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Vuzix Corporation (VUZI 4.90) Update

Vuzix reported Q1 results Thursday after the closing bell and held the company’s Q1 conference call on Friday the 13th. The Friday the 13th conference call was anything but a nightmare and the positive message delivered by management to investors was resounding. Investor sentiment has been resoundingly positive and shares may be ready to take off beginning this week.

Vuzix Glasses

The M300 (image above) smart glass is Vuzix’s second-generation enterprise edition hardware that was developed with the aid of Intel’s capital investment and engineering expertise. The M300 is on schedule and the customer demand for the new product is off the charts

Specific customers were not mentioned by name, but Vuzix outlined several large accounts that are interested in taking products.

DHL will be rolling out operational pilot programs in Q3 in the US and Europe
A major retailer wants to rollout smart glasses to over 1,000 stores. DHL represents a 200,000-unit account for Vuzix.
A major electronics manufacturer wants to bundle the M300 with their hardware as an out of the box solution in tens to 1000’s
A North American facilities management consortium is planning to outfit thousands of their technicians with M300s for a competitive advantage.
Vuzix sold roughly 2,500 M100 smart glass units for enterprise customers in 2015 and while it may sound ambitious to sell 10.000 M300 units in the 2016 the goal is not far fetched.

Vuzix has lined up 194 companies that are interested in taking delivery of the M300 in 2016. Vuziz identified 50 VIP partners that will have access to the first production units coming off the line in July at a cost of $4,500 to $10,000 per unit even though interest to participate in this program exceeding 130 requests.

The first production units will include a layer of support as well, but allow key customers to begin preparing for the delivery of production orders in larger quantities later this year. Pipeline demand for the M300 currently outstrips supply, which is great news for investors.

The M300 retails for $1,499 and the revenue opportunity for the first batch of 10,000 M300 units represents the potential for between $12m and $15m of revenue over the second half of 2016 and into early 2017. The M300 is expected to come off the production line in volume beginning in early September (late Q3).

Vuzix’s cash balance fell $3.2m for the quarter and now sits at $8.2m and despite the cash burn management expects to fund operations for the foreseeable future with cash on the balance sheet and cash from operations. Vuzix’s inventory on the balance sheet sits at over $3m and is composed of $2m of iwear and $1m of M100 inventory. As Vuzix works through iWear and M100 inventory over the remainder of the year the inventory on hand will convert directly into cash.

The iWear video headphone production and supplier issues have been resolved. Manufacturing is being ramped up and marketing efforts surrounding the iWear product will kick off in June. Vuzix indicated that the company is working with the Drone Racing industry to leverage the iWear product.

Vuzix’s competitive advantage is a latency improvement of 30x compared to similar first person view (FPV) headsets. The iWear is not the most important product in Vuzix’s lineup, however the iWear makes up 2/3 of Vuzix’s $3.4m inventory balance. If Vuzix can successfully work through the first batch of iWear units it would in a cash injection of $5m for the company.

On the waveguide front Vuzix expects to ramp up production in late July and indicated during the call that it expects to receive NRE payments before the end of 2016. Waveguide revenue generation from OEMs is not expected to hit the income statement until early 2017.

Sell-side analysts expect 2016 revenue to come in between $5.8m and $8.1m, which puts Vuzix in a tremendous position to exceed street expectations from the sale of just one product (M300) in 2016. Directionally investors should expect increased revenue in Q2 driven by iWear contributions and initial M300 production unit deliveries to VIP accounts.

Q3 revenue will pick up significant due to iWear volume shipments and a partial quarter of M300 unit shipments, which are expected to come off the line in September.

Q4 is setting up to be a major quarter for Vuzix and if the anticipated demand for the M300 holds true investors could see the company generate cash flow from operations as well as the classic hockey stick growth that excites and brings institutional investors to the table.

Industry checks in recent weeks have confirmed that the demand for Vuzix’s M300 enterprise smart glasses is very strong. Management indicated that they see demand outstripping manufacturing capacity and I am not surprised. The recent pullback is an opportunity for investors to pick up shares at a tremendous discount to fair value.

The launch of the M300 will be an exciting celebration for the company and the augmented reality industry. In the coming weeks ahead investors should prepare for an onslaught of press releases and announcements surrounding key M300 accounts as pre-production units get delivered to customers in June.