If you follow the Augmented Reality, Virtual Reality, and Metaverse spaces, you will be quite familiar with Kopin (NASDAQ:KOPN). They are considered by many investors to be the leading supplier of Microdisplays for a number of verticals. Given the activity surrounding Apple’s new AR Mixed Reality headset, and a potentially large scale Consumer head worn device opportunity emerging for microdisplays and optics, it makes sense to learn more about Kopin’s business model and speak to management about what trends they are anticipating.
At CES in January, I was able to sit down with the new CEO of Kopin, Michael Murray, and start to capture his thoughts on how he plans to position the Company to more fully commercialize its IP portfolio. We ran out of time at CES but agreed to catch up at a later date for a more formal interview. In early February we did just that and I am pleased to be able to share this summary of our discussion in a Q&A format below along with “My Takes” having followed the company for some time. You will find we covered a lot of ground including MicroOLED, MicroLED, optics, and Mr. Murray’s plan to move Kopin up the value chain by transforming into a provider of Application Specific Optical Solutions. Enjoy!
Q: As you know, the rumor mill is active with speculation Apple will use MicroOLED and Pancake optics. Regardless of whose MicroOLED Apple uses in their first generation device, it could certainly be a validation of the architecture and likely a catalyst for lots of activity for MicroOLED providers. Combined with the recent news of your Lightning Silicon spin-off decision, I’m curious, how you see Kopin participating in this space?
A: So, first things first, I think the industry is still in the very early days when it comes to AR, VR, and the Metaverse. As part of the maturation process, everyone is starting to figure out that there are some real challenges they need to overcome to make AR and even VR systems that consumers really want to use: a cost issue related to new technology, performance issues related to optics or image quality that are inherent in the physics of near-to-eye displays, and power consumption/battery requirements that relate directly to the weight, size, and form factors for these devices.
So, if you package all that up, what you have is all of the big three or four device makers struggling to balance the detailed specifications of their products to what the market – consumers — desire in a product that they are going to embrace and integrate into part of their life. And, there is one more critical factor, and this is what’s really important, the common denominator is why do you want to use a device like this for more than 20 minutes at a time? You have to have a compelling use case – that has yet to emerge.
Now, we review the technology Kopin offers in the AR, VR, and Metaverse space. Remember, we have over 200 patents, including 20 related just to MicroOLED specifically. In addition, Kopin has many more patents in the area of specialized optics for near-to-eye microdisplays and systems, including our All-Plastic Pancake which is very unique in the industry.
Now let’s talk about actual products. Kopin has more than seven different MicroOLED panels produced on our 8″ wafer architecture. Our highest resolution is our 2.6K X 2.6K resolution which is a cutting edge panel and the technical challenges we have been working on to produce these products are significant. To put this in perspective, today we are already putting 4 million pixels in a square inch in some of our current mass producible microdisplays. We know this space very well.
Having arrived at Kopin as CEO and assessing the Company, technology, and addressable markets, my background tells me that, when we look at where the MicroOLED market is going, it is definitely moving to a 12″ silicon wafer foundry and OLED depositions foundries with 4K X 4K resolution displays. The investment in these OLED fabs is already happening and obviously, they need a backplane designed for those 12″ wafers.
From a performance standpoint the market would love a 4K resolution MicroOLED device, but what price is the market willing to pay for it? The hope is that a 12″ wafer will drive the cost down sufficiently to have a viable product.
As I mentioned our current MicroOLED designs are based on 8″ wafers and transitioning from 8″ wafers to 12″ wafers, which is completely different physics, requires a different design and significant investment. At this time we did not see the need for the 12″ inch wafer investment as the products we have are sufficient for our current needs. However, some former employees wished to pursue the 12″ development so, we made the decision to license some of our MicroOLED and optical technologies to Lightning Silicon and re-focus Kopin on near term business opportunities. To that end, the Lightning Silicon spin-off essentially removes a significant amount of MicroOLED R&D OpEx from Kopin while Kopin has upside via royalties and an equity stake in Lightning SIlicon. If and when all customers do go to 2.6K or 4K on 12″ wafers to get the cost and the volume benefits, Kopin participates directly.
As you can see, and this is an important key message from a shareholder perspective, we are focusing Kopin’s efforts and resources on the strong and growing base business we see in front of us for the next 36 months while still participating in a potentially very large scale Consumer MicroOLED opportunity a little further down the path. The spin-off approach lets us do both.
My Take: By spinning off the OLED business to licensee Lightning Silicon, Kopin is avoiding the likely very high cost R&D effort of moving DuoStack OLED from 8″ to 12″ wafers. But, this means Kopin will also take less of the ultimate Revenue and Gross Margin upside once the Consumer MicroOLED market starts to scale. This seems like a prudent trade-off right now for the company given the seemingly endless delays of Apple’s anticipated MicroOLED headset reveal along with the various AR, VR and Metaverse twists and turns we are seeing from Meta, Pico, Microsoft and others prior to broad Consumer adoption. I will now watch for the remaining Defense, Enterprise, and other Microdisplay lines of business at Kopin to become profitable on their own under Mr. Murray’s leadership – while we all await Consumer scale for MicroOLED.
Q: There has been some press lately highlighting yield challenges with MicroOLED. What are your thoughts on the MicroOLED yields you are seeing from the current 8″ fab?
A: Low yields are a part of the early stages of bringing this new technology to market. Unfortunately, a deposition fab doesn’t turn on and just run linearly with perfect yields. With the 2.6K DuoStack MicroOLED panel, we along with our partners are literally at the bleeding edge of technology in the display space and these products just came off the line in December. For reference, I can tell you my experience developing cutting edge MEMS accelerometers, taught me it takes you a good 18 months to get the process layered in, defined, and documented properly before moving at a predictable rate. The more wafer you run, the more solid your process is going to be – then you can start turning knobs to get the yield up and moving in the right direction.
Q: Many believe MicroLED is what comes after MicroOLED and it could even be the ultimate microdisplay architecture if it can be mastered and manufactured at scale. How should we think about Kopin’s efforts in this space?
A: We currently have a funded research project with the United States Department of Defense and a customer we’ve been working with to develop a monochrome MicroLED panel that is extremely bright.
It is possible we could actually see monochrome MicroLED adoption come on sooner and displace MicroOLED for some applications. Why? Because of the brightness that you’re able to achieve as well as avoiding some of the ghosting or image persistence issues that you can see in OLED physics. For these and other reasons, MicroLED becomes very interesting for not only Defense customers, but industrial customers as well.
This brings me to an important point. All of these microdisplay architectures have different inherent physical properties. Some have shortcomings that others don’t, some have benefits that others don’t. Kopin is in the unique position of offering expertise: AMLCD, FLCOS, MicroOLED, and now MicroLED architectures. Our strategy is to combine any of these display technologies with our optics capability, whether it be Pancake or some of the other types of optics that customers are requiring, into a higher level assembly to fit the overall application. We call this high-value approach Application Specific Optical Solutions.
My Take: MicroLED is a very hot topic in the Microdisplay space right now and it appears this technology will follow the same development and adoption cycle we have seen for decades. As with AMLCD 30 years ago, Defense first, then Enterprise, then on to Consumer devices. A Customer announcement of a Kopin MicroLED enabled device could signal the start of similar cycle and growth opportunities.
Q: Speaking of optics, the Optical See-Through versus Video See-Through AR debate is a hot topic in many industry circles. What is your current thinking in this area?
A: This is a great question. I think what you’re going to find is a blend over time and that’s what we are hearing from customers. Many are exploring Optical See-Through AR and many are exploring Video See-Through. Remember, we know the Defense side of the market where we are the world’s leader in Video See-Through AR using Pancake lenses. But we also participate in Optical See-Through solutions in pilot helmets.
Logically then, we need to have different display technologies and different optics for solutions that can serve both Optical See-Through and Video See-Through applications. Another way to think about this is the variety of eyewear solutions many of us already wear. You may have different glasses for different reasons or use cases. For example, you will have your sunglasses for when you are outside in very bright conditions, you may have your readers for when you are reading book, and you may have a pair of glasses optimized for driving.
Thinking about it this way, for an AR/VR set of goggles, what happens if the person that’s using them doesn’t have great eyesight? Or, what happens when you use the device at night? So, all of a sudden many of our customers are figuring this out saying, oh wait, one size doesn’t fit all and one display doesn’t fit all and one optic doesn’t fit all.
So how are we going to make this work? In Defense the answer is, you might have a daytime HUD, you might have a nighttime HUD, and you might need different displays and optics for each. Furthermore, the ability to adapt those types of applications is becoming more important. The ability to tune the display from brightness to contrast becomes very important. Perhaps you have display cartridges that are swappable. You could have one type of display cartridge for daytime and one type of display cartridge for nighttime. For sure, a trend that we’re seeing in the industry is you want to be able to adapt your technology for the user application as opposed to them adapting to you.
My Take: This is an interesting response to a question on Video See-Through vs. Optical See-Through AR. I have placed myself firmly in the Video See-Through AR camp having been convinced by a number of industry veterans of its merits vs. OST. Mr. Murray seems more open to both architectures as end user solutions. In the end, what matters is what Customers and end users of devices will be able to use comfortably and safely. From that perspective, I was encouraged by Mr. Murray’s comments relative to potential dual-use optics approaches that could be both VST and OST depending on situations and conditions.
Q: Something you have spoken a lot about are the near term Defense business opportunities before you and how the pipeline for Kopin in this area is super-strong. Any highlights you could point out there?
A: A big advantage Kopin has in the Defense space is that we are supplying a fully integrated solution. Remember, we offer the full range of microdisplays (AMLCD, FLCOS, MicroOLED, MicroLED). It’s not just a display panel business for us. The fact we can offer a fully integrated optical solution that includes the display panel, drive electronics, optics, connectors and enclosure, means we deliver a very high-value product to our Defense customers.
The testament to our technologies is the wide-range of use applications in the most demanding environments in the world. Our Defense products are used in soldier centric applications like thermal weapon sights, fixed and rotary wing pilot helmets, laser targeting systems and armored vehicles. But don’t forget, we believe we are the leader in head-worn near-eye industrial applications and we are seeing early traction in medical applications.
Q: A part of the Kopin story that is not well understood is that, in addition to building a vast IP portfolio, Dr. Fan and yourself in your role as CEO, have assembled equity stakes in a number of AR VR pioneers. We know Kopin has used IP to secure equity stakes in RealWear, Lenovo New Vision, HMDmd, SOLOS, Intoware, and now Lightning Silicon. Notably, RealWear has seen success as an Enterprise AR leader and just recently announced plans to go public. It’s an interesting way to monetize IP. Do you a plan to communicate more about the value of this approach to investors over time? How are you viewing Enterprise AR at this time?
A: Right, so there are a couple pieces there. Let me speak to Enterprise AR first. Due to our close working relationships as both a Partner and Supplier, we have the luxury of getting to talk extensively to MoziWare, Lenovo New Vision, Panasonic, RealWear and others. These are all true leaders in their respective spaces. So what happened was certain Enterprise AR devices saw great growth through COVID due to remote work requirements. And you know, being positive thinkers, many observers think that growth is going to be linear. However, what happened after COVID abated, is everyone paused and said, okay, we need to reevaluate how many people are going come back to work. Companies have moved through that pause and evaluation period now and we are returning to normal in many ways.
On your question about monetizing our IP, a number of our investments are actually seeding and enabling a market and we have been able to use our valuable IP to do it. In the case of RealWear and now Lightning Silicon, its important to note there is also a royalty structure that also enables Kopin to directly participate in growth as unit shipments ramp.
I would encourage you to watch Kopin closely in 2023 and moving forward as we start to engage differently in our communication with investors. For example, we’ve connected with a new IR firm called MZ Group and we are asking them to help us tell the Kopin story. The focus of the Company needs to be well understood.
I will say that, due to the nature of how the AR VR market story itself has unfolded more slowly than expected and also the number of unexpected twists and turns the journey has taken, there has been some investor fatigue. Whether you are a Meta, Apple, or Kopin investor, the AR VR Metaverse opportunity has taken longer to materialize than all of us in the industry had expected.
We do have a strong order book coming into this year and we have the best of the best customers. We have reduced force, reduced OPEX and lowered risk by removing the MicroOLED R&D load so that we can invest in quality, yields, and operational excellence.
Our focus is operations and delivering on programs that are coming in that will absolutely be transformational from a revenue and profit perspective. We are driving a culture of OTIF – On Time, In Full. That is, delivering on time 100% of the time, 100% quality to every customer, every time. If you come down to Kopin HQ today, you will see that OTIF messaging everywhere.
In summary … we are in midst of transforming the company from a pure display company to an Application Specific Optical Solutions firm that leverages a full suite of OLED, FLCOS, AMLCD and now micro-LED technologies to enable near eye applications in multiple markets. 2023 is going to be an exciting year of focus, changes and execution.
My Take: After three decades of effort by Kopin Founder, Dr. John Fan, including the deployment of substantial capital and resources, the company has seen a number of successes. The HBT transistor that enabled the smartphone revolution, shipping millions of AMLCD microdisplays in Consumer camcorders, developing and spinning off Whisper audio AR IP, and the commercialization of the Golden-i Enterprise AR platform to name a few. However, despite all of this, Kopin’s share price has lagged its peers. What is the best approach to take now to unlock and commercialize the valuable IP contained within the company? Mr. Murray certainly has a plan and he’s put it into motion.
I like the compromise on a MicroOLED spin-off that reduces R&D costs today with potentially less upside long term as there is still some risk to the Consumer MicroOLED story (where are you Apple?). I like the focus on near-term Defense and Enterprise base businesses that appear to have lots of profitable growth in front of them. I like the focus on OTIF, operational excellence, and cost control. I like moving up the value chain beyond just displays. I’ll also be watching the bench at Kopin to see if new talent is attracted to this story – a few key hires at this stage could send the right signal on commercialization of IP. Previously, acquisition of R&D talent was the focus in my view – and rightfully so.
The R&D work has been done, the IP is built. As with all great companies, it’s now about execution.
Near term, I think Mr. Murray is focused on all the right things. Long term, Kopin, via Lightning Silicon, has a sizeable chip in the Big Game: Consumer MicroOLED. Has Kopin just delivered a “Best of Both Worlds” compromise for the microdisplay space? We shall see. I’ve been on this file a long time and feel the company is positioned better than ever.