C.E.Unterberg Towbin Buy Rec. 12/30/2003 Target $9.50-$11.50
Microvision, Inc. (MVIS 1,2,3,5,6,7 $7 .4 9 )
SHORT-T E RM MARKET P E RF ORM
LONG-TERM BUY
MVIS: Lumera Contract-Greater Visibility for 2004
• Microvision’s majority-owned subsidiary, Lumera, announced a
$950,000 contract from the U.S. Government to continue
developing high performance electro-optic polymers that would
be used to create wideband optical modulators. This is the second
contract extension on this project and brings total funding to $3.5
million. The specific unit of the US Government is not named,
but both DARPA and the Missile Defense Agency have active
programs in this area.
• We have modeled $2MM in revenues in 2004 from Lumera, and
this goes a long way to that estimate. Lumera will require cash
by the end of Q104, and MVIS maintains that Lumera must raise
that cash on its own. There is always a chance MVIS would be
part of the funding, but we believe, based on Microvision's
history with Lumera, that this risk is low.
• We recently initiated coverage of Microvision, Inc. with a Market
Perform/Buy rating and $9.50 to $11.50 price target range. The
company has gained traction in recent months with the US military,
NCR, Canon and American Honda. We expect further
announcements of purchase orders for the Nomad™ and Flic™ laser
bar code scanner products over the next few months.
• Microvision's scanned beam technology platform eliminates the
visualization bottleneck. Microvision has a unique technology
platform that it should be able to leverage to a wide range of
applications. We believe visualization bottlenecks exist in many
different areas, implying the company’s addressable market is
potentially very large. The technology uses a scanning mirror and a
beam of light to paint images on the retina of the viewer's eye, with
no screen to block the viewer's field of vision. This technique
provides a unique, true "see-through" capability. The scanner
developed for a scanned beam display can be used in reverse to
create image capture devices such as a bar code reader or a laser
camera.
Key Data
52-Week Range $3.43 - $9.38
Shares Outstanding (MM) 21.4
Float (MM) 19.6
% Held Institutionally 12.2%
Market Capitalization (MM) $160.3
Average Daily Volume (000) 168.4
Revenues – LTM (MM) $13.8
Total Debt (MM) $0.3
Cash Per Share $1.55
3-Yr. EPS Growth Rate NM
12-Month Price Target Range $9.50-$11.50
Fiscal Year Ends: Dec 2002A 2003E 2004E
Revenue (MM) $15.9 $15.2 $25.7
Earnings per Share
Q1 $(0.63) $(0.46)A $(0.30)
Q2 $(0.49) $(0.38)A $(0.23)
Q3 $(0.37) $(0.39)A $(0.21)
Q4 $(0.46) $(0.28)E $(0.16)
Year $(1.93) $(1.48)E $(0.91)
P/E NM NM
Diluted Shares (MM) 14.1 21.4 21.4
Company Overview: Microvision develops high-resolution
displays and imaging systems based on the
company's proprietary silicon micro-mirror technology.
The company's technology has applications in a broad
range of military, medical, industrial, professional and
consumer products.
December 30, 2003
C OMPA NY R E P OR T
C.E. UNTERBERG, TOWBIN
2
• Its launch product is a head-mounted display system, known as the Nomad™ Augmented
Vision System, a see-through, head worn display. The company's first commercial target
market for the Nomad™ is the automotive repair industry. We believe the addressable market
exceeds $1 billion. We expect the company to start production of the Nomad™ in early 2004
and for it to generate $10.2 million in revenue next year.
• The company's next product, the Flic™ Laser Bar Code Scanner is a low cost, highly
advanced laser bar code scanner. The entire market for handheld scanners is an estimated $1
billion. In November, Microvision received two purchase orders for over 5,000 Flic™ bar
code scanners from NCR. We expect customer traction for Flic™ to continue and for it to
generate approximately $2 million in revenue in 2004.
• The opportunity is large; so too, we believe, are the risks. Microvision has been a
developmental stage company and is in the early stages of marketing and producing
commercial quantities of Nomad™ and Flic™. Risk of execution and financing could delay
and endanger the company’s development.
• Our $9.50 to $11.50 price target range is based on an enterprise value to sales multiple
of 3.6x to 4.4x our Q4 05 run rate sales estimate of $56 million.
Investment Risks
Execution Risk
To date, Microvision has produced limited quantities of Nomad and Flic™ products. As a
result, the company could be subject to product development risk either through their own
or their overseas OEM partners' delays, which could affect its revenues. Microvision also
has various development contracts with the U.S. government, BMW, Canon and others
that are exploratory in nature and are intended to develop new types of technology or
applications. These efforts may prove unsuccessful and these relationships may not prove
to be profitable.
Financing Risk
The company recently raised $21 million bringing its cash balance to $27 million, but will
probably need to tap the capital markets again in 2004. The recent cash burn rate of $6
million per quarter could diminish as product revenues increase, but a rapid growth could
place strains on the company’s working capital. There is no assurance the capital markets
will be favorable to continued investments in Microvision.
Competition
The information display industry is highly competitive, and Microvision's Nomad products
compete with miniaturized cathode ray tube and flat panel display devices from
manufacturers such as Kopin, Sony and Texas Instruments. The bar code scanning
industry is also highly competitive and dominated by Symbol Technologies. Microvision's
Flic™ products will compete with existing laser and wand type scanners produced by
established bar code companies.
C.E. UNTERBERG, TOWBIN
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Technology Risk
Although the company has experienced recent customer traction, the scanned beam
technology may not be widely accepted by manufacturers who use display technologies in
their products or by customers of these products in the defense, industrial, medical and
consumer markets. Additionally, customers, such as the Medical Special Forces division
of the U.S. Army, would be more inclined to use a product that features a full color,
wireless display as opposed to the current wired, monochrome display.
Potential Patent Litigation
Even though the company has an extensive patent portfolio, there are several patents held
by third parties that relate to certain aspects of scanned beam displays and image-capture
products. These patents could be used as a basis to challenge the validity, limit the scope
or limit Microvision's ability to obtain additional or broader patent rights of the company's
patents or patents that it has licensed.
Lumera
In 2000, Microvision formed a subsidiary called Lumera, which develops electro-optic
materials based on its proprietary polymer compounds and processing technologies. These
materials can be used to improve the performance of electronic components found in
optical and wireless communications systems, semiconductor markets and biotechnology
applications. Lumera’s primary source of revenue to date has been from the U.S.
government contracts for materials development.
The consolidated financial statements include both Microvision and Lumera. As of
September 30, 2003, Microvision owned 76% of the common stock, 11% of the Series A
and 46% of the Series B convertible preferred stock. In August 2003, Microvision
invested $868,000 in a financing for Lumera, of Series B convertible preferred stock, in
order to maintain its ownership level.
Microvision is not contractually obligated to provide funding for Lumera, and its exit
strategy is to spin it off to shareholders. With its majority interest, Microvision maintains
its tax-free status in the event of a spin-off. Lumera raised additional funds on October 30,
2003. At the time of the last financing, the valuation for Lumera was $20 million.
Lumera is burning approximately $1 million per quarter, and will need to raise cash in the
new year. Microvision’s original $6 million investment was reduced in March of 2001 by
$3.5 million with a raise from outside investors. Since then, Microvision has made one
additional capital contribution ($868,000 in August 2003) and it has committed to
shareholders that Lumera’s cash needs will constitute a call on Microvision. Certainly, at
the right valuation, MVIS would raise cash in order to help keep Lumera alive, so there is,
in our opinion, some risk of Microvision raising additional cash to fund Lumera and/or
depleting its cash to fund Lumera. |
