Vuzix Corporation
Q4 2019 Earnings Call Transcript

Published: 16 Mar 2020

[Operator:]

Greetings, and welcome to the Vuzix Corporation Fourth Quarter and Full Year 2019 Conference Call. At this time all participants are in a listen-only mode, a question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Ed McGregor. Please go ahead.

[Ed McGregor:]

Good everyone, and welcome to Vuzix' Fourth Quarter and Full Year 2019 Financial Results and Business Update Conference Call. With us today are Vuzix' CEO, Paul Travers; and 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. 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 management's estimates as of today, March 16, 2020. Vuzix assumes no obligation to update these projections in the future as market conditions change. This morning the Company issued a press release announcing its financial results and filed its 10-K with the SEC.So participants in the call who may not 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 non-GAAP financial measures. When required, reconciliation to the most directly comparable financial measures calculated and presented in accordance with GAAP can be found in the Company's Form 10-K annual filing at sec.gov, which is also available at www.vuzix.com.I'll now turn the call over to Vuzix' CEO, Paul Travers, who will give an overview of the company's operating results and business outlook. Paul will then turn the call over to Grant Russell, Vuzix’s CFO, who will provide an overview of the company's fourth quarter and full year financial results. We will then move on to the Q&A session, after which Paul will provide some closing remarks. Paul?

[Paul Travers:]

Thank you, Ed. Hello, everyone, and welcome to the Vuzix' Q4 and full year 2019 conference call. 2019 was a transitional year for Vuzix on many fronts. The changes and introductions we went through during the year were necessary and they are setting us up well for 2020 and beyond. Bringing up a new technology from R&D to production is never easy and waveguide production has proven to be no exception.In 2019 we finally successfully transitioned our waveguide manufacturing capabilities from research and development to cost effective volume manufacturing with consistent yields over 85% now. In the six month period in the second half of 2019 we not only completed the transition of the M Series Smart Glasses manufacturing from China to an West Henrietta manufacturing facility, but we successfully introduced and commenced volume production and shipments of the Vuzix’s M400 and Blades Smart Glasses.In 2019 we achieved ISO 9001

[Grant Russell:]

Thank you, Paul. Before I begin, I would like to encourage interested listeners to review our 10-K that we filed this a.m. with the SEC for a more detailed explanation on some of the annual year-over-year variances as I will be highlighting just a few.For the full year ended December 31, 2019, Vuzix reported $6.7 million in total revenues as compared to $8.1 million for the prior year, a decrease of 18% year-over-year. Revenue decline was due to multiple factors are primarily customer deferrals related to the timing of the production and delivery of our M400 Smart Glasses last September and price reductions on our M300XL and Vuzix Blade Smart Glasses.For the full year, total sales of our M Series Smart Glasses decreased by 44%; OEM smart glass revenues were essentially flat and Vuzix Blade revenues increased by 244% in 2019 versus 2018. Sales of engineering services for the full year increased 67% to $0.7 million from $0.4 million in 2018. For the three months ended December 31, 2019, Vuzix reported $2 million in total revenues versus $2 million in the prior year's fourth quarter.Sales of our M Series Smart Glasses rose by 16% quarter-over-quarter and sales of our Vuzix Blade Smart Glasses increased by 54% in Q4 2019 versus Q4 2018. OEM product sales with Smart Glasses and waveguides with display engines were nil in Q4 2019 versus $0.3 million in Q4 2018 when they were 16% of total revenues for that comparable period.In total, product sales were off 8% in Q4 2019 over Q4 2018. Engineering services revenues were up 58% in Q4 2019 versus Q4 2018. For the full year ended December 31, 2019, there was an overall gross profit of $0.2 million on product sales before a $4.6 million inventory reserve for obsolescence provision that was recorded in the fourth quarter.The net gross loss was $4.4 million as compared to a gross profit of $1.8 million for the 2018 period. In addition to our normal reserve for obsolescence provisions, the company made several reserve provisions as of December 31, 2019. Firstly, the company wrote down the net realizable value of its components, inventory parts related to its M300 and M300XL smart glass products, resulting from the decision to end their production in China. We did this as we feel, they are at a disadvantage selling position against our newer improved M400 that was introduced in the fall of 2019.The company also wrote down excess components related to the cessation of production in China of the M300C Smart Glasses for an OEM customer, which currently appears to desire no further production. These two reserve provisions totaled $3.2 million. The company also recorded an additional obsolescence provision of $1.4 million related to it’s legacy M300 finished goods on hand for a total of $4.6 million in reserve for obsolescence provisions as of December 31, 2019. These provisions were included in cost of sales on the consolidated statement of operations.Other factors negatively impacting the gross loss included lower product sales to absorb overheads, higher manufacturing overhead costs in our West Henrietta facility with the move of production back from China and lower margins earned after the price reductions on the M300XL and Vuzix Blade Smart Glasses implemented midyear, partially due to new product introductions and finally lower margins earned on our summer M400 Early Adopter Program.Research and development expenses for 2019 declined 14% to $8.9 million as compared to $10.4 million for the 2018 period. The decrease in R&D expense was primarily driven by a year-over-year decrease in external consulting fees related to the Vuzix Blade and its related software applications. Now the marketing cost for 2019 decreased 13% to $4.2 million from $4.8 million in 2018, with the decline primarily attributable to a drop in advertising and tradeshow costs and a decrease in salary and stock-based compensation.General and administrative expenses for the 2019 year declined 5% to $6.6 million as compared to $7 million for the 2018 period. Within this overall decrease for lower salary benefits and stock compensation costs and reduced travel expenses, which were partially offset by higher IR and shareholder related expenses, higher legal fees and higher IT security assessment consulting fees.Our spent control efforts in 2019 were fruitful as we realized over year-over-year declines in all three of our operating expenses and we achieved almost two-thirds of the previously stated $4 million expense reduction goal for the year. We will continue to manage our expenses in 2020, including the further rightsizing of our operations, salary freezes and decreasing tradeshow and external PR expenditures.On the R&D side, we are reducing the rate of new product introductions and leveraging existing platforms to reduce our new product development and engineering costs. I’d note the M4000 is based mainly on the M400 Smart Glasses and includes our waveguide-based Cobra II display engines, which will significantly reduce our costs in getting this new exciting product to market this summer. For the full year 2019, the net loss after the revision for a crew preferred dividends was $28.4 million or $0.94 share as compared to $23.7 million or a loss $0.87 per share for the full year of 2018.Now for some balance sheet highlights. Our cash position as of December 31, 2019 was $10.6 million and we had a net working capital position of $16.4 million. Cash used in operations, excluding changes in our working capital totaled $17.9 million in 2019 as compared to $18 million in 2018. As compared to December 31, 2018 our inventory level declined at December 31, 2019 by $1.6 million to $5.7 million. This reduction is of course, after our $4.6 million inventory reserve for obsolescence that was recorded as of December 31, 2019.Management over the next year will be looking to recover as much cash as possible from the timely sale and disposal of as many of these products and components included in our inventory reserve for obsolescence. And for 2020, we hope that with our final assembly of our manufactured products back from China, we can improve our inventory level management and avoid the larger finished good batch builds as is typically required by Asian contract manufacturers. Cash used for investing activities in 2019 was $3.2 million the same amount invested as in the prior year. Included in the 2019 amount was $1.9 million for the purchase of manufacturing equipment, product mold tooling and computer equipment primarily related to the new waveguide manufacturing facility and equipment and the remaining payments totaling $0.8 million to reacquire certain sales and marketing rights related to the TDG non-compete agreement amendment concluded in October 2018.CapEx for 2018 is currently expected to be less than 2019, as we feel our recent waveguide manufacturing equipment additions can meet our goals for 2020 well. For tooling investments on Vuzix branded products, our expenditures will also be down as we were only expecting to tool up for the introduction of the M4000 in 2020.Given our current cash position and our previous cash burn rates, I’d like to spend a few minutes discussing how we intend to maximize our cash flow opportunities in 2020 and provide runway to both maintain our operation and fund our future growth. As Paul just mentioned, we intend to grow sales of both our existing and upcoming smart glass products this year, which when combined with effective expense management should generally allow us to reduce our net cash burn as the year progresses. We will also pursue sale of the M series products and components we just wrote down, which should add to our cash coffers.Additionally, we plan to increase our efforts to further promote our engineering services programs, which could result in overall larger gross margins by absorbing some of our operating costs by utilizing a significant portion of our internal engineering fixed salary costs. As Paul highlighted, these NRE revenues could become substantial for this year and next.Finally, we will continue to pursue licensing and strategic opportunities around our waveguide technologies with potential OEMs, which ideally could include the receipt of upfront licensing fees and supply agreements. Some of these opportunities could also involve strategic investments.With that, I’d like to turn the call back over to Paul.

[Paul Travers:]

Thank you, Grant. The seed for the upcoming wave of enterprise growth and the adoption of smart glasses has been successfully planted and Vuzix continues to show that it is establishing itself as one of the leaders in this market. Our strategy and enterprise is proving itself to be correct by way of our products and software developer ecosystems growing acceptance in the market. With each new relationship we build, we are increasingly positioned to deliver accelerating growth in technology leadership in 2020.The M400 is currently the most powerful monocular AR smart glasses built for enterprise and we expect to be in production by mid summer with the M4000, the revolutionary waveguide-based sister product of the 400. Our M Series Smart Glasses in combination with expanding Vuzix Blade sales and substantial NRE-based OEM programs positioned Vuzix’s to deliver significant growth.I’d like to turn the call back over to the operator for Q&A now.

[Operator:]

Thank you. [Operator Instructions] Our first question today is coming from Christian Schwab from Craig-Hallum. Please proceed with your question.

[Christian Schwab:]

Great. Thank you. Thank you for all the detail on all the potential new customer ramps that could happen throughout the year. Can you just give us an idea directionally, the type of revenue magnitude you guys are talking about that we should expect to go through the second half of the year. Just trying to reconcile the fact that the cash burn will decrease throughout the course of the year to a revenue number, make sure our math is right. Thank you.

[Paul Travers:]

Yes, good question. What the base business Vuzix has been working to with the M400 and M300 and the Blade, that’s going to continue to grow as we’ve expected and had some discussions with you. So we’ve seen it jumping right up until last year where we’ve gone through this transition. You’re going to see it grow through this year. You should see it grow nicely through this year.There’s added business now. This OEM portion of our business at the beginning of the year, we put our shingle out on our website, if you look, there’s a technology section and over the last six months, we’ve been bidding on a lot of projects, companies coming to us saying, can you help us solve X, Y, or Z problem?The revenues from those kinds of efforts are significant in the millions of dollars in potential for any given one of those engineering programs, and they’re non-engineering for the sake of engineering. These folks are coming to views, it’s because they’re trying to solve the problem and build a product in the end.So you’ll see engineering to the tune of millions of dollars worth of upfront engineering fees and NREs. And then you will see those programs in many cases, transition to production programs for devices that are in the defense space fairly, it’s significant from a cost per unit perspective, but mostly this year I think you’re going to be seeing the engineering portion of it, which could equal the kinds of revenues, which will probably slightly less than the kinds of revenues we were talking about from the perspective of our product lines themselves.

[Christian Schwab:]

Okay, great. Thank you. No other questions.

[Operator:]

Thank you. Your next question today is coming from Brian Kinstlinger from Alliance Global Partners. Your line is now live.

[Brian Kinstlinger:]

Great. Thanks so much. What we’re learning everyday about COVID-19 changes, and obviously, experts say, it’s going get worse before it gets better. Can you talk about what customers in the last couple of weeks are saying, given the recent scare, does it sound like purchasing decisions are getting pushed to the right, especially for programs maybe that aren’t in the – that are close to the finish line?

[Paul Travers:]

It’s really good question. In one sense, it’s accelerating. The people that are trying to deal with the virus themselves, they have business continuity issues that they’re all trying to deal with. It’s really hard to send people out in the field today, especially when – countries are actually shut down. And so we’re seeing an acceleration in the side of our business that has to deal with through remote support kinds of applications, telemedicine kinds of applications, et cetera.The general business, day-to-day sales and the likes, it’s really hard to tell the impact just yet. I mean, there’s some things that are going sideways, there’s some things that are accelerating. It’s such an unknown right now, honestly, Brian. But right now, we just really don’t know and I don’t think anybody can predict what the next couple of months will bring. I can say though that from the perspective of Vuzix being able to help the world with its recent issues related to the virus, that part of our business seems to be accelerating.

[Brian Kinstlinger:]

And then maybe can you talk about – today, I guess there’s a limit business travel environment – can you talk about how that impacts your business and how you’re adapting to that current environment?

[Paul Travers:]

Yes. Vuzix is restricting travel for our employees. I mean, if we don’t need to go, we’re not going. There’s the rare case where we have to, I mean, a couple of weeks ago or three weeks ago, I have suggest that Mobile World was canceled Mobile World Congress. Vuzix, some of the staff, myself included, did end up going to Europe. But that was pretty much the end of us getting out on the road for the most part. So it has curtailed some of our travel and the likes and we’re all trying to follow the rules. We don’t shake hands in the building. Customers do come to the office, but we bumped out post now instead of the whole shaking hands and the likes.

[Brian Kinstlinger:]

And then have this SWORD’s new security solution, how is that advancing? Is that on – can you communicate anything that’s going on there in terms of how that impacts your business, if it’s slowdown, speed up given what’s going on there?

[Paul Travers:]

Their goals have been to be in production by the mid summer timeframe, the June, July timeframe. They seem to be on track for that. They have as a derivative of one of the final solution they were making. They had built this thermal imaging system. It looks like that actually might be coming to market sooner. And what’s nice about it is, it allows you to, much like what we’re doing with our friends at Librestream. You take this thermal camera, you point it at a group of people going by and with some AI software and the lights, it can pick out people that might have elevated temperatures in the lichen. That actually might be coming to market here pretty soon.

[Brian Kinstlinger:]

Interesting. And then lastly, Grant, you talked about that expenses being reduced recently and I couldn’t tell, should we expect the fourth quarter is a good baseline for the next few quarters or do you expect minus increases or decreases from those levels from the operating standpoint?

[Grant Russell:]

I’d say, the fourth quarter isn’t too bad as a base. And we hope to get it reduce that a little from there. That’s our goal.

[Brian Kinstlinger:]

Great. Great. That’s helpful. Thank you.

[Operator:]

Thank you. Your next question today is coming from Jim McIlree from Bradley Woods. Your line is now live.

[Jim McIlree:]

Thank you and good morning. Can you talk a little bit about what happened with the M300C, why the customer is no longer going through with that project?

[Paul Travers:]

Well, Jim, we haven’t seen follow-on orders from that project. I will say there, they’re still continuing business on that front. In fact, just this morning on LinkedIn, there’s a – in any event, it’s not necessarily not moving forward, it’s just we haven’t seen orders from them in a while. And so because of that, we sort of have made some assumptions that it’s going to be slower than they thought it would be going forward.

[Jim McIlree:]

Helpful. Thank you. And the price – is there a price change on the inventory that you wrote down in order to move that out or can you talk about…

[Grant Russell:]

Not at this stage.

[Jim McIlree:]

Okay.

[Grant Russell:]

We made no price changes.

[Jim McIlree:]

All right.

[Grant Russell:]

We brought it down to zero, like the M300 down to zero. We’re going to do our best to recover. But as Paul said the M400 is so much better and reality is from a net cash flow basis to the company. If a customer could be convinced to buy an M400, we’re going to make a lot more money than selling them discounted M300 overall. So that’s a challenge we have and we’ve got to find people that are very price sensitive in markets where they don’t need the top performer model and they can still have a success with Smart Glasses, but at a budget price. And not cannibalize our premium product sales. That’s the balance – we helped to achieve.

[Paul Travers:]

That’s that most markets deep support multiple stratus of price products. And we see folks that just couldn’t afford the M400. Beginning of the year, we had a price increase even on the M400 actually. And so there’s more separation between the M300, M300XL and the M400, and we’ll be doing some bundles and stuff that make the solution appealing for the lower end side of the market.

[Jim McIlree:]

Okay. Thank you. That’s helpful. And lastly, the trajectory of revenues during the year, it sounds like it builds as each quarter progresses. And so the second half will be in terms of revenue will be larger than the first half.

[Grant Russell:]

Absolutely.

[Jim McIlree:]

Is that to say exactly, but it’s like 60-40, 70-30 or…

[Paul Travers:]

I think you’ll see it continue to grow quarter after quarter after quarter, barring any impact of this virus stuff that’s going on. But it’ll probably really start to accelerate towards the fall of the year.

[Grant Russell:]

Maybe 60, the two-thirds in the second half. I mean, we’re going to have the M4000out by then and a few other good things on the go. And these engineering services programs should – many of them should be in high gear. So it’ll be the second half.

[Jim McIlree:]

Okay.

[Grant Russell:]

Of course, we hope to do well in the first half. But I’m just saying, it’ll even be better in the second half.

[Jim McIlree:]

No, I understand. I understand. Okay. Thanks. Yes, that’s it for me. Thanks a lot and good luck with everything.

[Paul Travers:]

Thanks, Jim.

[Operator:]

Thank you. We reached the end of our question-and-answer session. I’d like to turn the floor back over to management for any further or closing comments.

[Paul Travers:]

Well, I’d like to thank everyone for your interest in participation on today’s call. We look forward to speaking with you again in May when we report our Q1 2020 results. On a final note, I wish all of our listeners, shareholders and their families’ good health and hope you all stay that way. The world is facing some significant challenges around the COVID-19 virus. Please stay safe.

[Operator:]

Thank you. And this does conclude today’s teleconference. You may disconnect your lines at this time, and have a wonderful day. We thank you for your participation today.