Vuzix Corporation (NASDAQ:VUZI) Q4 2022 Earnings Call Transcript
Vuzix Corporation (NASDAQ:VUZI) Q4 2022 Earnings Call Transcript March 1, 2023
Operator: Greetings, and welcome to the Vuzix Fourth Quarter and Full Year ending December 31, 2022, Financial Results and Business Update Conference Call. As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to Ed McGregor, Director of Investor Relations at Vuzix. Mr. McGregor, please go ahead.
Ed McGregor: Good afternoon, everyone, and welcome to Vuzix's fourth quarter and 2022 full year ending December 31 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 would 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 the legal and regulatory requirements.
In addition, any projections as to the company's future performance represent management's estimates as of today, March 1, 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 final 2022 financial results and filed its 10-K 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 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. Paul will then return to make some closing remarks, after which we'll move on to the Q&A session. Paul?
Paul Travers : Thank you, Ed. Hello, everyone, and welcome to the Vuzix Q4 and Full Year 2022 Conference Call. On this call, we're going to review our results and recent developments and then give you some perspective on where we see things headed. It bears repeating that the use of augmented reality by most business organizations and, ultimately, consumers remains the wave of the future. Despite the technical challenges encountered when making AR glasses and their uneven and unpredictable adoption curve seen to date, most entities around the world are realigning their future strategies around AR glasses with AI. The expected ubiquitous use of AI across applications in areas such as education, e-commerce, health care, communications, defense, security and more that hand the glove with AR smart glasses, examples like visual search, language translation, voice control, the list goes on and on.
This marriage of technology will accelerate the need and use cases for lightweight wearable displays. Vuzix is an AR smart glasses optics and display engine pioneer. The company was built from the ground up over the last 25 years to deliver on the larger promise of AR and, as such, is well positioned to participate in this emerging market. Vuzix, as a recognized leader in smart glasses, now also offers OEM solutions that utilize Vuzix optics, waveguides and display engines. Over the next 3 slides, I'd like to first give you some color on our 2022 results, followed by our 2022 achievements, which collectively were significant. This will then allow me to paint the bright picture we see for 2023 and beyond. Speaking of which, our first quarter of 2023 is lining up to be one of our best in a decade in terms of revenue.
In fact, based on current Q1 2023 shipments and confirmed orders received to date, we will achieve over $3.5 million in product shipments already exceeding each quarter's revenue in 2022. Our overall smart glasses product revenue did decline modestly in 2022 compared to the previous year, primarily due to the challenging macro environment and some customer rollout hiccups, although Blade revenue rose year-over-year as a result of strong customer acceptance of Blade 2. Moreover, Smart Glasses demand for businesses related to our largest key accounts which are being serviced together with ISVs and directly by Vuzix also grew with warehousing and logistics and health care remaining 2 of our key market verticals. We were also successful in expanding our sales channel through the addition of numerous new distributors across select markets in 2022.
Last but not least, our product revenue in 2022 included sharply higher sales of waveguides, several magnitudes greater in fact, versus 2021 levels. Engineering services sales increased substantially in 2022, rising 250% versus the prior year. We planted a lot of seeds in a short amount of time and witnessed widespread account growth with both existing and new defense customers such as L3 Harris as well as on the commercial side. One of the more exciting developments in our OEM business has been around our Ultralite platform and the doors it has already opened, which I'll touch on more shortly. Our competitors are spending literally billions of dollars investing in the future of the AR industry. To get this right and stay ahead, Vuzix needs to invest its precious dollars wisely and remain focused on our success.
In 2022, we had a number of noteworthy achievements as an organization as we continue to invest in our core competencies in the future. We made significant advancements in our core technology behind closed doors to our waveguide manufacturing processes at 4 to 5 Vuzix position to play a critical role in an industry that is expected to ultimately represent many billions of dollars of revenue annually from consumer OEMs and the like. Most people have no idea of the value of what we have built here at Vuzix around our waveguide intellectual property and production capabilities. For the broader markets to be successful, waveguide manufacturing in volume and at price points that can meet the market requirements are critical and Vuzix investments in this area have uniquely positioned us to deliver on this need.
This is a cornerstone capability to achieving success in the broader markets. And so far, we have not seen any competitors anywhere close to what Vuzix can currently deliver. As part of our waveguide manufacturing expansion, we entered into a lease for an additional 12,000 square feet of manufacturing space adjacent to our existing plant and kicked off upgrades to our waveguide manufacturing capabilities. This new facility is designed to support our latest waveguide technologies, increase our unit capacity and significantly lower the unit cost to manufacture our waveguides for ourselves and, ultimately, our OEM customers. On the microdisplay front, we entered into a series of agreements with Atomistic, a France-based firm with a novel material science technology related to the development of next-generation micro light-emitting diodes.
The combination of atomistic technology and Vuzix see-through waveguides will ultimately deliver full color high-resolution HD solutions. We formalized within our corporate structure and OEM design and manufacturing group which offers customers one-stop shopping for their advanced and customized waveguide and display engine solutions needs from design assistance to high-volume, cost-effective production capabilities. We successfully developed and integrated miniature AR imaging systems and transferred this technology from the R&D lab into a functional industrial design and product assembly of the Vuzix Ultralite Smart Glasses OEM platform. The Vuzix Ultralite OEM platform was introduced at CES, and it was an eye-opener for many wire consumer electronics and IT firms at CES due to its sleek holiday fashion forward modular design that is highly customizable and can be supported by hundreds of mobile phone ready applications out of the box.
In the fourth quarter, we also acquired Moviynt, a revenue-generating SaaS solution provider that supports SAP, traditional handheld hardware used in warehousing as well as Vuzix smart glasses. The Moviynt solution has already proven to be very sticky for end customers, which are attracted by the simplicity of use and performance of the offering. The Moviynt acquisition also broadens our go-to-market strategy for customers and ISVs within the warehousing and logistics market verticals. On the operational side, we invested in staff and infrastructure to help our company scale and to take advantage of the opportunities at hand in the market. We continue to invest in R&D and advanced our smart glasses product lines. At CES 2023, we demonstrated specific enterprise use cases for 2 new products, Vuzix Shield and the Vuzix M400C, which were in development during 2022.
Finally, on the technology and IP side, we increased our patents and patents pending to 278, up 37 from 241 a year ago. Again, our first quarter of 2023 is off to a very strong start, and we're bullish on our full year prospects for 2023 as well as we believe we are well positioned to achieve continuing record revenue from our collective product and OEM engineering services. As our business expands, the revenue-generating opportunities are growing with it. We are seeing increased deployments in warehousing and logistics, expanding health care from existing ISVs and multiple new customers, further engagements with blue-chip customers early in their deployment cycles, further expansion of our sales channel in specific regions, increased SaaS revenue from our Moviynt acquisition, additional and larger engagements from defense firms, paths to production for multiple U.S. defense firms, signing of new agreements by OEM and white label firms, development of contracts and initial deployments of ultralight based products and more.
The formalization of our OEM design and manufacturing platform in 2022 helped streamline our OEM efforts to respond to RFIs, or request for inputs; and formal RSQs, request for quotes, for our waveguide-based solutions and, in most cases, display engines to go with them. To deliver on the growing needs for waveguides for these OEM programs and Vuzix's own products, our new and expanded manufacturing facility will bolster advanced capabilities from metrology to capacity. The facility will focus on the advancement of higher index materials, advanced glass substrates and unique formulation technologies, all designed to further address Vuzix and our OEM customer needs. Vuzix, with our manufacturing operations located in Greater Rochester, New York, is well positioned to ultimately be a key supplier to prime defense contractors in needs of waveguides and wearable display technology for a variety of applications.
The current geopolitical environment also bolsters the need for U.S.-based suppliers such as Vuzix to offer solutions for outfitting U.S. defense forces along with their humvees and aircraft with heads-up display, optics and waveguide technology that are made in the U.S.A. We believe our OEM offerings will help Vuzix foster business relationships with key defense contractors that will continue to yield follow-on and new OEM programs over the course of 2023 and beyond. As mentioned briefly, the Vuzix Ultralite Smart Glasses OEM platform was introduced at CES, and it captured the attention of everyone who saw it. The ability to pack compelling AR technology inside a fashionable industrial design was unexpected until Vuzix made it happen. These glasses were unheard of until now and are appealing to broad market players ranging from the fashion and sports brands to some of the largest Internet search and social media companies out there.
At CES, we showcased a variety of ultralight smart glasses models, ranging from single color frames, multicolored frames and sunglass versions, the ability for white label or co-brands to customize the ultralight Smart Glasses OEM platform and turn our design into SKUs as very exciting for the AR, AI smart glasses marketplace. There are multiple critical characteristics that are needed to be successful in the broader markets, and the Vuzix Ultralite platform was designed to cover them all. 64% of the population wears glasses. This must be addressed for the smart glasses category to be successful, and Vuzix has IP around prescription-based waveguides that we feel should be able to drop right into the current supply chain for prescriptions. People won't wear glasses that are heavier than 50 grams, and the Vuzix Ultralite platform comes in at approximately 35 grams.
People want and need to have choices. Think about picking out your last pair of prescription glasses or sunglasses. Some people spend hours of time on this endeavor. The Ultralite platform as a platform is designed to be tooled into as many different SKUs as our OEM partners can imagine. People are vain and need fashion-forward glasses too. There is no way around this. Our Ultralite platform is near indistinguishable from conventional fashion glasses. Think about the AR competitors today. Nobody is clamoring to wear a Hollow Lens or Magic Leap down the street as a fashion statement, and a one-size-fits-all pair of glasses just doesn't appeal to the broader markets. People need multi-day battery life and the Ultralite delivers up to 2 days of operation on a single charge.
The AR Smart Glasses must deliver a compelling experience and plug and play with the smartphone as an accessory. And here, again, the Ultralite is designed to integrate right into the messaging systems of a smartphone. And with the available SDK, we expect many cool applications will be in the offing. Vuzix Ultralite delivers an array of information to the heads-up display of wearers wirelessly, including term by turn navigation, language transcription, language translation, powered by Google, text notifications. And with the addition of AI for visual search and more, the application space becomes endless. Again, the AR smart glasses market has been waiting for a breakthrough in the industrial design to deliver compelling technology that is low weight and a form factor that everyone can appreciate, and the Vuzix Ultralite platform delivers just that.
As a result of all of the above, we are now engaged with a number of consumer electronics and fashion brands focused on the Ultralite OEM platform. Although it can take time for all these OEM projects to move into production programs, contributions to the top line are expected to ramp over the balance of this year as programs from consumer OEM customers alongside U.S. and allied defense, homeland security customers come online and move through the process. The underlying trend towards enterprise-wide rollouts from numerous key Fortune 100 accounts is a very exciting development for Vuzix and the enterprise smart glasses industry in general. Industry awareness of smart glasses and enterprise is pervasive. Customers are committing to deploying smart glasses-based solutions across their company, and we're very bullish about the growth of our enterprise business in 2023.
Unlike some of the Carl Sagan-esque market research reports predicting more stars than grains of sand on the beach, Deloitte, one of the world's largest and most respected professional services firms has been in the trenches working with enterprise organizations as they look to wearable technologies to solve problems in supply chain and elsewhere. In their 2022 research report, they expect 75% of enterprise organizations over the next 5 years will be adopting wearable and mobile technology, something Vuzix is finally starting to see firsthand. A case in point, just yesterday, Ryder Systems, Inc., commonly known as Ryder, who specializes in fleet management, supply chain management and transportation management started an ad campaign that aired on CNBC during Squawk Box and other shows.
This ad was about their approach to ever better their names -- and how important it was for their customers' experience. It was great to see them showcasing the Vuzix M400 as a cornerstone for the advanced technology around their e-commerce and inventory management solutions. Vuzix smart glasses are going to work across enterprise and a multitude of environments and configurations, whether it's health care, where we have customers deploying the Vuzix Blade, M400 and M4000 as their go-to device of choice to warehousing and logistics and Industry 4.0. We recently standardized the operating system level across our family of smart glasses with the general availability of Android 11 operating system for the Vuzix Blade, Vuzix M400, Vuzix M4000 and the Vuzix Shield.
The advancement to Android 11 enables a variety of key benefits, including increased security, improved user experience, easier integration with a variety of third-party mobile device management software packages and enablement of advanced Android features within third-party apps. And as you might imagine, Vuzix has in development, several next-generation smart glasses solutions that will keep us at the forefront of the competition. During Q4 2022, Vuzix closed the acquisition of Moviynt, a SaaS-based SAP solution provider, which is now a Vuzix's-owned company. As previously mentioned, Moviynt's warehouse workflow solution and architecture are unique in that it does not require an online connection or middleware to operate. The core Moviynt team brings more than 40 years of experience related to SAP system-level architecture, mobility, project management and implementation of SAP software suites.
The Moviynt solution was developed in a close collaboration with a very large aerospace and defense customer and is currently deployed in numerous of their locations across the U.S., Europe and has recently gone live in Canada as well. The Moviynt solution is currently supporting handheld scanners and mobile phones, which represent a logical transition to Vuzix smart glasses. We see this as a significant market opportunity to support traditional warehousing hardware, and our plan is to introduce Vuzix Smart Glasses as an upgrade for hands-free picking into these environments. Strategically, we believe that Moviynt's underlying technology and architecture can be packaged into APIs that could be used by Vuzix ISVs and the likes to enhance their current software offerings and help expand existing markets and open up new markets for smart glasses across warehousing and logistics.
In terms of moving into revenue generation, we expect a low to mid 7-figure revenue contribution in 2023 with good gross margins and minimal impact on our net operating costs. I'd like to now pass the call over to Grant for his financial review. Grant?
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Grant Russell: Thank you, Paul. As Ed mentioned, the 10-K we filed this afternoon with the SEC offers a detailed explanation of our annual financials. So I'm just going to provide you with a bit of color on some of the full year as well as quarterly numbers. For the year ended December 31, 2022, Vuzix reported $11.8 million in total revenues as compared to $13.2 million for the prior year, a decrease of 10% year-over-year. Sales of engineering services for the year increased 250% to $1.3 million from $0.4 million. Smart Glass revenues decreased 18% compared to the prior year due to larger volume sales discounts, negative foreign exchange comparatives and to expand spend lower unit volumes. For the 3 months ended December 31, 2022, Vuzix reported $2.9 million in total revenues versus $3.3 million in the prior year's fourth quarter.
Current economic uncertainties and continued geopolitical tensions we feel resulted in the deferrals of some customer purchases in Q4. For the full year ended December 31, 2022, there was an overall gross profit of $1.5 million or 13% as compared to $1.6 million or 12% for 2021. The improved gross profit percentage was a result of decreased depreciation and amortization expense in 2022 versus 2021, as more of our current manufacturing equipment became fully depreciated and an 8% expense reduction in unapplied manufacturing overheads. Research and development expenses for 2022 rose 9% to $12.7 million as compared to $11.7 million for the 2021 period. The increase was largely due to a rise of $0.6 million in external development expenses primarily related to our Blade 2 and Shield Smart Glasses and a $0.4 million increase in wage costs due to additional personnel hired in 2022.
Sales and marketing costs for all of 2022 rose 32% to $8.1 million from $6.1 million in 2021, an increase attributable to a $1.7 million rise in wage expense due to headcount increases and a $0.4 million increase in trade show expenses. General and admin expenses for the 2022 decreased 7% to $21 million as compared to $22.5 million for the 2021 period. The decrease was primarily due to a $1.3 million decrease in noncash stock-based compensation, primarily related to the company's LTIP, which was implemented in the first quarter of 2021. For the full year ended December 31, 2022, the net loss was $40.8 million or $0.64 per share as compared to $40.4 million or a loss of $0.66 per share for the full year of 2021. Now for some balance sheet highlights.
Our cash position as of December 31, 2022, was $72.6 million, and we had a net working capital position of $76 million. Net cash flows used in operating activities was $24.5 million for the year ended December 31, 2022, as compared to $27 million for 2021, a reduction of $2.5 million. Cash used for investing activities in 2022 was $21.2 million, up significantly from $4.9 million in the prior year. The increase was primarily a function of the strategic investments we made in our future, including $16.3 million related to our technology license with Atomistic and $2.3 million related to the acquisition of Moviynt. We also invested $1.7 million for fixed assets in 2022 that included manufacturing equipment and product tooling. We will continue to make investments to drive our development and growth in 2023, including over $5 million for the purchases of fixed assets primarily around expanding and improving our waveguide manufacturing capabilities.
During the year ended December 31, 2022, the company repurchased 464,672 shares of our common stock at an average cost of $4.32 with the bulk of these purchases taking place in Q4. Looking forward to the balance of 2023, we are confident we have the resources to execute on our business plan and further invest in our future. With that, I would like to turn the call back over to Paul.
Paul Travers : Thanks, Grant. Vuzix investments in our future are paying off in spades. We have diversified our product portfolios, and with our waveguide products hitting the market, we have formalized our OEM group, and they are opening up multiple new revenue streams for the company. More and more enterprise organizations are embracing wearable technology, and 2023 will see this momentum accelerate. And as Grant just said, we have all the resources we need to execute on our plans. With that, I'd like to turn the call back over to the operator for Q&A.
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