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Edited Transcript of KOPN earnings conference call or presentation 8-Nov-18 1:30pm GMT

Q3 2018 Kopin Corp Earnings Call

TAUNTON Nov 21, 2018 (Thomson StreetEvents) -- Edited Transcript of Kopin Corp earnings conference call or presentation Thursday, November 8, 2018 at 1:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Chin Chiang Fan

Kopin Corporation - Co-Founder, Chairman, CEO & President

* Richard A. Sneider

Kopin Corporation - Treasurer & CFO

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Conference Call Participants

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* Matthew Evan Galinko

National Securities Corporation, Research Division - Senior Research Analyst

* Patrick Metcalf

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Presentation

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Operator [1]

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Good morning. My name is Emily, and I will be your conference operator today. At this time, I would like to welcome everyone to the Kopin Corporation Q3 Earnings Conference Call. (Operator Instructions) Thank you. Rich Sneider, Chief Financial Officer, you may begin your conference.

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Richard A. Sneider, Kopin Corporation - Treasurer & CFO [2]

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Welcome, everyone, and thank you for joining us this morning. John will begin today's call with a discussion of our strategy, technology and market. I will go through the third quarter of 2018 results at a high level, John will conclude our prepared remarks, and then we'll be happy to take your questions.

I would like to remind everyone that during today's call taking place on Thursday, November 8, 2018, we will be making forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. These statements are based on the company's current expectations, projections, beliefs and estimates and are subject to a number of risks and uncertainties that could cause actual results to differ materially from those forward-looking statements. Potential risks include, but are not limited to, demand of our products, operating results of our subsidiaries, market conditions and other factors discussed in our most recent annual report on Form 10-K and other documents filed with the Securities and Exchange Commission. The company undertakes no obligation to update the forward-looking statements made during today's call.

And with that, I'll turn the call over to John.

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Chin Chiang Fan, Kopin Corporation - Co-Founder, Chairman, CEO & President [3]

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Thank you. Thank you for joining us this morning to discuss our third quarter results and the industry developments that point to accelerating the adoption of AR glasses in the enterprise and industrial space. The adoption of enterprise wearables, being that -- in enterprise space was the highlight for Kopin in Q3 as well as for many of our partners.

Let me review some of the events that occurred in Q3.

First, we are very pleased with the initial development -- or shipments of display modules to a Tier 1 U.S. customer, who was an early mover in the development of smart glasses. The shipment of 5,000 display modules to that company of soon to be launched next-generation AR smart glasses was a major milestone for Kopin.

The benefits of AR headsets to enterprise is improved productivity and safety by enabling workers to communicate with remote experts to document data and to provide other functions in a hands-free manner. AR smart glasses are also very useful for training, medical applications and in manufacturing environments. We expect shipments to ramp in 2019 rapidly as that product moves to full production.

We're also seeing significant order increases from our other enterprise headset customers, reflecting the spending interest from companies across many verticals that are seeing the benefits of AR.

For example, our partner, RealWear, has recently announced news for its HMT-1 headsets with consumer product companies like Colgate-Palmolive where it's being deployed in 20 manufacturing facilities in 11 countries to industrial leaders like Honeywell.

RealWear is also working with a number of auto companies, such as Volkswagen and Lexus, which show how AR is being utilized across many verticals, each with unique applications and goals in using the technology. Another Kopin customer, Vuzix, has announced similar product demand for its M300 device.

We expect to ship over 100,000 units of our display modules for enterprise AR smart glasses in 2019.

We also anticipate our own Golden-i Infinity smart glasses targeting the enterprise market will begin field testing with customers this quarter. We have demonstrated Infinity to many potential customers, including approximately 30 Fortune 500 companies, and their interest has been very strong.

Golden-i Infinity is quite different from what our partners are providing. It has a unique form factor and connects directly to a smartphone or mini PC by cable. It has a very high -- it has a high-resolution display, a high-resolution camera and a multiaccess head tracker. But it has no radio or batteries residing on a device.

Golden-i Infinity utilize Kopin's patented core technologies, including our display, our Whisper Voice Extraction for improved speech recognition and advanced hands-free user interface controls, to integrate the benefit of AR into industrial workers' daily tasks. We look for commercial shipments to begin in Q1 2019.

Let's now discuss military business.

F-35 sales again was a significant contributor to our military business. We announced in September that we have received a production contract for F-35 pilot helmets to late next year.

Our FWS-I unit has been fully qualified, and we received the first production order. We expect to begin shipping in November under the -- our $4.2 million contract, and we have just been informed the imminent follow-up order is coming.

Our shipment was slightly delayed because of the issue with one of our suppliers. We believe the issue is now resolved, and the supplier is getting on track.

Let's turn to the development program for our next defense contract -- defense product.

We continue to achieve the milestones for both the FWS-CS and the armored vehicle programs. These 2 programs are the 2 previous products I expect to bring Kopin very significant production revenues.

In summary, we're seeing very strong demand for enterprise AR smart glasses, and we continue to be the dominant supplier for the military applications. While enterprise AR is gaining traction, it is certainly a challenging time for VR and AR wearables. VR is undergoing a reassessment by the market.

After the initial VR assignments and strong push for consumer adoption, we noticed a sharp pause in the momentum. It's likely the VR applications, similar to AR, will move to enterprise industrial applications before becoming a widespread consumer product. Further complicating the matter is the tariff situation in China, which we believe negatively affected our Chinese customers, especially those who buy our components for drones applications.

I'm flying over to Asia tonight to discuss with our partners, customers and suppliers to further understand the effect of this trade war and what can be done to minimize its impact.

Now I will turn the call to Rich to discuss the financial details of this quarter.

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Richard A. Sneider, Kopin Corporation - Treasurer & CFO [4]

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Thank you, John.

Beginning with the results of the third quarter of 2018, total revenues were $5.1 million compared to $6.1 million for the third quarter of 2017. As a reminder, in 2017, we acquired NVIS, and they had certain military contracts in place. In the third quarter of 2017, 2 of those contracts were essentially filled in Q3 and Q4 of 2017, representing about $1.5 million of the $6.1 million of 2017 revenues.

Cost of sales for the third quarter was approximately 100% of product revenues compared with 74% for the third quarter of last year.

Gross margins decreased due to lower absorption of overhead costs as a result of lower volumes.

R&D expense in the third quarter of 2018 was $4.6 million compared with $5.3 million in the third quarter of 2017, reflecting a $1.2 million increase in funded R&D expense, offset by a $1.9 million decrease in internal R&D.

SG&A expenses were $7.2 million in the third quarter of 2018 compared with $5.3 million in the third quarter of 2017. SG&A increased for the 3 months ended September 29, 2018, as compared to the 3 months ended September 30, 2017, primarily due to an increase in stock-based compensation, legal expenses, product promotion expenses and patent maintenance fees.

Other income/expense was $175,000 in the third quarter of 2018 as compared with income of approximately $300,000 in the third quarter of '17.

The third quarter of 2018 includes approximately $227,000 of foreign currency losses as compared to approximately $224,000 of foreign currency gain in the third quarter of 2017.

Turning to the bottom line. Our net loss attributable to controlling interest for the quarter was approximately $9.8 million or $0.13 per share compared with a loss of $8.2 million or $0.11 per share in the third quarter of 2017.

While we expect strong results in military and industrial sales in the fourth quarter, with the weakness in consumer AR and VR demand and a slight delay in FS-1 (sic) [FWS-I] shipments, we are reducing our full year revenue outlook to $24.5 million to $26.5 million from the previous $30 million to $35 million.

We conclude the quarter with approximately $46 million of cash and marketable securities and no long-term debt.

The amounts I just discussed are our current estimates, so I'll remind listeners to review our Form 10-K for the third quarter ended September 29, 2018, when filed for final amounts.

And with that, I'll turn the call over to John -- oh, excuse me, I'm sorry. With that, operator, we'll take questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question comes from the line of Matthew Galinko from National Securities.

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Matthew Evan Galinko, National Securities Corporation, Research Division - Senior Research Analyst [2]

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I guess maybe -- so just one quick one on the -- I think you mentioned you expect to ship 100,000 of display modules for enterprise AR in 2019. Is that inclusive of what you expect to ship as part of the ramp in Golden-i?

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Richard A. Sneider, Kopin Corporation - Treasurer & CFO [3]

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No, that's to external customers.

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Matthew Evan Galinko, National Securities Corporation, Research Division - Senior Research Analyst [4]

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Okay. Got you. And then on the consumer wearables front, particularly your internal product that you developed, I didn't hear you touch on that. I'm curious how commercialization is going there. And in the past, we've talked a little bit about sort of building a distribution channel for it. So how are efforts going on that front?

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Richard A. Sneider, Kopin Corporation - Treasurer & CFO [5]

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So as we mentioned, we expect -- while we showed the product originally at AWE several months back, the reception has been very strong. As we noted in our remarks, up to -- over 30 Fortune 500 companies have looked at it and are waiting samples, and we expect to get those into people's hands this quarter with production and shipments starting in Q1. We're going to use a VAR model, as we discussed, to distribute it. So -- and we've also identified and signed contracts with fulfillment centers. So the distribution network is coming together. And for the most part, it's in place. So those issues should all be behind us as we enter Q1. So at this point, we just need the initial feedback on the product, and then as we expect, shipments in Q1 will start generating revenue.

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Chin Chiang Fan, Kopin Corporation - Co-Founder, Chairman, CEO & President [6]

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And Matt, are you talking about the Golden-i Infinity or are you talking about the consumer aspect of the AR glass?

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Matthew Evan Galinko, National Securities Corporation, Research Division - Senior Research Analyst [7]

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The consumer athletic wearable.

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Chin Chiang Fan, Kopin Corporation - Co-Founder, Chairman, CEO & President [8]

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Yes. I think this is about SOLOS. Let me answer. This is John Fan, Matt. And the SOLOS was actually introduced late -- I think, late second quarter, sometime late second quarter, and there are 2 things that are happening. One is the hardware. We actually found the hardware is actually pretty good. In fact, we're the only one now in the market. Yes, it's -- everybody who reviews say the hardware is very good. What we are doing now is connecting with people for the benefits, with people software, application software, and we're making very good inroads. And I'm sure people will be seeing a lot of additional partnerships with software companies in -- are coming soon. With that, I think the benefits that users cite is one that's become very clear. So actually, we're very happy with the hardware, and we're busily and rapidly working with the benefits. So I think that's a very interesting problem because, as we say, AR, even for a consumer, people are still hesitating. Remember, everything has to go from military to enterprise to consumer. The AR glass has made a transition to the enterprise world now. I think the next stage is -- it is going to be the consumer. VR has jumped from military immediately to consumer. I think now they are pausing, and then they probably have to work for the enterprise world first.

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Matthew Evan Galinko, National Securities Corporation, Research Division - Senior Research Analyst [9]

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Got you. Okay. Appreciate that. And then maybe on the Golden-i. You have discussed and sort of established that it's a fairly different design and approach to industrial wearables than kind of what your partners are doing. How is reception? And are the potential customers you're talking to kind of lining up the existing design of wearables against Golden-i and sort of comparing? Or are they sort of looking at their first industrial wearable and sort of evaluating on its own merit without necessarily looking at other units on the market?

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Chin Chiang Fan, Kopin Corporation - Co-Founder, Chairman, CEO & President [10]

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Let me answer this question. See, in the wearable world, especially in enterprise, I think eventually, even for consumer world, it's going through different layers, yes, especially industrial world. There are very ruggedized industrial applications, and there's middle applications and there are these very broad industrial workers where they're really on mobile head -- systems. So what we are targeting is, in fact, the truly very mobile workers. So very lightweight, probably very low -- much lower cost because they had no battery, no radio and no processor. You just hook up to the existing cellphone or existing mini PC people in industrial world are already using. So it's a very different category. It's actually, in some way, are contrarian to the normal thought, is that you actually tie it to a phone or mini PC and don't have any battery in. So it's a different thing and I think are appealing to different types of workers, very mobile, very broadly distributed segment. There's no such thing in the market right now. And as we know, we work with our partners and also now do the pioneer job. And also, because we did talk to the customers, and the ultimate customer is the industrial world a lot because we probably have about 80% of order enterprise. Our handsets are kind of in the world right now, which -- we're in production. So we know our customers and that some of the customers have -- actually, many of the customers say, this is what we like to see, a very broad, lower cost, lighter weight, more -- in many ways also, I would say really -- because it's just really like a smart screen with a camera. So all the PCs and the phones, if they change their performance, it's already piggybacking. You don't get outdated. It's very, very good system for enterprise world. Jeff, maybe I speak too much on that. So I'll take the next question.

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Operator [11]

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(Operator Instructions) And our next question comes from the line of Patrick Metcalf from Newbridge.

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Patrick Metcalf, [12]

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John, can you give us an update on the product road map for Whisper chip, how you see it playing out and how good the technology is, the feedback you're getting from customers and maybe some more information on that? And then my next question is, on the U.S. internet company that you shipped 5,000 units to, have you done business with this customer before? Or is this a brand-new customer?

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Chin Chiang Fan, Kopin Corporation - Co-Founder, Chairman, CEO & President [13]

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Okay, this is John Fan. Thank you, Peter (sic) [Patrick], for that question. I will answer the customer question first. That's a customer that we know and had been doing business with before, and they're a good partner to us for many years. Back to the Whisper, actually one of the purpose of my trip is -- to Asia is talk about Whisper. What we have now noticed is that -- is both in the AR world -- in the whole wearable world, people begin to recognize one of the human -- important human interface is from the voice. Not going to be done by touch. The touch screen is very, very good for handheld smartphones. It was a wonderful thing that they have invented the phone, smartphone. But once you go to wearable, you really don't want to touch your eyeglasses or touch anything if you can avoid it. So it's voice. And so a lot of activities now on the voice. As you well know, the voice is -- could be the next touch. So we actually -- in our product, both in our Golden-i Infinity, in fact, that's where we want to show the power of the Whisper is actually in the Golden-i Infinity. Golden-i Infinity -- Golden-i -- the Whisper is also, of course, in SOLOS, and Whisper is also in RealWear headsets. So -- but there are other activities going on. And we checked our Whisper now, and our customer and partner check it. The performance is better than anything in the market right now, especially in a noisy environment. So we are very active right now. And I think that by the time people see and then experience the Golden-i Infinity, which is really -- there's no touch, there's no tapping that you are accustomed to, it's going to be totally hands-free. It's all done by control by voice, by our Whisper voice, as well as by the head gesture. The whole thing, the whole human interface in Golden-i Infinity is no touch. And this is the first thing -- first time ever it has come up in any product. So we shall see. Whisper is doing well. It has very, very good performance, and it has been proven. It is going to the product -- it has been -- starting to go into the products, and I'll be in Asia talking more about it.

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Patrick Metcalf, [14]

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Okay, great. And then one follow-up on the Whisper chip. You had -- you've been granted a patent with the Whisper chip to be embedded in a Bluetooth or -- chip, I believe. Is there any chance the road map would have you licensing the Whisper software to a Bluetooth company like a Qualcomm or something like that? Is that possible?

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Chin Chiang Fan, Kopin Corporation - Co-Founder, Chairman, CEO & President [15]

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Yes, it's -- what appears, I think, is more importantly, the Whisper can be loaded into any processors of many kinds. Microcontrollers could be loading in there, too. So there is a licensing model. We also have a Whisper chip. So also the chip model. And then, of course, there's a model that people will get our algorithm into a standard processor, which they would sell the processor. So there are different kind of models coming up. And in many ways, I'm very, very excited by Whisper. It takes little time because I think people begin to -- have to recognize the voice is really our next interface.

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Patrick Metcalf, [16]

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Okay, great. And I just saw you signed a partnership with this -- a medical device...

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Chin Chiang Fan, Kopin Corporation - Co-Founder, Chairman, CEO & President [17]

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Just as a reminder, we have about 30 patents around Whisper. Most of them -- the large ones are issued. So we're excited about Whisper. I'm glad that you asked the question here.

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Patrick Metcalf, [18]

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Okay, good. Good, good. And then lastly, you had signed a deal with a company just recently in the medical device for an AR device for surgeons. Did you guys give your IP up to them for equity stake in that company like you have done with RealWear, BOE, New Vision, Lenovo's joint venture? Can you give us a little bit of idea or color on how you're using your IP to build up your equity stakes in so many different ventures in the AR/VR world? Because I don't think the market appreciates that.

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Chin Chiang Fan, Kopin Corporation - Co-Founder, Chairman, CEO & President [19]

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Yes. Let me answer that. It's an important question actually. In the BOE case, it is joint venture, but there is no IP transfer at all. If -- there's no technology or IP transfer. And so that is a very clear case. In the Lenovo case, it's a joint venture with Lenovo, of which we actually license one of our model. Remember, we do a lot of concept models or reference model of smart glasses. They licensed one of our models, and so -- which we get some equity. We do get significant equity there. In RealWear, the involvement is deeper with not only a license -- a reference model, which, again, the reference model is somewhat like a concept model. They're not full product like i Infinity, somewhere in between. So they reference -- license a reference model, also license some of our patents, not exclusive, of course. And they're on top of -- they promise to buy components for us as well as pay royalties. And we also get very significant part of the equity. And this is a model that we can -- kind of favor right now anyway, especially for small, very aggressive startups where we will license them in some way, especially reference models.

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Patrick Metcalf, [20]

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Okay. Well, I like what you're doing. And I think when the tide turns, this is going to be a big opportunity. Keep up the good work.

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Chin Chiang Fan, Kopin Corporation - Co-Founder, Chairman, CEO & President [21]

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Yes, I think that -- I think we're certainly disappointed, the whole industry is disappointed with what's happening, especially in the VR wearables. The VR wearables was a huge spike and then everybody fell to the earth. And it happened very rapidly, and everybody's examining it. And if you recognize and look around between the trade war and the -- or what's happening, the VR/AR, many of the stock companies here as well as overseas have seen some significant impact. However, it's different for a nice 3D TV with -- we think it's a pause and reassessment, regroup and things will come back out again.

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Patrick Metcalf, [22]

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Okay, great, John. And one -- you brought up one last point. With -- the markets seem -- AR/VR market seems to be bottoming here, it would be great like you've done in the past: Step in and buy your stock. It would be greatly appreciated.

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Operator [23]

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(Operator Instructions) And we have no further questions at this time. I will turn the call back over to John Fan for closing remarks.

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Chin Chiang Fan, Kopin Corporation - Co-Founder, Chairman, CEO & President [24]

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Thank you very much for joining us this morning, and I hope to see some of you in the coming CES next January. Thank you.

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Operator [25]

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This concludes today's conference call. You may now disconnect.