Vuzix Corporation (NASDAQ:VUZI) Q1 2023 Earnings Call Transcript May 10, 2023

Vuzix Corporation misses on earnings expectations. Reported EPS is $-0.16 EPS, expectations were $-0.15.

Operator: Greetings, and welcome to the Vuzix First Quarter ending March 31, 2023 Financial Results and Business Update Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions]. As a reminder, this call is being recorded. Now, I would like to turn the call over to Ed McGregor, Director of Investor Relations at Vuzix. Mr. McGregor, you may begin.

Ed McGregor: Welcome to Vuzix’s first quarter and 2023 ending March 31 financial results and business update conference call. With us today are Vuzix’s CEO, Paul Travers; and our CFO, Grant Russell. Before I turn the call over to Paul, I would like to remind you that on this call, management’s prepared remarks may contain forward-looking statements, which are subject to risks and uncertainties, and management may make additional forward-looking statements during the question-and-answer session. Therefore, the company claims the protection of the Safe Harbor for forward-looking statements that are contained in the Private Securities Litigation Reform Act of 1995. Actual results could differ materially from those contemplated by any forward-looking statements as a result of certain factors, including, but not limited to, general economic and business conditions, competitive factors, changes in business strategy or development plans, the ability to attract and retain qualified personnel as well as changes in legal and regulatory requirements.

In addition, any projections as to the company’s future performance represent management’s estimates as of today, May 10, 2023. Vuzix assumes no obligation to update these projections in the future as market conditions change. Today’s call may include certain non-GAAP financial measures. When required, reconciliation to the most directly comparable financial measure calculated and presented in accordance with GAAP can be found in the company’s Form 10-Q filing at sec.gov, which is also available at www.vuzix.com. I’ll now turn the call over to Vuzix CEO, Paul Travers, who will give an overview of the company’s operating results and business outlook. Paul will then turn the call over to Grant Russell, Vuzix’s CFO, who will provide an overview of the company’s first quarter financial results.

Paul will then return to make some closing remarks, after which we’ll move on to the Q&A session. Paul?

Paul Travers: Thank you, Ed. Hello, everyone, and welcome to the Vuzix Q1 2023 conference call. On this call, we’re going to review our results and recent developments and then give you some perspective on where we see things headed. 2023 is off to a strong start. Our Q1 revenue driven entirely by record product sales, and specifically sales of our smart glasses, was $4.2 million, an increase of 67% compared to the previous year and up 44% sequentially. We had record unit sales of our flagship M400 smart glasses, mainly to support our independent software vendors and the expansion of global sales channels. Our customer channel, which I will expand upon shortly, is focused on widening our distribution network with integrators and partners that are adept at solution selling.

We did not realize any engineering services sales in Q1, which was solely a function of project milestones and timing, and not a sign of demand for our OEM components and products as we move from the sales process of responding to quote requests, and ultimately receiving purchase orders from our customers. This is an exciting new business for Vuzix in very large markets that generate billions of dollars in revenues annually. I’ll explain more on this shortly. The investments we’ve made to streamline our operational and sales structure, expand our product breadth and competitiveness, and advance our IP and technology over the last several years are beginning to pay dividends and will increasingly continue to do so into the future as we have invested in a strong foundation for Vuzix to build upon.

As a result, we remain bullish on our full year prospects for 2023 and believe we are well positioned and should continue to achieve overall record revenues for the full year. As our business expands, our revenue generating opportunities are continuing to grow with it. Never before in our history has Vuzix had so many paths before it to drive stronger top line growth. What we are now seeing upon which I’ll expand shortly includes significant smart glasses deployments and warehousing and logistics, expanding opportunities in healthcare from existing ISVs and multiple new customers, further engagements with blue chip customers early in their deployment cycles, further expansion of our sales channels in specific regions. Increased SaaS revenue from our Moviynt acquisition, additional and larger engineering engagements from defense firms, short-term paths to production with multiple defense and enterprise firms, expectations of signing multiple new non-defense agreements by OEM and white label firms, and development of contracts and initial deployments of Ultralite platform-based products.

Our focus going forward will be to successfully monetize all of these opportunities and leverage our relationships to generate long-term sales and recurring programs related to smart glasses, SaaS solutions, and OEM components and products. Now I’d like to get into some detail on what we are seeing on the product side, then move on to our OEM efforts and finish with a discussion of the technologies and developments that will drive our future success and growth in both. Achieving record smart glasses sales this quarter post the COVID pandemic is significant. Two years ago, we saw an influx of new business coming from companies that were desperate for remote video and collaboration-based solutions, primarily driven by COVID. If you fast forward to today in the current environment, we’re witnessing the underlying smart glasses industry grow as companies get more and more engaged and focused on solving long-term operational challenges with smart glasses-based solutions to get them there.

The use of augmented reality in business, medical, defense organizations and ultimately by consumers represents the wave of the future as entities around the world are realigning their future strategies around AI, AR glasses and the combination of both. The expected ubiquitous use of AI across applications in areas such as education, e-commerce, healthcare, communications, defense, security, and more, it’s just amazing. But it fits hand to glove with AR smart glasses. Some simple examples include visual search, language translation, voice control, the list goes on and on. And this marriage of technologies will accelerate the need for use cases for lightweight, wearable displays. Logistics, healthcare and manufacturing are three market verticals that continue to expand and represent significant potential business for Vuzix, our ISVs and our ecosystem partners.

Google’s recent decision to step away from the enterprise smart glasses market presents an opportunity for Vuzix to capture additional market share. We are already in discussions with a number of prior Google Glass enterprise adopters to convert them over to Vuzix smart glasses as they continue their transformation journey. The underlying trend towards enterprise-wide rollouts from numerous key Fortune 100 accounts is a very exciting development for Vuzix in the enterprise smart glasses industry in general. Industry awareness of smart glasses and enterprise continues to grow. And although the move to smart glasses is slower than we would like, there is no doubt that customers are now committing to deploying smart glasses-based solutions across their company.

And as a result, we’re bullish about the growth of our enterprise business in 2023. Working with our leading ISVs like TeamViewer, LogistiVIEW and Ox in the logistics and warehousing spaces, Vuzix has significant accounts that have indicated that they will be rolling out our smart glasses in a major way this year. And in fact, in many cases have already started. We’re seeing sizable deals across all regions, including the U.S., Latin America, Japan, Europe, and Asia. Vuzix smart glasses are being used to enhance productivity across the enterprise in a multitude of environments and configurations; whether it’s healthcare where we have customers deploying with the Vuzix Blade, M400 and M4000 as their go to devices of choice to warehousing and logistics in Industry 4.0. Our newest announced win in the healthcare space was with Proximie.

Their PxLens product based on the Vuzix M4000 allows users to collaborate live on procedures and share surgical content from anywhere, as well as securely record and store procedural videos to let surgeons build a library of their own content to review and share, as well as analyze operating room practices to improve on patient safety and productivity. Our smart glasses product family now offers a standardized Android 11 operating system for the Vuzix Blade, M400 and M4000, and the Vuzix Shield. The advancement to Android 11 enables a variety of key benefits including increased security, improved user experience, easier integration with a variety of third party mobile device management software packages, and enablement of advanced Android features within third party apps.

On the software side, Moviynt SaaS solution, which was developed in a close collaboration with a very large aerospace and defense customer, is currently deployed in numerous warehousing locations across the U.S., Europe and Canada. Feedback from this customer remains very positive, and we expect additional sites to be converted to the Moviynt solution beginning as early as Q2. We see this as a significant market opportunity to support traditional warehousing hardware. And our plan is to introduce Vuzix smart glasses as an upgrade for hands free picking into these environments. Moviynt solution has already proven to be very sticky for end customers, and we’re focused on expanding our existing customer footprint and bringing on additional customers in select markets and niches.

We’re also continuing to advance the underlying software platform, which will enable Vuzix over time to broaden our go-to-market strategy for customers and ISVs within the warehousing and logistics market verticals. We continue to expand our global sales channel with a focus on solution selling to best service and support the end customers. Expanding our global channel is important for our long-term growth, as it allows Vuzix as a company to effectively multiply our sales team with minimal investment in core regions across the globe. We’re targeting mature companies that have an established ecosystem and integrators, ISVs, and end customers. Recent engagements with value-added distributors have included Mace Virtual Labs which services the U.S. and Tabbara Electronics which services the Middle East and Northern Africa.

Over the last 12 months, Vuzix developed and implemented a sales channel portal that brings us closer to our channel partners to share product information, marketing materials and more. The implementation of our sales channel portal alongside our efforts to streamline our operations with the recent opening and establishment of new offices and corporate entities in Germany and Japan are helping improve sales and customer support in these areas and also help to reduce overall costs. Germany and Japan are two examples of country that are geographically situated to address significant local and regional market opportunities, which not only increase Vuzix’s ability to better serve our customers and partners, but also show our commitment to these strategic growing markets.

We believe these structural enhancements will allow us to provide local staffing, a stronger regional presence, enhance our localized knowledge and result in higher customer confidence and sell through into these and other regional markets. The formalization of our OEM design and manufacturing group in 2022 helped streamline our OEM efforts to respond to requests for inputs and formal requests for quotes for our waveguide-based solutions, and in most cases display engines to go with them. It is interesting to note that it takes very specialized skills to design and manufacture waveguide optics and the display engines that go with them. And there are very few companies that have in-house staff with the knowledge to do it. There are very few giant companies that are investing billions of dollars to try to bring this capability in-house.

But most companies are not able, nor willing to bring it in-house. This is why our OEM business is being received with such open arms. Vuzix can spin a new design in three to four months, while the few competitors out there take 18 months for a new design, if they would even entertain trying to meet the customers’ requirements at all. We have done hundreds of designs while the competitors can only support the one or two that they are currently trying to ship. The fact is in this business, one size does not fit all and our fast turn and years of experience is unrivaled in the industry. And it is opening doors for Vuzix and many very large industries. The total addressable market for Vuzix OEM group is extensive and currently consists of multiple very large market segments.

Vuzix is primarily focused on solutions for the defense, commercial aviation, enterprise and the broader AR consumer markets. The defense head mounted display markets today consists mainly of night vision devices and head mounted information displays. The night vision device market alone is estimated to reach a value of 8.1 billion in 2027 according to Stratview Research. According to Markets and Markets, the head mounted display market is expected to reach 6.4 billion by 2027, not including the potential success of the U.S. Army’s IVAS program, which has a $22 billion IDIQ contract that is on hold for its potential deployment. Specifically for Vuzix, we now have over 10 major customers in defense that have been or are developing our waveguides into their head mounted display programs.

Some are focused on waveguides and engines, while others will employ our standard waveguide and display engine offerings. We anticipate several of these defense accounts to begin full scale production by the end of this year and going into the first half of 2024. The potential revenue from these companies for Vuzix could amount to hundreds of millions of dollars for several specific programs, and tens of millions for other smaller opportunities. We clearly have to go win the business, but the business looks like it will be fantastic for Vuzix when we do, and these represent a fraction of the overall multibillion dollar market potential. Waveguides and display engines are needed for all kinds of applications around information access in the field and are becoming critical, whether it is in the form of AR computing or night vision systems.

Access to the right information at the right time wins the day. Key to the success for these defense OEM programs is our ability to produce waveguides and volume out of our U.S. manufacturing facility here in the Greater Rochester, New York area. These new facilities have the ability to produce both small and large format waveguides, waveguides that are 10x larger than that needed for AR glasses. Meaning we can now manufacture waveguides to support not only head mounted displays, but also large format head up displays for use in ground vehicles to aircraft cockpits, just like the heads up display in the windshield of a luxury car. According to a Markets and Markets industry report, the market size for commercial head up displays, including aviation, is anticipated to grow to 6.4 billion by 2027, up from a current 2.4 billion in 2022, growing at a compounded annual growth rate of 21%.

Major players such as BAE Systems, Elbit Systems, Honeywell Aerospace, Rockwell Collins, and Thales Group are currently selling large, complex aviation heads up displays for well into the six figure range per aircraft. Factors such as increasing awareness about passenger and vehicle safety are driving the growth of the market during the forecasted period. Vuzix has just started to approach this market. And with our new manufacturing capabilities, we already have companies reaching out to work with us. Our waveguides and micro-LED display engines taken together can offer a significant reduction in the needed space and cost to implement the heads up display within the precious little space available inside the aircraft. According to AR Insider, “The entire smart augmented reality glasses market revenue is projected to grow to 17.7 billion by 2025, a 61.8% compounded annual growth rate.

Specifically, enterprise is expected to grow to 1.87 million units by 2025. Consumer AR glasses will trail enterprise in early years, but will pull ahead in later years. Why is this? The consumer AR market barriers will alleviate over time through improving standards and specs for consumer grade smart glasses around size, weight, style, et cetera.” In fact, we feel Vuzix Ultralite platform is the first AR glasses solution that solves for these critical issues, along with the most important basic requirement of delivering the number one issue, and that is the need for prescriptions for the 64% of users that need glasses just to see. Vuzix has IP around prescription-based waveguides. And based on our research and ongoing discussions with eyeglass brands, we believe we’ll be able to drop our prescription-based waveguides right into their current supply chains for prescriptions.

The Ultralite platform was announced about four months ago. And because it is utilizing the latest micro-LED technology and waveguides from Vuzix, the form factor is the first smart glasses form factor that appeals to the broader markets. Because of this, we already have an array of potential customers lining up for multiple consumer market areas, including the fashion glasses industry. And I have to say, in the 26 years I’ve been doing this, I have never seen that industry salute smart glasses until now. The sporting goods industry, the wireless phone industry, the entertainment and gaming industry and more. The customers in these markets are talking tens to hundreds of thousands of devices to address what they see as their market needs. Vuzix’s Ultralite platform will start production by the end of this year and should be going to market with multiple well known brands through 2024.

I would like to now take a few minutes to share some details on the intellectual property position Vuzix has built over the years. First, we feel that our current market capitalization does not fully reflect the vast amount of intellectual property we have created in a market that is touted by industry experts to be in the trillions of dollars within a decade. I would like to help frame this better for everyone, and let’s start with our patents. The Vuzix patent portfolio currently includes 308 patents and patents pending. This breaks down to 173 issued patents and 135 pending applications. Our portfolio covers a broad range of technologies including several applications directed to different designs for Vuzix eyewear products, including designs related to the Vuzix Blade, the Vuzix Shield, the Vuzix M400 and the 4000, and Smart Swim as well as designs related to the Vuzix Ultralite OEM platform.

The heart of the portfolio stems from our vast collection of waveguide design patents and applications, making up roughly one-third of the portfolio. Traditionally, multiple waveguides are needed within a display to achieve multiple colors. A number of our patents and patents pending are directed to designing the diffractive optics of a waveguide to allow for multiple colors within a single waveguide or a reduced number of waveguides. The compact designs that we have developed allow significant weight reduction of the overall system while maintaining color performance, allowing Vuzix to lead the industry with lightweight, fashion forward eyewear products. We have also focused on designs that reduce crosstalk between color channels within a single waveguide and allow for more complex solutions that offer more pupil expansion and fit in tighter spaces.

We have several applications and patents directed to optical coupling mechanisms, example prisms, that allow us to fold projectors into places and positions, virtual images in space without compromising our design intents. Several patents are directed to our fixed focus technology that allows us to change focal distances of virtual objects without the addition of extra push-pull optics around the waveguide to position the virtual image in space. This again allows for the work to be done without adding more heavy and expensive optics. We also have patents and pending applications directed to methods for building better waveguides, example making them flatter and more parallel than is possible with other methods that improves resolution or sharpness of the virtual image and methods for making waveguides that utilize the effective optics on the top and bottom surfaces of the same waveguide.

We also have patents that leverage different multi-projector solutions and ways of layering gradings across multiple parts of a waveguide stack to create larger fields of view. On a system level, we have applications that are directed to expanding our prescription capabilities beyond a simple insert and providing some customization in the form factor and fit of a pair of fashion forward smart glasses. Some of our latest filings include methodologies for incorporating complex, stronger scripts in the same compact space so the waveguide becomes part of a fully custom pair of glasses, and some designs incorporating replaceable components including custom lenses, and custom nose bridge designs. Vuzix also has a large trade secret war chest we have built.

We have a combination of both patents and trade secrets regarding Nano imprinting, process equipment and materials like polymers, adhesion promoters, and release agents. I can’t share a lot in this regard as these trade secrets are critical for how we can produce in volume and at low cost. I hope you can understand, but we just can’t share how our Coca Cola is made. Add to this our patents and trade secrets regarding replication and double sided formats, and Vuzix is the complete package. Finally, our core patents are layered atop the original core Nokia patents in this space. These patents range from stacking to wide field of view to 2D grading arrangements for compact designs. And of course, our agreements can flow through to our OEM customers providing access to these basic protections.

Bottom line, we feel Vuzix has the best intellectual property position of any other company in this critical area of the AR glasses space. Clearly, waveguides and micro-LED displays are essential components for lightweight AR smart glasses and other wearables, and our ability to design and fabricate waveguides in high volume in a low cost is second to none. From specification to design to mold production to replication to test and system integration, we do it all in-house in our New York facility. We can customize a ground-up system based on specifications, offer a reference design or provide design parameters so we can build to print, based on a customer’s own waveguide layout. We can make them small or large, and we can turn the design around quickly.

Our expertise and capabilities in this area are unmatched, in our opinion, substantially undervalued relative to our current market capitalization. And we’re going to push and leverage these advantages as hard as we can. The significant advancements in our core technology we are making behind closed doors to our waveguide manufacturing processes will fortify Vuzix position to play a critical role in an industry that should ultimately represent many billions of dollars of revenue annually. Our waveguide manufacturing expansion is being implemented in our recently released facility, which provides an additional 12,000 square foot of manufacturing space adjacent to our existing plant. This new facility is designed to support our latest waveguide technologies, increase our unit capacity, and significantly lower the unit cost to manufacture our waveguides for ourselves and our OEM customers.

The new facilities will also focus on the advancement of higher index materials, advanced glass substrates and unique formulation technologies. We expect optical component, waveguides and parts to be coming out of this facility during the second half of 2023. In the meantime, our current facility continues to meet the needs of this growing part of our business. The ability to produce RGB micro-LEDs on a single substrate that still have high efficiency color remains incredibly difficult. However, there have been varying degrees of success to date by some, but just barely to an acceptable level. And no one is shipping anything that’s full color yet. Because they are so strategic and fit hand to glove with the optical waveguides, we will feel it is critical to secure the supply of cost effective, high volume fabrication of these devices.

To that end, we have fortified our micro-LED efforts by establishing working relationships with several of the most advanced vendors in this space, through both partnerships and investments, many of which we will not publicize for competitive reasons. Of course, our highest profile development in this area is the agreement we signed with Atomistic roughly one year ago. While we have been short on specifics today, I can say that Atomistic with its very novel approach is making great progress. The design process takes time, and portions of the fabrication process will use very complex and customized equipment that had to be designed from the ground up. We will have more to share with you as all this unfolds. But suffice it to say, Atomistic technology has great potential to create incredibly advanced, full color high efficiency micro-LED displays, displays that have the potential to upend the entire smart glasses industry, and quite frankly, the display industry in general, with full color, exceptionally bright and all day battery performance to be incorporated in a fashion forward smart glasses form factor that everyone will wear.

I’d like to now pass the call over to Grant for his financial review. Grant?

Grant Russell: As Ed mentioned, the 10-Q we filed this afternoon with the SEC offers a detailed explanation of our quarterly financials. So I’m just going to provide you with a bit of color on some of the numbers now. Our first quarter total revenues for the three months ended March 31, 2023 was 4.2 million as compared to 2.5 million for the prior 2022 period, an overall increase of 67%. Revenue increase was solely the result of higher product sales as we did not realize any engineering services revenue in Q1. Please note, we have remaining performance obligations of just under 0.2 million on a current waveguide development project, which we expect to complete and recognize as revenue in Q2 of 2023. Product sales were primarily driven by record unit sales of our M400 smart glasses, partially offset by higher average sales discounts due to larger volume and reseller sales as compared to those in the same period of 2022.

There was an overall gross profit of 0.9 million or 21% for the three months ended March 31, 2023 as compared to a gross profit of 0.5 million or 19% for the same period in 2022. The improvement was due to our increased sales which resulted in further manufacturing overheads absorption. R&D expense was 3.1 million for the three months ended March 31, 2023, unchanged versus the comparable period in 2022. Sales and marketing expenses for the three months ended March 31, 2023 was 2.5 million as compared to 2 million for the 2022 period, an increase of 26%, largely due to increases in staff compensation expenses due to headcount increases. General and administrative expenses for the three months ended March 31, 2023 was 5.1 million, a decrease of 6% versus 5.5 million in the prior year period.

The decline was largely due to a decrease in non-cash stock compensation expense related to our 2021 performance-based long-term incentive plan. Depreciation and amortization more than tripled to $1 million for the three months ended March 31, 2023 versus the prior year’s period. The bulk of the increase was due to the amortization of the technology license with Atomistic, which was not in place in Q1 of 2022. The net loss for the three months ended March 31, 2023 was 10.2 million or $0.16 per share versus a net loss of 10.5 million or $0.16 per share for the same period in 2022. Now for some balance sheet highlights. Our balance sheet remains strong with cash and cash equivalents of 63.2 million as of March 31, 2023 and the net working capital position of 67 million.

The overall net cash flows used in operating activities after the net changes in operating assets and liabilities was 4.2 million for Q1 2023 versus 6.4 million in the comparable 2022 period. Improvements included a $1 million decrease in inventories and vendor prepayments, and $0.6 million reduction in accounts receivable. Cash used for investing activities for the first quarter of 2023 was 4.7 million as compared to 0.2 million in the prior year’s period, as we made further investments of 2.3 million in our waveguide expansion project and made a $2 million payment towards our Atomistic technology licensing fee commitment. As of March 31, 2023, the company continues to have no current or long-term debt obligations outstanding other than the currently outstanding license fee commitments to Atomistic.

Looking forward to the balance of 2023 and 2024, we are confident that we have the resources to execute on our growth business plan and further invest in our future. With that, I would like to turn the call back over to Paul.

Paul Travers: Thanks, Grant. As a public company, we are well aware of the importance of growth, profitability and positive cash flow as key drivers of a stock’s market valuation. As our revenues continue to grow, our line of sight to achieving profitable operations get clearer and nearer. We expect the pace of our growth in the coming months and quarters will continue, and with it our operating cash runway will get longer and of course our path to profitability will get shorter. It is a focused effort for Vuzix. And as Grant just said, we have all the resources we need to execute our plans going forward. Finally, the Vuzix annual shareholder meeting is on June 15, and will be held in person this year. We will have an open house and we’ll be providing tours of some portions of our amazing new facilities. We look forward to seeing everyone here at the Vuzix’s West Henrietta site. With that, I would like to turn the call back over to the operator for Q&A.

Q&A Session

Operator: Thank you. We will now be conducting a question-and-answer session. [Operator Instructions]. First question is coming from the line of Matt VanVliet with BTIG. Please proceed with your questions.

Operator: Thank you. Our next question is coming from the line of Jim McIlree with Dawson James. Please proceed with your questions.

Operator: Thank you. We have reached the end of our question-and-answer session. I’d now like to turn the call back over to Paul Travers for any final remarks.

Paul Travers: Everybody, again, thank you very much for listening in. We look forward to a phenomenal Q2. I think it’s going to be more exciting than our Q1 was and the back half of this year is going to be even more exciting than that. We’re on a great track this year. It would be great to unfold some of the announcements we have around relationships right on through the revenue streams and margin growth, et cetera. So it’s exciting times at Vuzix. Thanks again for listening in. I hope folks can make it to our annual shareholders meeting. We got some really cool stuff to share and I think a nice agenda of discussions that we’ll be sharing at the same time. Thanks, everybody, and have a great evening.

Operator: Thank you. That does conclude today’s teleconference. We appreciate your participation. You may disconnect your lines at this time. Enjoy the rest of your day.