Vuzix Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 8, 2023

There are 8 speakers on the call.

Operator

Greetings, and welcome to the Vuzix Second Quarter Ending June 30, 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. As a reminder, this call is being recorded. Now, I would like to turn the call over to Ed McGregor, Director of Investor Relations at Vuzix.

Operator

Mr. McGregor, you may begin.

Speaker 1

Thank you, operator, and good afternoon, everyone. Welcome to the Vuzix Second Quarter and 2023 Ending June 30 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'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 1995.

Speaker 1

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 addition, any projections as to the company's future performance represent management's estimates as of today, August 8, 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 Q2 2023 financial results and filed its 10 Q with the SEC. So 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 ks annual filing atsec.gov, which is also available at www.vuzix.com.

Speaker 1

I will now turn the call over to Vuzix's CEO, Paul Travers, who will give an overview of the company's operating results and business outlook.

Speaker 2

Paul will then turn the call over

Speaker 1

to Grant Russell, Vuzix's CFO, who will provide an overview of the company's Q2 financial results. Paul will then return to make some closing remarks, after which we'll move on to the Q and A session. Paul?

Speaker 2

Thank you, Ed. 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 twenty twenty three. Our Q2 revenue was $4,700,000 representing an increase of 56% compared to the previous year and up 12% sequentially from the prior quarter. Product sales driven by our smart glasses was a record $4,400,000 representing an increase of 53% compared to the previous year.

Speaker 2

During Q2, we recognized OEM revenue of $300,000 related to the delivery of optical components and waveguides. 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, 2023 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 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'd like to get into some details on what we are seeing on our various business areas.

Speaker 2

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, Healthcare, remote support and Industry 4.0 in general. The progressing trends towards broader enterprise wide rollouts 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 ecosystems of integrators, ISVs and larger end customers. During the Q2, we successfully continued to expand our global sales channels with a focus on solution selling and enablement to deliver better service and Expanding our global channel is obviously important for our long term growth as it allows Vuzix to effectively multiply our sales team with minimal investment in core regions across the globe with world class partners.

Speaker 2

ASH Corporation, Headquartered in Tokyo is one such value added channel partner joining Vuzix during the Q2. ASH Corporation provides Products, services and solutions to enterprise computing, consumer commercial and professional users across a variety of industries from healthcare to automotive, effectively creating a significant increase to Vuzix sales, service and support infrastructure in the Asian region. There is little doubt that the use of hands free augmented reality solutions in enterprise, medical defense and ultimately by consumers is the way for 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, healthcare, communications, defense, AI enabled smart glasses we feel are going to significantly enhance human capabilities in many ways.

Speaker 2

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 to 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. We're already starting to see AR 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 opportunities in the queue with new and existing customers.

Speaker 2

Vuzix is starting to get recognized by the market as both a U. S.-based OEM and OEM supplier as companies are turning towards Vuzix to not only potentially supply waveguides 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 waveguides. 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 waveguide related production needs for Vuzix and our 3rd party OEM customers will allow us to build more waveguides faster and less expensively.

Speaker 2

To be clear, we are already in production of waveguides. And in parallel, this fall, VIVUSIS will open its one of a kind waveguide mega factory that is dedicated to the production of waveguides in volumes ultimately in the millions of units annually. The flexibility of our new technology and waveguide design capabilities now allows Zuzix To spend a full custom design in as little as 3 to 4 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 intend to use expensive semiconductor equipment that results in lower volume capacity and non competitive cost structures. 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 AR Consumer Markets.

Speaker 2

Within each of these markets, we see significant opportunities that can leverage our know how And core technology that have been developed over the last 25 plus years of Vuzix. The defense head mounted display or head up around information access in the field and are becoming critical, whether it is in the form of AR computing or advanced see through night vision systems. Access to the right information at the right time generally wins the day. The head mounted display portion of the defense market is just getting started, but is expected to grow significantly as new technology offerings are designed in and adopted over time. In defense, Vuzix has major customers that have been or Are developing our waveguides into their head mounted programs.

Speaker 2

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 and D projects and begin scaled production by the end of this year and going into the first half of twenty twenty four. On the waveguide front, we have made some recent advancements that can allow us to manufacture large format waveguides that are many times bigger than that needed for AR glasses and head mounted displays. The ability to produce large format waveguides should open up new markets for large format heads up displays that are required for use in 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 can offer a significant reduction in the needed space and cost to implement the heads up display within the precious little physical space available inside most aircraft.

Speaker 2

We have received serious interest and look forward to providing further details as new programs are expected to get started soon. While the consumer AR market is still in its infancy in terms of volume, 1,000,000,000 of dollars are being poured into R and 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 wear. 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, Social 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 AR market will rapidly develop and ultimately become a multi billion unit market.

Speaker 2

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 waveguides and ultralight platform is strong. Vuzix's ultralight platform based solutions will be in production by the end of this year, and we We expect we'll be going to market with several OEM brands through 2024. The Vuzix patent portfolio currently includes 329 Patents pending, an impressive 50% increase over the last 24 months.

Speaker 2

This breaks down to 178 issued patents and 151 Pending applications in a variety of geographic areas. Our portfolio covers a broad range of technologies and includes a significant collection of fundamental waveguide design patents and applications. We have a combination of both patents and trade secrets regarding nanoimprinting, 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 in many of the critical areas of AR Smart Glasses. Assumed to be fully operational, WaveGuide Mega Factory is dedicated to the production of waveguides in volume.

Speaker 2

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 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 12,000 square feet of manufacturing space adjacent to our existing plant with an optional 27,000 square feet to grow into.

Speaker 2

The new facility is designed to support our latest waveguide Technologies increased our unit capacity significantly and lower the unit volume manufacturing costs of our waveguides. Our ability to design and fabricate waveguides in high volume and at low cost, we believe should be second to none. Ultimately, both lower Unit cost and the ability to manufacture in volume are 2 critical requirements to overcome to support the needs for a broad AR smart glasses market And Vuzix is positioned to get it done. From specification to design, to mold production to replication, to test and cinema system integration, We do it all in house in our New York facility. We can customize a ground up system based on specifications, offer a reference design or provide design parameters, so we can build to print based on a customer's own unique waveguide layout.

Speaker 2

We can make them small or large, we can turn the design around quickly components for lightweight AR Smart Glasses and other wearables. We believe our increased capacity, lower cost waveguide offering and our ongoing investments in next generation micro LED displays will fortify Vuzix position to play a critical role in an industry that should ultimately represent many 1,000,000,000 of dollars of revenues annually. As a reminder, the ability 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 microLED manufacturers with single color displays, but just Fairly to an acceptable level and no one is shipping anything that's full color in an operational range yet. Because microLEDs are so strategic and fit Hand to glove with the optical waveguides, we feel it is critical to attempt to secure the supply of cost effective high volume fabrication of these devices.

Speaker 2

To that end, we have fortified our MicroLED efforts by establishing working relationships with several of the most advanced vendors in this space through both partnerships and investments, many of which we will not publicize for competitive reasons. Of course, The highest profile development in this area is the technology license and development agreements we signed with Atomistic roughly 1 year ago. While we have been short on specifics to date, I can say that Atomistic with its very novel approach is making great progress. The microLED 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.

Speaker 2

But suffice to say, Atomistic's technology has great potential to create incredibly advanced, full color, high efficiency microLED 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 a fashion forward smart glasses form factor that everyone will standing leaders in the AR industry today, and it is evident in multiple areas. Our business is seeing expanded growth on the top line. Vuzix has one of the fastest growing enterprise product solutions in the market. Vuzix has critical waveguide technology from design to a one of Kine Mega Factory for high volume production at broad market enabling price points.

Speaker 2

Vuzix has a major stake in what should prove to be The most advanced microLED display technology available, solving for the critically needed high efficiency full color displays for the ultimate AR glasses solution of 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 to a market that is touted by industry experts to ultimately be greater than $1,000,000,000,000 plus within a decade. I'd like to now pass the call over to Grant for his financial review. Grant?

Speaker 3

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 bit of color on some of the numbers now. Our 2nd quarter total revenues for the 3 ended June 30, 2023 was $4,700,000 as compared to $3,000,000 for the prior 2022 period, An overall increase of 56%. The revenue increase was primarily the result of higher M400 product sales, which increased 53% year over year.

Speaker 3

Sales of Engineering Services for the 3 months ended June 30, 2023 was $300,000 as compared to $100,000 for the same 2022 quarterly period. We currently have remaining Performance obligations of approximately $100,000 on the current waveguide development project and we anticipate starting a new OEM projects with customers in Q3 of 2023. There was an overall gross profit of $1,000,000 or 21 percent for the 3 months ended June 30, 2023, as compared to a gross profit of $300,000 or 9 percent for the same period in 2022. The improvement was due to our increased sales, which enabled greater absorption of our relatively fixed manufacturing overhead costs. Research and development expense was $2,800,000 for the 3 Months ended June 30, 2023 versus $3,000,000 for the comparable 2022 period, a decrease of approximately 5%.

Speaker 3

The decrease was largely due to a reduction in external development expenses and consultants related to new products. Selling and marketing expense was $2,500,000 for the 3 months ended June 30, 2023 versus $1,900,000 for the comparable 2022 period, an increase of approximately 36%. This increase was primarily due to higher salary and benefit expenses associated with increased headcount as compared to the previous year's period. Dental and administrative expense for the 3 months ended June 30, 20 23 was $4,300,000 versus $5,000,000 for the comparable 2022 period, a decrease of approximately 15%. The decline was primarily due to a decrease in non cash stock based compensation expense.

Speaker 3

Depreciation and amortization expense increased to $1,000,000 for the 3 months ended June 30, 2023 versus $400,000 in the prior year's period. The bulk of the increase was due to the amortization of the technology license with Atomistic, which only began midway through Q2 of 2022. The net loss for the 3 months ended June 30, 2023 was $9,400,000 or $0.14 a share versus a net loss of $10,000,000 or $0.16 per share for the same period in 2022. Now for some balance sheet highlights. Our balance sheet remains Strong with cash and cash equivalents of $48,600,000 as of June 30, 2023, and the net working capital position of 61,500,000 The overall net cash flows used in operating activities after the net changes in operating assets and liabilities was $7,900,000 for Q2 2023 versus $4,600,000 in the comparable 2022 period.

Speaker 3

The bulk of this increase was due to a $3,400,000 increase in accounts receivable in the quarter. Excluding non cash items and changes in working Capital, our cash burn from operations, a non GAAP measure for the Q2 of 2023 was $4,800,000 versus $5,500,000 in the prior year's period. Cash used for investing activities for the Q2 of 2023 was $6,800,000 as compared to $8,200,000 in the prior year's With the bulk of these investments being a $6,000,000 payment toward our atomistic technology licensing fee commitment. As of June 30, the company continues to have no current or long term debt obligations outstanding other than the currently outstanding licensing fee commitments to Atomistic of $3,500,000 which will be fully paid during the second half of twenty twenty three. Looking forward to the balance of 2023 2024, We are confident we have the resources to execute on our growth business plan and further invest in our future.

Speaker 3

I would like to make a few comments in this regard. Firstly, our total cash uses 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 fee commitment. These expenditures will be significantly less in the second half of twenty 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.

Speaker 2

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 3rd party channel partners and resellers in our Smart Glasses segment, 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 income as possible to our bottom line. It is a focused effort for Vuzix.

Speaker 2

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 and A.

Operator

Thank

Speaker 4

you.

Operator

Our first question comes from Matt VanVliet with BTIG. Please state your question.

Speaker 4

Hey, good afternoon guys. Thanks for taking the question. I guess first on the SmartGlass' unit volume growth, especially on the M400 side. I wonder if you could just give a little bit more detail in terms of what market verticals you're seeing the most That's in. That's really driving those rates.

Speaker 4

And then in terms of either orders already in or orders Perspective for the second half, what market verticals do you think will drive performance in the second half as well?

Speaker 2

Hey, Matt. Thanks for the question. The interesting thing about our Smart Glasses products, right, it's a wearable computer and there's a lot of places that it can be used. There are, however, several places that seem to be leading the pace here at Vuzix. I'm sure everybody We have seen how much the medical community are embracing our glasses these days.

Speaker 2

That's definitely an area where we see growth happening. At the same time, The supply chain with warehouse picking and packing and there's just a plethora of areas we're moving boxes around With hands free ability to pick, it 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, our remote support is a big deal, right? Because In fact, it's even green.

Speaker 2

I was in Japan 2 weeks, 3 weeks ago at an ASG conference speaking there And there were 4 or 5 companies that gave presentations and it was all about how smart glasses can be used for the Environmental kinds of and 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 the like. So it's across those and some of the areas are from automotive to manufacturing. And of course, we've all heard about Guys like Amazon and the like. So it's pretty broad based, Matt.

Speaker 2

It's not just any given one. Of some of those though, there We really expect to see some significant uptick over the next 6 months plus because some of these guys are They're no longer in POCs. They're actually rolling out.

Speaker 4

Okay. Very helpful. And then on the OEM side, I guess what are the metrics that we should be looking for or the announcements for orders that might convince you to continue to take the space available to you on the new manufacturing facility. And sort of layered within that question, What are the additional costs that we should assume that eventually kind of layer in on top of maybe what the current costs

Speaker 2

1st, let me give you a feel for what's possible out of the 12,000 square foot that we already have in place. This is a Class 1,000 and better clean room facility that was put in specifically to manufacture in volume for us. This facility just by itself will get us over a 1,000,000 rate guides on an annual basis. In fact, working multiple shifts, it could be A few integers more than that. So 1, 2 kinds of numbers.

Speaker 2

Now if you look at the makeup of the product So in what markets they would go in, some of these markets are defense related and you might sell a waveguide solution with an engine for Somewhere between $3,000 to $7,500,000 apiece. And some of those guys have volumes like 20,000 to 40000 kinds of annual numbers. So there's a significant amount of revenue 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 this thing. The broader markets on the other hand are going to need much higher volumes.

Speaker 2

Admittedly, what comes with those higher volumes is the price points will 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 pretty darn good shape just with what we have. That said, we can 3x our capacity from where we are right now in the same building when we need to move into the rest of it. The numbers you can add them up pretty easy if you just make a little spreadsheet there and look at the fence and look at those kinds of numbers and You can see that it's in the many, many millions of revenues on an annual basis.

Speaker 2

So you should not Chief and Vuzix, the need to expand beyond where we're at in this footprint that we have today. And Grant can talk to this a bit more, but There's just a little bit more that we're kind of cleaning up by the end of this year, but generally speaking you're not going to see the level of CapEx and

Speaker 3

And Matt, Grant here. The incremental expense we're looking at for the Our Becker Road waveguide plant is around $60 a month for the we forecast for The next 6 to 12 months clearly is if The business is there and we got to run multiple shifts. That will go up, but that's really covering our fixed costs Of the new plant and a bit of supervision, the existing waveguides are being moved out of our existing plant across Integrated into that. So there'll be some economies, but it's not going to be significant.

Speaker 4

Okay. Very helpful. Thank you.

Operator

Our next question comes from Tyler Bernstein with Craig Hallum Capital. Please state your question.

Speaker 5

Hey, guys. Thanks for letting us ask a couple of questions. I guess first, Paul, it sounded Excited about the opportunities we have going into the back half of the year. With your pipeline and visibility there, I guess, would you be comfortable I think that's the continued sequential growth through the back half of the year.

Speaker 2

It sure looks that way, Tyler. Yes.

Speaker 5

Perfect. Thank you. And then

Speaker 2

a strong pipeline 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 In the engineering and NRE side of the OEM business, the OEM business is kind of interesting today in that There's so many companies coming out that really like our ultralight platform that they're buying our standard waveguides out of that platform, our engines out of Platform and looking at developing info for them to get started the engineering fees are less. That said there are some other programs that definitely will be significant that also will Knock on wood. I mean, we're literally in the throes of final agreements here. So you should see the OEM kick in also in the back half.

Speaker 5

That's perfect. And leads into my next question too and kind of a follow-up on that. Talk a little bit more about the OEM Judy is optimistic about these at least multiple or I think you said multiple opportunities that are going to begin ramping in the second half and into next year. Are these the type of defense contract opportunities that you just Data could be multiple of 1,000 of dollars ASPs with potential for tens of thousands used over time. And If that's over time, what should we expect kind of initial order next year?

Speaker 5

100 of units, still potentially 1,000 of units? Any help maybe framing that would be great.

Speaker 2

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 in the OEM side of our business. Excuse me, Maybe some flavor for that, some telecoms, some fashion brands and all those kinds of things. And the defense side of the business. And on the defense side of the business, these things are like pulling teeth on time.

Speaker 2

They take a long time to finally get right and they're rolling production. We've talked about this with several accounts that have been so darn close and that continues to be the case. So we're Pretty confident that by the end of this year going into next year at the latest early part of it, we'll have at least one defense Customer that's going into production and their price points are in the 5000 to 7000 Kinds of costs excuse me, not costs, say, of price. 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 1,000 plus kinds of numbers and you should see the engineering services side of it going up because There's literally a pile of accounts that we have working relationships with.

Speaker 2

Some of them have many of them have already bought and others are saying, look, now that we got this, We want to customize it, please. Can you do it like this when we're quoting on those kinds of things? So it's a pretty broad based piece of business. And Tyler, you could imagine that with the size of it and I'm not trying to be disparaging on our standard products I'm super excited there too that this thing I've said it before could be the tail wag in the dog. The OEM side of our business Could end up being very, very significant.

Speaker 2

Sorry, that's a lot to not too long. Sorry.

Speaker 5

No, I appreciate the color and put some parameters on that. Maybe just last question, pivoting a little bit, highlighted your strong PAM portfolio continues To grow, obviously, besides protecting your IP, protecting your developed products that you're selling, any thoughts or updates to try to monetize those through licensing or some sort of IP partnership like that? Any color there would be interesting.

Speaker 2

Thanks. We really don't want to take our intellectual properties and put them in a box and go license them out. That said, The transactions on the OEM 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 is and there's some people that have asked that the last thing we're interested in doing right now is Setting somebody up where we get $1 a unit for a license fee.

Speaker 5

Perfect. That makes perfect sense. That's all for us. Thanks guys.

Speaker 2

You bet.

Operator

Our next question comes from Jack Vander Aarde with Maxim Some group, please state your question.

Speaker 6

Great. Hey, guys. I appreciate the update. Thanks for taking my questions. Hey, Paul, 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 mix to kind of look in 2024, 2025, maybe in terms of defense, enterprise and consumer?

Speaker 2

Right now, you can see that it's enterprise based. The M400 is leading The charts for Vuzix. And through the end of this year, I would well, right now it's like 90%, I I believe, I don't know the exact number, but it's 90 plus percent that is all enterprise based. I think you'll see in the back half of this year, the OEM side of our business It starts to move the other way. It will grow to maybe as much as 20% in the back half.

Speaker 2

I don't know. I I hate to throw out numbers like that because it's hard to tell where it might really end up. I will tell you though from a booked 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 OEM 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.

Speaker 2

So you'll see enterprise continue to lift. You'll see more and more places that are deploying. Our channel partners are doing a great job of helping us to expand our business. But then you'll also see more and more OEM customers come on board. And I wish I could give you, Jack, a great well, this is where we see it all adding up right now.

Speaker 2

I can only tell you there is a Nice pile of customers that are in our pipeline on the OEM side of business. And these are not customers that talk about Making 5,000 or 10000 pieces on an annual basis. It doesn't work for them. That's not business for them. So it should represent a significant growth area for Vuzix.

Speaker 2

Yes. I could tell you a more hard data point just yet, but I think we'll see more and more as this year and going into next year unfolds.

Speaker 6

Great. No, I appreciate the color. I have 2 more. Just kind of on that same topic, just trying to understand or if you can help remind us How Voozies going to market or plans to go to market overall with in terms of the consumer vertical? Is it going to be under the Voozix 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?

Speaker 6

Thanks.

Speaker 2

It's more like the ODM, OEM model where these guys come to us. We supply key components and or white labeled solutions. Some of these companies coming to us don't even have an engineering team. They're more companies that know how to move product in the marketplace. And in those cases, Now engineering team, they want as much done by Vuzix as we can possibly do.

Speaker 2

Excuse me. Some of these guys have no optics team. So they need the optics engines, but they have other stuff. If you look at this waveguide space, any company that's making waveguides today has put 100, if not In the B, 1,000,000,000 of dollars in the time to figure out how to make waveguys, we bring that to the table for a lot of companies. What we don't want to do is compete with And quite frankly, I've been in this business for a long time when you're in retail and you fill Best Buy With a bunch of products and after Christmas hits and you get it all back, that's a train wreck and we don't Vuzix doesn't want to be there.

Speaker 2

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 relationships in the broader consumer In the enterprise side, you will see a continued flow of products that are sexy fashion forward, ruggedized For the enterprise space, but in the broader markets, you're going to see partnerships and OEM relationships, not Vuzix branded.

Speaker 6

Got it. That makes a lot of sense. I appreciate the reiteration of color there. Maybe just one more for me, maybe for Grant, on the gross margin front. Just kind of what are normalized levels From your view on both the product and engineering services gross margins, do you see an uptick in gross margin going forward on both for both revenue streams?

Speaker 6

And why is that? Thanks.

Speaker 3

Well, our goal is Clearly, to get as close to 40% as possible. I mean, right now, we're not there, but that's going to take higher Revenues where we can absorb our overhead costs at a greater level. I mean, we made Some progress. The 21% we reported this quarter is our best in a long time. And clearly at this stage engineering services are more profitable than our own product sales because We don't have we don't assign the same level of fixed manufacturing overhead costs To those product offerings.

Speaker 3

When we get to actual production, Again, it's going to depend on the account. Defense customers, you can usually Command a much higher price and which results in a higher margin, but of course the volumes are less. And on the consumer base, Let's say OEM or ODM relationship, we'd be looking at much lower margins. However, total should be much Greater because the units they would ultimately move we hope would be greater. So it's going to be And mixed bag, depending on our overall revenue mix, but defense has the biggest margins, commercial Engineering services, we always get at least 50%.

Speaker 3

Products components is probably going to be less particularly when we get into consumer Ranger Products and our smart glasses today, I mean, when we sell them on a standalone basis, We're getting in the 50% to 50% plus, but we have the overheads and other costs to deduct per GAAP. So It's all related to volume and we hope to get there sooner than later.

Speaker 6

Got it. Very helpful. Well, Congrats on the continued top line momentum guys. I appreciate that. Thank you.

Speaker 2

Thanks, Jack.

Operator

Our next question comes from Jim McIlree with Dawson and James. Please state your question.

Speaker 2

Thank you. Good evening.

Speaker 7

I want to understand a little bit better the mix on the smart glasses. Is it mostly M400 or is there Anything else that's meaningfully contributing to revenue this quarter?

Speaker 2

Yes. It's mostly M400s. I will say though Jim that We're seeing positive momentum in our blade side of it also and there's some portions Our shield business that is looking like it's starting to ramp nicely. So it takes time for the optical C3 systems and the solutions around And then to be finalized and if you think about the M400 has been around for 3 or 4 years now, whereas the shield and the blades have only been around for the last What shields a year at most and we've been shipping that just to the developer community so far. That's going into overdrive here in the following year.

Speaker 2

So, but yes, we don't normally advertise the mix of products that we're selling for competitive reasons, but Without doubt, the M400 is the front runner right now with these 2 other racehorses coming up from the back.

Speaker 7

Okay, great. That's helpful. And you talked about a large format waveguide. I'm trying to understand if 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 Finished, qualified, tested, etcetera, before those projects can move forward?

Speaker 2

It's definitely a new process for us, but it works. So 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 critical for our core business for any of our wearable technology, etcetera. This is a new opportunity that gets opened up for Vuzix. The waveguides that are in a pair of glasses like a shield, right?

Speaker 2

They're like a 50 millimeter diameter or like a lens and 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 a 72 inches television size, way you guide kind of a thing. I'm just exaggerating a little bit there, but they can be quite large. And with these you can do all kinds of things that are not head mounted display related.

Speaker 2

Very, very Quickly, though, 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 2 inches diameter to let's say 6 inches by 8 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, It's driving Beetle that wants an upgrade to have a heads up display in it kind of a thing you might imagine, right? So it's not something that's Cornerstone for our OEM business. It's just something that we can do now and we have more than one customer saying, you guys can do this, we would buy From our OEM group, those kinds of solutions and volume from you.

Speaker 7

And so is it reasonable to expect That a large format waveguide would contribute to revenue. It sounds like it's at least a year away. Is that is my timeframe correct on that?

Speaker 2

You will see engineering services, NOEs before that. Knock on wood? You should see it before that. Right.

Speaker 7

Okay. And I just want to confirm something that you said. You're expecting additional OEM contracts for NRE or services revenue In Q3, although the contracts that you have right now, they're kind of you're pretty much delivered on All of them, is that right? But you're expecting to start some more before the quarter ends?

Speaker 2

We delivered the bulk, but these guys are In discussions with us about Phase 3 kinds of stuff, etcetera. So, yes, you're just going to see some more continuation of Programs that we've already made some announcements regarding and one of them is very public with companies like L3 Harris. You'll see follow ons from those and you'll see new companies coming on board. It's a growing piece of business for us, Jim. It's a growing piece of business.

Speaker 2

It's new and it's Folks that have been with us for a bit now.

Speaker 7

All right. Very good. Thanks.

Speaker 2

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

Operator

Thank you. And ladies and gentlemen, we have reached the end of the question and answer session. And I will now turn the call over to Paul Travers closing remarks.

Speaker 2

Well, I'd like to thank everyone for your interest and participation on today's We're looking forward to the ribbon cutting ceremony for our Waveguide Mega Factory this fall and please look for us at multiple investor

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Earnings Conference Call
Vuzix Q2 2023
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