Precision Optics Corporation, Inc. (POCI) Q2 2026 Earnings Call Transcript
Access earnings results, analyst expectations, report, slides, earnings call, and transcript.
Overview
Despite some positive developments in the aerospace and cystoscope programs, the company faces significant challenges. Declining gross margins, increased net loss, and negative EBITDA signal financial strain. The Q&A section revealed uncertainties about equity financing and loan success, which could lead to dilution. The strong demand and production improvements may not offset the immediate financial issues, leading to a negative sentiment and potential stock price decline.
Key Financial Performance
Revenue Revenue for Q2 reached a record $7.4 million, up from $4.5 million in the year-ago quarter, representing a 64% year-over-year increase. This growth was driven by expanded production revenue, which grew 105% year-over-year, and sequential growth in engineering revenue.
Production Revenue Production revenue was $6.4 million, up from $3.1 million in the year-ago quarter, representing a 106% year-over-year increase. This was driven by strong demand in aerospace and cystoscope programs.
Engineering Revenue Engineering revenue was $1.0 million, down 29% year-over-year from $1.2 million, but up 47% sequentially. The year-over-year decline was due to the abrupt reduction in engineering work following the transfer of the single-use cystoscope product to production.
Gross Margins Gross margins were 2.8%, down from 23.6% in the year-ago quarter and 14.2% in the prior sequential quarter. The decline was due to high levels of manufacturing scrap, temporary tariff impacts, and inefficiencies in the cystoscope production line.
Aerospace Program Revenue The aerospace program generated $2.7 million in revenue, consistent with Q1 levels. Net of tariffs, revenue was $2.5 million. The program benefits from strong demand and operational improvements, which are expected to increase throughput by over 50%.
Cystoscope Program Revenue The cystoscope program generated $2.0 million in revenue, up from $1.5 million in Q1. Net of tariffs, revenue was $1.8 million. Gross margins remain challenged due to yield issues and inefficiencies, but operational improvements are expected to increase gross profit by $150,000 to $200,000 per quarter.
Ross Optical Revenue Ross Optical delivered revenue above $1 million for the second consecutive quarter, with the highest backlog in over 3 years. This rebound is attributed to market recovery and operational improvements.
Net Loss Net loss was $1.8 million for the quarter, compared to $1.0 million in the year-ago quarter and $1.6 million in the prior sequential quarter. The increase in loss was due to lower gross margins and higher operational costs.
Adjusted EBITDA Adjusted EBITDA was negative $1.5 million, compared to negative $0.6 million in the year-ago quarter and negative $1.2 million in Q1. The decline was driven by lower gross margins and operational inefficiencies.
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Operating Highlights
Single-use cystoscope program: Generated $2.0 million in revenue during Q2, marking the sixth consecutive quarter with record revenue. Updates to product design and supply chain are expected to improve gross margins by $150,000 to $200,000 quarterly.
Single-use ophthalmic device: Ramping significantly with expected revenue of $2 million to $3 million in calendar year 2026. Yields improved from 60% to above 90%, with production increasing from 6 units/day to 20-25 units/day.
Aerospace program: Generated $2.7 million in revenue during Q2. Demand remains strong, with expected increase in shipments from $2.5 million in Q2 to over $3.5 million in Q4.
Ross Optical division: Revenue exceeded $1 million for the second consecutive quarter, with the highest backlog in over 3 years. Expected to experience improved margins in the second half of fiscal 2026.
Operational improvements: New operations team has stabilized production lines, improved throughput, and addressed inefficiencies. Expected to result in margin recovery and positive adjusted EBITDA by Q4.
Manufacturing efficiency: Production revenue increased by 105% year-over-year, but gross margins were challenged due to manufacturing inefficiencies and high scrap rates. Improvements are underway.
Market focus: Continued focus on minimally invasive medical devices and single-use products, with strong market interest and growth potential in the single-use endoscope market.
Defense aerospace market: Targeting next-generation aeronautic and satellite systems, with expectations for double-digit annual growth rates over the next decade.
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Risk or Challenges
Manufacturing inefficiencies: Gross margins remain challenged due to manufacturing inefficiencies associated with scaling operations, yield challenges on single-use programs, and production scrap.
Yield and throughput issues: The yield and throughput on the cystoscope production line were below optimal levels, leading to inefficiencies and lower gross margins.
Delayed updates to product design and supply chain: Updates to the product design and supply chain for the cystoscope program were delayed due to the complexity of making changes to an FDA-cleared product, impacting cost reductions and yield improvements.
Tariff impacts: Temporary tariff impacts have affected profitability, particularly in the Ross Optical division.
Underutilization in product development: Profitability of the product development group was negative due to underutilization during the quarter.
Delayed reorder of defense program: The optics lab experienced a delayed reorder of a key defense program, impacting revenue and margins.
Negative adjusted EBITDA: The company reported negative adjusted EBITDA for the quarter, driven by the above challenges, and revised its full-year adjusted EBITDA guidance to a loss of $2.5 million to $3.0 million.
Working capital constraints: Cash at the end of December was approximately $900,000, and the company is negotiating expanded loan facilities to fund business expansion and working capital needs.
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Guidance & Outlook
Revenue Guidance: The company has increased its full-year revenue guidance to a range of $26 million to $28 million, up from the previously estimated $25 million.
Adjusted EBITDA Guidance: The company revised its full-year adjusted EBITDA guidance to negative $2.5 million to negative $3.0 million, compared to the previously projected positive $500,000. The company expects Q3 to show strong improvement over Q2 and Q4 to achieve positive adjusted EBITDA.
Aerospace Program Revenue: Revenue from the aerospace program is expected to increase from $2.5 million in Q2 to over $3.5 million in Q4, supported by increased production capacity and operational efficiency.
Single-Use Cystoscope Program: Gross margins are expected to improve in Q3 and Q4 due to product design and supply chain updates, which are anticipated to increase quarterly gross profit by $150,000 to $200,000 at current production rates.
Ophthalmic Device Program: The program is ramping up significantly, with expected revenue of $2 million to $3 million in calendar year 2026 and gross margins exceeding 30%.
Ross Optical Division: The division is experiencing a market rebound, with the highest backlog in over three years. Revenue increases are expected to carry strong variable margins in the second half of fiscal 2026.
Product Development Revenue: Sequential increases in product development revenue are forecasted for Q3 and Q4, supported by the highest level of purchase order bookings in over a year.
Market Trends: The single-use endoscope market is expected to grow at mid-to-high teens annual rates over the next 10 years. Defense aerospace markets targeted by the company are also expected to grow at double-digit annual rates over the next decade.
New Programs Transitioning to Production: Four programs are scheduled to transition to production in the next 12 months, each expected to contribute $1 million to $3 million in annual revenue.
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Shareholder Return Plan
The selected topic was not discussed during the call.
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Key Q&A
Q:Can you clarify if the design revisions required to fix these yield shortfalls are currently within your internal manufacturing control? Or are you waiting on your customers to approve engineering changes? Furthermore, what is the exact lead time for these revisions to hit the P&L, and can you bridge the gap to that date without a dilutive equity raise?
A:The design revisions for the yield improvement on the cystoscope line have been approved by the customer. Initial parts have been received, and engineering builds for qualification are complete. Some documentation and testing remain, but production is expected to start within the next month. Financially, advanced discussions with lenders are ongoing, and a new loan facility is expected in Q3. Equity financing is an option, but the need for it is uncertain.
Q:Can you comment on facility changes and when they will all be up and running?
A:Facility updates in Maine and Massachusetts are complete, including a new headquarters. Production facilities are being updated as needed, with a more substantial overhaul planned in the next 6-12 months. Current facilities are sufficient for ongoing programs, and funding options for long-term updates are being explored.
Q:Can you talk about your loan discussions and how certain you are that you'll be able to reach positive EBITDA without dilution?
A:Loan discussions are advanced, and management is confident in their success. Funding is being explored from multiple sources, and the company is optimistic about reaching positive EBITDA without dilution.
Q:What’s the long-term return you expect on the investments the company is making in its production infrastructure?
A:Investments in production infrastructure include facilities updates and building out the operations team. These investments are expected to support higher production levels and provide significant leverage. The programs driving these investments have strong long-term prospects, ensuring a safe and substantial return.
Q:Can you talk about which program or programs is getting higher-than-expected order flow from your original expectations?
A:The aerospace program and the single-use cystoscope are receiving higher-than-expected order flow, with the aerospace program ramping up faster.
Q:Is it primarily the borescope business that is driving aerospace?
A:The borescope program is in the product development phase and is contributing to increased product development revenue. It is not yet in production but is expected to transition in about a year, potentially increasing production revenue at that time.
Q:Review of Unclear Management Responses
A:Management avoided providing specific details on the exact financial gap that might require equity financing, stating uncertainty about the amount of equity capital needed. Additionally, while they expressed confidence in loan discussions, they did not provide concrete timelines or guarantees for reaching positive EBITDA without dilution.
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Earnings Word Cloud
The most frequently occurring keywords in this quarter's earning call
Optical
Product development
Production
addition
assembly
benefit
booking
calendar
cystoscope program
day
debt
defense
development engineering
division
driver
expansion
generation
inefficiency
leverage
line progress
line throughput
margin line
market interest
marketing effort
material
net tariff
outlook remainder
planning
profitability
program improvement
program market
program yield
rebound
recovery
reduction
sale
scrap
stage
strength
tariff impact
trend
POCI Transcript
Precision Optics Corporation, Inc. (POCI) Q2 2026 Earnings Call Transcript
Unknown2-17
Despite some positive developments in the aerospace and cystoscope programs, the company faces significant challenges. Declining gross margins, increased net loss, and negative EBITDA signal financial strain. The Q&A section revealed uncertainties about equity financing and loan success, which could lead to dilution. The strong demand and production improvements may not offset the immediate financial issues, leading to a negative sentiment and potential stock price decline.
Precision Optics Corporation, Inc. (POCI) Q1 2026 Earnings Call Transcript
Positive11-13
The earnings call indicates strong revenue growth, especially in key manufacturing programs, and an optimistic outlook for fiscal 2026 with improved gross margins and positive adjusted EBITDA. The Q&A section did not reveal significant negative trends, and the company's strategic expansion into defense aerospace alongside medical devices suggests diversification and potential profitability. Despite some concerns over gross margins and delayed orders, the overall sentiment is positive, supported by strong revenue expectations and strategic operational investments.
Precision Optics Corporation, Inc. (POCI) Q4 2025 Earnings Call Transcript
Positive9-29
The earnings call reveals record-high quarterly revenue and a significant increase in production revenue, despite a decline in gross margin. The Q&A section confirms conservative but optimistic guidance, with expectations of improved gross margins and a well-prepared pipeline. Management's clear responses and strategic focus on production and engineering projects suggest a positive outlook. The stock price is likely to react positively, with potential gains of 2% to 8% over the next two weeks.
Precision Optics Corporation, Inc. (NASDAQ:POCI) Q3 2025 Earnings Call Transcript
Unknown5-17
The earnings call reflects significant challenges: a steep decline in gross margins, increased net losses, and staffing issues. The Q&A highlighted uncertainties about engineering revenue and production delays, although management expressed optimism about resolving these issues. Despite a $5 million raise to improve financial health, there's no immediate shareholder return plan. The military program's continuity is positive, but overall, the financial performance and lack of clear guidance on key issues suggest a negative sentiment. The market is likely to react negatively, with a potential stock price decrease between -2% and -8%.
POCI Report
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