Vuzix Corporation (NASDAQ:VUZI) Q3 2023 Earnings Call Transcript

Vuzix Corporation (NASDAQ:VUZI) Q3 2023 Earnings Call Transcript November 9, 2023

Vuzix Corporation misses on earnings expectations. Reported EPS is $-0.17 EPS, expectations were $-0.14.

Operator: Greetings and welcome to the Vuzix Third Quarter Ending September 30th, 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. I would now like to turn the call over to Ed McGregor, Director of Investor Relations at Vuzix. Mr. McGregor, you may begin.

Ed McGregor: Thank you, operator, and good afternoon everyone. Welcome to the Vuzix’s second quarter and 2023 ending September 30th 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 the legal and regulatory requirements.

In addition, any projections as to the company’s future performance represent management’s estimates as of today, November 9th, 2023. Vuzix assumes no obligation to update these projections in the future as market conditions change. This afternoon, the company issued a press release announcing its Q3 2023 financial results and filed its 10-Q with the SEC. So participants on this call who may not have already done so may wish to look at those documents as the company will provide a summary of the results discussed on today’s call. Today’s call may include certain non-GAAP financial measures. When required, reconciliation to the most directly comparable financial measures calculated and presented in accordance with GAAP can be found in the company’s Form 10-K annual 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 CFO, who will provide an overview of the company’s third 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 Q3 2023 conference call. On this call, we’re going to review our operating results and recent developments and then give you some perspective on where we see things headed in the fourth quarter and into the first half of 2024. Grant will cover our financials in detail a bit later in the call, but I want to start by providing some additional color regarding our third quarter financial results. During the quarter, we saw lower than planned smart glasses sales, primarily due to the order placement timing associated with several larger channel partner deals. Most of them, we fully expect, will close in the coming months. As previously stated, we are focused on the growth and expansion of our strategic channel partner program at Vuzix.

This program allows us to expand the size of the qualified expert sales team that Vuzix has in the market without the cost and efforts of having to grow an internal sales team. We now believe this longer-term strategy is the most cost-efficient path while allowing Vuzix to best address the growth we are confident is coming in the overall smart glasses enterprise space. Expected third quarter revenue related to our OEM business was also negatively impacted by macroeconomic business conditions, specifically with a few large corporations having delayed their investments in new technology in favor of maximizing their current earnings and cash flows. Again, we believe this represents a shift in their timing, and we fully expect over the next several quarters that we will close on the bulk of these transactions.

Despite the soft third quarter revenue, I am pleased to report that we have our largest pipeline of smart glasses sales opportunities in the company’s history. Therefore, the outlook over the next 12 plus months we believe is for continued growth. Our OEM business continues gaining momentum. Our OEM group ended Q3 with the largest OEM backlog in our history, largely driven by continuing defense and aviation-related engagements. That said, interest for a growing list of broader market customer engagements is being pursued. Most of this OEM pipeline of customers’ projects are all focused ultimately on volume production programs. During Q3 we also made significant advancements in what is at the heart of the Vuzix value proposition to the entire AR wearable industry, our waveguides and micro LED display technology.

This industry is expected to represent many billions of dollars in value for just the required display and optical components and technology that Vuzix can deliver today, and as such, I’ll spend a little more time discussing this shortly. Lastly, and as mentioned in our third quarter’s earnings release, our company has reached a point to where we have both the ability and need to realign certain parts of the organization to take advantage of scale and realign our operations to better serve our customers. As a result, we are making changes that are expected to lower operating costs by as much as 20% annually once fully implemented. The process is underway and will continue into 2024. It impacts everything from operations to product development as well as marketing and sales.

We expect these adjustments will not only better support our growing customer base in all parts of our business, but also extend our operational runway and improve enterprise product margins. We have a bullish stance on the future, and we’re focused on realigning our company to become more efficient, lower our cost operating burn, and put ourselves on a faster and more visible path to profitability. The Vuzix patent portfolio continues to expand and currently includes 346 patents and patents pending, an impressive 50% increase over the last 24 months. Our portfolio covers a broad range of technologies and includes a significant collection of fundamental waveguide, utility patents and applications as well as trade secrets regarding nano-imprinting, process equipment and materials like polymers, adhesion promoters, and release agents that are critical to how we can produce in volume and at low cost.

Bottom line, we feel Vuzix has a strong intellectual property position which will be able to create a significant value for us across solutions including waveguides, micro display engines, full systems, white label products, and of course enterprise AR smart glasses. As slide six shows the projected total market opportunity for the products and key technologies that Vuzix is and can ultimately deliver on using its intellectual property we believe is massive. Vuzix fields a family of competitive solutions within the enterprise smart glasses space and expects to win and maintain a meaningful share of this market as it ramps and ultimately grows our annual revenues to the hundreds of millions and potentially up to in excess of $1 billion annually.

As exciting as our enterprise business is, it is dwarfed by the potential represented by the much larger broader market opportunities for AR smart glasses. And producing components and technology for this broader consumer market is where the lion’s share of our development efforts in IP is ultimately focused. Such expected demand is a strong part of the reason why some of our competitors, waveguide and display makers have commanded purchase prices of $0.5 billion to a $1 billion in recent years. Key suppliers of these technologies to third parties should be able to realize billions of dollars in annual sales in due course. And we are positioned to be one of the leading suppliers of the critical OEM components and a highly profitable one at that.

I’d like your takeaway from this slide to simply be that Vuzix’s value should not be determined solely by how many AR product units we currently sell and ship in any given quarter. Maturing markets are historically choppy in terms of demand and implementation schedules. We believe our enterprise has a long-term incredible value and IP and that we are in the throes of leveraging it to become the leading supplier in a market that is touted to equal or exceed the mobile phone market. That market alone currently exceeds $1 trillion in hardware revenue annually. Vuzix waveguide mega factory is now operational and dedicated to the production of waveguides. This state-of-the-art manufacturing plant is a one-of-a-kind facility that increases our waveguide unit capacity, lowers manufacturing costs, and allows us to utilize the more advanced processes needed for our latest waveguide designs.

This new facility, which is adjacent to our headquarters, provides an additional 10,000 square feet to our existing 12,000 square foot facilities at our headquarters and has the option to expand into the full approximately 40,000 square foot building as needed. This facility is home to class 1000 and 10,000 clean rooms and will enable the use of higher index materials, advanced glass substrates, and unique waveguide configurations. Vuzix now has broad in-house capabilities that include rapid specification to design, mold production, replication and test, system integration and waveguide fabrication. This unique facility enables not only the manufacturer of waveguides for augmented reality smart glasses market, but also other potential markets like large format or direct view heads up displays for in-vehicle use cases and more.

A single example of this is our recent Vuzix’s INCOGNITO announcement. I’m sure everyone has seen pictures of competing see-through AR glasses, where the glasses literally look like someone has turned on a flashlight glowing out of the user’s eyes. This is known as eye glow. As you all can imagine having eye glow in a pair of smart glasses for the broad markets is practically a non-starter. Vuzix incognito technology virtually eliminates the forward eye glow typically associated with waveguide based smart glasses. As you can clearly see, eliminating the eye glow is critical technology for the broader markets to accept smart glasses. Vuzix’s INCOGNITO is the first waveguide based technology in the world to achieve this level of performance. Vuzix INCOGNITO manages internal light reflection, minimizes and manages forward light leakage within a waveguide, enhances low light optical performance, significantly advances Vuzix already industry leading forward light ratio of 1 to 8 improves the contrast of virtual images in AR glasses, and interaction with the external environment.

These refinements have been accomplished with no increases in Vuzix’s manufacturing cost per waveguide. This new game-changing waveguide functionality will be targeted for introduction into certain of the company’s defense industrial enterprise and ultimately broader consumer market applications. Waveguides and ultimately the micro LED displays that drive them are essential components for lightweight AR smart glasses and other wearables. We believe our increased capacity, lower cost waveguide offerings, And our ongoing investments in next generation micro LED displays will fortify Vuzix’s position to play a critical role in an industry that should ultimately represent many billions of dollars of revenue annually. As we’ve discussed in the past, micro LEDs have the potential to be a driving force in providing the performance, size and cost needed for AR and MR to achieve success in the mass market.

Micro LEDs have the potential to be much more efficient, lower power to drive high brightness, with the resolution and form factor to enable small, lightweight, fashion-forward smart glasses. But the current market technology approach, primarily using GaN, gallium nitride, and gallium arsenide material systems has its challenges with cost, scalability, power efficiency, and spectral performance that is constraining existing micro LED cost, manufacturability and performance. We believe our technology partnership with Atomistic that is developing new micro LED technology that will address these fundamental market requirements is much better than others. And as a result, we’ll have a profound impact on the AR micro display market and beyond. Atomistic with its revolutionary applied material science and unique atomic structure approach with the focus on required fundamental material characteristics has been operating under stealth mode out of the public eye for the last 24 months and it is making great progress on many fronts.

And while that might seem like a long time in the tech industry, the micro LED design process takes time and portions of the fabrication process need to use very complex and customized equipment. The Atomistic team is making excellent progress against multiple key milestones. Their highly specialized fabrication equipment that has been designed and built from the ground up by Atomistic is nearing completion and is on track to be qualified in the coming months. Atomistic has also just opened a website atomistic.com. It is simple just yet, but it is the beginnings of sharing more information about what they are doing with all of us. This website should be updated periodically as progress is made over the coming year. Suffice to say Atomistic’s technology has great potential to create incredibly advanced full-color, high-efficiency micro LED displays.

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Displays that have the potential to upend the entire micro-display industry with very compact full-color, exceptional brightness, and all-day battery performance that can be incorporated in a fashion-forward smart glasses form factor that everyone will want to wear. Music smart glasses are assisting enterprises across multiple key markets including warehousing and logistics, healthcare, education, language assist, and others. Early adopters of smart glasses understand the value proposition that our technology affords and are adopting wearable technology to eliminate costs such as expensive and time-consuming travel and to deliver ROIs and productive KPIs. As I mentioned earlier, our smart glasses pipeline is arguably our largest in our history with key accounts across all of the key markets.

Outside of traditional enterprise, we are beginning to see not only interest but traction in the marketplace coming from emerging applications that are utilizing artificial intelligence. The combination of AI and smart glasses have created a new value proposition and business opportunities for smart glasses. AI-enabled smart glasses can deliver rich new experiences to support education, e-commerce, healthcare, communications, defense, security, and more. The possibilities are almost endless with this new technology. Examples that exist today include visual search, language translation, voice control, fact checking, hearing impaired solution, sign language smart glasses, and real-time human enhancement in the field. We expect this marriage of technologies to accelerate and help define the specifications and use cases for the next generation of lightweight, all-day wearable AR smart glasses.

First, I want to be clear that when we talk about OEM products, we mean the entire broader market segment. This is everything outside of the enterprise medical and defense market segments we play in today. On the OEM products and engineering services front, Vuzix has a growing list of companies under contract and opportunities in the queue with new and existing customers. Our investments into new manufacturing and research equipment and enhanced production processes are beginning to yield fruit in the OEM portion of our business. Our recently opened state-of-the-art manufacturing plant for optical waveguides with significantly increased capacity is another solid foundation to further enable Vuzix to be the preeminent supplier of optical waveguides for our own internal production needs and our third-party OEM customers.

We continue fielding new interests to develop waveguide-based solutions for the defense, commercial, aviation, enterprise, and even the broader AR consumer markets. In defense, Vuzix has many major customers that have been or are developing our wave guides into their head-mounted programs. Some are desiring full custom waveguides and display engines while others will employ our standard waveguide and display engine offerings. We continue to anticipate several of these defense accounts to move from R&D projects and begin scaled production by the end of this year and going into the first half of 2024. To quickly recap, we feel that Vuzix is one of the outstanding leaders in the AR industry today, and it is evident in multiple areas. Vuzix has critical waveguide technology from design right through to a one-of-a-kind mega factory for high volume production at broad market enabling price points.

Vuzix has a major stake in what should prove to be the most advanced micro LED display technology available, solving for the critically needed, high efficiency, full color displays for the ultimate AR glasses solutions of the future. Most importantly, we feel we are positioned well to win and see significant growth, especially considering we are a company that is cornerstone to a market touted by industry experts to ultimately be greater than $1 trillion plus within a decade. I’d like to now pass the call over to Grant for his financial review. Grant?

Grant Russell: Thank you, Paul. 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 third quarter total revenues for the three months ended September 30th, 2023, was $2.2 million as compared to $3.4 million for the prior period in 2022, an overall decrease of 36%. The revenue decline was primarily the result of lower smart glass product sales, which fell 46% year-over-year. At this time, we feel that several anticipated product orders from direct and channel partner customers were delayed a quarter or two as opposed to being cancelled. Sales of engineering services for the three months ended September 30th, 2023 was 0.8 million as compared to 0.9 million in the comparable 2022 period.

Please note that as of September 30th we had approximately 3 million of remaining performance obligations under four current waveguide and projector development projects which represents the remainder of transaction prices totaling approximately 4.4 million under these active development agreements. The company expects to complete and recognize revenues from these projects over the next 3 to 18 months. There was an overall gross loss of 0.2 million for the three month end of September 30th, 2023, as compared to a gross profit of 0.9 million for the same period in 2022. The decline was due to lower sales volumes, resulting in higher overall cost of sales as a percentage of revenues due to lower absorption of fixed manufacturing overhead costs over a reduced sales base.

Research and development expense was $2. 9 million for the three month ended September 30, 2023 versus $3.4 million for the comparable 2022 period, a decrease of approximately 15%. The decrease was largely due to a reduction in external development expenses and contractors related to our existing and new upcoming products. Selling and marketing expense was $2. 8 million for the three months ended September 30, 2023, versus $2 million for the comparable 2022 period, an increase of approximately 43%. This increase was primarily due to higher salary and benefit expenses associated with increased head count as compared to the previous year’s comparable period. Dental and administrative expenses for the three months ended September 30th, 2023, was $4.5 million versus $4.

9 million for the comparable 2022 period, a decrease of approximately 8%. The decline was primarily due to a decrease in non-cash stock-based compensation expense. Appreciation and amortization not included in cost of sales increased to $1 million for the three months ended September 30th, 2023 versus $0.5 million in the prior year period. The bulk of this increase was due to the amortization of the technology license we have with Atomistic. The net loss for the three months ended September 30th, 2023, was $11 million or $0.17 per share versus the net loss of $9.5 million or $0.15 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 $38 million as of September 30th, 2023, and a net working capital position of $54.5 million.

The net cash flows used in operating activities was $8 million in the third quarter of 2023 as compared to a net cash use of $6.9 million for the third quarter of 2022. The bulk of this increase in cash was due to investments in accounts receivable and a comparatively larger net loss in the period versus the prior year third quarter. Cash used for investing activities for the third quarter of 2023 was 2.5 million as compared to 3.3 million in the prior year’s period, with the majority of this being a $1.5 million payment towards our atomistic technology licensing fee commitment. As of the date of this call, there remains the final outstanding licensing fee commitment to atomistic of 1.5 million due on December 31st, 2023. Other investments in Q4 2023 will be modest as we complete the installation of final additional equipment to our waveguide plant expansion.

Capital and licensing expenditures will be significantly less in 2024 as compared to 2023. As of September 30th, the company continues to have no current or long-term debt obligations. outstanding. As Paul mentioned earlier, we are taking proactive steps to reduce our cost structure and position is better to respond to demand fluctuations while continuing to invest in new product development and maintaining our high standards of customer service and support. Vuzix will remain not only a growth-oriented organization, but ideally also a more cost-effective organization. We expect these transformation actions can produce many benefits, and our actions will include improving the economics of our smart glasses business, resulting in improved growth margins and reducing operating costs in absolute terms and as a percentage of revenue, implementing a headcount freeze throughout the organization after our last several years of additional operating cost investments.

This will also include reassignment and combination of functions and focus. But of course, we will respond to the product demand fluctuations and continue to staff our production teams appropriately. Outsourcing more of our non-differentiating capabilities and activities to external contractors and partners. This should allow us to reallocate resources to focus on important investments in what we do uniquely and gives us a competitive advantage. We will strive to operate more efficiently and expect to create durable savings to fund investments in our key technologies and product capabilities. These cost transformations are expected to deliver results in the short, medium, and long-terms. Looking forward, we are confident 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 our business continues to grow on multiple fronts, our line of sight to achieving profitable operations gets clearer. We expect the pace of our growth in the coming quarters will continue, and with our shift more to third-party channel partners and resellers in our enterprise smart glasses segment, this should allow us to more effectively manage our sales and marketing costs. And of course, we will be looking at further ways across the company to reduce costs and improve productivity so we can bring as much of our revenues as possible as income to our bottom line. It is a focused effort for Vuzix and as Grant just said, we have the resources we need to execute on our plans going forward. With that said, I would like to now turn the call back over to the operator for Q&A.

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Q&A Session

Operator: Thank you. [Operator Instructions] And our first question comes from the line of Matt VanVliet with BTIG. Please proceed.

Matt VanVliet: Good afternoon. Thanks for taking the question. I guess first, what gives you confidence that some of the larger orders that you were anticipating that sort of failed to come through this quarter will be coming through in the next one to two quarters, as you mentioned, and maybe not even longer beyond that or outright making a cancellation or decision to move away from the technology?

Paul Travers: Yeah, there were two categories, Matt, of orders that got delayed. Let’s talk about the product side of the business first, because there’s really three categories of order books get filled at Vuzix. We’ve got the channel business that we’re building right now. And building that business, it’s not just as simple as, you know, you got a new guy and you bring them on board. It takes work to vet and make sure that you’ve got folks that are compatible with the music, that understand the markets that we’re trying to sell into and can support them well. And between doing that vetting and getting the negotiations done on bringing those folks on board, it just slipped into the next quarter. We have other folks that we’re bringing on here in the fourth quarter and that has not been impacted.

It’s just taken a little bit longer for those channel partners to come on board for us. And then there’s the direct sales. And the one category that is really the front end of seeing a lot of growth, which was in our expectations for Q3, revolves around the whole supply chain marketplace. There are more than a handful of companies that are in that box that just like they’ve been doing for some time now sliding sideways a bit that said there’s three or four of them which represent significant business opportunity for Vuzix. Literally, it just was a function of this excuse or that excuse revolving around things like new systems that got installed, or they took a smaller order because they’re not going to roll out quite as fast because part of what’s going on in the world right now is they want to make sure that they’re not screwing up their revenue streams.

But there is nobody in the warehousing and supply chain side of the business that is saying, we’re not doing this. So that’s why I say Q4, Q1 possibly, because some of those supply chain side of the house, in Q4, they get awfully busy with year-end sales opportunities and the likes. And on the channel side of it, it’s just Vuzix has got to get the deals in place and rolling. So our Q4 still looks like it’s a great, going to be a fine quarter for us. And some of that business that we were planning on in Q3 should roll into our Q4. On the OEM side of the business, you can see, we’ve actually got a backlog now of like $3 million plus. And there’s another $3 to $4 million that by all rights should have closed in the third quarter. And the only reason why it didn’t is because you have companies that are saying, look, we’re not bringing on new projects until the New Year, period, across the board.

It’s almost like freezing hiring and so for two of those we’re 100% certain that these guys are moving forward we’ve gotten zero reason to believe that they’re not and it’s possible that at least one of them will sign up in the in the fourth quarter The other one’s probably going to be the first quarter of next year. We’re not seeing the business going away at all. It’s just timing and issues in the world as such as they are.

Matt VanVliet: All right, helpful. And then Grant, when you look at the cost reduction steps that you’ve taken, how much of those are headcount reduction versus just pulling back on discretionary spend and maybe any level of magnitude, at least on the structural cost reduction that you’re going through?