Q2 2023 Vuzix Corp Earnings Call

[music].

Greetings and welcome to the Vuzix second quarter, ending June 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.

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.

I would like to turn the call over to Ed Mcgregor Director of Investor Relations at Vuzix. Mr. Mcgregor, you may begin.

Thank you operator, and good afternoon, everyone.

Welcome to the Vuzix second quarter in 2023, ending June 30th.

Actual results and business update conference call.

With us today, our music CEO , Paul Travers and our CFO Grant Russell.

Before I turn the call over to Paul I'd 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 1095.

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 managements estimates as of today August eight 2023.

<unk> assumes no obligation to update these projections in the future as market conditions change.

This afternoon, the company issued a press release announcing its second quarter 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 on the company's Form 10-K annual filing in SEC Dot Gov, which is also available at Www Vuzix dotcom.

I'll now turn the call over at 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 second quarter financial results.

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

Paul Thank.

Thank you, Ed and Hello, everyone and welcome to the Vuzix Q2, 2023 conference call on this call. We are going to review our operating results and recent developments and then give you some perspective on where we see things headed in the second half of 2023.

Our Q2 revenue was $4 $7 million, representing an increase of 56% compared to the previous year and up 12% sequentially from the prior quarter.

<unk> sales driven by our smart glasses was a record $4 4 million, representing an increase of 53% compared to the previous year.

During Q2, we recognized OEM revenue point $3 million related to the delivery of optical components in wave guide at the same time, the number of engagements, which should ultimately result in significant business going forward for Vuzix has been expanding at an amazing pace.

As you can see 20 twenty-three is off to a strong start with first half revenue up 61% over the first half of 2022 as we enter the back half of 'twenty three we remain bullish on our full year prospects and believe we are well positioned to achieve continued overall record revenues for the full year.

Now I would like to get into some details on what we are seeing on our various business areas.

Music Smart glasses are being called upon to enhance productivity across markets and a multitude of environments and configurations. We are witnessing underlying smart glasses industry growth as companies get more engaged and focused on solving long term operational challenges and improving productivity with smart glasses based solutions.

This is occurring in most of our markets, including warehousing and logistics health care remote support and industry 4.0 in general.

Progressing trends towards broader enterprise wide rollouts from key Fortune 100 accounts is exciting for Vuzix and the enterprise smart glasses industry in general Vuzix has numerous existing accounts that are expected to continue their rollout plans for smart glasses in an expanded way over the second half of this year, especially in warehousing in la.

Just sticks. These early adopter accounts represent a core business that understands and is adopting wearable technology for the proven rois and productivity kpis that the technology affords at the same time, we're targeting more value added channel partners that have established ecosystem.

Some of the integrators Isps and larger end customers during the second quarter. We successfully continued to expand our global sales channels with a focus on solution selling and enablement to deliver better service and support to the end customer expanding our global channel is obviously important for our long term growth as it allows vuzix to affirm.

We multiply our sales team with minimal investment in core regions across the globe with World Class partners.

<unk> Corporation headquartered in Tokyo is one such value added channel partner, joining vuzix during the second quarter.

<unk> Corporation provide products services and solutions to enterprise computing consumer commercial and professional users across a variety of industries from health care to automotive effectively creating a significant increase in music sales service and support infrastructure in the Asian region.

There is little doubt that the use of hands free augmented reality solutions and enterprise medical defense and ultimately by consumers is the wave of the future.

At the same time companies are aligning their future strategies around AI enabled smart glasses. The expected ubiquitous use of AI in areas such as education E Commerce Health care Communications Defense security and more you can see in AI is everywhere.

Will fit hand in glove with AR smart glasses AI enabled smart glasses, we feel are going to significantly enhance human capabilities in many ways.

Examples include visual search language translation voice control on the fly fact checking hearing impaired solutions sign language smart glasses human enhancement in the workforce with applications from visual picking two pallet packing. The list goes on and on and we are just getting started.

And this marriage of technologies should accelerate the need and use cases for lightweight wearable AR smart glasses were already starting to see a our smart glasses with AI based applications and use cases, gaining traction in both the business and consumer markets.

On the OEM products and engineering services front Vuzix has a growing list of opportunities in the queue with new and existing customers do is actually starting to get recognized by the market as both a U S based ODM and OEM supplier as companies are turning towards vuzix to not only potentially supply.

<unk> guide and optical components, but also complete product designs for Wearables.

Over the last year Vuzix began to ramp up our efforts around our OEM design and manufacturing group to streamline our efforts to respond to requests for quotes for our waveguide based solutions.

In many cases customers are also looking at display engines to drive images into the wave guides.

We have been investing in new equipment and enhanced production processes. The expansion of our waveguide manufacturing into a new separate facility with significantly increased capacity to support wave guide related production needs for Vuzix and our third party OEM customers will allow us to build more wave guides faster.

And less expensively.

To be clear we are already in production of waveguides and in parallel. This fall you'll just will open its one of a kind Wade guide Mega factory that is dedicated to the production of wave guides in volumes ultimately in the millions of units annually.

The flexibility of our new technology and wave guide design capabilities now allows vuzix to spend a full custom design and as little as three to four months, while other companies can take 18 months for a new design, if they will even do it.

Others can only offer a one size fits all solution, which is not suitable for most Oems, particularly those intending to enter the broader mark consumer markets.

Additionally, if you wave guide competitors, we do have are not domestic and tend to use expensive semiconductor equipment that results in lower volume capacity and noncompetitive cost structures.

Yeah.

We are fielding new interest to develop with the ultimate goal of producing waveguide based solutions for the defense commercial aviation enterprise and even the broader consumer markets within each of these markets. We see significant opportunities that can leverage our knowhow and core technology that have been developed over the last 25.

This year's abuse ex that.

The defense head mounted display our head up display markets. Today consists mainly of night vision devices and head mounted information displays.

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 a our computing our advanced See-through night vision systems access to the right information at the right time generally Wednesday day, the head mounted display portion of the defense market is just getting started.

Got it but it is expected to grow significantly as new technology offerings are designed in and adopted overtime into.

In Defence Vuzix has major customers that have been or are developing our wave guys 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 <unk>.

End of this year and going into the first half of 'twenty 'twenty four.

Okay.

On the waveguide front, we have made some recent advancements that can allow us to manufacture large format wave guides that are many times bigger than that needed for a our glasses and head mounted displays.

The ability to produce large format wave guides should open up new markets for large format heads up displays that are required for using conventional vehicles to aircraft cockpits, just like the heads up display in the windshield of a luxury car.

Specifically the aviation industry is a market that already has incumbent HUD solutions in the cockpit both in the defense and commercial markets are wave guides and micro OLED 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 physical space available.

Side most aircraft.

We have received serious interest and look forward to providing further details as new programs are expected to get started soon.

While the consumer a our market is still in its infancy in terms of volume billions of dollars are being poured into R&D by major tech companies trying to solve the challenges required to miniaturize the technology for the needed fashion forward designs that people would actually where the race for them to secure.

The supply chain and key components to bring fashion forward smart glasses to market is well underway.

We continue to receive strong interest from a diverse group of companies, including fashion brands.

Telecoms.

Actual media firms sports and gaming and we look forward to providing further details once their new programs get started with vuzix similar to the adoption curve offered by the modern day smartphone the expectation is that the consumer market will rapidly develop and ultimately become a multibillion unit market.

The ultra light a our platform announced earlier this year utilizes the latest micro OLED engines and wave guides from Vuzix and as packaged into a form factor that we feel will finally appeal to the broader markets. We have been meeting with many potential customers across the globe, where we showcased our ultralight platform.

The interest abroad, as well as domestically from ODM and OEM solutions from Vuzix around our wave guides and ultra light platform is strong Vuzix Ultra light platform based solutions will be in production by the end of this year and we expect will be going to market with several OEM brands through 2024.

The Vuzix patent portfolio currently includes 300, and twenty-nine patents and patents pending an impressive 50% increase over the last 24 months. This breaks down to 178 issued patents and 151 pending applications in a variety of geographic areas. Our portfolio covers a broad range of.

<unk> and includes a significant collection of fundamental wave guide design patents and applications.

We have a combination of both patents and 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 in that low cost Bottomline. We feel vuzix has a strong intellectual property position and many of the critical areas of.

AR smart glasses.

The soon to be fully operational wave guide Mega factory is dedicated to the production of wave guides and volume. We believe it is one of a kind in the world today, the new facility will focus on the advancement of higher index materials advanced glass substrates and unique formulation technologies the required power infrastructure.

<unk> has been installed and turned on at the factory and waveguide production equipment is being moved in and qualified we expect the new facility to be operational in the fall of this year.

This new facility provides an additional 12000 square feet of manufacturing space.

Jason to our existing plant with an optional 27000 square feet to grow into.

The new facility is designed to support our latest wave guide technologies increase our unit capacity significantly and lower the unit volume manufacturing costs of our wave guides, our ability to design and fabricate wave guides and high volume and at low cost, we believe should be second to none ultimately both lower use.

That cost and the ability to manufacture and volume are two critical requirements to overcome to support the need for a broad AR smart glasses market and Vuzix is positioned to get it done.

Some specification to design to mold production to replication to test in cinema system integration, we do it all in house and 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 our customers' own unique wave guide Les.

Out we can make them small or large we can turn to design around quickly and our expertise and capabilities. In this area are unmatched wave guides and ultimately micro OLED displays are essential components for lightweight a our smart glasses and other wearables. We believe our increased capacity lower cost wave guide offering and are ongoing.

Investments in next generation micro OLED displays will fortify vuzix positioned to play a critical role in an industry that should ultimately represent many billions of dollars of revenues annually.

As a reminder, the ability to produce RGB micro Leds on a single substrate that still have high efficiency color remains elusive. However, there have been varying degrees of success to date by some micro OLED manufacturers with single color displays, but just barely to an acceptable level and no one is sure.

Dipping anything that's full color and an operational range yet.

Because micro Leds are so strategic and fit hand in glove with the optical wave guide we feel it is critical to attempt to secure the supply of cost effective high volume fabrication of these devices to that end, we have fortified our micro OLED 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 publicized for competitive reasons of course, the highest profile development in this area as the technology license and development agreements, we signed with atomistic roughly one year ago, while we have been short on specifics to date I can say.

Atomistic with its very novel approach is making great progress.

Micro Leds 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 this all unfolds, but suffice to say atomistic technology has great potential to create incredibly advanced full color high efficiency micro OLED displays displays that have the potential to upend, the entire smart glasses industry and quite frankly, the display industry in general.

With very compact full color exceptional brightness and all day battery performance to be incorporated in our fashion forward smart glasses form factor that everyone will wear.

Okay.

To recap we feel that Vuzix is one of the outstanding leaders in our industry today and it is evident in multiple areas.

Our business is seeing expanded growth on the top line.

Music is one of the fastest growing enterprise product solutions in the market.

Vuzix has critical waveguide technology from design to a one of a kind Mega factory for high volume production at broad market, enabling price points Vuzix has a major state and what should prove to be the most advanced micro Leds display technology available solving for the critically needed high efficiency pool.

Color displays for the ultimate a our glasses solution in the future.

Bottom line, we feel we are positioned well to win and see significant growth in our enterprise value going forward, especially considering we believe we are a company that is cornerstone toy market that has touted by industry experts to ultimately be greater than a trillion dollar plus within a decade.

Like to now pass the call over to grant for his financial review.

Grant.

Thanks, 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 better color on some of the numbers now.

Our second quarter total revenues for the three months ended June 30th 2023 was $4 7 million as compared to 3 million for the prior 2022 period, an overall increase of 56%.

The revenue increase was primarily the result.

Of higher than 400 product sales, which increased 53% year over year.

Sales of engineering services for the three months ended June 32023 was <unk> 3 million as compared to point 1 million for the same 2022 quarterly period.

Currently have remaining performance obligations of approximately <unk> 1 million on the currency on a current waveguide development project and we anticipate starting a new one.

OEM projects with customers in Q3 of 2023.

There was an overall gross profit of $1 million or 21% for the three months ended June 30th 2023, as compared to a gross profit of point.

$3 million or 9% for the same period in 2022, the improvement was due to our increased sales, which enable greater absorption of our relatively fixed manufacturing overhead costs.

Research and development expense was $2 8 million for the three months ended June 30th 2023 versus $3 million for the comparable 2022 period, a decrease of approximately 5%.

The decrease was largely due to a reduction in external development expenses and consultants related to new products.

Selling and marketing expense was $2 5 million for the three months ended June 30th 2023 versus $1 9 million for the comparable 2022 period, an increase of approximately 36%.

This increase was primarily due to higher salary and benefit expenses associated with increased head count as compared to the previous year's period.

General and administrative expense for the three months ended June 32023 was $4 3 million versus $5 million for the comparable 2022 period, a decrease of approximately 15%. The decline was primarily due to a decrease in noncash.

Stock based compensation expense depreciation and amortization expense increased to $1 million for the three months ended June 30th 2023 versus <unk> 4 million in the prior year's period. The bulk of the increase was due to the amortization of the technology license without domestic which only began.

And midway through Q2 of 2022.

The net loss for the three months ended June 30th 2023 was $9 4 million or 14 cents a share versus a net loss of $10 million or <unk> 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 $48 6 million as of June 32023, and the net working capital position at 61 5 million.

The overall net cash flows used in operating activities. After the net changes in operating assets and liabilities was $7 9 million for Q2 2023 versus $4 6 million in the comparable 2022 period.

The bulk of this increase.

Was due to a $3 $4 million increase in accounts receivable in the quarter.

Excluding noncash items and changes in working capital our cash burn from operations and non-GAAP measure for the second quarter of 2023 was $4 8 million versus $5 5 million in the prior year's period.

Cash used for investing activities for the second quarter 2023 was $6 8 million as compared to $8 2 million in the prior year's period, but the bulk of these investments being a $6 million payment toward.

Our atomistic technology licensing fee commitment.

As of June 30th the company continues to have no current or long term debt obligations outstanding other than the currently outstanding licensing fee commitments to atomistic, a $3 5 million, which will be fully paid during the second half of 2023.

Looking forward to the balance of 2023 and 'twenty four we're confident we have the resources to execute on our growth business plan and further invest in our future I would like to make a few comments in this regard.

Firstly, our total cash users over the past year included ongoing investments in equipment, and our new waveguide production facility as well as significant payments related to the atomistic technology licensing peak amendment.

These expenditures will be significantly less in the second half of 'twenty to 'twenty three.

Looking forward to 2024, we expect to see continued moderated investment levels, but perhaps further increases in our working capital investments as our business continues.

Its strong growth trajectory with that I would like to turn the call back over to Paul.

Thanks Grant as our revenues continue to grow our line of sight to achieving profitable operations gets nearer we expect the pace of our growth in the coming months and quarters will continue and with our shift more to third party channel partners and resellers and our smart glasses segment. This will slow the growth in our sales and marketing costs.

Which have grown the fastest of all our cash operating costs.

Of course, we will be looking at further ways across the company to readings costs and improve productivity. So we can bring as much income as possible to our bottom line.

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.

With that I would like to now turn the call back over to the operator for Q&A.

Thank you and ladies and gentlemen at this time, we will conduct a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad.

A confirmation tone will indicate that your line is in the question queue.

You May press Star two if you would like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys.

Our first question comes from Matt Vanvliet, yet with B P. I G. Please state your question.

Hey, good afternoon, guys. Thanks for taking my question I guess first on the smart glasses unit volume growth, especially on the M 400 side I'm wondering if you could just give.

Give a little bit more detail in terms of what what market verticals, you're seeing the most success and that's really driving.

Those rates and then in terms of either orders already in orders expected for the second half you know what what market verticals do you think will drive performance in the second half as well.

Yeah, Hey, Matt Thanks for the question.

The yen.

The interesting thing about the smart glasses products right, it's a wearable computer and Theres a lot of places that it can be used there are however, several places that seem to be leading the pace here at Vuzix Im sure everybody has seen how much the medical community are embracing our glasses. These days, that's definitely an area, where we see growth happening.

Same time, the supply chain with warehouse picking and packing and Theres just a plethora of areas, we're moving boxes around with hands free ability to pick is important. So that's another accelerating piece of the business and it's across multiple accounts on both of those.

Areas and then finally general remote support is a big deal right because in fact, it's even green I was in Japan, Australia weeks three weeks ago at an ESG conference speaking there and there were four or five companies that gave presentations and it was all about how smart losses can be used.

For the environmental kinds of social side of things at the same time quite frankly, but so the whole idea of remote support saving money not putting people on airplanes and alike. So it's a it's a.

Cross those and some of the areas of automotive manufacturing and of course, we've all.

Heard about guys like Amazon and the like so it's pretty broad based it's not just any given one.

Some of those though there.

Really expect to see some significant uptick over the next six months plus because some of these guys are they're no longer in poc's actually rolling out.

Okay very helpful and then on the OEM side I.

I guess what are the metrics that we should be looking for or the the announcements for orders that.

Might convince you to continue to take the extra space available to you on the new manufacturing facility.

And sort of layered within that question you know what what are the additional costs.

But we should assume that that eventually kind of layer in on top of maybe what the current cost started today.

First let me give you a feel for what's possible out of the 12000 square foot lease.

Already have in place. This is a class 1000 and better clean room facility. It was put in specifically the manufacturer in volume for us.

Facility just by itself will get us over 1 million wave guides on an annual basis in fact, working multiple shifts isn't it could be.

A few instances more than that so one two kinds of numbers.

Now if you look at the makeup of the product flow and what markets. They would go in.

Some of these markets are defense related and you might sell a wave guide solution with an engine for somewhere between three to seven and a half granted piece and some of those guys have volumes like 20% to 40000 kinds of annual numbers. So there's a significant amount of it.

Revenues that should be high margin that will come out of that facility.

And that's only a small piece of the overall kinds of volume that we can produce out of the slide the broader markets on the other hand are going to need much higher volumes admittedly.

What comes with those higher volumes as the price points, where we need to come down we still will garner significant margin, we believe out of those higher volume opportunities, but right now for the next year plus I would suggest we're in a pretty darn good shape just with what we have that said, we can three X our capacity.

From where we are right now in the same building when we need to move into the rest of it.

So you can add them up pretty easily if you just.

Nick a little spreadsheet look at defense you look at those kinds of numbers and you can see that it's in the many many many millions of revenues on an annual basis. So you should not see from Vuzix will need to expand beyond where we're at in this footprint that we have today and grant can talk to this a bit more of it.

Just a little bit more of that or what kind of clean it up by the end of this year, but generally speaking youre not going to see the level of Capex and expenditures that we've had to put them to get the plant floor to where it's at.

And Matt Ryan here.

The council expecting to see continue sequential growth to the back back half of the year.

It sure looks that way yes.

Perfect. Thank you and then.

The onsite line of business.

In fact, it's exciting to see.

Just in our standard product side, but I will also say that you should see a nice uptick.

The engineering side of the Oan business <unk> business is kind of interesting today and that we there's so many companies coming out it really like our ultra like platform that they're buying our standard waveguides out of that platform at orange inside of that platform and fucking at developing drinks so for them to get started.

The engineering fees are less that.

There's some other programs that definitely will be significant that also will be coming on board knock on wood I mean literally in the throes of final agreements here. So you should see the alien kick in also in the back half.

That's perfect and leads into my my next question too and kind of a follow up on <unk> talk a little bit more about the OEM opportunities you know optimistic about you know.

<unk> at least multiple or I think you said multiple opportunities that are gonna begin ramping and the second half and into next year.

You know.

The type of defense contract opportunities that you just did it could be you know multiple of thousands of dollars H a S p's with it'll potential for tens of thousands used over time and you know if that's over time, you know what what what what should we expect you know kind of initial order next year hundreds of units potentially thousands of units.

Any help maybe frame and that would be that'd be great.

First of all it's not just defense going into next year I believe in 2024, you will see pretty broad based.

Mix of customers and the only inside of our business.

Excuse me.

Maybe some flavor for that some telecom some fashion brands, you know those kinds of things and.

And the defense side of the business and on the defense side of the business. These things are like pulling teeth on time, they take a long time to finally get right in the role in production we've talked about this with any.

Several accounts that have been so darn close and that continues to be the case said weird.

Pretty confident that by the end of this year going into next year at the latest early part of it will have at least one defense customer that's going into production and you there the price.

<unk> you know the 5000 to 7000 <unk>.

Kinds of of of costs excuse me not costs setup price [laughter] and.

And.

We expect that to roll next year and it should be.

In the hundreds of units kinds of things the whole year would add up to maybe thousand plus kinds of numbers and you should see that engineering services side of it going up because.

Literally a pile of accounts that we have working relationships with some of them are awesome. Many of them have already bought and others I'm not saying look now that we got this we want to customize it. Please can you do it like this one little clothing on those kinds of things. So it's a pretty broad based piece of business and I hope you could imagine that with a side of it.

And I'm not trying to be disparaging on our standard products business I'm Super excited there too that this thing I've said it before it could be the tail wagging the dog D. O M side of our business could end up being very very significant.

Sorry, that's a lot to <unk> sorry [laughter].

No I appreciate the call in and put some parameters on that maybe.

Maybe just last last question to visit a little bit you know <unk> continues to grow.

Obviously, besides protecting your IP protecting your develop products that you're selling you'll any thoughts or updates to you know try to monetize those through licensing or you know.

Some sort of you know I P partnership like that.

Any color there would be would be interesting I think.

We we really don't want to take our intellectual properties and put them in a box and go license the amount that said.

This transactions on the <unk> side of our business come with effectively a license to the intellectual properties that are needed to put our products into the marketplace under the brand names of these other companies. So in a way there's a portion of the sale price that comes with that but what we're not doing this.

And there's some people that have asked that the last thing we're interested in doing right now is setting somebody up or we get a dollar per unit for a license fee.

Perfect that makes that makes perfect sense, that's all for us.

You bet.

Our next question comes from Jack Van <unk> with Maxim Group police to your question.

Great Hey, guys I appreciate the update thanks for taking my questions, Hey, Paul I I guess I'll start with just a question on how you expect maybe if you look forward.

And more production starts ramping up how do you expect your overall revenue mixed to kind of look in 2024 2025, maybe in terms of defence enterprise and consumer.

You know right now you can see that it's <unk> excuse me. It's it's it's enterprise space cause N 400 is leading the charge of uses <unk> to the end of this year I would well right now it's like 90 per cent I believe I don't know the exact number but it's 90 plus percent that is all enterprise space.

I think you'll see in the back half of this year <unk> inside of a business start to move the move the other way it'll it'll go to maybe.

Maybe as much as 20 per cent in the back half I don't know I I hate to throw out numbers like that because it's hard to tell where it might really ended up I will tell you, though from a book business perspective, there's a fair amount of it that we should see here in the back half of this year.

When some of these programs on the <unk> side kick in and it takes time. Unfortunately, it's hard to gauge exactly when but I believe you'll start to see the OEM catch up to our growing enterprise business next year. So you'll see enterprise continue the left you'll see more and more places that a decline.

Our channel partners are doing a great job, helping us to expand our business, but then you'll also see more morally and customers come on blood and I wish I could give you Jack a great well this is where we see it all out and up right now I can only tell you there is a <unk>.

Nice pile of customers that are in a pipeline on the side of business and these are not customers that talk about making you know five or 10000 pieces on an annual basis that doesn't work for them, that's not business with them. So it should represent a significant growth area for visits.

Wish I could tell you more hard data point, just yet, but I think we'll see more and more as this year and no one to the next to your uncles.

Great No I appreciate the caller I have two more just kind of on that same topic, just trying to understand or if you can help remind us <unk> going to market or plans to go to market overall with in terms of the consumer vertical is it going to be under the <unk> brand. In addition to designing frames for other brands just.

Can you provide maybe a high overview of.

All the different approaches on the consumer vertical <unk> it's.

It's more like the ODM OEM model, where these guys come to us, we supply key components and or white labelled solutions. So.

Some of these companies coming to us don't even have an engineering team.

<unk> you know companies that know how to move product in the marketplace and in those cases now engineering team they want as much done by views. It says we can possibly do.

Excuse me.

Some of these guys have no optics team so they need the optics Indians, but they have other stuff if.

If you looked at this waveguide space any company that is making waveguides today has put hundreds if not.

And the B billions of dollars into trying to figure out how to make waveguides, we bring that to the table for a lot of companies. What we don't want to do is compete with those guys and quite frankly.

I've been in this business for a long time when you were in retail and you fail best buy with a bunch of products and after Christmas hats, and you get it all back that to train wreck and we don't usually it doesn't want to be there we don't need to be there. We've got the secret sauce to enable other partners to move these products into the marketplace and we plan on having those kinds of <unk>.

<unk> in the broader consumer marketplace.

And the enterprise side, you will see a continuous lower products that are sexy fashion forward ruggedized for the enterprise space, but in the broader markets, you're gonna see partnerships and OEM relationships.

Not use X branded.

Got it that makes that makes a lotta sense, then and I appreciate the the reiteration of color there and maybe just one more from me <unk> me for grant on the gross margin front.

Kind of what are you what are normalized levels from your view on both the product and engineering services gross margin you've seen upticking gross margin going forward on both for both revenue streams in N Y is that thanks.

Well.

Our our goal is is clearly the they got as close to 40% as possible I.

I mean right now we're not there, but that's gonna take higher revenues, where we can you know observer overhead costs at a greater level. I mean, you know we made some some progress you know the the 20th.

One per cent reported this quarter is our best in in a long time.

And clearly at this at this stage engineering services are more profitable than you know our own product sales because.

We don't have we don't assign the.

The same level of fixed you know manufacturing overhead cough.

To those those product offerings, when when we get to actual you know <unk>.

<unk> you know it it again, it's gonna depend on you know the.

The account defense.

Defense customers, you can usually come out at a much higher price and which results in a higher margin, but you know of course, the volumes or laugh and on the you know the Ah consumer base, let's say Oh am are already M relationship you know we'd be looking at.

Much lower margins however.

Total should be much greater because the units they would.

Ultimately move we help what would be greater so.

It's gonna be you know a mixed mixed bag dependent on our.

Our you know our overall revenue of <unk> defense has the biggest margins commercial.

Engineering services, we we always get at least 50 per cent products components is probably gonna be last particularly when we get into consumer.

Their products and in our you know our smart glasses today I mean, when we sell them on you know on a standalone basis, you know where you know.

We're we're getting in the the 50 to 50 per cent plus but you know we we have the the overheads and.

Another cost of <unk> so.

It's all related to volume and we hope to get there sooner or later.

Got it very very helpful. Well congrats on the continued topline momentum guys I I appreciate that thank you.

Thanks Jack.

Our next question comes from Jim Mockery with Doctor James Please have your question.

Thank you good evening.

Just I wanted to understand a little bit better the mix on the on the smart glasses is it mostly M 400 or is there.

Anything else, that's meaningfully contributing to revenue this quarter.

Mmm.

Yes, it's Moseley M for hundreds I will say, though Jim that we're seeing.

Positive momentum and our blade side of it also and there's some portions of our shield business that is looking like it's starting to ramp nicely.

So that it takes time for the optical see-through systems, and the and the solutions around them to be finalized and if you think about the M. 400 has been around for three or four years now, whereas the shield and the blades have only been around for the last like shields a year at most and we've been shipping that just to the developer community so far.

That's stolen into overdrive hearing the phone at ear, so, but yes, and we don't normally advertise the mix of products that were selling for competitive reasons, but.

<unk> M 400 is the front runner right now with with the these two other resources coming up from the back.

Okay great.

That's helpful and you talked about a large format waveguide.

I'm I'm trying to understand if the.

The large format waveguide is tied to these OEM projects that you are expecting to.

Either consummate or begin production in the second half of this year that is do you need to get the large format waveguide.

You know finished qualified tested et cetera before those projects can move forward.

It says definitely a new process for us, but it works so a.

A full up volume production program, probably does need a little bit of work, Jim but it's not science, it's just turning the crank quite frankly, it's not it's not.

It's not critical for our core business for any of our wearable technology et cetera. This is a new.

Opportunity.

That gets opened up for Vuzix.

The waveguides that are in a pair of glasses like the shield right. There like a 50 millimeter diameter like you know a lens in a regular pair of glasses, which is really cool.

But.

We now are capable of making things that are like 10 times much bigger than that even we could make up 72 inch television sideways guide kind of a thing and and just exaggerating a little bit there, but it can be quite large and with these you can do all kinds of things that are not.

Head mounted display related <unk>.

Very very quickly low something that's related to a head mounted display is a heads up display it's a very easy extrapolation to go from something that's.

You know two inches diameter to let's say six inches by eight inches kind of a thing and make it a window that you can look through as like a heads up display in your car and it's exciting because there's a big market opportunity, especially.

Especially in after markets and stuff like that for heads up displays and all kinds of vehicles from air crash, two luxury cars to a Volkswagen beetle that want an upgrade to have a heads up display and it kind of anything you might imagine right. So it's not it's not something that's cornerstone for auto in business.

It's just something that we can do now and we have more than one person, they're saying you guys can do this we would buy from our only on group those kinds of solutions in volume from Ya.

And so is it reasonable to expect that a large format waveguide would contribute to revenue it sounds like it's at least it your way is that is my timeframe correct on that.

You will see engineering services and <unk> before that.

Knock on wood, you should see it in the <unk>.

Okay.

And I just wanted to confirm something that you said you're expecting.

Additional OEM contracts are NRT or services revenue.

In Q3, although the contracts that you have.

Right now, they're they're kind of there you're you're pretty much delivered on all of them is that right, but you're expecting to start some more before the corner and.

We we delivered the bulk that these guys are in discussions with us about face three kinds of stuff et cetera. So yeah, you you're just gonna see some more continuation of programs that we've already made some announcements regarding and one of them was very public with companies like <unk>.

<unk>.

<unk> follow on from those and you'll see new new companies coming on board.

It's a growing piece of <unk>.

Growing up as a business, it's it's new and it's folks that had been with us for a bit now.

Alright, very good thanks.

This business is only really a year old for Vuzix anything we were doing previous to that was AD hoc somebody knock on the door. We have an active effort that's going on now so it's starting to pick up.

Thank you.

You're welcome.

The end of the question and answer session and I will not turn the call over to Paul Travers for closing remarks.

Well I'd like to thank everyone for your interest and participation on today's call. We're looking forward to the ribbon cutting ceremony for a waveguide Mega factory. This fall and please look for us at multiple investor confidence is will be attending throughout the rest of this year have a nice evening, everyone and again, thanks for joining the call.

Thank you.

Conference all parties and may disconnect have a good evening.