VirTra Q3 2023 Earnings Call Transcript

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Provided by Quartr
November 14, 2023

There are 5 speakers on the call.

Operator

Good afternoon, and welcome to VirTra's Third Quarter 2023 Earnings Conference Call. My name is Irene, and I will be your operator for today's call. Joining us for today's presentation are the company's CEO, John Givens CFO, Alana Boudreaux and Executive Chairman, Bob Ferris. Following their remarks, we will open the call for questions. Before we begin the call, I would like to provide Virtra's Safe Harbor statement that includes cautions regarding forward looking statements made during this call.

Operator

During this presentation, management may discuss final projections, information or expectations about the company's products and services All markets or otherwise make statements about the future, which are forward looking and subject to a number of risks and uncertainties that could cause actual results to differ materially from the statements made. The company does not undertake any obligation to update their measure guide by law. Finally, I'd like to remind everyone that this call will be made available for replay via link in the Investor Relations section of the company's website at www.virtra.com. Now, I'd like to turn the call over to VirTra's CEO, Mr. John Givens.

Operator

Thank you, and you may proceed.

Speaker 1

Thank you, operator, and thank you, everyone, for joining us this afternoon. After the market closed today, We issued a press release that provided our financial results for the Q3 ended 30 September 2023. Along with highlighted business accomplishments, we also filed our 10 Q with the SEC today, which is available for your review at your discretion. As a brief overview for today's call, I'll begin by providing highlights for the Q3 of 2023 and summarizing our Operations and initiatives before passing the call to Alana to discuss our financial results in more detail. Bob will then come on to discuss our recent VXR product development and after that I'll provide some concluding remarks before moving to the Q and A.

Speaker 1

And with that, we'll begin. In Q3, we built on our success from the first half of the year, Advancing our operations and sales efforts further. These improvements continue to show up in our financial performances With net income climbing over $2,400,000 from the previous year and revenue increasing by 54% year over year. Operationally, we are finalizing our machine shop consolidation into a single facility, while being mindful to minimize the impact Of our delivery schedule, we're also planning a $1,400,000 capital investment to significantly enhance our manufacturing capability and speed and most importantly the quality of our product. As a result, we're improving The customer experience while also reducing our cost.

Speaker 1

We've established the right processes to scale our operation effectively without compromising The quality of our final product. Our operational efficiencies set the stage for increasing our sales opportunities. We maintain a robust pipeline of potential agreements within the law enforcement and military markets. With the recent introduction of our VXR training solution, we have further accelerated this momentum. Since its debut last month at IACP, VXR, an innovative headset based training platform that transcends the traditional shoot, don't shoot Scenario has sparked a wave of interest.

Speaker 1

VXR provides unprecedented value to our law enforcement and government customers, But also the security agencies, the hospital security teams, educational institutions and criminal justice academies. And by focusing on the development of critical interpersonal skills, these professionals will be better equipped to navigate sensitive situations, Diffuse potential conflict, increase their cultural awareness and build stronger relationships with the communities that they serve. VXR's extensive range of use cases gives it that unique position in the market. Following its debut in October, we received a strong response from the market with hundreds of inquiries Already coming in from agencies looking to advance their team's soft skills, we are currently accepting preorders With deliveries expected to begin April of 2024. Bob will delve into the product and how it's transforming the sector, But we already see it as a considerable opportunity.

Speaker 1

As we roll out VXR, we have a longer term plan of offering annual subscriptions for access to our training content library. Personally, we believe that our content library is the most comprehensive and effective in the industry as made possible by our V3 technology. We expect over time this offering will enhance our predictable reoccurring revenue streams Bringing us closer to our 30% our goal of 30% of total revenue. Our commitment to innovation doesn't stop at VXR. We are actively advancing internal research and development projects surrounding the implementation of artificial intelligence into Virtra's content creation and data analytics processes.

Speaker 1

As we continue to push the boundaries of immersive Training solutions, AI will play a pivotal role in enhancing our capabilities and driving further success. 1st and foremost, AI will transform our content creation process by leveraging advanced algorithms and machine Learning techniques, we will generate highly realistic and dynamic content assets at an unprecedented pace. This means that our customers will have access to a broader range of training content and scenarios allowing for more comprehensive and realistic simulations. Furthermore, AI will enable us to analyze vast amounts of data collected during training sessions. With the help of sophisticated algorithms, we can extract valuable insight and patterns from this data, providing our customers with actionable feedback and performance matrix.

Speaker 1

This data driven approach will not only enhance the effectiveness of our training programs, but will allow for targeted improvements and customization based on individual needs. Additionally, AI will play a significant role in enhancing the adaptability and responsiveness of our simulations. By continuously analyzing user interactions and feedback, AI algorithms can dynamically adjust and fine tune the training experience in real time. This adaptive learning capability ensures that our simulators remain relevant, engaging and effective for each The utilization of AI and Virtru's content creation and data analytics Processes marks an exciting chapter in our journey. By harnessing the power of advanced algorithms and machine learning, We are poised to deliver even more immersive and effective training experiences.

Speaker 1

Through AI driven data analytics, We will gain valuable insight that will guide our decision making and ensure we remain at the forefront of the industry. In addition to these product innovations, we are focused on revamping our sales and operation functions. On our last update call, I shared our plans to realign sales the sales force into designated territories. We expect this to increase direct engagement with existing and potential customers to cultivate important relationships and expand our footprint. We've since made substantial progress in this approach, successfully establishing our presence In all our outlined territories, we've placed particular emphasis on the international market, recognizing the need for dedicated international sales Personnel to tap into the expanding global labs landscape, we expect this to bolster our total pipeline of opportunities.

Speaker 1

This quarter, we revised our sales initiative incentive program To not only attract the industry's top talent, but also reward performance to retain the best talent. We're fostering an environment that rewards performance and dedication. To further support this initiative, we've added sales support Specialist to our team. Their role is to streamline our sales process and work in tandem with our sales representatives who are now more focused than ever on generating new business. These sales specialists are strategically located in Arizona and Florida offering extended support to our customers and acting as a catalyst to move sales through the pipeline efficiently.

Speaker 1

In addition, we've refined our internal sales procedures to enhance monitoring and advancement of potential deals. These improvements enable more frequent and meaningful touch points with law enforcement agencies and military departments. Our goal is to provide unparalleled customer service, responding properly to their needs and ensuring the seamless journey from initial contact to close. The enhancements we've made to our sales infrastructure reflects a strategic shift designed to propel us forward. It's with this context of transformation that we welcome Tony Sanflon to the Virtrus team as our new VP of Sales.

Speaker 1

With his rich history of sales leadership, Tony has already begun to infuse our sales strategies with new insights and proven tactics. As Tony joins the fold and gets acclimated to our operations, we look forward to his expertise to further hone Virtra's market opportunities. These significant changes with our sales functions are not just Promising for the future, they're already having influence on our financial results. Our recent progress is beyond our initial projections and we're optimistic that as these initiatives solidify, our booking rates will escalate in tandem. While these enhancements were only recently implemented and thus fully reflected in the 3rd and not fully reflected in the 3rd quarter results, We're seeing indications of future benefits.

Speaker 1

Just to be clear, all of these territories are now up and running and there are Sales individuals hired work in these territories, along with the leadership and the sales support specialist. Looking closer to how end markets performed in the quarter. In Q3, our government revenue increased by 71% to $7,300,000 from $4,300,000 in the prior year. This growth is attributable to a jump in design and prototyping revenue complemented by stronger simulator and accessory sales. Internationally, our revenue was $180,000 a decrease from $380,000 in 2022.

Speaker 1

This can primarily be attributed to the longer lead times for the international pipeline. And while our international pipeline has grown, the current geopolitical tension and U. S. Government budgeting issues have affected the We do expect higher close rates in the next several quarters as that funding and those projects are released. We have reported continued growth from our subscription training equipment partnership and STEP program, which provides reoccurring revenue for Virtra and offers an easy on ramp for the smaller agencies interested in our solution, but are perhaps budgeted constraint for an outright purchase.

Speaker 1

This also gives our staff another tool in closing the sale. Currently, our reoccurring revenue, Including warranty revenue represents 25% of the total quarterly revenue, but we expect this to increase in the future. Regarding our military operations, as of Q3, we continue to work ahead of initial expectations. Our nurturing of a strong pipeline of leads has resulted in military related contracts reaching $4,000,000 year to date, an achievement that notably surpassed our goal set at the onset of the Department of Defense's fiscal year 2024 in October. While the competition and sensitive nature of these contracts warrants discretion in public disclosures, our confidence in Virtra's potential for further expansion And the military section remains high.

Speaker 1

Overall, the outlook for the military small arms training acquisition is likely to focus on modernization, Technology Driven Training, Realism, Safety and Interoperability. Military Small Arms Training is shifting towards more realistic and mission Specific scenarios, Virtra's products and training programs are designed specifically to replicate real world conditions, including urban warfare, counterterrorism and asymmetric warfare. As defense strategies evolve, The acquisition of small arms training systems and equipment that remain as important aspect of military readiness and effectiveness. As we tailor our products for this market, Virtras is positioned as a Tier 1 provider of our revolutionary recoil capabilities for military weapons such as the M4 and the M249. I'll now turn the call over to Alana to further discuss the financial results and their details.

Speaker 1

Alana?

Speaker 2

Thank you, John, and good afternoon, everyone. It's a pleasure to be speaking to you today to review our unaudited financial results for the Q3 and 1st 9 months ended September 30, 2023. Our total revenue for the 1st 9 months of 2023 increased 42% to $27,900,000 from $19,700,000 in the prior year period. For the Q3 of 2023, revenue increased 54 percent $7,600,000 from $4,900,000 in the Q3 of 2022. The increase in revenue was driven by our continued improvement in sales Our gross profit for the 1st 9 months of 2023 increased 67% to $18,300,000 or 65 percent of revenue compared to $10,900,000 or 56 percent of revenue in the prior year period.

Speaker 2

For the Q3, gross profit increased 114 percent to 5,400,000 from $2,500,000 or 51 percent of revenue in the Q3 of 2022. The increase And gross profit margin for both the 3 9 month periods was due to increased sales while maintaining cost of sales in line with 2022 levels. Our net operating expense for the 1st 9 months increased to $11,200,000 from $10,300,000 in the prior year period. Net operating expense for the Q3 of 2023 was $3,700,000 compared to $3,600,000 in the Q3 of last year. The increase in net operating expense is primarily due to an increase in salaries and benefits resulting from addition of new staff, expenses for the New Orlando office, increased R and D spend and implementation expenses related to the launch of the new ERP system.

Speaker 2

Our operating income jumped to $7,100,000 from the 1st 9 months of 2023, a $6,400,000 increase from $600,000 in the prior year period. For the Q3 of 2023, operating income increased by $2,800,000 to $1,700,000 from negative $1,100,000 in the Q3 of 2022. Net income for the 1st 9 months of 2023 was $5,600,000 or $0.51 per diluted share, an improvement compared to the net income of $600,000 or 0 point 0 $5 per diluted share in the year prior. And net income for the Q3 of 2023 totaled $1,600,000 or $0.15 per diluted share, which represents an increase compared to the Net income of negative $800,000 or negative $0.7 per diluted share in the Q3 of 2022. For the 1st 9 months of 2023, adjusted EBITDA, a non GAAP metric, increased to $9,400,000 from negative of $1,700,000 in the prior year period.

Speaker 2

Adjusted EBITDA for the Q3 of 2023 increased to 2 point of $5,000,000 in the Q3 of 2022. Now turning to our bookings and backlog. We define bookings as the total of newly signed contracts and purchase For the Q3 of 2023, we received bookings totaling $7,300,000 As John mentioned, we anticipate that These will gain momentum as our sales success initiative begins to take effect. Now looking at our backlog, which we define as the accumulation of from signed contracts and purchase orders that are not yet started or incomplete and cannot be recognized as revenue until delivered in a future period. As of September 30, 2023, our backlog totaled $16,000,000 The breakout of this backlog includes $7,300,000 in capital, $5,900,000 in service and warranties and $2,800,000 in step contracts.

Speaker 2

And based on current contract delivery dates, we expect the majority of new capital bookings received in the 1st 9 months of the year to be converted into revenue in 2023. As a reminder, our service Warranties and step backlog is revenue that will be recognized on a straight line basis over the coming years. In addition to the backlog, there is about And finally to our balance sheet. As of September 30, 2023, we had unrestricted cash and cash equivalents of $17,200,000 an increase from $13,300,000 at June 30, 2023. And from a working capital standpoint, at the end of Q3, we had $29,200,000 in working capital, an increase from $26,600,000 at the end of Q2.

Speaker 2

We did have an increase in our inventory, largely due to the development projects we've been looking on. For additional details about our financial results, please reference our 10 Q, which was filed earlier today. And that concludes my prepared remarks. And now I'll turn it over to Bob to discuss some of the improvements we've made with our technology.

Speaker 3

Thank you, Elana, and good afternoon, everyone. I'd like to take a step back and provide a broader perspective on our trajectory and how our recent technological strides are aligning with overarching industry trends. As we navigate our leading position in the training landscape, Innovation remains at the forefront of our strategy. It's clear that a key strength of ours lies in recognizing unique challenges faced by each of our customers. The VXR training solution It is more than a new headset product.

Speaker 3

It embodies our response to an increasingly complex world that demands a sophisticated approach to training beyond the conventional. Its design is more than a shoot, don't shoot trainer, as John mentioned, extending its scope beyond mere marksmanship improvement. Rather, it cultivates critical soft skills in high pressure situations. The VXR is a low profile lightweight system that immerses users in a span of situations containing lifelike Characters. Our 3 d human characters captured by our V3 capture studio are displayed in front of students.

Speaker 3

These characters are highly realistic and include eye and mouth movements that look natural and eliminate the uncanny valley. This plagues all of our competitors and the difference between what they offer and what we offer is just undeniable. The system can be instructor led or entirely self driven, making it a flexible training solution for agencies. It offers a variety of lessons across 3 learning modules, which we call the 3 E's educate, experience, and Engage. Users can learn skills like interviewing, de escalation, whip and transitions, decision making and more.

Speaker 3

Our Engage module, for example, provides unmatched training with realistic simulated individuals experiencing mental health crises. With VXR, we are not just evolving training methods, but also responding to societal need for empathy and understanding in law enforcement and security practices. Regrettably, the lack of mental health resources is unlikely to change in the near term. However, this challenge presents an opportunity for VirTra to make a significant impact. We are determined to supply affordable, Super convenient and superior solution through VXR.

Speaker 3

Our recent technological advancements encompass both hardware and software guided by valuable customer and expert input. We've significantly refined our 180 and 300 series Optimizing them for standard room heights and streamlining across access to critical components. These enhancements not only accelerate setup now achievable by a single individual, but also integrates standardized cables and materials, which reduces manufacturing costs and augments profit margins. This balance of operational excellence with financial stewardship is a testament to our commitment to delivering Customer satisfaction hand in hand with cost effectiveness and there's a lot of what John Givens has been driving here at VirTra. Our progress and investment in the military products have resulted in capabilities that are levels beyond anything else In the market, keep in mind that VirTra not only leads in simulator capabilities, but we also supply market leading Recoil kit capabilities allowing realistic training without the need for expensive and dangerous Blank rounds.

Speaker 3

It's these significant developments that will help to fuel some of our future growth and advance our reputation as industry leaders. I look forward to sharing more about our achievements when the time is right and when we can provide further details. While our year to date figures are promising, the true value lies in our potential for tomorrow. Our technology doesn't just represent a product rather it's a pathway to a safer, more prepared society. And as we continue to innovate, we keep our vision clear to equip those who serve with the very best training tools available, helping them to become the best trained version of themselves to make critical decisions that save lives and protect communities.

Speaker 3

I will now pass the conversation back to John, who will offer closing thoughts on our exciting journey ahead. Thank you.

Speaker 1

Thanks, Bob. As highlighted, our products form the core of Virtra's mission. This year, we've witnessed growing demands for our solutions, And I'm proud to say that our operations have scaled to meet this challenge. In the first half, we effectively addressed our backlog and concentrated on elevating the customer experience. The complete overhaul of our ERP system has not only increased our installation Efficiencies, but also significantly boosted our customer service capabilities and provided visibility on how well our processes changes are affecting the bottom line.

Speaker 1

We also made strong advances in supply chain management, reducing the risk of delays and disruptions while enhancing our operational performance. These improvements along with our scalable infrastructure have Refined inventory management, enhanced timely order fulfillment and improved financial oversight. The restructured territories and additional regional sales managers, along with the revised incentive plans and the addition of sales support specialists are already reflecting positively in our outcomes. Collectively, the modifications we've implemented in our operational And sales strategies are set to propel growth further. Our ongoing focus is to fortify our business pipeline across key markets, Uphold a standard of world class operations and consistently deliver superior quality to our customers.

Speaker 1

As we move forward towards the end of the year and into 2024, we are confident in the opportunities that lie ahead and expect a strong continued pace of growth. And with that, I'll open up the call for questions. Operator, please provide the appropriate instructions.

Operator

Thank you. We will now be conducting a question and answer The first question we have is from Jaeson Schmidt of Lake Street. Please go ahead.

Speaker 4

Hey guys, thanks for taking my questions and congrats on a nice quarter. Want to start with that big jump in bookings. Was this driven by a few customers or was it just broad based strength across the business?

Speaker 1

It was broad based strength and maybe in our perspective 1 or 2 decent sized deals. But yes, it was pretty much strength across the board.

Speaker 2

I concur.

Speaker 4

Okay. And then looking at gross margin also took a nice jump sequentially. How should we think about gross margin going forward? Is this the new level or will it revert to more of that normalized Q1, Q2 range?

Speaker 2

I would say that Q1 is probably more normal. Q2, we know we took a hit because of the inventory write off that we had. So I think a combination of Q1 is where we need to be. Q3 was an anomaly as we moved a fair amount of labor into our R and D category as we were doing some development items that offset some of our cost of goods.

Speaker 4

Okay, that's helpful. And then just the last one for me and I'll jump back in the queue. Looking at that BXR product, I know it's early, but just based on customer feedback, how should we think about order patterns for this? Do you think police departments are ordering multiple of BXR devices or is this one for the whole department? And I guess relatedly, it does seem very complementary, but are you at all concerned that this will cannibalize your core simulator market?

Speaker 1

Yes. I'm going to I'll talk about the cannibalization because I thought about that very long. So one of the problems that we've had is, There's such a long cycle because when you're doing sales, whether it's military or with counties State governments, they have to put the budget in. So there's 12 to 18 months. One of the problems that we had is we're standing alone waiting on that, but they have discretionary dollars At a level, we needed a product not only that serve to solve a problem of Soft skills, but we also needed something at a price point, so we could stay in there, show our capability.

Speaker 1

As far as cannibalize, No, because the training component with our V300s other than the shoot, don't shoot in those scenarios, We're not chasing that in the VXR headset because we find that that is negative training because you can't put your regular weapon, you can't see the sights. There's a whole bunch of complementary. We did a lot of searching and a lot of investigating, a lot of research to put together What path we were going to chase. And so I think we're in a very sweet spot that really complements what our B300 or B180 It does. We don't use our recoil kits with the VXR.

Speaker 1

The price point is quite low. And your other part of that question is, I think they're going to buy multiple kits because of our price point and what's the value. I always say content is king And the VXR is based on our content. We made a significant investment prior to me coming on board in the V3 studio and all these captures, And I want them to continue to capture and I tell them every 3 months I want them to come to me and tell me they need to paint the floor because they burnt Paying off the floor with using it so much. So, building that library is paramount and going forward.

Speaker 1

So, I think you will see some Nice revenue from that capability as a complementary product, but no, nothing in the cannibalizing at all.

Operator

At this time, this concludes our question and answer session. I'd now like to turn the call back over to Mr. John Givens for his closing remarks. Please go ahead.

Speaker 1

Thank you, operator. We stand firm in our service to our customers and their life saving missions. The passion and dedication of our team is a driving force behind our success, and I have every confidence that we will continue to push the boundaries of what is possible and change the world for the better. As we look forward to the rest of the year and into 2024, I'm excited to see the results following the strong foundation we've worked diligently to lay out. Thank you.

Speaker 1

Be safe. Take care and God bless.

Operator

Thank you for joining us today for Virtro's 3rd Quarter 2023 Conference Call. You may now disconnect.

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