Precision Optics Corporation Inc's Q4 2025: Contradictions Emerge on Gross Margins, Revenue Growth, and Customer Contributions

The above is the analysis of the conflicting points in this earnings call

Date of Call: None provided

Financials Results

• Revenue: Q4 revenue $6.2M, up from $4.2M sequentially and $4.7M in the prior-year quarter; FY2025 revenue $19.1M, flat YOY.
• Gross Margin: Q4 gross margin 13%, compared to 10% in the prior sequential quarter and 22% in the year-ago quarter; FY2025 gross margin 18% vs 30% in FY2024.

Guidance:

• FY2026 revenue expected ~ $25M (~30% growth vs $19M in FY2025).
• Systems manufacturing +75% to ~ $14.5M; product development to ~$5.6M.
• Micro-optics ~$1.3M (down from $2.1M); Ross Optical ~$3.7–$3.8M (flat).
• FY2026 blended gross margin ~30%, back-half weighted; Q4 FY2026 >30%.
• Positive adjusted EBITDA targeted at ~ $0.5M for FY2026.
• Aerospace program ramping; customer can accept deliveries ~2x Q4 rate; backlog nearly $9M.
• Single-use cystoscope pricing +24% near term; tariffs to be covered; yields to normalize by Q3 FY2026.

Business Commentary:

* Revenue Growth and Production Expansion: - Precision Optics Corporation reported record $6.2 million in revenue for the fourth quarter, marking an annualized run rate of approximately $25 million. - The growth was driven by the advancement of two major production programs and increased top-line revenue.

• Gross Margin Challenges and Resolutions:
• Gross margins were 13% for Q4, down from 22% in the previous year, due to production yield issues and higher touch time on the single-use cystoscope program.

• Improvements are expected as the company focuses on design updates, touch time reductions, and renegotiated pricing to account for yield and touch time costs.

• Investment in Facilities and Talent:

• The company moved its headquarters to Littleton, Massachusetts, and expanded facilities in South Portland, Maine, to support growth and access a broader engineering talent pool.

• These moves are part of broader investments to support the company's growth trajectory and address production challenges.

• Tariff Costs and Reimbursements:

• Tariff costs resulted in a $180,000 impact on Q4 gross margins, 3% of total gross margin.
• The company is working on tariff reimbursement arrangements with major production customers to mitigate these costs.

Sentiment Analysis:

• “Highest quarterly revenue in our company’s history” at $6.2M. “Expect revenue of approximately $25 million” in FY2026 (vs $19M). “Gross margins of approximately 30%” (vs 18% in FY2025) and “recover positive adjusted EBITDA… ~$0.5M.” Aerospace backlog “nearly $9 million” with deliveries at “approximately double” Q4 rates. Tariffs to be reimbursed and pricing increased 24% on cystoscope to improve profitability.

Q&A:

• Question from Chris Vachowski (Private Investor): Your FY2026 revenue guide matches the Q4 run-rate despite expected growth from top two customers and higher engineering revenue—are you being conservative?
  Response: Yes; guide is conservative due to an ~$0.8M timing decline in micro‑optics and Q4 tooling revenue mix that will be replaced by higher‑margin production, with more contribution from aerospace.

• Question from Chris Vachowski (Private Investor): How will the temporary price increase on the medical program step down as yields improve?
  Response: Open‑book pricing; a ~24% temporary increase and tariff coverage will step down against agreed improvement targets, returning to originally negotiated margins.

• Question from Chris Vachowski (Private Investor): Any risk around tariff reimbursements?
  Response: No; verbal agreements are in place with customers and documentation is pending.

• Question from Chris Vachowski (Private Investor): Are engineering resources freed to drive billable work now?
  Response: Largely yes; less sustaining work on the line, new manufacturing/quality hires in place, and design tweaks continue while engineering revenue ramps in Q1–Q2 FY2026.

• Question from Chris Vachowski (Private Investor): Did the engineering diversion hurt future production orders and pipeline?
  Response: No; 6–8 programs active with three in verification/validation moving to production within 12 months, plus one robotic laparoscope relaunch later this year.

• Question from Robert Blum (Wilson Partners): Update on the second single‑use program—any similar startup issues?
  Response: Ramping more slowly and more smoothly; applying cystoscope learnings; customer just doubled the forecast; expect a smoother ramp with new COO support.

• Question from Robert Blum (Wilson Partners): Should Q4 FY2026 gross margin be well north of 30%?
  Response: Yes; margins strengthen through FY2026 with Q4 above 30% as cystoscope improvements take hold and aerospace ramps.