Precision Optics Corporation, Inc. Q1 FY2026 earnings call

• Systems Manufacturing: - Aerospace program: Achieved record quarterly revenue for the fourth consecutive quarter, with $2.5 million in revenue net of tariffs in Q1, a more than 800% increase compared to the same quarter a year ago, and a backlog of over $9 million. - Cystoscope program: Generated $1.5 million in revenue in Q1, an 85% quarter-over-quarter increase and 180% year-over-year increase, with ongoing efforts to improve yield and efficiency, and expect margin improvements in subsequent quarters. • Ross Optical: Saw a 10% quarter-over-quarter revenue growth to over $1 million, indicating the beginning of a recovery in the optical components market. • Product Development: Signed 2 new large development agreements, including one for augmented reality systems for defense applications and another for a high-resolution borescope for jet engine inspection, with expected revenue recovery starting in Q2.

In the first quarter of fiscal 2026, Precision Optics achieved a record quarterly revenue of $6.7 million. Production revenue was approximately $6 million, with the Aerospace program contributing $2.5 million (net of tariffs) and the cystoscope program generating $1.5 million (net of tariff reimbursements). The Ross Optical division saw a 10% quarter-over-quarter revenue growth, reaching over $1 million. The Micro-optics division was impacted by a delayed reorder from a large defense contractor, resulting in low revenue. Product development revenue in the first quarter was $656,000, the lowest in many years due to programs transitioning from development to production and natural demand fluctuations.

• Expect fiscal year 2026 revenue to exceed $25 million. • Anticipate approximately $0.5 million of positive adjusted EBITDA for the year despite the Q1 loss. • Believe the gains in top-line revenue will increasingly flow through to the bottom line throughout fiscal '26 and beyond.

• Gross margin challenges due to the aggressive ramp of production operations, including the need to build infrastructure, processes, and talent. • Uncertainty in defense program orders potentially affected by government-related factors. • Automation investment return on investment cycle, with the need for higher volumes to justify the costs associated with automation systems.

Q: Are the 2 new development programs in defense and aerospace applications a pivot towards further that area?

A: No, it's in addition to the medical device space. Defense and aerospace programs can move faster due to less regulatory requirements in some cases and can be large and profitable.

Q: Can you talk about capacity utilization and how you see this at the end of 2026 and what kind of revenue can it support?

A: There is a final facility update needed in Gardner, MA. Once completed, expect capacity to double the current size before significant expansion-related costs are incurred.

Q: Can you break out your COGS in terms of labor versus materials versus overhead? Can you automate production any further into the future?

A: Automation has opportunities, but upfront costs for automation systems require volumes roughly double the current cystoscopy program volume, likely 1-2 years away. For COGS breakdown, different divisions have different compositions: manufacturing has significant materials and labor impact; micro-optics lab is labor-heavy; product development is labor-based; Ross Optical is sourcing with material impact.

Q: Do you know what the cause for the delay in the legacy defense program reorder was?

A: Uncertain, possibly related to government impact, but hopeful government restart will help.

Q: What are the average life spans of some of these programs, defense versus medical? And what does the bell curve look like for these programs?

A: Medical device products typically last at least 5 years and often longer due to regulatory and risk-averse factors. Defense programs are also expected to be in the 5-10 year or longer time frame due to high start-up costs and risk aversion.

Q: What is the time line of the manufacturing that was done in Maine and being moved to Gardner? And what was the dollar volume?

A: One line was moved, tools and fixtures reinstalled, expect to be back up in the next few months, with the volume of the related program being ~$1 million annually.

Q: How many new hires have you recruited in the last 3 months? And how many do you expect in the next 3 months?

A: ~20 hired in the last 3 months, similar number expected in the next 3-6 months.

Q: On the borescope, can you provide a little more detail? Is the customer using it for their own planes? Or will they be going out to market against other borescope suppliers?

A: Made for a jet engine manufacturer, the custom borescope is specifically for their jet engines and will be sold with the engines when they are sold to the market.