Q3 2020 VirTra Inc Earnings Call
Please standby we are about to begin.
Good afternoon, and welcome to furniture third quarter 2020 earnings Conference call. My name is Christie and I'll be your operator for today's call.
For todays presentation are the company's chairman and CEO, Bob series and CFO Judy Henry.
In their remarks, we will open up the call for questions from purchase institutional analysts and investors.
Before we begin the call I would like to provide for trust 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 might get worse.
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 this.
Statements made.
The company does not undertake any obligation to update them as required by law.
Finally, I would like to remind everyone that this call will be made available for replay via a link in the Investor Relations section of the company's website.
At Www Dot <unk> dot com.
Now I would like to turn the call over to purchase chairman and CEO Mr. Bob that Sir. Please proceed.
Thank you good afternoon, everyone. Thank you for joining us today for Virtusas third quarter 2020 earnings call.
I'm also joined by Judy Henry our CFO.
2020 has been a volatile year to say no to say the least.
But at the last three quarters of demonstrated anything for Berkshire.
We are highly adaptable organization, it's an incredibly robust customer base.
We serve a need that is integral to the wellbeing of all.
Thus improving the training and therefore performance of law enforcement and military personnel through highly effective simulation training.
With our talented personnel into an assay for success, we've adapted well to changing circumstances and ensure vital mission continues relatively on impaired.
In fact, despite the significant challenges weve faced due to COVID-19.
Were able to achieve about the same revenue in the first half of 2020 as we did last year.
Bear in mind, our third quarter results and 29, she were quite good.
Q3 last year was the second best quarter in the 27 year history of our company.
Very high bar Andy.
As those of you have seen our earnings release, we already know despite the pandemic, which is particularly complicated our installation process. Our third quarter results were essentially in line with our results a year ago.
For the third quarter revenue was 6.4 million. We're in positive net income, which drove EPS of 11 cents and we earned 1.6 million in adjusted EBITDA.
As a result, we are in a very similar position. This year as we were at the same time last year. When there were no travel restrictions for pandemic.
Get the silver lining for Virtusa is that despite the strong revenues. We also increased our backlog.
As of September 32020, our backlog was 14.4 million, which is 3.1 million higher than it was at this time last year.
The financial results for the third quarter underscore it seem consistent with second quarter.
Berkshire continues to sell and service the essential needs of our customers. Despite the obstacles created by Koby 19.
However, unlike Q2, we were able to ship and install product to domestic customers more effectively this past quarter as various state lockdowns lifted as regulatory guidelines became less restrictive and as we and our customers became more proficient at navigating the obstacles.
Let me be clear virtually is not immune from business challenges unique to 2020.
Trade shows which are large focus for us each year and particularly in Q3, and Q4 are obviously cancelled or converted to online portals.
International orders more so than domestic ones have been delayed due to additional complications with continued international travel restrictions.
However.
I've said this in the past and it continues to be true that as far as we know we have not lost sales directly from covered 19th.
And our ability to exceed last year's pace when taking into account our backlog indicates that despite installation headwinds this year's sales have accelerated.
We highlighted a few more and more important sales with press releases this quarter that are worth mentioning today.
The first is the 1.5 million dollar order we received.
From the U.S. Department of Homeland Securities Federal Law enforcement training center or Flushing.
Let's see provides career long training to law enforcement professionals and more than 90 Federal agency.
And is the nation's largest provider of law enforcement training.
They became a virtual customer in October of last year and with the second order our simulators will be installed at all four of their training centers by the end of this year.
Given flood she's reputation their choice to double down on their partnership with US sends a strong signal to perspective customers.
Our partnership with lets see provides us with a concentrated channel through which we can reach and educate a wide range of police agencies and.
And it serves as a great example of how Virtusa is able to grow our brand awareness with those who could influence purchasing decisions.
During the quarter. We also received an 863000 dollar order from the U.S. customs and border protection, a long time and large customer for Virtusa.
This order was for simulation training products and services and worth noting it included some of our newer dropping recoil kits.
Those of you who have followed our story for some time, we'll know that Virtusa has long been the leader in judgmental use of force and de escalation simulation training.
But maintaining that reputation and expanding market share requires constant innovation.
Innovation is a part of our DNA and is often at the heart of our competitive advantage. It's.
It's always rewarding to see long term satisfied Berkshire customers upgrade to the latest tools to provide their officers with the best training available.
Our third press release this year relates to a new partnership we have with a company called info Cytec or I guess Ti.
But since this discussion relates directly to some of the larger growth opportunities in the military market I'm going to save that discussion for my closing remarks for now I'm going to turn the call over to our CFO Judy Henry to provide an overview of the financial results for the third quarter of 2020 Judy.
Thank you Bob and good afternoon, everyone.
Our total revenue for the third quarter of 2020.
6.4 million.
This was a 4% decrease from 6.7 million of revenue we recognized in Q3 of last year.
For the nine months ended September 32020.
Total revenue was 12.5 million this.
This was a 2% decrease from the 12.8 million week, we recorded in the first nine months of last year.
The decrease in revenue for the three and nine months ending September 32020 was the result of a reduction in the number of equipment installations due to COVID-19 travel restrictions.
Compared to the same period in 2019.
Our gross profit for the third quarter of 2020 increased 6% to $4 million or 61.9% of revenue from 3.8 million or 55.9% of revenue in the third quarter of 2019.
The increase in gross profit was primarily due to the product and service mix reduce direct material costs warranty costs and lower travel costs.
For the first nine months of the year, our gross profit increased 1% to 7.1 million or 57% of total revenue from 7.1 million or 55.2% of total revenue.
The slight increase in gross profit was primarily due to sales volume and product mix, which tends to remain fairly consistent as a percentage of total revenue when compared annually.
Our operating expenses for the third quarter of 2000 22.7 million a 10% increase from the 2.5 million we reported in Q3 of last year.
For the first nine months of 2020, our operating expenses increased 1% to 7.3 million from $7.2 million in the same period a year ago.
The increase in operating expenses three months ending September 32020.
Due to a 266000 impairment in the investment in EPS Entertainment Corp, known attack rate.
Recorded as an operating expenses then.
The nine month period also included a 406000 dollar impairment in the investment of Tech.
Court it as an operating expenses.
Which was also offset by reduced selling general administrative costs from COVID-19 restrictions on travel and trade shows.
Turning to our profitability measures income from operations for the third quarter 2020 was 1.2 million inline with income from operations of 1.2 million in third quarter of last year.
For the first nine months of 2020 loss from operations was 115000 slightly above the loss from operations of 94000, we reported for the third first nine months of 2019.
Our net income for the third quarter of 2020 totaled 860000 or 11 cents per diluted share.
This compares to net income of 937000 or 12 cents per diluted share in Q3 of last year.
For the nine months ended September 32020.
Our net loss totaled 123000 or two cents net loss per diluted share.
Compared to a net loss of 10000.
Zero cents net loss per diluted share in the comparable period a year ago.
Our adjusted EBITDA, and non-GAAP financial measure improved to $1.6 million in the third quarter of 2020 compared to adjusted EBITDA of 1.4 million in Q3 last year.
Through the first nine months of 2020, our adjusted EBITDA was 615000 compared to adjusted EBITDA of 339000 in the first nine months of 2019.
Turning to our bookings and backlog.
We define bookings as the total of newly signed contracts and purchase orders received in a given time period.
For the three months ended September 32020, we received bookings totaling 6.5 million.
We define backlog as the accumulation of bookings from sign contracts and purchase orders that have not been started or uncompleted performance objective. Therefore, they cannot be recognized as revenue until delivered in a future period.
Backlog also includes extended warranty agreement and step agreement that are considered deferred revenue recognized on a straight line basis over the life of each respective agreement.
As of September 32020, our backlog was 14.4 million, which was up 27% or 3.2 million from the 11.3 million, we reported a year ago and up from 14.3 million at the end of June 32020.
Finally to our balance sheet.
At quarter end, we had approximately 4.1 million in cash and cash equivalents, which was up from 3.3 million in cash and cash equivalents and certificate of deposits at the end of the period ended December 31 2019.
Accounts receivable and Unbilled revenue combined to total approximately 6.2 million at quarter end compared to 5.9 million at December 31 2019.
From a working capital standpoint, we ended the second quarter 2020.
With 7.7 million in working capital compared to $7.2 million in working capital at December 31, 2019.
For additional details of our financial results. Please reference our 10-Q, which was filed earlier today that concludes my prepared remarks, I'll turn it back over to Bob.
Thanks Judy.
As we've discussed on prior calls virtually began as just an idea and then after years of hard work became the gold standard for effective simulation training for police.
What's incredibly exciting is to see it happening again.
You see by leveraging millions of dollars of already in invested by virtue military clients could benefit from our technology.
Could realize higher realism, and training at higher levels of durability and with lower costs than in the past.
This is very possibly the largest growth opportunity presented to our business.
This is also exactly the kind of thing that excited Mitch salts.
His courage to start new enterprises, or takeover Smith, and Wesson and turn it into one of the greatest success stories that American business was nothing short of amazing.
As you likely know and independent virtual board member Mitch salts passed away. This this year.
The entire virtual community has been warning has loss and our thoughts and prayers remain with his family and loved ones.
Mitch believed that when virtually created the best simulators in the world.
Than we owed it to the world to train not just police, but also were fighters.
And we plan to accomplish this goal.
In the last quarter, we made substantial progress positioning virtually to grow our business in the military market.
The 1.9 million dollar contract, we won as a result of our partnership with into a cytec or.
S. T. I mentioned a few moments ago is a great example of the key foothold.
We're establishing with the military.
Yes, she is a subsidiary of Dcs Corporation, which.
Which previously won the 135 million dollar contract to support the Air Force Research Laboratories, Ehrman decision, making in interface research for admire program.
The purpose of the contract is due to develop technology that improves our military were fighters decision, making marksmanship skills and others.
Through our partnership we're providing critical and unique piece to the puzzle.
It is made possible by building upon versus award winning technology.
We're working to develop next generation training content with the expected result of unveiling. The most effective stimulation system for school improvement the world has ever seen.
Never before have our aspiration has been so high and the support we are receiving from the Deo D. So complete.
The revenues from this project are important but whats Paramount is what it says about the military's appetite for our solutions and technical know how.
The U.S this contract vehicle to bring us onboard and work together on new capabilities.
There are obviously no guarantees, but this work shows the value we can offer to the federal government.
And it could help accelerate our penetration into the military market, especially when major milestones are reached.
To ensure our strategic approach the military market a sound, we required dose with proven track records and decades of experience.
Last year, we engage in jail O'connell and associates, a highly regarded business development firm to help our efforts in the military market.
And last week, we added John Gibbons, one of the very best military simulation experts in the country to our board of directors.
Johnson incredibly well regarded and accomplished simulation industry executive who started with an idea and built one of the most prominent simulation training companies in the world.
We're confident that his expertise and simulation training and in particular has experienced with the military market will be of great value to our organization as we make a more concentrated push into the military.
We are honored and very excited to have him on board.
Matt Berlin, and I have a combined total of about 30 years experience in the police simulation train market, where as John has about 20 years in the military simulation market and as a World Class addition to our board.
I'd like to now move our attention towards the end of 2020 and the start of 2021 as.
As you can see our nine month financial results were in line with where we were a year ago. Despite the pandemic.
And while we had quite a hill to climb last year, we were able to achieve a rare business achievement.
Our 14th consecutive year of top line growth.
There is no guarantee that we'll be able to continue that trend. This year given the state of the world, but we are cautiously optimistic that it is possible.
We have the same great and commitment to excellence. This year as we did last year and our team has certainly proven our ability to deliver under pressure.
We have a larger backlog than we did a year ago and during the third quarter. Our hard working sales team generated 6.5 million in bookings the majority of which will likely be converted into revenue in the fourth quarter.
As I said at the start of this call the pandemic and our customers and governments response to it could materially impact our ability to install product and therefore recognize revenue we've.
We've seen lock Lockdowns hit Europe in recent weeks and should that happen in the US we could certainly find ourselves in situations that echo the challenges we faced during the second quarter.
Regardless of whether installation headwinds pickup the fact remains that the long term prospects for our business remain.
Better than ever before.
Virtusa has proven a remarkably stable company with a clean balance sheet and a history of successfully navigating challenging economic environments.
We have $4.1 million in cash no debt other than the PPP loan, which we expect to be fully forgiven and financial progress at essentially matches. This time last year, but with new sales exceeding last year.
We remain cautiously optimistic that we will end the year on a positive note due to the quality and mix of our backlog and exceptional work our team continues to put in everyday.
And with that I'm going to wrap up my personal remarks, and we'll open the call up for your questions. Operator, please provide the appropriate instructions.
Thank you the floor is now open for questions. If you would like to ask a question. Please press Star then one on your telephone keypad.
And if you are using a speakerphone. Please pick up your handset to provide that that's sound quality.
Again, ladies and gentlemen, do you have a question or comment. Please press Star then one on your telephone keypad.
Our first question comes from Jason Jason Smith with Lake Street. Please go ahead.
Hey, guys. Thanks for taking my questions Bob I know your remaining mindful of sort of the macro backdrop here in Q4, just curious if you think Q3 potentially benefited from customers who are in a pulling in orders to get in ahead of some potential noise, whether it be the election, whether it be spiking code.
Cases et cetera.
Yes, great question.
I think that that there is definitely some potential there but realize in years past. It they've also had those kind of concern so.
Even even though there is an election year. If you go back four years in versus history.
There wasn't an unusual event. So I do think though that there was some of that but I do think it is kind of in line with the way it's been handled in years past.
Okay. That's helpful. And then you've always talked about the military market being a significant opportunity for you guys or what do you think is are really driving sorry, some of the traction you've been seeing recently.
Okay can I ask.
Simple as the results of a lot of hard work by very talented people.
We've been we've been working on the military market for many years Weve focused on it specifically of late but.
But really we are first our first products released in 2004 had designs built into them in ambitions around the military market.
Now we ended up finding a lot more success in the police market.
Right off the bat in 2000 for the military market, though is known for taking much longer to develop to find the right contacts to to get the right opportunities. It generally takes more time. So I do think though that the military recently has gone through a major transfers.
And where they're really looking at how does immersive virtual reality transform the way that they train and in doing that they really have focused on the idea of point of need training meeting.
How do we get simulation products into the hands of the actual were fighters and not have have it be a situation where we're we're fighters have to travel to simulation center. Once every six months and get some training and so that shift is at I believe is really open up opportunities because.
Virtusa has done a lot of products from our.
Electric return fire device that simulates return fire fire, our threat fire to R. Chop in recoil kits that work with actual firearms and can create.
This locked back at 30 rounds, so if you're shooting and M. It locks back when you're when you would be out of ammunition for proper training and avoiding training scars.
So and I also think maybe the military of today is a little more open for innovative commercial companies that have products that have been refined.
In the commercial sector that actually have a lot of applicability to the training within the military sector. So if you look at the.
Hey awards that other transactional to already being executed by military that whole idea of OTI. A is is around the concept of getting innovative companies that traditionally have not been a large supplier to the defense department getting them into the queue and if they have a great.
Product at a great price for the military than than taking advantage of that opportunity. So.
So our philosophy is that we want the military to see Virtusa as an area, where they can take advantage of an opportunity where they can leverage what we've already accomplished and.
And then possibly weaken a little for their need, but ultimately end up with a incredible product that exceeds what they've done in the past I think a lot of the military.
Lot of the military decision makers are onboard with that concept.
Okay I appreciate that color and then last one from me and ill jump back into queue curious if you could update us on what you're seeing in that program and if you're seeing any traction there.
Yeah.
We continue to see traction on the step program.
But it is a very situational.
Program, meaning that certain agencies. They may already have money cued up and available for an equipment purchase and so they will go to proceed with the equipment purchase regardless of us offering to step program. We have other customers out there that have no ability to do a capital purchase they do not have the money it might be.
One to two to three years for them to get budget for the equipment.
And so sometimes those groups absolutely are delighted that we have a step program options. So they can get get started with some of our equipment right away.
So we're seeing a mix it just every groups a little different I will say that we are noticing some some move towards simulation as a service and and so that simulation as a service definitely feeds into the whole step concept and we feel very fortunate that we spent the time.
Two three years ago to do the research and begin the ground work needed to have a step program. That's now entering its second year.
And the last I heard every single customer who had signed up for a subcontract renewed.
Every single, one which has a phenomenal track record and many times people have other issues of why they might cancel but right. Now every single person who did the one year step has renewed for a second here that.
Begun soon.
Great question. Thank you.
Okay perfect. Thanks, a lot guys.
And our next question comes from Richard Baldry with Roth Capital. Please go ahead.
Thanks.
And just wondering if you could comment a bit on the linearity of the quarter curious at both in terms of the bookings and deployments. So did it start pretty tight in the beginning of the quarter and then kind of open up a lot by the end or was it more flattish and maybe a little color around the beginning of the fourth.
Quarter to date thanks.
Just to clarify are you speaking to recognize revenue throughout the quarter.
Sort of how well you're able to get out and actually deploy.
Yes, because you had a good revenue quarter end, but the backlog in income so I'm sorry, just curious.
I guess it could be two parts it could be the bookings hard to sales and how that reacted but also your ability did where a lot of the deployments are late in the quarter. Because you were able to gain access to facilities later and how thats working now.
Yes, if you want to cover that Judy.
In terms of the bookings have been very.
Hard to say they have just come in consistently throughout the quarter. I mean, we've had some larger contracts and those have been in the works for a while we have you know quite a long lead time in our pipeline, especially for some of those larger contracts and so they just tend to come in the door when all of the.
The items are checked off in the contracts can be issued.
As far as recognized revenue I do think that that those that there were moments, where we had a little bit more travel available but are that that team is isn't a constant mode of planning and so that does adjust based on the customer so really many many times that's based on.
How open customers are saying, okay. We're ready ship the equipment, we're going to have people on staff for training.
And so and then if somebody if one group says we cant do it then we pivot and look for another customer who we've completed the products for or can get the products through production and testing in time to meet meet their deadlines I.
I think the sales surge that we've had with our sales team is outperformed where we were last year I think thats given our operation team a lot more flexibility and even despite the fact that co bid would stop them from doing certain installs are able to pivot to add another install where they get an opportunity to get in before the end.
For the quarter.
And so yes, you are right we have a dual situation where despite co bid we had a really incredible recognize revenue quarter. But then also we were able to pivot and.
And actually have.
That might be achievable because our sales inflow is is very high so we have a lot of.
New orders that we can kind of pick and choose from as far as working through the timelines of customers to get them.
To get them through.
And then we also of course do you have.
International is where we think there are more delays and things where we could have even had a better year. This year had it not been for the.
The major headwinds from co bid on the international front, which is more exacerbated and domestic front.
Great. Thank you.
As a reminder, ladies and gentlemen, if you would like to ask a question. Please press Star then one on your telephone keypad.
And our next question comes from Allen Klee with National Securities. Please go ahead.
Yes, Hi, you said in your remarks that your ability to kind of travel and and deliver.
Had improved in Threeq versus Twoq you I'm just curious how would you say that that is you know today versus how it was in threeq.
Yes, Thanks, Great question.
Hi.
As of today, it's similar third quarter, we Didnt co bid did not impair us very much on the domestic front in some cases not at all.
Fourth quarter, it's it's unknown so if.
If fourth quarter is similar to third quarter, Dan we're expecting to have a good finish to 2020.
So I have we have heard like you like everyone's heard and watch the news of surging cobot cases.
But also we've had a lot of a lot of those.
A lot of the reports that.
That people are getting adjusted to Cove in 19, and if found ways to work around it. So it's really us many times as you can imagine it's somewhat particular to the exact customer that we have.
As to whether or not we're able to install so.
And then there is the potential of some states requiring negative test before accepting travelers.
And of course, we we have no problem with complying with that but that could also slow us down in fourth quarter. So.
So we're still cautiously optimistic about fourth quarter.
But.
Definitely realize that we could we could have some efforts hamper. Good news is that all that that might mean is a is a delay in revenue and and not a negative impact overall on the company. So.
We continue to gain a lot of traction throughout the industry with our products and our services and.
And we see that only potentially accelerating into the future.
When I look at those.
Segments of your revenues you are customized software and customized.
Content scenarios has been growing nicely sequentially over the last three quarters could you tell us kind of what's going on there and how you think about that particular line.
Yes, I think that's that's a result of.
Having a large installed base of equipment out there.
And that's also a result of certain clients requesting very specific customization from us for their their purpose I.
I think thats, just a sign of a.
Healthy company, that's got a large installed base with some very strong customers that have the interest and the wherewithal to get some customization done to.
To exactly their specifications and so.
We we certainly support that and we also support clients who want to use our nationally certified curriculum.
EBITDA.
As it sets and we have a lot of people who are really really liked the fact that they can get world class de escalation from Virginia without having to try to to hire a bunch of experts from around the country and figure a lot of things out for themselves that we've done a lot of that hard work for them. So.
While the custom projects, we support and.
And it is helpful to our company, we also very much so.
Support those those clients that want to use our library as it comes.
Okay, and you've spoken about your international business and and the reasons why it's down year over year due to covance being more of an impact.
But how about just the general interest of.
Potential deals that could you know maybe turn into something in the future. Once once travel becomes better could you comment on that.
No we.
We think that that.
That is actually very healthy and growing and.
A very macro level I think that has to do with how the world is becoming more and more accepting of technology.
Many years ago I know this sounds are outrageous, but many years ago. There was actually pushback from instructors I thought the only way to train was using live bullets and paper targets and that any other type of training could not be useful now granted that was 2030 years ago, but that was also a time when people were not.
Using smartphones and and there is just a a large wave of acceptance that and it grows every year with younger and younger instructors in younger and younger mayors and city Council people and chiefs of police.
There is this acceptance that technology can help in so many ways, where it didn't help before and de escalation training.
The the certified curriculum learning how to handle autism and those with mental.
Mental issues all of that type of training that officers are often expected to have nowadays.
Our our capability to deliver that is really unparalleled and I think it's more and more accepted worldwide as technology is essentially more and more accepted and more powerful everyday we we normally see our AR.
The components that we have available to use for our for our approach to simulation training, they get better and cheaper because of all the push of.
Of the components the cost items that we use so so it's a very good macro level story for the future of Virtusa and not just version for the future simulation training.
I believe is is going to only increase.
Also as co bid it remains an issue for years or other another biological hazard becomes an issue virtuous approach to training.
As often very friendly to having some level of isolation. So.
Can get a lot of training done through our technology without having to have a large group of people in one location. So that could also be helpful for for as an.
On the international stage.
Did that answer your question.
Yes. Thank you one just a small housekeeping question.
Could you say that the the expense related to your impairment charge was 260000 and that that some one time in your expenses and then Dick.
Does this mean anything in terms of how the royalty payments that you get should.
Is there any reason why that number should change in the future.
So the impairment is tested quarterly and looked at on a quarterly basis ongoing.
For the life of the investment.
And.
In terms of the impact on royalty it is that is it.
Just the cost basis of carrying on the balance sheet for the investment that we have to review and analyze for impairment and is independent of the royalty. The royalty is based on the calculation.
Modern round.
Performance and that's an ongoing.
Quarterly or monthly.
Calculation and Alan Yes, it's it is a one time expense.
Well or weren't as high.
No its analyze quarterly yet but it is you are correct that is a onetime hit as you could think of it.
Great. Thank you very much.
At this time. This does conclude our question and answer session I'd now like to turn the call back over to Mr. Farrell for his closing remarks.
Thank you.
As always we appreciate you all taking the time to join us.
On Thursday, we'll be participating in the Roth technology virtual event for those investors and analysts who are attending we look forward to speaking with you soon.
As you know tomorrow.
Number 11, we honor the service of all veterans.
I asked that we make special effort to keep in our thoughts and prayers the missing the fallen.
And those who right now.
Volunteer to potentially be in harm's way to preserve our way of life.
I'd like to remind those who own shares of Hersha that our staff of nearly 100 talented professionals are hard at work building. The worlds most effective simulation training products. So that the war fighter and the peace officer conserve their country accomplish their missions.
And make it home safely.
I firmly believe the best days for Virtu are ahead of us be safe take care and God bless.
Thank you for joining us today for purchase third quarter 2020 Conference call you may now disconnect.
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