Q3 2022 Vuzix Corp Earnings Call
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Greetings and welcome to the Vuzix third quarter, ending September 30th 2022 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.
If anyone should require operator assistance during the call. Please press star zero on your telephone keypad. As a reminder, this call is being recorded its now my pleasure to turn the call over to Ed Mcgregor Director of Investor Relations at Vuzix. Mr. Mcgregor, you may begin.
Good afternoon, everyone and welcome to the Vuzix third quarter 2022, ending September 30th financial results and business update conference call.
With us today are Vuzix, 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 I imagined what 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 1095 <unk>.
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.
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 Companys future performance represent managements estimates as of today November 19 2022.
<unk> 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 Dot 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 return to provide some closing remarks, after which we will move on to the Q&A session.
Thank you, Ed and Hello, everyone and welcome to the Vuzix Q3, 2022 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.
During the third quarter, we achieved both sequential and year over year double digit revenue growth. We made strong progress in terms of product development technology advancement and new business engagements on the OEM side of our business. We are now engaged with many new potential defense consumer electronics and enterprise customers that are.
Interested in our waveguide and display engine solutions.
At the same time larger deployment opportunities for our smart glasses, among key enterprise customers continued to expand both the number and visibility within warehousing and logistics automotive pharma and health care verticals.
Let me elaborate.
From a customer engagement perspective, the third quarter continued to be very encouraging across our core smart glasses business. Despite numerous headwinds most notably at the end of Q3, we expanded our international sales channel with the addition of Honky Tac to support our business development in China, We also bolstered our.
Our local sales and support team in Europe with additional personnel that came online during Q3 to support our key accounts and drive additional sales growth in the EMEA region as always we continue to work closely with our key independent software vendors to support the needs of our collective customers as they work through their optimizations in support of a growing number of enterprise.
Why rollouts on.
On the OEM side of the business there is growing momentum with both existing and new customers sales of waveguides and display engines as well as engineering services were both at record levels and our third quarter and we expect our OEM business activities will continue to grow.
After the third quarter's close we announced two notable developments Vuzix has been working on upgrading and expanding our waveguide manufacturing capabilities to support this effort in October we entered into a lease for new manufacturing space. This facility located across the street from our existing plant includes an option to expand over time.
The separate plant will support the advanced capabilities, we need for our latest wave guide technology, including the use of higher indexed materials advanced glass substrates and unique formulation technologies designed to further address vuzix and our OEM customers' needs. This new facility is designed to increase our unit capacity and significantly.
Lower the unit cost of manufacturer or a wave guide as we move into the broader markets as part of this expansion we teamed up with leaders from the Empire State development to receive up to $1 million to support related job creation through the Excelsior job tax credit programs.
Second we completed the acquisition of movie in a revenue generating SAS solution provider that supports <unk>, which broadens our go to market strategy for customers and I S fees within the warehousing and logistics market verticals using SAP.
Along with making our products stickier for the end customer we have high expectations for this strategic investment and I'll share more a bit later on in the call. Clearly there is a lot of forward momentum going on at Vuzix.
It's great to see that our smart glasses core customer base continues to expand both vertically and geographically and customers continue to move forward with the scaling initiatives that being said during the third quarter several customers did push their purchasing decisions out.
Also impacting growth a bit in the quarter with some higher volume discounts and to a lesser degree negative exchange rate with the strong U S dollar.
In terms of market verticals the outlook for warehousing and logistics continues to be one of our brightest one fortune 100 customer that we referenced in the July press release has already placed multiple orders for initial rollouts and is expected to continue to expand their use of our smart glasses in their organization.
The smart glasses project at this retailer as it currently is slated will represent one of the largest deployment of smart glasses in the world to date.
Visibility at Amazon, another large warehouse and logistics customer remains positive as we expect their smart glasses users to expand further beginning as early as Q4 2022 as a reminder, Amazon has their own custom M 400, smart glasses SKU from Vuzix.
Outside of these customers Vuzix smart glasses have been deployed within the distribution centers of several other large retail customers and we expect to finally start to see further expansion into additional Dcs also beginning as early as this quarter.
In health care, our major Isps continue to expand the global availability of their vuzix powered surgical solutions.
Most notably Medaka, Pixie medical and rods and cones, all of which continue to post new milestones and deployments almost daily on Linkedin, among other social media again health care related trials and use cases of Vuzix smart glasses continue to steadily expand around the world such as those recently announced with AVR.
Japan, and others for ambulance emergency medical care tow Pan for order picking of homebound seniors and expert Inc. For the deaf and hearing impaired.
Overall, our smart glasses sales pipeline is healthy and growing and we expect to see sequential revenue growth in smart glasses products and solutions in Q4, Vuzix smart glasses have made their way into an impressively long and still growing list of blue chip firms around the world as either.
A preferred or in most cases sole smart glasses solution further solidifying vuzix position as the market leader in enterprise Smart glasses.
To expand on my earlier comment Vuzix recently closed the acquisition of movement, a SaaS based solution.
Provider that has now become a vuzix company.
<unk> warehouse workflow solution and architecture is unique in that it does not require an online connection or middleware to operate.
The movie solution is designed to be ERP agnostic and as such we expect overtime to support other leading ERP back end systems, such as Oracle and Microsoft dynamics.
The core movie team brings more than 40 years of experience related to our SAP system level architecture mobility project management and implementation of SAP software suites.
This solution was developed in close collaboration with a very large aerospace and defense customer and is currently deployed in numerous of their locations across the U S and Europe and is now being piloted for expansion into Canada. The movement solution is currently supporting handheld scanners, and mobile phones, which represent a logical transition to views.
Smart glasses we.
We see this as a significant market opportunity to support traditional warehouse hardware and our plan is to introduce Vuzix smart glasses and upgrade for hands free picking into these environments strategically.
Strategically, we believe that movements underlying technology and architecture can be packaged into API that could be used by vuzix Isps and the likes to enhance their current software offerings and help expand existing markets and open up new markets for smart glasses across warehousing and logistics.
In terms of movements revenue generation, we expect a low six figure contribution in Q4 of 2022 and seven figure contribution in 2023.
With a minimal impact on our net operating costs.
As announced in mid day music signed a series of agreements with Atomistic, a France based technologies firm with a novel materials science approach related to the development of next generation micro light emitting diodes or micro Leds the combination of atomistic displays and Vuzix Heathrow.
Wave guides will deliver full color high resolution HD solutions level.
The level of form and functionality that represents what we believe to be a critical piece for the broader AAR wearable markets markets expected to ultimately become as large as the current smartphone market itself.
We're making steady progress and if you would like to learn more about Vuzix micro led the efforts in this transaction. Please review the conference call that Vuzix hosted on May 18th of this year you can find it on our website.
Our newly established OEM design and manufacturing platform is rapidly gaining momentum and a short six months since its official launch we are seeing indications of significant need in both the broader markets and in the defense markets. It is clear that waveguides and display engines will be an integral part of the wearable.
<unk> platform of the future from defense, all the way to literally replacing the smartphone to help make consumer AR glasses ubiquitous.
The platform that was announced early in the second quarter as being proactively offered to select third parties. This new platform offers customers one stop shopping for their advanced and customized waveguide and display engine solutions needs from design to high volume cost effective production capabilities.
Mix that we believe is currently almost impossible to find anywhere else in the world.
Since announcing the platform we have been fielding many RF is a request for inputs and formal RF queues request for quotes for our waveguide based solutions and in most cases display engines to go with them. Our early success as evidenced by the fact that we achieved as I mentioned earlier record sales of waveguide display engine.
In engineering services in Q3.
I would like to give you some more color on what's going on in the OEM space. We are currently in discussions with well over a dozen firms with multiple projects already underway with many of them.
On the defense side, our noncompete agreement that expired in June has been timely for the introduction of our OEM platform as the only U S. Based manufacturer of wave guides, we are well positioned to directly grow our defense and military business. Our end goal is qualification and selection of our OEM component offerings into volume production.
Grams, where production runs can span five years or more and result in four five and even six figure unit volumes.
And wars are won and lost with information and the ideal method to deliver that information to the user requires a wearable display from new use cases to upgrading older defense solutions and frankly, two alternatives to what should have been the fact those solution I've asked the need is palpable.
Clearly visible example, we announced in July an agreement with <unk> technologies, a leading defense contractor to develop a new customized waveguide based head mounted display engine for use within their existing L. Three Harris programs and new ones in the works.
And it's exciting that our technology can be used on multiple projects that they are pursuing and the multiyear unit potential for us could be quite large given the size of L. Three Harris as existing product lines and the use cases they target.
L. Three Harris is one of the almost dozen defense firms coming to Vuzix at this point and things are just getting started.
On the consumer electronics side, we are well positioned to be a high volume cost competitive provider of wave guides display engines and related reference designs.
The largest west coast consumer technology companies continue to publicize their intentions to offer smart glasses for the masses and at the same time most of them are dealing with the realities of just how hard it is to design and build a pair of highly functional cost effective consumer AR smart glasses.
Since announcing our OEM platform, we've had significant inbound request to responder RF skus from leading consumer electronics firms and their interest in working with Vuzix as a solution provider to their programs.
Again by way of example in July we received a purchase order for custom design wave guides from a fortune 50 software and hardware technology customer the work for this customer which is consistent with the consumer related remarks, I made previously is well underway and the wave guides developed and built by Vuzix are being delivered specifically to match. This.
As customers needs and specifications.
Led by both consumer OEM customers and U S and Allied defense and Homeland security customers. We expect our OEM revenue in Q4 to show continued growth slide eight highlights the new products. We have introduced over the past four years and I think it's safe to say that no. Other firm in the world is a more comprehensive.
Hence of smart glasses product lineup and the core technologies behind them then vuzix.
Each of these products is designed to address the unique needs of different vertical markets and the burgeoning smart glasses market. We feel we have never been in a stronger product position than we are today and we intend to keep pushing the competitive envelope going forward.
Towards the end of the third quarter, we announced the general availability of blade to our third generation blade product featuring our latest advanced waveguide optics are new microprocessor and the ability to run Android 11 out of the box.
Customer reception to the blade to has been great and we have a number of significant opportunities associated with this product as it answers the call from many of our <unk> customers that love the blades form factor, but required an upgraded Android OS the latest security support broader Wi Fi capabilities and updated MDM.
Compatibility to support their applications deployments.
The Vuzix <unk> hundred <unk>, our second generation USB C based windows PC and phone compatible smart glasses that takes full advantage of the robust M 400 platform design, including IP 67 is now shipping and is being actively marketed through select vuzix channels.
The M 400 C are designed to work in concert with a smartphone or belt worn PC and to take advantage of that existing ecosystem.
Finding the shield, our first Binoxalate and fashion forward Smart glasses is starting to ship to key customers system integrators and development partners and is on track for broader availability before the end of the year.
The production release of this product has been hampered by earlier supply chain challenges, which are now behind us I.
I'd like to now pass the call over to grant for his financial review.
Grant.
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 32022, with $3 4 million as compared to $3 million for the prior 2021 period and overall increase of 14%.
<unk> of waveguides and display engines for the quarter rose to approximately a quarter million dollars.
A new quarterly record for US revenues from Engineering services were also a record at $9 million versus none in the prior year's period.
Offsetting some of these revenue gains were decreases in sales glass revenues, which as mentioned by Paul was due to higher sales discounts for larger volume orders by a smaller extent negative foreign exchange impacts and lower unit sales.
There was an overall gross profit of <unk> 9 million or 25% for the three months ended September 32022.
As compared to a gross profit of <unk> 4 million or 13% for the same period in 2021.
The improvement in gross profit percentage in the quarter was largely attributable to increased amounts of engineering services revenues, we typically earn us higher gross margin.
R&D expense was $3 4 million for the three months ended September 32022, an increase of only 1% against the comparable period in 2021.
Selling and marketing expense for the three months ended September $32022 2 million as compared to $1 7 million in the 2021 period, an increase of 20% largely due to increases in stock compensation due to head count increases.
General and administrative expense for the three months ended September .
At September 32022 was $4 9 million, a decrease of 11% versus $5.5 million in the prior year's period.
The decline was largely due to decreases in non cash stock compensation related to our long term incentive plan and legal expenses.
The net loss for the three months ended September 30 of 2022 with $9 5 million or <unk> 15 per share versus a net loss of $10 5 million or <unk> 17 per share for the same period.
In 2021.
Now for some balance sheet highlights our balance sheet remains strong with cash and cash equivalent position of $90 4 million as of September 32022, and a net working capital position of $100 8 million.
Cash used in operations, but $4 9 million after adding back noncash operating expenses.
Mainly stock compensation, depreciation and amortization and net changes in our working capital for the third quarter of 2022 as compared to $5 8 million in 2021 cash used for investing activities for the third quarter of 2022% to $3 4 million as compared to $3 1 million in the prior year's period.
As of September 32022, the company continues to have no current or long term debt obligations outstanding.
Other than the outstanding license fee commitment and a remainder remaining contract work for back plane without a mystic.
For the balance of 2022 and throughout the calendar 2023, we are confident we have the resources to execute on our business plan and further invest in our future with that I'd like to turn the call back over to Paul.
Thanks Grant as you can see it is incredibly busy at Vuzix. These days and in the new year Vuzix will be attending the consumer electronics show in Las Vegas, as we excite the world with our newest fleet of industry, leading smart glasses we.
We would like to invite everyone to stop by our booth to see them firsthand.
We'll say it should be an exciting show this year as we are also planning to unveil the proverbial one more thing or.
Our biggest smart glasses leap forward, yet and pointed directly at the broader markets.
With that I would like to turn the call back over to the operator for Q&A.
Thank you, we'll now be conducting a question and answer session if you'd like to be placed in the question queue. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May press star two if you'd like to move your question from the queue for participants using speaker equipment may be necessary to pick up.
Before pressing star one one moment. Please before we pull for questions. Our first question is coming from Matt Van Vliet from BTG. Your line is now live.
Hey, good afternoon, guys. Thanks for taking my questions I guess first just curious on how youre thinking about the distribution and warehousing channel.
Light of some of the macro headwinds and some of the struggles we're seeing across kind of e-commerce and retail more holistically.
And just kind of what's baked into your forward expectations on kind of the overall macro trends.
Sure Matt.
This is a really cool data about what vuzix does in that space when.
When you're in the distribution channel and you can make it more efficient and deal with high turnover rates because it's so easy to use our products they pay for themselves so fast and it helps deal with the Factset.
Hard to even get good employees to do those jobs and so we.
We see 2023 fantastic.
Fantastic year for us as deployments, we believe theyre going to happen all over the place and some of these companies that we've been working with for quite some time now so.
<unk>.
Sure.
Device that helps make workers more efficient.
That simple, it's going to be deployed quite a few places because of it.
Alright, very helpful and then on the aerospace and defense side.
A bunch of engineering services opportunities, but.
Maybe within that mix and even beyond the consumer electronics side, how should we think about the mix of the OEM business, maybe over the next call it four or five years or something about more longer term versus AR smart glasses sales and kind of what youre thinking about the ultimate <unk>.
The mix between those two might be.
Well some of these accounts that we're working with are they are selling.
Selling devices for like 60 Grand upon.
To vuzix, it could be 5% to $7000, a pop and it could be as many as 60000 pieces over a over a program. So the defense side of our business could be pretty significant and it could represent.
First of all it is great margin for Vuzix, one and number two it should represent some significant top line.
On the brighter market side.
When you are in multiple programs knock on wood.
These are companies that are expecting to sell millions of these things and it's part of the reasons why we've done this upgrade to our facility and we set it up so we could expand even further and grow into it as the demand grows.
These guys are going to be talking millions of units.
Add that all up Matt.
It could run over the top of the enterprise side of our business.
I mean, there is theirs.
Hundreds of thousands of headset that can be sold maybe millions even an enterprise no doubt about it and it's a higher number.
But the unit volumes are just going to be.
Impressive in the broader market side of it.
Alright, great. Thank you.
Thank you. Your next question today is coming from Tyler Burmeister from Craig Hallum Capital. Your line is now live.
Hey, guys. Thanks for letting us ask a couple of questions.
So first I guess as a point of clarification.
The OEM revenue is the 900000 in Q3 that engineering services and when when you say you expect OEM to grow in Q4 does that quarter over quarter sequential comment or was that a year over year comment and then as we look into next year.
These quarterly levels kind of getting close to a million dollars is that the type of run rate. We could expect in the next year or is there maybe some one time project startup or for completion.
Possibly kind of impacted the near term.
There's no doubt that these things are a bit lumpy right because sometimes you're you've got two or three guys in the queue, maybe more that youre developing for and delivering against but.
So many of them Tyler that looked like they're coming to us like I said, there is upwards of a dozen defense companies now.
It should.
You'd start to get more consistent next year, but it still will be lumpy as we deliver and programs come in and out until theyre going into production on the defense side for production next year.
Should be at least one and maybe a couple of them that we're producing.
In production oriented quantities.
The sequential growth.
Again this is a lumpy kind of business right now I mean, we feel pretty good about what's going to happen here in our Q4.
Yes.
It should match it.
In a little rough plus or minus.
But it should be a reasonably good quarter the fourth quarter into next year. These numbers should be significant jumps over what they're doing in this year. There's just so many programs coming onboard.
That sounds great. Thanks.
For that clarification color and then.
As we talk about wave guides and the opportunity to sell those into third parties.
How should we think about that the timing of the opportunity.
Obviously pretty excited with some of the long term opportunities.
Taking material step up in revenue next year is this kind of looking out for.
For three five years.
It's not it's not three to five.
In fact, we will see some revenue from a product perspective I believe in 2023.
Some of the broader market guys, we're talking to they want product by the end of next year.
So.
It won't be it won't be massive next year, it'll really crank up into 2020 forego.
That's helpful.
Okay.
Alright.
I'm just going to say it takes time to get through the development phase of some of the stuff I will tell you, though that some of these companies are already well into their product development. They just haven't been able to solve this side of it.
That's helpful. Thanks.
Youre welcome.
Thank you next question today is coming from Jack Vander <unk> from Maxim Group. Your line is now live.
Hi, guys. This is actually Jack Cordero Korean project, maybe Eric Thanks for taking my questions.
I was actually just wondering if you could possibly.
Possibly any more color on the OEM opportunity I was wondering if you could explain it all.
The timeline for those opportunities from the early conversations to point of sale can you give any color on how long that whole process takes.
It really depends a lot Jack on which on which programs that we're talking.
First of all some of these programs.
A smaller number of them of course, because this is something thats only been six or seven months that we've really hung our shingle out but there's a couple of these that we've been working on for the last two years or three years and those projects programs. We believe are going to be rolling into production in 2023.
At least for sure one of them.
A new a brand new project based upon what it is can take 12 to 18 months before I get in before it might be in volume production. Some of them are even longer term thinking two to three years out based upon what the program. So it really does dependent now that said the size of the engineering the longer the ones.
The ones that color longer.
Engineering services part of it is the part where you do to develop the much bigger numbers in this regard so.
And of course, we make good margin on that side of our business at the same time, so youre going to see in 2023, a reasonably large number of new programs in that baseline of engineering services fees to get these things developed in the multiple millions of dollars.
Awesome, that's wonderful color I'll hop back in the queue. Thank you.
Thank you we reached end of our question and answer session I'd like to turn the floor back over for any closing or further comments.
Thank you very much everybody for joining the call again and again like I said <unk> be a lot of fun, we look forward to seeing everybody there and we look forward to reporting in March.
<unk>.
Thank you that does conclude today's teleconference and webcast you may disconnect. Your lines at this time and have a wonderful day, we thank you for your participation.