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Vuzix's (VUZI) CEO Paul Travers on Q1 2016 Results - Earnings Call Transcript

Q1 2016 Earnings Conference Call

May 13, 2016 8:30 AM ET

Executives

Andrew Haag – Managing Partner-IRTH Communications

Grant Russell – Chief Financial Officer, Executive Vice President, Treasurer and Director

Analysts

Amit Dayal – Rodman & Renshaw

Operator

Greetings and welcome to the Vuzix First Quarter 2016 Financial Results Conference Call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. [Operator Instructions] As a reminder, this call is being recorded. Now, I would like to turn the call over to Andrew Haag, Managing Partner at IRTH Communications. Mr. Haag, you may begin.

Andrew Haag

Thank you very much. I would like to welcome all of you to Vuzix’s first quarter 2016 financial results conference call. With us today Vuzix’s CEO, Paul Travers; and the company’s CFO, Grant Russell. Before I turn the call over to Paul, I would like to remind you that on this call that management’s prepared remarks 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 is contained in the Private Securities Litigation Reform Act of 1995.

Actual results could differ materially from those contemplated by any forward-looking statements, as a result of certain factors 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, and changes in the legal and regulatory requirements. In addition, any projections as to the company’s future performance represent management’s estimates as of today, May 13, 2016. Vuzix assumes no obligation to update these projections in the future as market conditions change.

Last evening, the company filed its 10-Q with the SEC and issued a press release announcing its financial results. So, participants in this call who may not have already done so, may wish to look at those documents as we provide a summary of the results we discuss on today’s call. Today’s call may have included non-GAAP financial measures. When required a reconciliation to the most directly comparable financial measure calculated and presented in accordance with GAAP can be found on sec.gov or at the company's website vuzix.com.

I would like to now turn the call over to Paul Travers, who will give a brief overview of the company’s business activities and developments during the first quarter of 2016. Paul will then turn the call over to Grant Russell, Vuzix's CFO who will provide an overview of the company’s first quarter results, Paul will then talk about the company's outlook and programs as we move through 2016.

We will then open up the call for Q&A after management's update. Paul?

Paul Travers

Thank you, Andrew. Hello, everyone, and thank you all for joining our call today to discuss the company’s first quarter 2016 financial results and outlook for the remainder of 2016. And thanks to everyone else for joining the call. As everyone knows, the Intel investment of last year, Vuzix has been working hard to bring to market a series of next generation VIRTTU products and starting in this current quarter, the results of those efforts will concretely start to show. In the quarter we are currently in, revenues for our video headphones will start to accelerate as we have resolved the production issues and are beginning again to build and ship high order customers. Even more exciting in Q2, Vuzix will launch its highly anticipated M300 smart glasses.

This is the first major upgrade to our smart glasses on the first major product developed since we received the investment from Intel and began that relationship. We are happy to report that the M300 smart glasses has tool parts already completed with production of the electronics due in next week. As many of you know, the M100 smart glasses is one of the top selling enterprise smart glasses in the world. We have developed the M100 at a time when Vuzix was not as well capitalized and still have sold thousands of M100s. We feel this has helped to create a high level of pent-up demand for a new solution that would solve the many problems current smart glasses have and we are confident the M300 does just that. As a result, we expect the M300 will far outpace the M100 sales, both in units and speed of sales ramp. Over the coming months, the initial demand should be robust.

I’ll share more on this later in the call, but first I’d like to turn the call over to Grant to review the financial results for the first quarter. Grant?

Grant Russell

Thanks, Paul. Good morning, everybody. Before jumping in, I would like to point out that I’ll be rounding many of the discussed numbers to thousands even though we currently in dollars. Further, I encourage interested listeners to review our 10-Q for a more detailed explanation of some of the quarter’s year-over-year differences since I’ll be highlighting just the major items. For the three months ending March 31, 2016, Vuzix reported $364,000 in revenues as compared to $809,000 for the same period in 2015. Binocular smart glass product sales or M100s were 86% of revenues for the three months ended March 31, 2016 versus 72% in the prior 2015 period. And total consumer focused video iWear product sales were 12% of revenues for Q1 2016 versus 13% of prior year’s quarter. The decrease in sales was primarily the result of lower M100 smart glass revenues caused primarily by existing and new customers choosing to defer purchases and so, the new M300 smart glasses began shipping in the second half of 2016.

Sales of our M100 to M300 migration packages and M300 preorder deposits are continuing to accelerate, but of course, most of these customer preorders and deposits for the M300 smart glasses are not recognized as revenue in the last quarter and won’t be until these units ship to customers. The revenues from our video iWear product line categories were less than due to the impact of our ongoing production difficulties with our iWear video headphones. This limited available shipments despite demand. Contributing to the comparable revenue reduction in this category is the fact that during the quarter 2015, we were still selling our prior luxury products which we will discontinue to invest early spring of 2015.

Sales from our – the company’s engineering programs for the three months ended March 31, 2016 were nil as compared to a $114,000 or 14% of total revenues in the same period in 2015 when we completed the last of our defense related engineering programs. As you know, when we sold our defense division, we are no longer allowed to compete in the defense markets. The decreased net gross profits for the three months ended March 31, 2016 as compared to the prior 2016 period was primarily the result of revenues not being high enough to absorb many of our relatively fixed manufacture and overheads and amortization costs.

As a result, cost of goods items like manufacture and overheads were 40% of Q1 2016 revenues and they are just $147,000 as compared to that same number effectively being 18% of revenues in Q1 2015. Other relatively fixed costs and cost of goods include non-cash expense to the amortization of software development costs which due to lower sales and 20% of revenues in Q1 2016 as compared to just 10% of revenues in Q1 2015, even though the dollars spent to non of $71,600 was exactly the same in each period. Clearly, the company needs to achieve higher revenues to absorb these and overhead costs to have a positive gross profit.

Actual product gross profit before overheads and amortization costs was 28% in the first quarter, and that’s excluding the impact of $90,000 related to scrapping some component materials related to the iWear video headphones. Those amounts scrapped represent components which cannot be reworked and usable with our new iWear production processes. As a final note on the scrap side, I would like to mention that M100 product margins are still greater than 50% on average currently, but the iWear gross margins are around 20% due to its current higher production costs. We still expect gross profit levels will be closer to 40% and will be realized when revenues pick up to probably levels in excess of $1 million per quarter.

R&D cost for Q1 2016 $1,275000 which represents a $760,000 or 148% increase over the same period in 2015. This increase represents our continued investment in our new upcoming M300 and M3000 smart glasses as well as waveguide research and increased R&D staff resources. The two largest cost changes were increases in 2016 salaries and benefit expense of $441,000, primarily the result of additional staff additions and an increase in product development and research costs of $210,000 related to the new product development, for the M300 smart glasses and expanded waveguide development works.

Selling and marketing costs increased overall for the three months ended March 31, 2016 over the 2015 period by $769,000 or 215%. This increase was primarily the result of higher wage costs due to staff additions of about $140,000 and increased trade show costs $276000 which represents our larger and more complex biz [ph] we had in CS this January 2016, as well as the attendance of additional trade shows including Mobile World Congress in Barcelona in February as well as increased public relation for us of a $123000 related to the hiring of two new PR firms which we didn’t have on retailer for the 2015 period, $48,000 for the production cost of our iWear video – headphone video unleashed at the CS and a new website cost of $ 122,000 which we feel was a worthy investment and will outpace for many more quarters to come.

G&A costs decreased to $886,000 for the three months ended March 31, as compared $2,935,000 in same period of 2015. This 70% increase was primarily due to lower non-cash compensation expenses and IR costs, hopefully if you remember them in the 2015 period, we’ve had made share-based awards of $1,475000 to our officers, directors and legal firm, that was a one-shot deal in 2015 numbers. Total other expenses for the quarter $80,000 as compared to an overall expense of $1,402,000 in the same period in 2015.

The reduction in these expenses is primarily a result of two items; company reported a gain of $102,000 on its derivatives liability valuation mark-to-market versus a loss of $1,003,000 in the prior 2015 quarter. Second, we had a reduction of $208,000 in the amortization of senior term debt and amortization in the 2016 versus 2015 period. Overall, the company reported a net loss of $3,776,000 or $0.26 per share for the Q1, 2016 versus a loss of $5,091,000, or $0.40 per share for the same period in 2015.

Moving to the balance sheet, as of March 31, 2016, we had cash and short term marketable securities totaling $8.2 million. This represents a decrease of $3.6 million from the December 31, 2016 balances and reflects of course not just our operating losses, but also our investment in new products, R&D, tooling and plant. With our new facilities now completed, we expect the remainder of capital additions for the remainder of 2016 with the new product tooling and production equipment focus, and we currently forecast that to be well less than a $1 million.

Inventories were basically flat as of March 31, 2016 versus our December 31 numbers being down slightly by $57,000. Our iWear component inventories represent about two-thirds of this investment and the balance being M100s, we expect inventory levels not to increase significantly over the next two quarters and even with the iM300 entered production as the iWear backlog –supply chain backlog will be coming down with production moving slowly.

Overall, we believe that our existing cash and cash equivalent balances and cash flow from operations will if that since the operating plan is met, be sufficient to meet our working capital and capital spending needs for the foreseeable future even with expected operating losses for the next two quarters. With that, I would like to turn the call back to Paul.

Paul Travers

Thank you, Grant. I would like to begin my update and outlook by first talking about our iWear. During our year-end conference call, we reported on the production quality issues we are having with the iWear and that we finally have them in hand. The last 30 days we have rolled these fixes into the production line and are now producing one of the best HMVs Vuzix has ever brought to market. The quality improvements not only have improved yields, but we are seeing significant improvements in color and contrast and other optical futures. With this effectively brand-new version of the iWear, Vuzix is starting a proactive marketing campaign to share them with the world.

For example, and this is just one example, as most of you know, the home industry is growing like wildfire and as it happens, our iWear is perfectly positioned to be the hands-on choice for FPV growing use, that’s first person view, find a remote controlled drone through a twisted race cars at speeds in excess of 80 miles an hour is all done with a video feed coming off the drone that allows the racers to see as if he was sitting in the drone. To this V, the racers use head-mounted displays, much like our iWear. You could imagine that if there was delay in the video link, you would end up hitting the tree before you saw it, this is where the iWear shines. The iWear was designed to be a low latency device for VR gaming and with less than one millisecond video delay, it is 30 times faster than any other HMV out there. Again, this is a big deal. When you are flying that fast at 30X increase in what you see versus where you really are is important. The iWear are also much more comfortable to wear than the competitors and they have a clear image right to the corners of the virtual display with a much larger field of view. This allows the racer to easily see the entire field of view without having to constantly adjust their headset like they do with competitors to see critical portions of the video.

And these guys that rarely find the drone, they got to reach up, one handed, find the drone and grab the current competing products and move them around on their head in order to see in the corners. It’s not a great option for them. Some of the racers and top racing league companies have high marks to the iWear for all these traits. This is a big market, and although we’re just getting started, we’re already cutting deals and preparing to be front in center some of the large coming events. You’d be getting much more about these efforts shortly. That’s just one example.

Our gaming support activities are also continuing to bear fruit as our title support grows. Shortly, we will also be announcing mode Unity 3D support. Unity is one of the number one gaming engines in the world today. Finally, like the drone activity above which is very recent, we have been delaying our general marketing efforts until we were ready. It’s really challenging to market a product and generate demand and have your customers screaming because you can’t deliver. That problem is behind us now. iWear really performed well. We are getting comparisons even against the Oculus that is better for various reasons.

So, in any event, now that we are there, we’ve got inventory, we are building product, you will see a growing users at present starting June 1, to both end users, the viewers and the press. Its goal time for the iWear and we are really excited about it and I think everybody will be thrilled when they start to see some of the news reports and review the reports on the iWear, they really are fantastic there. The M100 update, as we’ve been saying, sales were weaker than planned as many customers are waiting to move to M300 or are waiting for an eventual price reduction that typically follows the launch of a new more powerful, successful product.

That said, we have opted to not yet reduce the price of the M100. At the right time, this will happen as we do have customers that want lower price or lower price solution and we will also bundling self-contain user applications that a lower cost product market would support. Until the M300 gets a bit closer, we are not prepared to do that, but that will be coming soon. As part of our last 3000 units, we have improved the cameras and software features and we will focus on markets with price sensitivity as more important once the M300 is rolling.

M300 update, the M300 is getting very close to its official launch and unlike the iWear, we believe the risk of delay is almost non-existent. It is always exciting when a new product comes to life, and for the M300 it is not only Vuzix that can wait, our customers are also eager to get them so they can finally capitalize on all their efforts over the last couple of years and I’ll explain more about that in a few minutes. So, with that, it’s great to report that T1 tooling of the plastic parts is completed now. It’s done two weeks ahead of schedule. It’s nice to be working with folks, who know what they’re doing that our current guys don’t, but these guys really have it together. First shops are already off the tools and they look...


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