RP Optical in the First Quarter: Backlog Is Lifting Revenue, Working Capital Is Still Absorbing Cash

RP Optical opened 2026 with clear proof of demand: revenue rose to $12.5 million, backlog reached $145 million at the end of March and $155 million near publication, and the company is still aiming for about $80 million of revenue this year. But the quarter also shifts the center of gravity from whether there are enough orders to a harder question: whether the company can produce, deliver, collect, and protect profitability while backlog expands. Operating profit fell despite revenue growth, Radomatics is still loss-making at the segment level, and operating cash flow was negative by $2.5 million because working capital absorbed cash. That is the direct continuation of the prior Deep TASE article on backlog and cash conversion: the company received more evidence that demand exists, but it has not yet proved that growth converts into cash quickly enough to change the risk profile fully. At the same time, IPO proceeds are starting to become strategic capital through a minority investment in a motion-control company and a memorandum to acquire control of a lens company in Western Europe. Those moves can shorten the path to capacity, technology, and European customer access, but they also add execution and capital needs before the quarter showed cash-flow improvement.

Backlog Is Working, but Profitability Is Less Clean

The strongest number in the quarter is not only revenue growth, but the depth of backlog supporting 2026 and the following years. First-quarter revenue was $12.5 million, up about 54% year over year. Backlog stood at about $145 million at the end of March, compared with about $85 million at the end of March 2025 and about $101 million at the end of 2025. Near publication, it had already reached about $155 million.

This backlog is not only a distant figure. At the end of March, the company expected about $68 million of it to be recognized as revenue during the rest of 2026, including about $18 million in the second quarter. Near publication, out of about $155 million of backlog, about $64 million was expected to be recognized during the rest of 2026 and about $41 million in 2027. Together with first-quarter revenue, this brings the company close to its annual revenue target of about $80 million, but it does not remove the heavy execution burden in the second half.

Two layers should be separated here. The first is positive: during the period and through publication, the company signed binding customer agreements totaling about $58 million, including the full conversion of letters of intent totaling about $36 million into binding agreements for execution in 2027 to 2030. That is not another general pipeline statement. It is a material move from potential demand to binding orders. The second layer is more cautious: a large part of the addition sits after 2026, so it mainly improves multi-year visibility rather than near-term cash.

Revenue grew quickly, but each dollar of sales left less operating profit. Gross margin fell to 40% from 42% a year earlier. Operating profit fell to $1.3 million from $1.7 million, and operating margin fell to 10% from 22%. Adjusted EBITDA rose only to $2.3 million from $2.1 million, so adjusted EBITDA margin fell to 18% from 26%.

The issue is not weaker demand. The company is growing, but research and development expense jumped to $1.7 million from $0.5 million, sales and marketing expense rose to $0.6 million, and general and administrative expense rose to $1.4 million. Part of this comes from Radomatics, part from headcount expansion, part from share-based compensation, and part from acquisition-related amortization.

The segment note makes the gap clearer than the consolidated line. Electro-optics generated $11.5 million of revenue and $2.1 million of operating profit, while Radomatics generated $1.0 million of revenue and an operating loss of $0.8 million. The acquisition was meant to add a second technology and activity layer, but in this quarter it still looks like a business that has not yet proved serial production economics. Consolidated growth therefore looks stronger than operating profitability.

The shekel also affected the picture. Some costs are shekel-denominated, while the company measures and reports in dollars. Shekel strengthening against the dollar increased the dollar weight of shekel costs and contributed to profitability erosion. On the other side, the shekel deposit holding IPO proceeds generated finance income, so net profit stayed close to the comparable quarter at $1.5 million. That helps the bottom line, but it is not a substitute for operating improvement.

Cash Flow and Acquisitions Raise the Execution Bar

The cash test for this quarter should be all-in cash flexibility after actual cash uses: operating cash flow, property and equipment purchases, and lease payments. This is not a normalized cash-generation estimate for the existing business. It asks how much cash was left after the real uses that occurred during the period.

On that basis, the quarter was negative. Operating cash flow was negative by $2.5 million, compared with a very small positive operating cash flow in the comparable quarter. After $0.1 million of property and equipment purchases and $0.2 million of lease principal and interest payments, actual cash uses were about $2.7 million before exchange-rate effects.

The operating logic is straightforward: the company sold more, but part of the money stayed in receivables and inventory, while the decline in suppliers reduced the natural financing of working capital. Average customer credit during the period was about $22 million, compared with about $10 million of average supplier credit. That gap is the center of the cash story. As long as it widens, backlog and revenue can advance while cash lags.

Still, this is not a near-term liquidity stress story. The company had $33.8 million of cash and cash equivalents at the end of March, and near publication about NIS 114 million was deposited in a short-term shekel deposit bearing a main annual interest rate of 4.18%. The cash balance is strong, but it mainly came from the IPO. The next few quarters are therefore less about whether the company has cash today and more about whether the business begins funding itself before that cash is directed toward more acquisitions, equipment, and capacity expansion.

Two post-balance-sheet moves change how the cash balance should be read. The first is a binding transaction to acquire about 19% of a company focused on motion control and current and voltage management systems for military systems, for about $2.9 million. The company also received a future option in 2029 to acquire control, which could bring its diluted holding to about 55%, subject to conditions.

The second move is not yet binding: a memorandum of principles to acquire about 70% of a private company in Western Europe that develops, designs, and manufactures high-precision lenses and opto-mechanical assemblies for complex optical systems. The stated consideration is about €2.9 million, based on a company value of about €4.2 million, with options that could increase the holding to about 85% after about three years. The company estimates that such an acquisition, if completed, would also require production-equipment investments of a similar magnitude to the purchase consideration.

The positive side is clear. Local European activity can help with customers that prefer or require purchasing from a local company, and internal lens capability can expand the company's value chain. The other side matters just as much. If the first quarter already shows negative working capital cash flow, an acquisition that also requires capex raises the execution burden on the cash balance. That does not make the move wrong, but it makes 2026 an expansion year in which investors need to see not only deals, but also cash discipline.

Short Interest Is Testing Conversion Quality, Not Only Demand

The market layer is not the center of the analysis, but it adds a warning signal. Short interest as a percentage of float rose from 0.19% at the beginning of January to 4.22% on May 20, and SIR reached 6.27 days to cover. The sector average was 1.12% short float and 1.295 days to cover, so the stock is no longer getting full credit merely for the backlog.

Higher short interest is not proof that the skeptics are right. It does explain why the next quarters could get a sharper response to any deviation. If the company recognizes revenue at the backlog pace, improves collections, and shows Radomatics moving toward break-even, the short position will look like tactical pressure against a growing company. If working capital keeps absorbing cash and profitability remains low, the skepticism will have a stronger foundation.

Conclusions

The first quarter strengthens the positive side of the story: demand exists, backlog is deep, and the company continues to move into additional technology layers and territories. But it also sharpens the practical constraint. Growth is not yet flowing fully into operating profit and cash flow, and Radomatics is not yet a clear profit engine. 2026 therefore looks less like a year in which the company has to prove demand, and more like a year in which it has to show that demand can move through the factory, customers, and cash balance without consuming the margin.

The current read is constructive but not clean: the company has backlog that can support fast growth, and it has a cash balance that allows it to invest. The constraint is conversion quality. Over the next quarters, the key proof points are recognition of about $18 million in second-quarter revenue, better customer collection, lower working-capital pressure, and signs that Radomatics is moving from a segment loss to an operating contribution. What would weaken the story is not only a revenue miss, but a continued pattern in which orders grow, expenses grow, and cash stays behind.