Vuzix: Up Close And Personal

| About: Vuzix Corp (VUZI)

Summary

Q1 is over and the second half of 2016 that is set to feature impressive growth begins in less than 90 days.

iWear manufacturing issues experienced in Q4 and Q1 are contained to the iWear and unrelated to the M300 launch in June.

Vuzix's lineup of products of today and tomorrow (M300, M3000, B3000, iWear and waveguides) position the company for impressive growth over 2H of 2016.

Vuzix (NASDAQ:VUZI) delivered surprisingly weak revenue results in Q4 that were significantly below my expectations. Although, Q4 results were underwhelming, it is far too soon to throw in the towel on this exciting augmented reality opportunity, as growth will prevail in the back half of 2016 behind the launch and availability of a lineup of new products.

I had an opportunity to sit down with Vuzix CEO Paul Travers last Friday to test drive and handle several Vuzix products of today and tomorrow. Additionally, the visit provided me additional comfort that the current manufacturing issues associated with the iWear headphones will not be repeated with the launch of the M300 coming up late in Q2.

The iWear product although it sells for just $499 is fairly complex to manufacture and the product design is a complete overhaul from its predecessor the Vuzix wrap. On the other hand, the design of the M300 is very similar to the M100 and the complexity associated with the display of the iWear video headphones does not apply to the M300.

For these reasons, I expect the issues that recently cropped up related to the manufacturing of the iWear to be contained to the iWear and will not be an issue as Vuzix ramps manufacturing of the M300 with the company's new Tier-1 contract manufacturing partner in the coming weeks.

My attempt at the PS4 while wearing the iWear video headphones (Image Source Wall Street Forensics)

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I was able to play a PS4 game using the iWear headphones and watch a video in slow motion to appreciate the color, the response to my head movements and the incredible experience overall. During one slow motion video, I was able to turn my head and look in all directions and watch objects coming at me from all directions.

Once you put on the iWear headphones, you forget where you are and you feel immersed and drawn into the content in front of you whether it's a movie or a game. The display screen of the device is actually curved, but the end result for users is a very large flat viewable screen. The device provided a snug fit and I did not feel dizzy or disoriented. I can attest to why medical professionals are knocking on Vuzix's door to deploy units in their facilities due to the immersive impact on the user.

In the pictures below, I test drove the M100 and tried on the M300. The M100 augmented reality smart glasses for enterprises will be displaced by the M300 beginning in late Q2 2016.

M100 Image Source Wall Street Forensics Click to enlarge

M300 Image Source Wall Street Forensics Click to enlarge

The M300 is a major step up from the M100 and will solve and build upon the feedback received by users of the M100. Some of the improved features include a 13 MP auto-focus camera, waterproof design along with an Android 6.0 operating system. The M300 has a much more compact CPU board (image below) compared to the M100. The compact M300 CPU board allows for a smaller form factor and less weight versus the M100.

M300 CPU board on the left side by side next to the M100 CPU board on the right. Image Source Wall Street Forensics

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Side shot of the M300 versus the M100 CPU board. Image Source Wall Street Forensics (click to enlarge) Click to enlarge

During the Q4 conference call, CFO Grant Russell indicated that Vuzix has 3,000 M100s on hand that they expected to push out the door over the first half of 2016. Assuming an ASP as low as $700 per unit, this would still put Vuzix in a position to deliver $2m over 1H of 2016 from the M100 sales alone.

The company's waveguide opportunity as a supplier to Tier-1 customers is significant with tremendous upside that is not assumed in any analyst model. I was able to handle waveguide prototypes that will be used in the M3000 as well as the B3000 devices. I viewed a movie through the M3000 waveguides to experience the color and video through a tiny display window that demonstrated the uniqueness of the waveguides.

My non-technical explanation of how the waveguide works begins with the Vuzix engine (projector) that pushes images through a beam into the circle on the waveguides pictured below. The images then essentially bounces like a ping pong ball within the waveguides until it reaches the display.

The waveguides are actually transparent. However, when the waveguides are held in the right light, you can see where the images are entered (blue colored circle) as well as the display that projects the images (square in the middle of waveguides).

Vuzix waveguides - B3000 waveguide on top shaped like traditional sunglasses as well as the M3000 waveguide designed for enterprise applications.

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Vuzix indicated during the Q4 conference call that they expect waveguide revenue to be reflected in Q1 and Q2. I'm not expecting a significant amount of contribution from waveguides, but I would not be surprised to see between $100,000 and $200,000 in each quarter during the first half of 2016. These amounts would be on a level of magnitude similar to the $200k plus that was recorded in Q3 related to Vuzix's relationship with Intel (NASDAQ:INTC) according to the Q3 filing.

Analysts remain bullish on Vuzix and expect revenue to pick up significantly in 2H of 2016 and I expect nothing different. The calendar is now in April and Q1 is in the books and Q3 begins in just 90 days. If Vuzix can deliver a monster second half in terms of year-over-year revenue that has been waiting in the wings for over a year, shares should be well positioned to make a push to new heights.

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.

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