Q1 2023 VirTra Inc Earnings Call
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Good afternoon, and welcome to the Vitreous this quarter, that's pretty 23 earnings conference call My.
My name is Cathy 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 <unk>.
Hershey, China, given and Chief financial officer of lineup they've got them.
Following their remarks, we will open the poll for questions from virtuous institutional analysts and investors.
Before we begin the pool I would like to provide the 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 all markers.
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.
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 Dot Dot com.
Now I'd like to turn the call over to chairman and CEO Mr. Bob. Thank.
Thank you and you May proceed sir.
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.
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 Atlanta 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.
Priest, 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've made in our infrastructure technology and talent over the last several quarters, which have ensured that our training solutions remain top of market are 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 V. Three into our solution set as discussed during our previous update VIII stands for virtual volumetric video and presents a significant potential for advancing our customers' training con.
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The combination of high definition video and <unk> characters enables us to build a comprehensive library of training content, and an affordability and quality level unmatched in the industry.
This library is uniquely adaptable for both screen based and headset based platforms.
Which provides virtue a distinct advantage to attract and retain customers.
We firmly believe this most realistic and reusable training capabilities 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 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 are beginning to show up in our results as well.
These new team members have been implemented new systems made us more effective across our operations and have position 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 are.
Our new facilities to 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.
But in.
Both of our facilities are equipped all inspiring state of the art equipment. As a result, our facility tours are more impressive than ever before especially for those seeking the worlds 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 realized 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 hardworking staff members. While this might sound like an impressive increase keep in mind that the comparison quarter was rather light to begin with we.
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 <unk>.
And also offers an easier on ramp for smaller agencies interested in our solution, but are perhaps budget constrained for now right purchase.
This also gives our sales staff another tool and 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.
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 .
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. So bookings were lower than the first quarter of what was expected in the first quarter.
Then we'd like to have it is 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 accepted an acceptable trend. We want to continue we are actively ramping up sales efforts restructuring.
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 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.
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 and 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 and a moat.
A lot of them 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.
Currently 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.
<unk>, 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 tourist 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 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, 'twenty, four which begins October 23 is 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 men.
The 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 will now turn the call over to audit to provide final.
Okay.
Thank you John and good afternoon, everyone. It's a pleasure to be speaking to you today to review our financial.
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 Scottsdale, stimulator sales accessories curriculum and training driven.
By both the domestic and international law.
Unfortunately.
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 is now in line with 2022 levels.
Increased gross margin resulted from a 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 our new Orlando facility, one time costs and.
New hire staff and severance.
Oh obsessed beginning March one the company entered into a new sub lease for our old facility, which will give us the 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 jumped to $3 5 million from 700000 in the first quarter of 2022.
Net income for the first quarter of 2023, total $2 9 million or 27 cents per diluted share, which represents a significant increase compared to net income of <unk> 6 million or five cents per diluted share in the first quarter of 2020 came.
Our adjusted EBITDA, a non-GAAP metric for the first quarter of 2023 increased <unk> 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 or.
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 future periods.
As of March 31st 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 product and services.
Take out of this backlog include $10 3 million in capital $6, 5 million and service and warranties and $2 1 million and stock buybacks service warranties and stuff that Bob 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 and renewable stuff contracts that would represent additional revenue for the next five years.
Historically, we have a greater than 95% renewal rate on our 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 the 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.
Thanks, Falana I'd like to end by pointing out that the first quarter witness 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 and 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 that.
The first quarter of 2023 provides an objective perspective on our results. So far. These results are due to the entire <unk> 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.
Yeah.
Thank you we will now be conducting a question and answer session.
I would like to ask a question. Please press star and then one on your telephone keypad.
A confirmation tone will indicate your line is in the question queue.
You May press Star and then two if you would like to remove your question from the queue.
For participants using speaker equipment, it may be necessary for you to pick up your handset before pressing the star Keith one moment, please while we poll for questions.
The first question comes from Richard Baldry from Roth.
Please proceed with your question Richard.
Thanks can we drill into the cost of goods line actually almost flat year over year on a nearly 50% increase in.
Below the fourth quarter on higher revenues any way you want to look at it a lot better how sustainable do you think that is what were the key drivers. There was there anything one time in there to think about it.
It's the highest level in over two years and just it's a very much an outlier performance on any color would help.
Yeah.
Yeah. Thanks for that question.
So that's we believe that's a reflection of the mix that occurred some efficiencies that we've been able to gain.
And some timings on different things. There are there are not specific onetime reductions in that mix. Obviously some of our infrastructure cost will get gets our streamlined as we centralize in our headquarters in other words certain overhead costs that.
Have to be amortized across cost of goods sold.
We will go down and have and have started to go down in that in that regard but.
Structurally that we do expect that to fluctuate somewhat based on our our cost of goods and what kind of deals. We can we can we can do and then also.
As far as what what our costs are on a particular order. So it was a particularly favorable mix for us.
We are not saying that this is the the profitability that we will sustain indefinitely, but.
We are happy with with that cost of goods sold number.
Our focus is to try to find ways of even possibly increasing it but it will vary from quarter to quarter.
I mean, yes, do you hear me.
Where we can.
Okay.
A bridge from that into the inventory, which <unk> been building safety stocks and things for a few quarters. It stepped up another pretty considerable amount this quarter or do you want to talk about why that is or there are some visible order our physical shipment near term that that drove that was it something opportunistic for sourcing.
How do we think about that level.
As new way to stay or will it have float down overtime.
Well this is John .
Would say that we've identified in the supply chain, where we've had some issues and we have purchased.
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 youll see it as 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. One time, we had a problem with cameras. We resolved that now we have a problem with screens and then we have another one of them there will be another one that comes up so.
Just a matter of.
Watching our supply.
Supply chain closely and.
Anticipating.
You don't give formal guidance, but maybe talk about how this quarter.
Outperformance impacts what you would expect to be typical seasonality on the revenue side and then maybe switching over to the booking side, which is a little below trend.
The third quarter has typically been a big.
Impact on your bookings for full year how.
How do you feel like that's tracking them in terms of pipeline et cetera versus prior years. Thanks.
I would say the key.
The key word that using that sentence is pretty apropos of 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 in multiple option years.
I talked about in previous calls previous calls that becomes plateau. So we'll raise will raise our base each time that we get one of those contracts. That's one of the reasons why we've done step a lot of broke out the steps. So it 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 the 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 theirs.
We try to do something about it and Thats, what the step program and our military contracts will do.
Okay, and then maybe looking at the bookings because it you know it has volatility like any other company.
You talked about you know when you have a tougher quarter. It feel like you enter the next quarter or some push out deals that helped that when come in or are there. Other factors to think about in terms of what our expectations on near term versus long term bookings trends should look like.
Yeah.
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 will probably have something more to say on that topic.
In the coming quarters.
Right now.
Yes, it's something we're digging into it it's been disappointing long term I would say is.
And I hate to always using it because it's it sounds redundant, but theres no performance on it but.
Our military and our federal contracts I want to use those as my base from where we sit with revenue.
We're looking at another product a product line that we can as a whole.
A lot of police departments out there, but many of them have much lower budgets and much more looks less staff. So we're trying to put products in that range. So we don't leave anything on the table. So.
I think I'll report more on that as we dig into these and we look at the performance based on those initiatives. So I can't give any more than that.
Great. Thanks for your help.
Yeah.
Thank you ladies and gentlemen, just another reminder, if you'd like to ask a question. Please press star and then one if you'd like to ask a question. Please press Star and then the next question comes from Jason Smith from Lake Street. Please proceed with your question Jason.
Hey, guys. Thanks for taking my questions just wanted to follow up on sort of the March quarter outperformance did the quarter benefited 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.
Yes.
Quite unique because we as you know we had those two large government contracts.
<unk>.
Came out.
Kind of the revenue itself pushed into the first quarter, we didn't pull anything in early but the other the other significant piece of that is kind of like I said our report card for.
Streamlining our operations and working off a backlog that's what really drove the revenue.
Okay. That's helpful. And then just following up on a gross margin I know you mentioned, it's going to fluctuate based on mix and obviously.
Revenue level, but just based on sort of industry recent performance and assuming there is 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 60% or better level.
I wouldn't speculate that I would say that if youre looking at it I would keep it somewhere between the Q4 performance in the Q1 performance in that range.
And the reason why I say that is the reason why I say that is is that because we have.
With our ERP, we're really identifying those areas of opportunities and were taking advantage of our previous cost on buys on our supply chain. So we.
We will get a better idea as that starts to.
Starts to flush out.
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 her revenue to be coming from that program or how big of a big of a piece of the pie it should be longer term.
We love subscription revenue, but we also recognize a lot of folks out there have grant money and they need to to actually spend capital money or they that's what they are approved for so.
Our preference for subscription is a great tool, it's a great tool to keep 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.
And but.
But we're willing to we're certainly willing to take large orders of of cash upfront or cash on delivery. Those are also avail. A very acceptable. We just want to also make sure that people get the very best training tools that money can buy whether it's a subscription arrangement or just an outright purchase.
But 30% or higher would be our preference and actually I can be a little more specific on how you need to think about that I want to step revenue be at 30% and the reason for that is when you take on the first year of revenue from the step the margins are lower so I don't want to take away from our gross margins because we increased the step two.
Much once we get those on that we want to replace it every year because in the outer years, our margins are much higher so that will kind of level the margins and keep us keep us moving throughout the year and multiple years after.
Okay that makes sense. Thanks, a lot guys.
Thank you J T.
Thank you at this time. This concludes our question and answer session I would now like to turn the call over to Mr. Harry Mr face policies for closing remarks, Thank you Sir.
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.
<unk> 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.
With the tools they need to serve their country complete their missions and return home safely at 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. After a strong start I firmly believe the best days for virtual are ahead of us be safe take care and God bless.
Thank you very much and thank you very much for joining us today for <unk> first quarter 2023 Conference call. You may now disconnect your lines.
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