Precision Optics' 2026 Q1 Earnings Call: Contradictions Emerge on Defense/Aerospace Strategy, Capacity Expansion, and Gross Margin Timelines

Date of Call: September 30, 2025

Financials Results

• Revenue: $6.7M, up from $4.2M year-ago and up from $6.2M sequentially
• Gross Margin: 14.4%, compared to 12.9% in the prior sequential quarter and 26.6% year-ago

Guidance:

• Fiscal 2026 revenue expected to exceed $25.0M.
• Adjusted EBITDA expected to be approximately $0.5M positive for the year.
• Expect steady gross margin improvement as production yields and fixed-cost absorption increase through FY26.
• Product development revenue expected to recover with a 50%–75% QoQ increase in Q2 and continued growth in Q3/Q4.

Business Commentary:

* Record Revenue and Growth: - Precision Optics reported record revenue of $6.7 million for Q1 fiscal 2026, marking a 46% increase compared to the previous quarter, and a 180% increase year-over-year. - The growth was primarily driven by two key manufacturing programs, one with a top-tier aerospace company and the other with a surgical robotics company.

• Gross Margin Challenges and Improvement Strategy:
• Gross margin faced challenges due to the aggressive ramp of production operations, impacting their margins.

• Efforts to improve include scaling production infrastructure, processes, and talent, and addressing team, infrastructure, and process changes to serve both long-standing and new customer programs.

• Product Development Recovery:

• Revenue from the product development segment was $656,000 in Q1, the lowest in many years due to programs transitioning to production.

• A recovery is anticipated with a 50% to 75% quarter-over-quarter increase in Q2, driven by new agreements and improved sales efforts, including social media engagement and AI tool usage.

• Increased Capacity and Future Expansion:

• The company is in the final stages of updating its production area in Gardner, Massachusetts, to support future expansion.
• Once completed, Precision Optics anticipates having ample capacity to double the company's size without significant expansion-related costs.
  
  

  Sentiment Analysis:

  Overall Tone: Positive

  • Management highlighted "record quarterly revenue of $6.7 million," stated "we are now operating at a new level," and reiterated guidance of revenue > $25M and ~ $0.5M adjusted EBITDA, while noting gross-margin headwinds are temporary and expected to improve as yields and fixed-cost absorption increase.

Q&A:

• Question from Robert Blum (Lytham Partners): Noticing there are 2 new development programs in the defense and aerospace applications. Is this an area the company is pivoting towards further?
  Response: POC is increasing promotion in defense/aerospace but not pivoting away from medical — defense programs add diversity and can scale quickly; medical opportunities remain significant.

• Question from Robert Blum (Lytham Partners): Can you talk about capacity utilization and how you see this at the end of 2026? And what kind of revenue can it support?
  Response: Once final facility upgrades (Gardner) are complete (possibly by end-FY26 or into FY27), capacity should support roughly a doubling of current company size before major new expansion is required.

• Question from Robert Blum (Lytham Partners): Can you break out your COGS in terms of labor versus materials versus overhead? Can you automate production any further into the future?
  Response: Automation is feasible but requires ~2x current cystoscope volumes (1–2 years timeline); COGS mix varies by division—manufacturing and Ross Optical are materials-heavy, micro-optics and product development are labor-intensive.

• Question from Robert Blum (Lytham Partners): Do you know what the cause for the delay in the legacy defense program reorder was?
  Response: Management does not know the definitive cause; they suspect external factors (e.g., government actions) could be involved and remain hopeful the reorder will arrive.

• Question from Robert Blum (Lytham Partners): 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?
  Response: Medical programs are 'sticky'—typically at least ~5 years and often much longer; defense/aerospace programs similarly tend to run 5–10+ years once established.

• Question from Robert Blum (Lytham Partners): What is the time line of the manufacturing that was done in Maine and being moved to Gardner? And what was the dollar volume?
  Response: One production line moved from Maine is being reinstated and expected back online in the next few months; that program previously ran at about $1M per year.

• Question from Robert Blum (Lytham Partners): How many new hires have you recruited in the last 3 months? And how many do you expect in the next 3 months?
  Response: About 20 hires in the last 3 months (≈15 direct labor, 4–5 management/engineering); expect a similar level of direct labor hiring over the next 3–6 months.

• Question from Robert Blum (Lytham Partners): 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?
  Response: The borescope is a custom product for a major jet engine manufacturer and will be sold by that customer alongside their engines to their customers.

Contradiction Point 1

Defense and Aerospace Market Strategy

It highlights a shift in strategic focus towards defense and aerospace markets, which could impact the company's growth trajectory and investment focus.

Are there two new development programs in defense and aerospace? Is the company pivoting toward this area? - Robert Blum (Lytham Partners)

20251114-2026 Q1: Yes, the company is actively promoting itself in the defense aerospace marketplace but not as a pivot from medical devices. The recent programs are due to timing, and upcoming announcements may lean more towards medical device programs. - Joseph Forkey(CEO)

Could you elaborate on the reasons for the increased demand for [Specific Product Name] in the Medical Optics segment? - CEO Name

2025Q3: In addition, we continue to make significant strides in developing next-generation optical solutions, which are crucial for various industries, including aerospace, telecommunications, and consumer electronics. - CEO Name

Contradiction Point 2

Capacity Utilization and Production Expansion

It involves the company's plans for capacity expansion and production capabilities, which are crucial for operational efficiency and revenue growth.

What is your capacity utilization outlook for 2026? What revenue potential does this capacity utilization support? - Robert Blum (Lytham Partners)

20251114-2026 Q1: Once the final facility update is completed, which could be by the end of fiscal '26, the company will have enough capacity to expand significantly without incurring major additional costs. - Joseph Forkey(CEO)

What factors contributed to the Q3 FY2025 revenue increase? - CEO Name

2025Q3: As of today, we are well-positioned to deliver against our full year fiscal 2025 revenue guidance and to drive sustainable long-term growth across our business. - CEO Name

Contradiction Point 3

Defense and Aerospace Program Focus

It reflects a shift in strategic focus, which could impact resource allocation and revenue expectations.

Are there two new development programs in defense and aerospace? Is the company further pivoting toward this area? - Robert Blum (Lytham Partners)

20251114-2026 Q1: The company is actively promoting itself in the defense aerospace marketplace but not as a pivot from medical devices. - Joseph Forkey(CEO)

How do you explain maintaining 2026 revenue guidance at Q4 2025 levels given that your two largest customers and engineering revenues are expected to grow? - Private Investor

2025Q4: Never absent, but more promoted. We've always had defense programs in the portfolio. But we're more actively pursuing the defense space now. - Joseph Forkey(CEO)

Contradiction Point 4

Gross Margin Improvement Timeline

It involves changes in financial forecasts, specifically regarding the timeline for gross margin improvement, which is crucial for investor expectations.

Will gross margin improvement be back-half weighted, with Q4 margins exceeding 30%? - Robert Blum (Lytham Partners)

20251114-2026 Q1: We continue to expect our gross margins to improve over the balance of the year, we expect to have a stronger second half than first half. - Michael Olson(CFO)

Can you clarify if gross margin improvement is second-half weighted, with Q4 margins significantly above 30%? - Lytham Partners, LLC

2025Q4: Yes, gross margins are expected to strengthen in the second half of the year as a result of work on the cystoscope line and the ramping of the aerospace program. - Wayne Coll(CFO)