maker (HWP) are turning over their product lines more quickly and 1Q has been slow last year and this as a result ... may not always stay that way... has recently. Q. We are hearing of pockets of weakness in AMLCD (computer screens?) and semi equipment makers - what weakness are you seeing if any? A. We are seeing strength. Some of those computer screens are in oversupply - some manufacturers desperate. We are see our major customer now committed to digital. When we had our problems with them two years ago they were still analog in a digital world. They are fully expecting their digital products to take off in 2Q98. (Note: MOT has had a very tough and disappointing two years because of their lag in getting into digital). Q. Are you involved with any of the satelite phone systems? A. No. Q. LCOS outlook. A. You are talking about developing a projection system. That will be a year to 18 months project vs our more typical 9 month - 18 month cycle. Q. Will China acceleration hurt 2Q98 bottom line? A. Not much ... maybe 10% short of previous expectations.( Implied would make some of that up later iun the year.) Biggest hit will be 2Q when outlay will be up $1mm without ofsetting sales. Q. What do you see for sales in 199? A. Another 30% sales growth. Q. After first half, should there not be some good bottom line leverage? A. Yes. Some costs will grow, but as a % of sales they should go down overall. Q. New products - what are the applications? A. Microdisplays: First - using silicon expertise from National Semi partnership - projection. Then hand held virtual image devices, cell phones with virtual displays. This will be our major target, the one we know best and where we know the customers best. Then we will hit a lot of other markets some of which will work and some won't. LCiD: major applications will be replacements for LED in cellular phones. Other application plans not yet meaningful. LCaD High end monochrome passive matrix displays : grey shading: fast. Expect this to make us a heavy player in the PDA arena. Q. What are your capacities? A. Manilla: we do about $1mm a month per production line. We have 14 lines. China: start with two lines in May, move them to 40,000 sq ft. permanent facility(same as manilla), have 4 lines by year end. 14 possible. Note: actual numbers vary with average selling price - varies with product, size of order, maturity of product line, run rate, ramp rate. In all, 2 plants will = $280 - 300 mm capacity. Q. Did asia's currency problems hurt us in this 1Q98? A. No. Typically that sort of thing is favorable to us as we source some things in asia. We have low labor content. Does affect prices we can get for some lines as some asian competitors are desperate. Q ( I missed this) A. LCoS can be used in projection mode for TV. Lots of work to get there. Q. Phillips ??? flat panel intorduced. A. Yes, very expensive ... $20,000 each. Remember looking at applications must always ask how do we stand up on function and cost. We do not make products, we make technologies that go into products Q. How about "Universal ______?" A. Interesting - light emitting - complications - not a problem for 5 to 10 years. Q. Could we license that> A. Yes, we have had discussions with them and they are willing. Q. MOT, are we on all of their digital products or on some particular product. A. All Q. Are you sole source to MOT on these or any of these? A. No, probably not more than 25% of any one line. Q. What % of backlog is MOT? A. Just over 50%. Q. Major competitors? A. All asian: Seiko(?)/Epson, Samsung, Phillips, Optrex. Motorola gets their other 75% from these guys. Q. (missed) A. Motorola, Erikson, Nokia = 60%. We are not allowed into Japan. We figure we have only 7% of the world cellular market at this time.