Saturday, September 10, 2011

A 3D look at the Vuzix financial reports

In the spirit of the previous financially-related post, I decided to take a look at the Vuzix (VZX.V) 2nd quarter SEC 10-Q filing and see if there is anything interesting to share from a market direction standpoint.

Some disclaimers: I am not a financial adviser and I don't make stock recommendations. You should buy or sell Vuzix stock based on what you read in this post. It is just my opinion as an individual fairly versed in virtual reality, not a Wall Street person. Also, I don't own Vuzix shares so I don't stand to gain or lose if their share price changes. This analysis is fully based just on the public information contained in the 10-Q.

Having said that, let's take a look at some of the interesting nuggets in the report, in no particular order:

VR Market-focused:

  • Sales of what the company calls consumer eye wear products are in decline. It sold $1M of consumer products in the first six months of the year compared with $2.2M in the first six months of 2010.
  • Sales of defense products, such as eyepieces, are on the rise.
  • The company notes that demand for their consumer eye wear has declined for two reasons. The first is that they pre-announced a higher-performance product which they did not deliver yet, causing customers to slow down their purchasing. The second is that the iPad and other high-resolution tablets are used as media viewers instead of goggles. Personally, I don't fully understand the market need for goggles as video viewers: Resolution on the low-end products is fairly poor (I don't think that Vuzix has an HD product - not even HD720 - in that category); Privacy is not truly needed unless you are viewing certain kinds of media in public places.
  • The company says it is going to place lower emphasis on consumer products and phase out some of their low-end products. Instead, they will focus on the defense market and upscale products such as their recently announced $5K augmented reality glasses which is priced for academic research (a fun, but not very large market). I can understand the attraction of the defense market. Sales are less sporadic (Vuzix reports a backlog of $3.8M on page 18); margins are higher. But, how large can this defense market really get?
  • It seems that Vuzix which is/was known for consumer goggles as trying to move uptown in price, whereas professional HMD providers are being encouraged to produce affordable mass-market products. As the saying goes: "The grass may look greener on the other side, but believe me, it's just as hard to cut."


  • Cash is getting tight (page 2). Cash on hand + accounts receivable was approximately $1.8M at the end of Q2, as compared with approx $4M at the end of 2010.
  • Accounts receivable ($1.2M) is substantially lower than accounts payable ($3.1M)
  • Customer deposits (these are typically pre-pays or down-payments) are nearly $900K and are higher than cash on hand (approx $700K). Without down payments, the company looks like it would be in a difficult financial situation.
  • Inventories ($3.8M, page 2) are more than twice the second quarter product sales (about $1.7M, page 11). Since inventory is typically recorded at cost yet product sales reflect actual prices, this is even more startling. Assuming material cost is the primary driver of cost of sales, and looking at Q2 cost of sales ($1M cost on $1.7M product revenue), $3.8M inventory could be enough for more than $6M worth of product sales, which are at least 9 month's worth of sales. It would appear that Vuzix is sitting on really large inventories. Are these obsolete parts? Do they have very long-lead items that require substantial stocking? Were they planning for much higher sales? Page 7 shows the breakdown of the inventory and shows more than $1M of finished goods waiting to be delivered or sold. On page 17, the first item mentioned in discussion on how to improve cash position is "managing our working capital through better optimization of inventory levels."
  • There are two loans totaling over $400K made to the company by one or two of its officers. Clearly, cash is a bit of a struggle. There is also accrued compensation of over $100K to be paid in the future to officers.
  • There is an interesting margin discussion on page 14. Apparently, video eyewear is not a truly profitable business. Augmented reality is a bit more, but the best business from a gross profit perspective is engineering services related to the defense side of the business.
  • The shift away from consumer products is reflected in lower sales and marketing costs, which the company notes are in part due to reduction in catalog advertising costs (Skymall?)
It's great to have a small public company to provide everyone with some market data on virtual reality!

I think Vuzix was tempted to try and create a substantial consumer market for goggles by offering reasonably-priced, nice-looking products. In my opinion, the experience is just not compelling enough both in terms of resolution/field of view and also in terms of content (games/movies) that can take advantage of the goggle capabilities. As such, not enough goggles are being sold and the company is perhaps unable to get the economies of scale it was hoping for as well as to cover its relatively fixed costs for product development and advertising.

Would the company's product fared much better if they were offered by a bigger brand (e.g. Apple), or is there some other missing ingredient needed to break open the consumer market?

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