Vuzix Q4 Results Falls Short But The 2016 Growth Story Remains Intact

| About: Vuzix Corp (VUZI)

Summary

Vuzix Q4 results were disappointing leaving investors hungry for results and answers.

Augmented reality hardware sales continue to stutter, but is expected to be a $40 billion industry by 2020.

The second half of 2016 driven by several new product rollouts is on target to finally produce the revenue growth that Vuzix investors have been expecting since early 2015.

Vuzix confirmed during the Q4 conference call that the company is working and in discussions with multiple Tier-1 partners related to the company's waveguide offerings.

Vuzix (NASDAQ:VUZI) reported revenue in Q4 below analyst expectations, but the expected ramp up in augmented reality hardware deployments and new product launches remains intact for 2016. Vuzix reported revenue in Q4 of $564,000 versus analyst expectations of $960,000 and well below my estimate of $1,500,00.

Vuzix's financial results came in below expectations for two reasons. The first item that impacted financial results was due to a pause in adoption from customers that are waiting for the next generation of augmented reality hardware. The customer "pause" is detailed in Vuzix's 10-K.

It appears that many of our current customers using the M100 that are preparing for larger rollouts of smart glasses in their enterprise environments, may or will pause doing so in anticipation of the M300 and the waveguide based M3000 Smart Glasses (Vuzix 10-K)

The second issue that impacted Vuzix's Q4 financial results were inferior displays received from suppliers. The lack of quality displays from suppliers impacted manufacturing yields and resulted in less unit shipments than originally expected.

So where does Vuzix go from here and are 2016 estimates in jeopardy? Analysts expect Vuzix to generate $7.7m of revenue in 2016 or roughly 180% top line growth year over year.

Vuzix's next generation M300 is on track for delivery in Q2 and will feature improved features that were incorporated based on M100 user feedback over past two years. The M3000 a waveguide based enterprise smart glass that resembles a pair of sunglasses versus a head mounted display is expected to be ready for shipments in Q3.

The introduction of the M300 and the M3000 will result in a significant revenue ramp during the 2H of 2016 as enterprise rollouts come continue to jump from 10s and 20s to 100s and 1000s. The M300 features several improvements to the overall design and performance of the M100. The M3000 a waveguide based smart glass offers a different use case versus the M300 and opens the door to a different mix of customers. DHL is expected to expand on two new pilot programs in 2016 with Vuzix in the United States after completing a pilot program in the Netherlands in 2015.

Vuzix's iWear sales were severely impacted by supplier display quality issues and as a result Vuzix has in some cases replaced the existing supplier. Manufacturing yields have improved and the company expects to relieve $2.4m of inventory over the course of 2016.

Vuzix had originally expected to manufacture 10,000 units in 2015, however due to supplier quality issues the manufacturing targets were not met. At this point the company believes the issues that have supplier quality issued that have plagued the manufacturing process are in the rear view mirror.

In terms of unit shipments management expects iWear shipments to approach 10,000 units in 2016. The iWear unit guidance is below my estimate of 15,000 to 20,000 units, but still points to iWear revenue that could approach $5m in 2016.

During the Q4 call, Vuzix CEO Paul Travers confirmed that the company is in discussions and working with multiple with Tier-1 customers for waveguides. At this point top potential waveguide OEM customers include Intel (NASDAQ:INTC), Samsung (OTC:SSNLF) and LG, but management declined to comment on specific names to respect the company's potential partners. Vuzix is expected to deliver waveguide revenue as soon as Q1 and Q2 of 2016 to the company's unnamed partners, however management declined to answer when volume shipments of waveguides would commence for the company. Below are the specific comments provided by management related to waveeguide OEM partners and revenue.

Now that we're actively sharing our new waveguides and display engine publicly we have started to also actively pursue strategic relationships to bring our waveguides to market in ways that complement our own product plans as well as our potential customers.

While we can't comment on specifics here we are in discussion and working with multiple tier one customers to support this effort.

The whole wearable display marketplace is really starting to heat up and I'm sure you guys have noticed that the virtual reality headset are all starting to ship and there's such a buzz around all of this and you know wearable tech in general is on this path and a lot of companies feel like there's a race to try to go as fast as they can to be the first players and so some of the folks we're talking to are trying to work fairly aggressive timelines. I can't comment if it'll be a 2016 kind of a thing. I just know that some of these folks they want to move aggressively.

Unidentified Analyst

And these waveguides, when do you anticipate those order start coming in? Would that be in 2016 like first half or second half or?

Paul Travers

You will see revenues generated out of these relationships even in the first and second quarter of this year but you know kind of volume sort of production inside but I can't comment on when that will happen.(CEO Paul Travers Q4 Conference Call)

Intel has had a deal in place with Luxottica (NYSE:LUX) since 2014 to develop fashion smart glasses, which has yet to bear fruit. The Wall Street Journal in early March indicated that Intel was developing a wearable headset to deliver augmented-reality experience.

The chip giant (Intel) is developing a wearable headset to deliver augmented-reality experiences, people briefed on the company's plans said. (Wall Street Journal)

However, Intel outside of the Luxottica deal announcement in late 2014 and the recent Wall Street Journal story has yet to officially announce the company's plan to rollout augmented reality smart glasses.

Vuzix and Intel have been working closely to develop Vuzix's waveguides and optical systems. Vuzix's waveguides are the thinness of reading glasses with built in optics, which puts Vuzix in a leading position to be a waveguide supplier to Intel once Intel/Luxottica's fashion based smart glasses are officially introduced to the public.

As I step back from Vuzix specific and look at the entire augmented reality market place it is clear that the smart glass adoption is beginning to gain traction. With that said the deployment time frames from initial deployments through the testing and tweaking phase take significant time. The larger the company the more decision makers that need to assess and approve new technological offerings in terms of security risks that connected device possess.

Overall the use cases for Vuzix M100 smart glasses have been well documented through a 2015 DHL case study with Ricoh that as well as a recent independent university study from Maastrich University completed in November 2015.

If you listened to the company's Q4 conference call you would have heard the long list of integrators, software developers that Vuzix has partnered with to deploy smart glasses to enterprise customers. Vuzix partners such as APX Labs have business relationships with some of the biggest manufacturing and logistics companies in the world including 6 out of the Fortune 10 companies. It is clear that the necessary players in the augmented reality industry are in place and all of the companies involved are awaiting commercial rollouts in volume.

The augmented reality investment story for patient investors reminds me of the 1989 movie Field of Dreams starring Kevin Costner. "If you build it, he will come."

As leading augmented reality hardware company's like Vuzix continue to build better devices large customers like Airbus (OTCPK:EADSF), Boeing (NYSE:BA), General Electric (NYSE:GE), Volkswagen (OTCPK:VLKAF) and Tesla (NASDAQ:TSLA) will continue to come knocking.

The biggest question that everyone wants to know is when will the first big game be played on the augmented reality field of dreams. My best guess is late 2016 or early 2017 and I expect tickets to sell out fast once industry adoption begins to pick up speed over the second half of 2016.

Disclosure: I am/we are long VUZI.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.