The Small Private Company That Is Disrupting The Industrial AR Market

| About: Kopin Corporation (KOPN)

Summary

Industrial Augmented Reality Is Generating Attention and Investment Across the Globe.

Many Large Enterprises Are Moving From Pilot To Deployment.

I Believe One Company Has A First Mover Advantage - Bet On This Disruptor.

Prior to widespread Consumer acceptance, Augmented Reality will see broad and meaningful adoption in the Enterprise Industrial space first. This mega trend has already begun with tablets providing an AR overlay on top of live video resulting in increased worker productivity. For example, Index AR Solutions has been an early leader in tablet-based AR.

However, tablet-based AR implementations require a worker to use his or her hands to hold and manipulate a device. The result is less than optimal worker safety and efficiency. I believe decisions to deploy AR in the workplace will hinge on safety and, as such, a viable enterprise AR device must be entirely hands-free to unlock its true potential.

We are several years from an Iron Man-like transparent user interface that seamlessly blends synthetic data and imagery as partially transparent dynamic overlays or layers on top of the real world occluding most of or all of a users field of view. This will be a truly amazing experience once optical and processing technologies catch up with Hollywood's vision of what AR can be.

HYPER-REALITY from Keiichi Matsuda on Vimeo.

Above is a simulated example of fully occlusive transparent AR - a compelling concept, but many years away from wide availability.

Furthermore, to be effective, fully occlusive partially transparent AR will mean accessing and manipulating information with new UI paradigms and a mass translation of legacy documents into formats that are compatible. For example, do you believe that viewing an Acrobat PDF file as a transparent overlay occluding most or all of a worker's field of view is optimal or even safe? The answer, of course, is no.

What Will Industrial AR Look Like In 2018?

There are enterprise-ready AR devices available in 2017 that will provide visual information to a user safely above or below their line-of-sight while they perform work. You can access a simple explanation of what I mean here.

While not exactly Hollywood's Iron Man version of AR, these devices can present a live video feed from an integrated camera combined with a relevant data overlay resulting in AR with virtually zero latency. Think of it as an off-axis AR window just above or below your line of sight. A user can reference this augmented reality video feed to improve work effectiveness and efficiency. You can view an example of this concept here courtesy of PTC (NASDAQ:PTC) and RealWear (more on them later).

I think video see-through AR as demonstrated by PTC above will begin to permeate the industry in a few years, but there are some other areas of opportunity I see driving enterprise adoption much quicker - beginning in 2017.

In my opinion, the near term "killer apps" for enterprise adoption of AR in 2018 will include:

Remote Hands-Free Content Consumption

A head-worn wearable device can workers to access all existing legacy documents, checklists, schematics, procedures, and files as well as allowing them to input data via workflow applications. For example, a user can instantly bring up a schematic in the universal PDF format from their enterprise's existing library and intuitively consume the information contained safely without taking their hands off of their work if required.

Remote Mentoring

The ability to deliver experience-based guidance from a central location to remote workers will be huge. Partially due to changing demographics, experienced workers are retiring and new inexperienced workers are replacing them. Remote Mentoring will enable newer workers to tap into a wealth of human experience via a head-worn wearable headset and applications such as Hard Hat Connect from Hard Hat Wearables.

Killer App #1 - Viewing Legacy Content Hands-Free

I believe the most important capability for wide enterprise adoption of head-worn wearable devices will be the ability to comfortably present the most common file format in the world: Adobe PDF. Almost every enterprise in the world uses the PDF format as their primary vehicle to share information among employees securely and reliably. Whether you are reviewing construction plans, schematics, legal documents, or simple checklists, chances are you are looking at a PDF file.

If we agree PDF file viewing is important, I propose four additional requirements must be in place for safe and successful deployment of enterprise head worn wearable devices across an industrial workforce:

  • The more pixels the better - screen resolution must be at least WVGA
  • The display cannot be transparent! PDF files are optimized to look like paper documents and thus we need an opaque tablet-like display
  • You need the ability to safely and efficiently navigate a document hands free via voice and head gesture
  • Price point needs to be no more than $2,000 per device

Killer App #2 - Remote Mentoring

Remote Mentoring enables a remote worker to receive audio and video guidance from an experienced user located anywhere. This is a live two-way sharing of information. The remote worker can send the Mentor live still shots or video of the work site for review while explaining the situation via an audio channel. The Mentor can then speak, markup, or send other content back to the remote worker with additional information that can help complete the task. In addition to audio content, the remote worker can instantly receive visual content via the optical pod. In this way, experienced Mentors can guide an entire remote workforce from a central location.

If you are going to implement Remote Mentoring, you need a device that has a high-resolution display and a high-resolution video camera. Personally, just as when viewing PDF files, I believe that an opaque display provides a better Remote Mentoring experience than a partially transparent one. Also, I believe the display should be positioned off-axis above or below a user' line-of-site. For safety reasons, I prefer not to occlude a worker's field of vision with even partially transparent video content while working.

You should also have a relatively high performance CPU architecture to move lots of pixels and handle heavy network traffic all with minimal latency.

One Device For Two Industrial AR Killer Apps

Having identified the two likely "killer apps" for Industrial AR adoption, let's review some relevant specifications of the 7 head-worn wearable devices that will ship this year to enterprise customers from public companies including Fujitsu (OTCPK:FJTSY), Vuzix (NASDAQ:VUZI), Google (NASDAQ:GOOG), and Intel (NASDAQ:INTC):

Device

Display Resolution

Transparency

Hands Free

Price Point (Est.)

RealWear HMT-1

854 X 480

Opaque

Yes

$1,000

Fujitsu HMD001

854 X 480

Opaque

Yes

$2,000

Vuzix M300

640 X 360

Opaque

No

$1,499

Google Glass

640 X 360

Optical See-Through

No

$1,500

Recon Jet Pro

428 X 240

Opaque

No

$499

ODG R-7

1280 X 720

Optical See-Through

No

$2,750

Epson Moverio BT-300

1280 X 720

Optical See-Through

No

$779

All of these devices have video and still camera functionality in some form. All also have audio input/output capabilities. However, lets focus on a couple of critical areas that supersede technical specifications alone: User Safety & Optical Architecture.

User Safety

In my opinion, safety of an enterprise workforce will be the primary factor in choosing devices to deploy. Interestingly, only two devices on the list meet our safety requirement as they both employ a 100% hands-free UI - only the RealWear and Fujitsu devices enable user interaction using only voice and head gestures.

Additionally, due to the highly adjustable monocular display design of the RealWear and Fujitsu devices, virtually any combination of existing hardhat with visor and/or safety glasses is easily accommodated.

Optical Architecture

In addition to meeting the critical worker safety requirement, the RealWear and Fujitsu devices also provide the best balance of display resolution and opacity to comfortably display any legacy PDF document a worker would need to access. This means easy deployment, a bonus for any organization looking to unlock savings via head-worn wearable device deployment.

One final factor all enterprises will consider: unit cost, the lower the better. As you can see, the RealWear HMT-1 has a clear advantage as it comes in on the lower end of the cost spectrum considering its specs.

My conclusion is that the RealWear HMT-1 will be the industrial enterprise head-worn wearable device of choice when it ships this year. So, if I'm right, how do we profit from this information as investors?

One Stock Gets You Inside The RealWear HMT-1

RealWear officially launched the HMT-1 in January of 2017. It is the world's first head-worn wearable Android tablet. I was at the launch event and had the privilege of using the device. I was impressed by the form factor, voice recognition accuracy, display architecture, and depth of 3 rd party application development activity. I believe the RealWear HMT-1 platform has a real chance of becoming the industry standard for industrial workforces across all verticals.

As an investor, I am looking for the near-term AR platform that is best positioned to achieve widespread adoption. It could mean rapid revenue ramp and potentially large profits for investors. Unfortunately however, RealWear is currently a privately held company. So, how do I and other retail investors take a stake in the potential success of the HMT-1?

Fortunately, we can invest in a publicly traded company that provides the following key technologies inside the HMT-1 platform:

  • WVGA AMLCD micro display module with optics
  • Industry leading 4 microphone noise cancellation silicon
  • Software license revenue: embedded within the HMT-1 is a proprietary OS layer that enables virtually any existing Android application to become voice and head gesture enabled on the HMT-1
  • Possible reference design license revenue

Something you may not know: the RealWear HMT-1 is the latest iteration of Kopin's Golden-i platform launched by an experienced executive team including former Daqri and Sonim leaders.

Kopin (NASDAQ:KOPN) is providing a number of the aforementioned key technologies (display, optics, Whisper chip, and OS) and licensable intellectual property to RealWear and will realize revenue for each unit sold. I believe Kopin's Revenue could be as high as $100.00 per HMT-1 device including license revenue. I assume a 35% gross margin for Kopin on HMT-1 revenue.

Below is a table detailing the relationship HMT-1 annual shipments and potential benefit to Kopin assuming I am right about value of Kopin content inside each HMT-1:

Year

HMT-1 Units

Incremental Revenue

Kopin EPS Impact (Est.)

2017

10,000

$1,000,000

$0.00

2018

50,000

$5,000,000

$0.02

2019

100,000

$10,000,000

$0.05

2020

500,000

$50,000,000

$0.23

2021

1,000,000

$100,000,000

$0.47

Kopin posted EPS of -$0.37 for fiscal 2016.

Market estimates vary widely, but a recent report by Grand View Research estimates the enterprise wearables market will be valued at more than $20B by 2025. If RealWear disrupts this new market with the HMT-1 and secures dominant market share as an industry standard device, shipments could exceed 1M units annually well before 2021. Once shipments exceed 400K units annually, the benefit to Kopin becomes tangible on a per share basis.

Also recall that RealWear HMT-1 is just one of 7 enterprise devices we reviewed in this summary. You should be aware that Kopin provides displays and components inside 5 of the 7 devices listed. All will or already are shipping this year. Furthermore, Kopin has transitioned to a wearable-centric company - they have positioned themselves to be entirely levered to success in Enterprise and Consumer head-worn AR with components and licensable IP.

When you combine high level AR market forecasts with Kopin's device share dominance with design wins inside 5 Industrial AR headsets, I believe it is clear this stock is the one to own if you are looking to lever your portfolio to the massive growth possible in the head-worn wearable segment.

As I have noted previously and pointed out in my blog posting "The Wearables Acquisition Intel Needs To Make - And Fast!" I believe a current reasonable market capitalization value for Kopin would be $394M or north of $5.00/share based on the following:

  • IP portfolio I have valued at at least $300M: Kopin holds over 300 granted & pending wearables patents; I believe they possess the strongest head-worn wearables IP portfolio in the industry
  • Roughly $94M in cash on the Balance Sheet following Goertek's acquisition of a 10.1% stake in Kopin last month
  • No Long Term Debt on the Balance Sheet
  • 75.14M shares outstanding following Goertek's share purchase

As of the date of this article, Kopin is trading below my previously published personal estimate of its current intrinsic value (cash & IP) of $4.50/share. With Q1 earnings on-deck this week and the imminent launch of RealWear's HMT-1 this summer, I expect to have to revise my share price estimate upward very soon.

Disclosure: I am/we are long KOPN.

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.

Additional disclosure: Revised as requested to support current intrinsic value estimate of $4.50/share.

Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

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