VirTra, Inc. (NASDAQ:VTSI) Q1 2023 Earnings Call Transcript May 15, 2023

VirTra, Inc. beats earnings expectations. Reported EPS is $0.27, expectations were $0.04.

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 Ferris; Co-CEO, John Givens; and Chief Financial Officer, Alanna Boudreau. Following their remarks, we will open 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. During this presentation, management may discuss financial projections, information or expectations about the company’s 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.

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 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.

Bob Ferris: 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 first quarter ended March 31, 2023 along with highlighted business accomplishments. We also filed our 10-Q with the SEC today, which is available for review at your discretion. As a brief overview for today’s call, I’ll begin by providing highlights for the first quarter 2023 and I’ll summarize some of our recent business developments before passing the call over to John to discuss operations and provide an update on our military market progress. After that Alanna will discuss our financial results in more detail. I’ll then come back on to discuss how 2023 has been going so far before moving to Q&A.

And with that let’s begin. Q1 we continue to build on the momentum of our 17th consecutive year of revenue growth by achieving a remarkable $10 million in quarterly revenue our best performance ever. We achieved this remarkable growth while at the same time pushing costs downward a difficult accomplishment with recent inflationary pressures. 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. This significant growth also led to a net income of $2.9 million. 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 for the field.

In Q1, we continue to leverage the investments we made in our technology including 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. The combination of high-definition video and 3D characters enables us to build a comprehensive library of training content and an affordability point and quality level unmatched in the industry. This library is uniquely adaptable for both screen-based and headset based platforms, which provides VirTra a distinct advantage to attract and retain customers. We firmly believe this most realistic and reusable training capability strengthens our position in all major aspects of training simulation enhancing our competitive edge in 2023 and beyond.

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. The efforts to strengthen our leadership team in recent quarters were beginning to show up in our results as well. These new team members have implemented new systems made us more effective across our operations and have positioned us better for long-term success. 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. Our new facilities offer the necessary space and resources to support our recent growth and enable further scalability.

This includes accommodating more employees, equipment and production capacity to meet increases in demand and improve overall efficiency. Both of our facilities are equipped with awe-inspiring state-of-the-art equipment. As a result our facility tours are more impressive than ever before, especially for those seeking the world’s leading company and police and military simulation and 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 production eliminate redundancy and optimize our processes. These gains should help us in rewarding our faithful and patient shareholders in the quarters and years to come.

And now I’d like to provide some updates in each of our markets. Our government revenue increased by 70% to $5.5 million from $3.2 million in the prior year. The strong success was the result of improved performance in the law enforcement market as well as an increase in federal government police contracts. Internationally, we achieved substantial progress increasing our revenue by over $2 million to reach $3.1 million. 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. Currently, our recurring revenue, including warranty revenue represents 13% of the total quarterly revenue, but we expect this to increase in the future. In summary, our record-setting quarter has laid a strong foundation for us to continue our profitable growth path 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. I will now turn the call over to John.

John Givens: 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, though, bookings were — lower than expected in the first quarter, than we’d like to have. It’s important to note that, lower bookings in the first quarter and into the second quarter are not uncommon due to budget cycles and decision-making skewing to the second half of the year. That being said, it is not an acceptable trend we want to continue. We are actively ramping up sales efforts, restructuring and prioritizing our sales territories and adding more sales staff. Our sales expansion efforts include adding international salespeople to cover Central South America, Canada, Africa, Europe and Asia as well as breaking up the domestic territories further to cultivate and grow the 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. 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. It’s worth noting that our backlog remains robust and presents ongoing opportunities for executions in the second quarter, as we implement these additional sales initiatives. In a moment, Alanna, will brief you on our new backlog reporting which will provide leadership and shareholders, a transparent view of our progress as we target increasing our step in recurring revenue. We are confident in 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. 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 contract in the military market however, we remain optimistic about the opportunities available to us. We continue to build on promising leads and relationships as we introduce our best-in-class products to the military community. 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.

We will continue to keep you updated on our progress and developments in the future. 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. This quarter looks good based on historical performance, but it is not where the company should be given its history, product quality, market position and exceptional staff. Progress is happening. And we’re getting closer, but we haven’t arrived just yet. I’ll now turn the call over to Alanna, to provide financial update.

Alanna Boudreau: Thank you, John. Good afternoon, everyone. It’s a pleasure to be speaking to you today to review our unaudited financial results for the first quarter ended March 31, 2023. Our total revenue for the first quarter of 2023 increased 48% to $10 million from $6.8 million in the first quarter of 2022. 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 first quarter of 2023 increased 88% to $6.9 million from $3.7 million in the first quarter of 2022. Gross profit margin defined as total revenue less cost of sales was 69.3%, an improvement compared to 54.6% in the first quarter of 2022.

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 systems, accessories and services sold in the quarter. Our net operating expense for the first quarter of 2023 was $3.5 million, compared to $3 million in the first quarter of last year. The increase in net operating expense was mainly due to an 11% increase in R&D expenses, one-time costs related to the new Orlando facility, one-time costs in new hire staff and severance for old staff. 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 first quarter of 2023, we saw operating income jump to $3.5 million from 700,000 in the first quarter of 2022. Net income for the first quarter of 2023, totaled $2.9 million or $0.27 per diluted share, which represents a significant increase compared to net income of $0.6 million or $0.05 per diluted share in the first quarter of 2022. Our adjusted EBITDA, a non-GAAP metric for the first quarter of 2023 increased to $4 million from $1 million in the first quarter 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 first quarter of 2023, we received bookings totaling $4.4 million. 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.

As of March 31, 2023, our backlog totaled $18.9 million, which is a testament to the strength of our sales in Q1. Despite being lower compared to March 31, 2022, this backlog still represents a robust demand for our products and services. The breakout of this backlog includes $10.3 million in capital, $6.5 million in service and warranties and $2.1 million in STEP contracts. Service warranties and STEP backlog is revenue that will be recognized on a straight-line basis over the next seven years. In addition to the backlog, there is $6 million in renewable STEP contracts that would represent additional revenue for the next five years. Historically, we have a greater than 95% renewal rate on our STEP contracts. Finally to our balance sheet. As of March 31, 2023, we had unrestricted cash and cash equivalents of $14.3 million, an increase from $13.5 million at December 31, 2022.

From a working capital standpoint at the end of first quarter, we had $27.3 million in working capital, an increase from $24.3 million at the end of Q4. For additional details of our financial results, please reference our 10-Q which was filed earlier today. That concludes my prepared remarks and now I’ll turn it back to Bob.

Bob Ferris: Thanks, Alanna. I’d like to end by pointing out that the first quarter witnessed the onboarding of key new talent and implementing of the right processes, to support increased business volume while achieving the best financial quarter, in our company’s history. Though we acknowledge our current positive results, we firmly believe that they do not fully reflect our true potential. There are numerous areas in which we can further enhance and improve to unlock even greater opportunities for growth. 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 ahead are significant, and we remain focused on increasing momentum in all of these markets.

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. The first quarter of 2023 provides an objective perspective on our results so far. 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 first quarter 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.

Q&A Session

Operator: Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] The first question comes from Richard Baldry from ROTH MKM. Please proceed with your question, Richard.

Operator: Thank you. [Operator Instructions] The next question comes from Jaeson Schmidt from Lake Street. Please proceed with your question, Jaeson.

Operator: Thank you. At this time, this concludes the question-and-answer session. I’d now like to turn the call over to Mr. Harris – apologies, Mr. Ferris for closing remarks. Thank you, sir.

Bob Ferris: 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. VirTra team is fully committed to financial success, delivering shareholder value and developing the world’s most effective simulation training products. 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, complete their missions and return home safely. 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 start, I firmly believe the best days for VirTra are ahead of us. Be safe, take care and god bless.

Operator: Thank you very much, sir and thank you very much for joining us today for VirTra’s first quarter 2023 conference call. You may now disconnect your lines.