VirTra Q1 2023 Earnings Call Transcript

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Provided by Quartr
May 15, 2023

There are 6 speakers on the call.

Operator

Good afternoon, and welcome to VirTra's First Quarter 2023 Earnings Conference Call. My name is Claudia, and I will be your operator for today's call. Joining us for today's presentation are the company's Chairman and Co CEO, Bob Farris Co CEO, John Givens and Chief Financial Officer, Alain on the call for questions from VirTra's institutional analysts and investors. 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. Products and services or 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.

Operator

The company does not undertake any obligation to update them as required by law. Finally, I'd like to remind everyone that this call will be made available for replay via a link in in the Investor Relations section on the company's website at www.virtra.com. Now, I'd like to turn the call over to VirTra's Chairman and CEO, Mr. Bob Ferris. Thank you and you may proceed sir.

Speaker 1

Thank you, Claudia 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 Q1 ended March 31, 2023, operator along with highlighted business accomplishments. We also filed our 10 Q with the SEC today, which is available for review at your discretion. And operator for the Q and A session. Before passing the call over to John to discuss operations and provide an update on our military market progress.

Speaker 1

After that, Alana will discuss our financial results in more detail. I'll then come back on to discuss how 2023 has been going so far We achieved this remarkable growth while at the same time pushing costs downward, a difficult accomplishment with recent inflationary pressures. Operator. Our efforts to scale the company and control expenses led to our best profitability quarter on record. We increased our gross profit by an impressive 88% and achieved a gross margin of 69% of total revenue.

Speaker 1

This significant growth also led to a net income of 2,900,000 Our strong financial results are in large part thanks to the investments we have made in our infrastructure, technology and talent over the last several quarters, which have ensured that our training solutions remain top of market by providing realistic scenarios that are highly effective in preparing individuals and teams operator for the field. In Q1, we continue to leverage the investments we made in our technology, including operator for further integrating our breakthrough technology called V3 into our solution set. As discussed during our previous update, V3 stands for VirTra Volumetric Video and presents a significant potential for advancing our customers' training content. Operator. The combination of high definition video and 3 d characters enables us to build a comprehensive library of training content and an affordability point and quality level unmatched in the industry.

Speaker 1

This library is uniquely adaptable for both screen based and headset based and operator of the company's platform, which provides VirTra a distinct advantage to attract and retain customers. We firmly believe this most realistic operator. And reusable training capability strengthens our position in all major aspects of training simulation, enhancing our competitive edge in 2023 operator and we will not stop here. We are hard at work on new products expected to elevate the world of effective training and elevate our financial performance in 2023 and into the future. Turning our attention to the key issue of staffing.

Speaker 1

The efforts to strengthen our leadership team in recent quarters are beginning to show up in our results as well. These new team members have implemented new systems, operator. Over the past few quarters, we have centralized our operations in our Arizona and Orlando facilities, which has had a positive impact on our financial results and prospects. Operator. Our new facilities offer the necessary space and resources to support our recent growth to meet increases in demand and improve overall efficiency.

Speaker 1

Both of our facilities are equipped awe inspiring state of the art operator. As a result, our facility tours are more impressive than ever before, especially for those seeking the world's leading company in police and military simulation training products. These facilities have created a more collaborative and innovative environment for our employees, allowing us to be more efficient and creative. While there were short term costs associated with the move, in the long run, we will realize gains as we permit larger scale and I will be your operator. We will now begin the Q1 of 2019.

Speaker 1

And now I'd like to provide some updates in each of our markets. Our government revenue increased by 70 and I will be your operator. Thank you, and good morning everyone. We will be conducting a number of questions from the company's Investors and the Company's Investor Relations Officer. The strong success was the result of improved performance in the law enforcement market as well as an increase in federal government police contracts.

Speaker 1

Internationally, we achieved substantial progress increasing our revenue by over to reach $3,100,000 This growth is a testament to the dedication and exceptional effort of our hard working staff members. While this might sound like an impressive increase, keep in mind that the comparison quarter was rather light to begin with. We feel we have underpenetrated the international market and we are implementing changes to improve in this area. We have reported strong growth from our subscription training equipment partnership or STEP program, which provides recurring revenue for VirTra and also offers an easier on ramp for smaller agencies interested in our solution, but are perhaps budget constrained for an outright purchase. This also gives our sales staff another tool in closing the sale.

Speaker 1

Operator. Currently, our recurring revenue, including warranty revenue represents 13% of the total quarterly revenue, but we expect this to increase in the future. And achieve our financial and operational targets for 2023. Though we still see many opportunities for improvement throughout the organization. With much of our investments behind us, a great market position and lagging competition, we are focused on rewarding our customers, employees and shareholders in 2023.

Speaker 1

I will now turn the call over to John.

Speaker 2

Thank you, Bob, and good afternoon, everyone. I'd like to provide you an update on our overall company operations and our activity in the military market. First, regarding our sales effort, operator. Though bookings were lower than the Q1 lower than expected in the Q1 than we'd like to have, it's important to note that operator. Lower bookings in the Q1 and into the 2nd quarter are not uncommon due to budget cycles and decision making skewing to the second half of the year.

Speaker 2

That being said, it is not an acceptable trend we want to continue. We are actively ramping up sales efforts, restructuring and prioritizing our and adding more sales staff. Our sales expansion efforts include adding international sales people to cover operator. Central South America, Canada, Africa, Europe and Asia, as well as breaking up the domestic territories further to cultivate growth pipeline. While the timing of these efforts, particularly international is difficult to predict, we see good opportunities in the pipeline and are working to increase our footprint.

Speaker 2

The sales restructuring comes off the heels of our operations streamlining effort and the success of our process improvement to handle the increased sales volume. Operator. And I will be your operator. In a moment, Alana will brief you on our new backlog reporting, which will provide leadership and shareholders and our ability to generate additional revenue through our sales efforts and cultivate the pipeline. Additionally, our investments in our ERP and scalability have resulted in higher capacity to install systems, increased customer service capabilities and are assisting us in identifying areas of opportunity for cost reductions.

Speaker 2

We are also taking steps to improve our supply chain management to mitigate any potential delays or disruptions, which will serve to further improve our performance. Speaking specifically about our military operations in Q1, We have been actively engaged in building a strong pipeline of leads and connections and we are pleased to report that our Orlando facility, which is conveniently located near key military decision makers continues to prove invaluable in providing us access to industry and the opportunities to build relationships in person. Our team has been busy conducting tours, demos and meeting with key industry stakeholders and prospects. We have not yet announced any significant contracts in the military market. However, we remain optimistic about the opportunities available to us.

Speaker 2

We continue to build on promising leads and relationships as we introduce our best in class products to the military community. Operator. We continue to target the Department of Defense fiscal year 2024, which begins October of 2023 as a key timeline for demonstrating strong and meaningful traction in the military market. Our operational and technological advancements have bolstered our competitive position and placed us on solid growth trajectory for the years ahead. Overall, we are confident in our ability to capitalize on the robust pipeline of opportunities in law enforcement, military and international markets.

Speaker 2

We will continue to keep you updated on our progress and developments in the future. Operator. Our team understands we have a mission to drive revenue while delivering a quality training product and in many ways we're just getting started. Operator. This quarter looks good based on historical performance, but it is not where the company should be given its history, product quality, And I'll turn the call over to Alana to provide financial update.

Speaker 3

Thank you, John. Good afternoon, everyone. It's a pleasure to be speaking to you today to review our unaudited financial results for the Q1 ended March 31, 2023. Operator. Our total revenue for the Q1 of 2023 increased 48 percent to $10,000,000 from $6,800,000 in the Q1 of 2022.

Speaker 3

Operator. The increase in revenue was the result of increases in step sales, simulator sales, accessories, curriculum and training, driven by both the domestic and international law enforcement markets. Our gross profit for the Q1 of 2023 operator. Increased 88 percent to $6,900,000 from $3,700,000 in the Q1 of 2022. Operator.

Speaker 3

Gross profit margin defined as total revenue less cost of sales was 69.3%, an improvement compared to 54.6 operator. The increase in gross profit was primarily due to the increased sales achieved while maintaining cost of sales in line with 2022 levels. This increased gross margin resulted from the favorable product mix of operator. Our net operating expense for the Q1 of 2023 was of $3,500,000 compared to $3,000,000 in the Q1 of last year. The increase in net operating expense was mainly due to an 11% increase in R and D expenses, one time costs related to the New Orlando facility, one time costs in new hire staff and severance for Old Staff.

Speaker 3

Beginning March 1, the company entered into a new sublease for our old facility, which will give us offsetting revenue to the lease expense currently in our operating expenses. Turning to our profitability measures. For the Q1 of 2023, we saw operating income jump to $3,500,000 from $700,000 in the Q1 of 2022. Net income for the Q1 of 2023 Total $2,900,000 or $0.27 per diluted share, which represents a significant increase and operator to discuss the financial

Speaker 2

results as compared to net income of

Speaker 3

$600,000 or $0.05 per diluted share in the Q1 of 2022. Our adjusted EBITDA non GAAP metric for the Q1 of 2023 increased to $4,000,000 from $1,000,000 in the Q1 of 2022. Now turning to our bookings and backlog. We define bookings as the total of newly signed contracts and purchase orders received in a defined period. For the Q1 of 2023, we received bookings totaling 4,400,000 And we define backlog as the accumulation of bookings 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.

Speaker 3

As of March 31, 2023, our backlog totaled $18,900,000 represents a robust demand for our product and services. The breakout of this backlog includes $10,300,000 in capital, operator. $6,500,000 in service and warranties and $2,100,000 in step contracts. Service warranties and step back operator. Is revenue that will be recognized on a straight line basis over the next 7 years.

Speaker 3

In addition to the backlog, operator. There is $6,000,000 in renewable step contracts that would represent additional revenue for the next 5 years. Historically, we have a greater than 95% renewal rate on our STEP contracts. Finally, to our balance sheet. Operator.

Speaker 3

As of March 31, 2023, we had unrestricted cash and cash equivalents of $14,300,000 an increase from $13,500,000 at on December 31, 2022. From a working capital standpoint, at the end of Q1, we had $27,300,000 in working capital, and operator for the Q4. For additional details of our financial results, please reference our 10 Q, which was filed earlier today.

Speaker 1

Thanks, Alana. I'd like to end by pointing out that the Q1 witnessed the onboarding of operator. Thank you, Claudia. Thank you, Claudia. Thank you, Claudia.

Speaker 1

Thank you, Claudia. Thank you, operator. Though we acknowledge our current positive results, we firmly believe that they do not fully reflect our true potential. Operator. There are numerous areas in which we can further enhance and improve to unlock even greater opportunities for growth.

Speaker 1

Still with these operational systems mostly in place, We are well positioned to further develop our business pipeline in our key markets, which encompass law enforcement, military and international. The opportunities We are shifting to a culture eager to address areas of improvement proactively, swiftly resolving challenges that arise. This approach allows us to fulfill our commitment to our shareholders and provide the level of quality that our customers, their loved ones and the public rightfully deserve. Operator. The Q1 of 2023 provides an objective perspective on our results so far.

Speaker 1

These results are due to the entire VirTra team doing the hard work to enhance all facets of our business. We plan to continue our Q1 success as we look to capitalize on the many opportunities that lie ahead and to best serve our customers every day. And with that, I'm going to wrap up my prepared remarks and we'll open the call up for your questions. Operator, please provide the appropriate instructions.

Operator

Your operator. The first question comes from Richard Baldry from Roth MKM. Please proceed with your question Richard.

Speaker 4

Thanks. Maybe drill into the cost of goods line. You're actually almost flat year over year on a nearly 50% increase and operator. Hello, the Q4 on higher revenues, anyway you want to look at it, it's a lot better. How sustainable do you think that is?

Speaker 4

What were the operator. There is there anything one time in there to think about? It's the highest level over 2 years. It's just that's a very much an outlier performance, so any color would help.

Speaker 1

Operator. And some timings on different things. There are not specific one time and I will be your operator.

Speaker 2

Okay. Thank you. Thank you.

Speaker 1

Thank you. Thank you. Thank you. Thank you. Thank you.

Speaker 1

Thank you. Thank you. Thank you. Thank you. Thank you.

Speaker 1

Thank you. Thank you. Thank you. Thank you. Thank you.

Speaker 1

Thank you. Our next question comes from the line of in our headquarters. In other words, certain overhead costs that have to be amortized across cost of goods sold will go down and have started to go operator. But structurally that we do expect that to fluctuate somewhat based on Our cost of goods and what kind of deals we can do and then also, as far as what our Costs are on a particular order. So, it was a particular favorable mix for us.

Speaker 1

We are not operator. Saying that this is the profitability that we will sustain indefinitely, but we are happy with that cost of goods sold number. And our focus is to try to find ways of even possibly increasing it, but it will vary from quarter to quarter. Operator. I mean, yes, Deepak, we can.

Speaker 4

Then a bridge from that into the inventory, which You've been building safety stocks and things for a few quarters. It stepped up another pretty considerable amount this quarter. Do you How do we think about that level as new way to stay or will it have slowed down over time?

Speaker 2

Well, this is John. I would say that we've identified in the supply chain where we've had Some issues and we have purchased for the future and done some blanket orders and are taking those on a Trying to take those in a much more distributed fashion across quarters, but we found that We really can't do that because we put ourselves at risk. So you'll see it's kind of a one off on some of our suppliers. So That's how you need to think about that. I mean, it will fluctuate just given the market.

Speaker 2

One time we had a problem with cameras. We resolved that. Now we have a problem with screens. And then we have another one and there's be another one that comes up. So it's just a matter of watching our Supply chain closely and anticipating.

Speaker 4

And you don't give formal guidance. Maybe talk about how this quarter's outperformance impacts what you'd expect to be typical seasonality on the revenue side. And then switching over to the booking side, which is a little below trend. The Q3 has typically been a big pipeline etcetera versus prior

Speaker 2

years. Thanks. I would say The key word that you use in that sentence is pretty apropos, it's seasonality. So, it's still going to be that way Based on budgets, now once we win a large military contract where we're on for a base and multiple option years, Like I talked about in previous calls, that becomes plateau. So we'll raise our base each That's one of the reasons why we've done STEP.

Speaker 2

Alana broke out the STEP, so I could show the investors that transparency that says, Well, if they execute everything in their capital pipeline capital backlog, here's what the base of their revenue would be. Well, now going forward, You can see as we increase our STEP, we then increase that base so we can try to flatten that out. But it is seasonal and there's operator. We try to do something about it and that's what the STEP program and our military contracts will do.

Speaker 4

And then maybe looking at the bookings because it has volatility like any other company. Operator. When you have a tougher quarter, does it feel like you enter the next quarter with some push out deals that help that one come in? Or are there other factors to think about

Speaker 2

Yes, this quarter was disappointing in the bookings. And like I said in my prepared comments, my focus is on the sales, The territories, the staffing and performance. So digging into that now, I'll probably have something more to say on that topic operator in the coming quarters. But right now, yes, it's something we're digging into. It's a bit disappointing.

Speaker 2

Long term, I would say is, And I hate always using it because it sounds redundant like there's no performance on it. But our military and our federal contracts, I want to use those as my base on where we sit with revenue. We're looking at another product line that we can your operator. There's a lot of police departments out there, but many of them have much lower budgets and much more less staff. So we're trying to put products in that range, so we don't leave operator.

Speaker 2

So, I think I'll report more on that as we dig into these and we look at the performance based on those initiatives. Sorry, I can't give any more than that.

Speaker 4

Great. Thanks for your help.

Operator

Your operator. The next question comes from Jaeson Schmidt from Lake Street. Please proceed with your question, Jaeson.

Speaker 5

Operator. Hey guys, thanks for taking my questions. Just want to follow-up on sort of the March quarter outperformance. Did the quarter benefit from any sort of Push outs from December or pull ins from June. Just trying to get a sense of what really drove you guys being able to buck seasonality here?

Speaker 2

Yes, that was quite unique because we as you know, we had those 2 large government contracts that came out and kind of the revenue itself pushed into the Q1. We didn't pull anything in early. Operator. But the other significant piece of that is kind of like I said, our report card for streamlining our operations

Speaker 5

Okay, that's helpful. And then just following up on gross margin, I know you mentioned it's going to fluctuate based on mix and obviously Revenue level, but just based on sort of this recent performance and assuming there's not a massive drop off on the top line. Is it fair to say that you guys should be able to keep gross margin at this sort of 60% or better level?

Speaker 2

I wouldn't speculate that. I would say that if you're looking at it, I would keep it somewhere between the Q4 performance and the Q1 performance in that range. And the reason why I say that is, The reason why I say that is that because we have with our ERP, we're really identifying those areas of opportunities and we're taking advantage of our previous costs on buys on our supply chain. So We'll get a better idea as that starts to flesh out.

Speaker 5

Okay, that's helpful. And then just last one for me and I'll jump back into queue. In regards to the STEP program, is there a target percentage of how much you'd like revenue to be coming from that program or how big of a piece of the pie it should be longer term?

Speaker 1

Operator. Spend capital money or that's what they're approved for. So, our preference the subscription is a great operator. It's a great tool to keep us on track with great service and support, but it's also a great tool to have Some revenue waiting for us on the upcoming quarters. We'd like to see that over 30% for sure.

Speaker 1

And But we're willing to we're certainly willing to take large orders of cash upfront, or cash on delivery. Those are also available are very acceptable. We just want to also make sure that people get the very best training tools that money can buy whether it's subscription arrangement or just outright purchase. 30% or higher would be our preference.

Speaker 2

And actually I can be a little more specific on how you need to think about that. I want the STEP revenue to be at 30%. And the reason for that is when you take on the 1st year of revenue from the step, the margins are lower. So I don't want to take away from our gross margins because we increase a step too much. Operator.

Speaker 2

Once we get those on there, we want to replace it every year because in the outer years, our margins are much higher. So that will kind of level

Speaker 1

Okay. That makes sense. Thanks a lot guys. Thank you, JC.

Operator

Thank you. At this time, this concludes the question and answer session. I'd now like to turn the call over to Mr. Operator, Mr. Ferris of Hollysys for closing remarks.

Operator

Thank you, sir.

Speaker 1

No problem, Claudia. Thank you. We would like to express our gratitude to all those who have shown an interest in our company and extend a special thank you to our investors for their unwavering support. Operator. The VirTra team is fully committed to financial success, delivering shareholder value and developing the world's most effective simulation training products.

Speaker 1

Our mission is to equip the brave men and women of armed forces and law enforcement agencies around the world with the tools they need to serve their country, operator. It is at the core of why we exist. Once again, thank you for your continued interest and support. We are hard at work to increase the chances of delivering outstanding results for our shareholders. With 2023 off to a strong operator.

Speaker 1

I firmly believe the best days for VirTra are ahead of us. Be safe, take care and God bless.

Operator

Operator. Thank you very much, sir, and thank you very much for joining us today for VirTra's Q1 2023 Conference Call. You may now disconnect your line.

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