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Zecotek: Maintaining Outperform Rating

By Brian Marckx, CFA

Fiscal Q2 2014 Financials

Zecotek Photonics (ZMS.V) (ZMSPF) filed their financials for their fiscal 2014 second quarter ending January 31, 2014.  Revenue remains tepid, coming in at just $41k and again clearly did not reflect the initial $500k order from Hamamatsu for the scintillation crystals which was placed near the end of July 2013 or the $1.5M follow-on order which was announced in November.   Instead Zecotek indicated that most of the (insignificant) revenue to-date has come from companies that are testing the crystals prior to potentially placing larger future orders. 

Relative to Hamamatsu, Zecotek noted that they have started shipments to that company related to integration of the crystals into the new IDM modules which will be sold to third party PET OEMs.  We have made some revisions to our model to reflect the delayed recognition (relative to prior expectations) of the recent Hamamatsu orders.  We think the shipments will accelerate as the design of these new IDM’s using Zecotek’s crystals is finalized – which Hamamatsu continues to work to complete.

Q2 net income and EPS were ($1.7)M and ($0.02), compared to our ($863)k and ($0.01) estimates.  The difference in net income mostly reflecting an increase in R&D spend related to recent projects and additional headcount/

Zecotek exited the quarter with $1.5M in cash and equivalents.  Subsequent to quarter end, warrants and options were exercised which aggregated to cash proceeds of $2.8M.  Cash used in operating activities was $1.4M and $2.5M in the three and six months ending January 31, 2014. 

Recent Operational Highlights Focused on 3D Technology

As Zecotek is in the midst of initial roll-out of their scintillation crystals and related imaging products, they have also made substantive progress towards moving their 3D technology closer to commercialization.  As we first noted in our previous update, the company’s focus on bringing this technology to market in the near-term was more accelerated than we had been expecting. 

The company recently announced that they have been in discussions with major electronics companies to develop an OLED/LED-based, flat screen, glasses-free, 3D HD television.  While the company has not specifically identified the potential partners that they are in discussions with, "major electronics companies" likely indicates these are brand-name, major TV manufacturers.

Relative to the recent progress on moving the Display business forward, Zecotek's CEO noted in a recent press release that, "We have overcome the main technical barriers required to meet the consumer preference for flat screen form factors and HD picture quality with available OLED/LED flat screen display technologies.  Renewed discussions are now in progress and we feel confident about reaching a mutually rewarding business arrangement."

In March 2014 Zecotek filed two patents with the U.S. Patent Office related to front and rear-projection auto-stereoscopic 3D display, allowing for 3D visualization (on both front projection and rear projection systems) without the need for special glasses.  Then in March the company announced that it was awarded a patent in Korea related to its glasses-free 3D technology.  With many of the major display manufacturers located in Korea, this is potentially a step-forward for Zecotek towards a collaboration agreement in development of a glasses-free 3D display product.

While it is still unclear how soon commercialization of the 3D display technology for the consumer market may materialize, we view the recent developments as materially positive and the progress more rapid than we had previously anticipated.

Zecotek is also moving forward on other fronts related to its 3D technology.  This includes their 3D projection technology which they see applicable for applications where flat screens are not particularly important.  This is mainly the non-consumer markets including for applications such as advertising and large venue displays.  Of particular utility could be for 3D printing applications for commercial use.

In the last few months Zecotek announced that they are now designing a 3D interface platform between 3D printers and their 3D display technology as well as developing their own 3D printer.  The interface would allow someone to see a 3D image of an object prior to actually printing it on a 3D printer.  The user would be able to view the object from all angles and make any desired adjustments before they printed it, affording time, cost and materials savings.  Relative to a 3D printer, Zecotek is working with their long-time contracting partner LT-Pyrkal (Armenia) in designing a compact, high speed and more efficient printer than the 3D printers currently on the market.  The design is still in the early stages.

With the rapid growth in popularity of 3D printing, this could be another high-potential opportunity for Zecotek's 3D display technology.  The company envisions initially subcontracting production of the 3D display units for the 3D printer application and then potentially partnering for wider distribution.

While we still do not model a contribution from the display-related businesses (consumer or commercial related markets), we believe the recent progress could provide a greater chance of upside to our outlook.  We will be monitoring ongoing developments and update our model if and when appropriate.

Maintaining Outperform Rating 

Based on our DCF model, we value ZMS.V at approximately $3.75/share.  We continue to see significant upside in the share price based on the current market value.  We are maintaining our Outperform rating.  See below for access to our full 24-page report on Zecotek.    


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