Q4 2023 VirTra Inc Earnings Call
Good afternoon, and welcome to Virtualize fourth quarter and full year 2023 earnings conference call.
Doug: My name is Doug and I'll be your operator for today's call.
Doug: Joining us for today's presentation are the company's CEO, John Gibbons and CFO, a lotta boudreaux.
None: Following their remarks, we will open the call for questions.
None: Before we begin the call I would like to provide Mercury Safe Harbor statement that includes cautions regarding forward looking statements made during this call.
None: 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.
None: From the statements made.
None: 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 Dot virtual dot com.
None: Now I'd like to turn the call over to virtual CEO, Mr. John Gibbons. Thank you you May proceed sir.
Thank you operator, and thank you everyone for joining us this afternoon.
After the market closed today, we issued a press release that provided our financial results for the fourth quarter and full year ending December 31, 2023, along with highlighted business accomplishments. We also filed our 10-K with the SEC today, which is available for review at your discretion.
None: As a brief overview for today's call I'll begin by providing highlights from 2023 and detailing our recent operations and incentives initiatives before passing the call to Atlanta.
Atlanta: Discuss our financial results in more detail after that I'll provide some concluding remarks before moving to Q&A and with that let's begin.
Atlanta: 2023 was a year of substantial transformation and achievement, which culminated in a strong fourth quarter with revenue of $10 3 million, our third double digit million revenue quarter in 2023.
Atlanta: This led to record breaking annual revenues of $38 2 million, representing a 35% increase from 2022.
Atlanta: Our success has been the result of strategic changes, we've implemented across our business, particularly in enhancing our internal operations.
Atlanta: Last year, we successfully upgraded our machine shop and consolidated production into a single facility implemented a new ERP system and revised every process for scalability just to name a few of the operational strides we took.
Atlanta: These actions have increased our.
Atlanta: Throughput significantly and improved our book to ship ratio, all while reducing production costs and maintaining excellent product quality.
Atlanta: We are now shipping orders that we received within days instead of years.
Atlanta: And we haven't set a solid foundation for future success and demand for our solutions as our solutions continue to rise.
Atlanta: This strategic overhaul was important instrument instrumental in effectively working through the substantial backlog, we face entering 2023.
Atlanta: With that backlog down to $19 4 million and in 2024 volt bookings and our pipeline is critical to our growth trajectory going forward.
Atlanta: As such we began efforts to improve sales productivity and improve our customer success functions in the back half of 2023, beginning with the hire of Tony Standalone as the new VP of sales during Q4, and we aligned our sales team to maximize future growth opportunities introducing.
A mandatory sales methodology restructuring and increasing our territory based approach and revising our compensation structure.
Atlanta: Adult wind our initiatives in previous calls, but as a reminder, we established eight domestic and three international territories.
Atlanta: And our penetration into previously underserved larger regions. We also divided the federal accounts across the sales staff evenly to focus more attention on customer ownership and constant contact.
Additionally, we are placing particular emphasis on.
Atlanta: On the international market, recognizing the need for dedicated international sales personnel to tap into the expanding global landscape.
Atlanta: While the international sales lifecycle takes longer than domestic sales opportunities. We are confident this will significantly bolster our total pipeline of opportunities.
Atlanta: We revised our sales initiative incentive program to not only attract the industry's top talent, but also to reward performance to retain the best talent.
Atlanta: To further support this initiative, we added sales support specialists to our cheap their role is to streamline our sales process and working tandem with our sales representatives, who are now more focused than ever on generating new business.
Atlanta: <unk> sales specialists are strategically located in Arizona, and Florida, offering extended support to our customers and acting as a catalyst to move sales through the pipeline efficiently.
Atlanta: Concurrently, we refined our internal singles procedures, creating higher visibility on all opportunities no matter, which stage in the pipeline they exist.
Atlanta: These improvements enabled more frequent and meaningful touch points with law enforcement agencies and military service branches.
Atlanta: Our goal is to provide unparalleled customer service responding promptly to their needs and ensuring a seamless journey from the initial contact to the close to the product support.
Atlanta: As these new sales strategies take route we've also been driving important technological innovations that are designed to further serve our core law enforcement market and make significant inroads in the military sector.
The introduction of <unk> XR are extended reality training platform in Q4 has been met with great interest and its release in Q2 will set us up for strong delivery volume starting in the next few months.
Our extended reality training platform transcends the traditional shoot don't shoot scenario based system.
Atlanta: The <unk> provides unprecedented trading value to our law enforcement and government customers, but also to security agencies Hospital security teams educational institutions and criminal Justice academies.
Atlanta: By focusing on the development of critical interpersonal skills. These professionals will be better equipped to navigate sensitive situations.
Atlanta: <unk> potential conflicts increased cultural awareness and build stronger relationships with the communities they serve.
Atlanta: <unk> extensive range of use cases provides us with a unique position in the training market as well as the risk tool for risk mitigation.
Atlanta: Our strategy is squarely focused on expanding our market share even if it means temporarily dialing back on our strong margin position.
Atlanta: We are confident in our strategy because we believe in the unparalleled quality and comprehensiveness of our content library.
Atlanta: Like others are content benefits from our advanced capabilities of our <unk> technology, which in combination.
Atlanta: Issue with the expertise of our subject matter experts and a certified training curriculum.
Atlanta: We set the industry standard.
Overtime, we expect that <unk> will enhance our predictable reoccurring revenue streams, bringing us closer to achieving our target of having reoccurring revenue constitute 30% of our total revenue.
Atlanta: With the enhancements of our simulator technology. In addition to this new product to our portfolio, we've been able to expand our total addressable market beyond our legacy law enforcement market.
Atlanta: Our platform focuses on trends soft skills, including managing mental health crisis is recognizing key indicators and identifying decision points. This approach directly engages our core market and also expands our reach into adjacent markets such as hospitals and care facilities just.
Atlanta: Name a few.
Atlanta: Additionally.
Atlanta: As we talked about before we've integrated PBS virtual battle space, a premier military saw software facilitating the creation of real time Geo specific training into our stimulators.
This leading military software allows organizations to rapidly create very specific training scenarios for changing mission requirements as we focus on expanding our total addressable market. This step was absolutely necessary towards targeting the military training market military organization.
Atlanta: Rely on the software when it comes to high performance precision training.
Atlanta: We also position <unk> for success in this market by engineering custom recall kits compatible with the <unk> and $2 49 weapons that are frequently used by U S military.
Atlanta: We have we've made solid progress in penetrating this market in the fourth quarter.
Atlanta: Our confidence in this market segment is shown by our decision to open a dedicated business development and training center in the department of Defense's hub for simulation training procurement in Orlando, Florida.
Atlanta: We remain dedicated and engaged with our customers our existing relationships and are continuing to cultivate new leads in that area.
Atlanta: Take a closer look at how our end markets performed in 2023.
Atlanta: For the year, our government revenue increased by 39% to 31 million from 24 point of $22 4 million in the prior year. This growth is attributed to a jump in design and prototyping revenue complemented by stronger simulator and accessory sales as <unk>.
Atlanta: Enforcement budget space continuous cuts they rely heavily on grant funding from the federal government.
Atlanta: <unk> implemented a grant watch program, which monitors and matches department needs with grant requirements to fund needed equipment for training.
Atlanta: Internationally, our revenue was $5 8 million an increase from $4 2 million in 2022. This can primarily be attributed to stronger simulator and accessory sales along with associated training and service revenue.
While we experienced solid year over year growth here in 2023, we are experiencing.
Atlanta: Longer lead times for the international pipeline and while the international pipeline is growing the current geopolitical tension and U S. Governments continue resolution and budget issues have affected the expected release date of many opportunities which rely heavily on these government funds.
Atlanta: We expect a higher close rate in the next several quarters as budgets are approved and the continuing resolution is resolved we are.
Atlanta: We're also starting to see results from the changes in our sales structure and dedicated international sales employee.
Atlanta: They build out our international pipeline for more predictability within the segment.
Atlanta: We've reported continued growth from our subscription training equipment partnership or step program, which provides reoccurring revenue for virtual and offers an easy on ramp for smaller agencies.
Atlanta: Or constrained capital budgets interested in our solution, but are able to access operational funding.
Atlanta: This also gives our staff another tool.
Atlanta: In closing the sale.
Atlanta: Currently our reoccurring revenue, including warranty revenue represents 20% of the total quarterly revenue, but we expect this to increase in the future.
Atlanta: Regarding our military operations.
Atlanta: <unk> previously mentioned, we continue to work ahead of initial expectations.
However, given the highly competitive nature of these contracts and the security security sensitive.
Atlanta: Aspects of these contracts, we continue to exercise caution and sharing the specific details about the contracts at this time. However, we are confident in our progress and ability to capture and retain mill.
Atlanta: The military market share in the coming years.
Atlanta: While these contracts take time, they become an excellent source of dependable revenue in the long run.
Atlanta: Overall, yes.
Atlanta: Look for military small arms training acquisition is likely to focus on modernization technology, driven training realism safety and interoperability military small arms training shifting towards a more realistic and mission specific scenario integrated with AI assisted Trey.
Atlanta: An evaluation.
Atlanta: <unk> products and training programs are designed specifically to replicate real war real world conditions.
<unk> urban warfare, counterterrorism and asymmetric warfare.
As defense strategies involve the acquisition of advanced small arms training systems and equipment will remain an important aspect of military readiness and effectiveness.
Atlanta: As we progressed into 2024, our operational and sales strategies are taking hold and we are confident in our ability to seize the opportunities ahead.
Atlanta: I'll turn the call over to Atlanta to discuss our financial results in further detail Atlanta.
Atlanta: Thank you John.
Atlanta: Good afternoon, everyone. It's such a pleasure to be speaking to you today to review our financial results for the fourth quarter and full year ended December 31, 2023, our total revenue for the full year 2023 increased 34% to 38 million from $28 3 million in the prior year period.
Atlanta: Fourth quarter of 2023 revenue increased 17% to $10 1 million from $8 6 million in the fourth quarter of 2022.
Atlanta: Increase in revenue was driven by continued demand for our training solutions with government customers, both domestically and internationally.
Atlanta: Gross profit for 2023 increased 64%.
Atlanta: $96 7 million or 70% of revenue compared to $16 3 million or 50%, 57% of revenue in the prior year period.
Atlanta: For the fourth quarter gross profit increased 58% to $8 4 million or 83% is that now from $5 3 million or 61% of revenue in the fourth quarter of 2022.
Atlanta: The increase in gross profit margin for both the three and 12 month periods can be attributed to increased sales alongside a decrease in our cost of sales thanks to operational efficiencies as.
Atlanta: As well as an initial milestone payment from our contract with no stigma associated costs.
Atlanta: Our net operating expense for 2023 increased to 17 million from $13 7 million in the prior year period net operating expense for the fourth quarter of 2023 was $5 8 million compared to $3 4 million in fourth quarter of last year.
Atlanta: The increase in net operating expense was primarily due to an increase in salary and benefits, resulting from additions to the addition of new staff expenses for the new Orlando office increased R&D spend and the implementation expenses related to the launch of the ERP system.
Atlanta: Operating income jumped to $9 6 million in 2023 7 million increase from $2 6 million in the prior year period for fourth quarter of 2023 operating income increased by 700000 to $2 6 million from $1 9 million in the fourth quarter.
Atlanta: 2022.
Atlanta: Net income for 2023 was $8 4 million or <unk> 77 cents per diluted share an improvement compared to net income of 2 million or 18 cents per diluted share in the prior year period.
Atlanta: Net income for the fourth quarter of 2023, total $2 8 million or 25 cents per diluted share, which represents an increase compared to net income of $1 4 million or 13 cents per diluted share and fourth quarter of 2022.
For 2023, adjusted EBITDA, a non-GAAP metric increased to $11 6 million from $4 million in the prior year period adjusted EBITDA for the fourth quarter of 2023 was $1 7 million down slightly from $1 9 million in the fourth quarter of 2022 now.
Atlanta: 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 <unk>.
Atlanta: <unk> months, we received bookings totaling $33 6 million. This represented a year over year increase in bookings of half a million dollars continuing.
Continuing a seven year growth trend.
For fourth quarter of 2023, we received bookings totaling $13 5 million as John mentioned, we anticipate that these will gain momentum as our sales success initiatives began to take effect, we do anticipate a grace period for those initiatives to become fully realized.
Atlanta: Looking at our backlog, which we define 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.
Atlanta: As of December 31, 2023, our backlog totaled $19 4 million. The breakout of this backlog includes $10 5 million in capital $6 3 million in service and warranties and 2.6 million attracts based.
Atlanta: Based on current contract delivery dates we expect that the majority of new capital bookings. We received in the first three months of 2024 will be converted into revenue in 2024.
Atlanta: As a reminder, service warranties and step up backlog is revenue that will be recognized on a straight line basis over the coming years.
Atlanta: In addition to the backlog there are $6 9 million in renewable stock contracts that would represent additional revenues for the next five years historically, we have had greater than a 95% renewal rate on our contracts and.
Atlanta: And finally to our balance sheet as of December 31, 2023, we had unrestricted cash and cash equivalents.
Atlanta: Of $18 9 million, an increase from the $17 2 million at September 30th 2023 from a working capital standpoint at the end of the fourth quarter, we had $33 2 million in working capital an increase from $29 2 million at the end of Q3.
Atlanta: We did have an increase in our inventory largely due to the development projects that we've been working on for.
Atlanta: For additional details of our financial results. Please reference our 10-K, which was filed earlier today and that concludes my prepared remarks, and now I'll turn it back over to John to discuss some of the improvements we've made with our technology and where we see the rest of the year heading.
John F. Givens: Thank you your Atlanta, now I'd like to take a step back and provide a broader perspective of our trajectory and how our recent technological strides are aligning with overarching industry trends.
John F. Givens: As we navigate our leading position in the training landscape innovation remains at the forefront of our strategy. It's clear that a key strength of ours why isn't that in recognizing the unique challenges faced by each of our customers.
John F. Givens: Early in the call I touched upon our technology advancements.
John F. Givens: While the technology has continued to improve so too has our content as we have learned from our rich history and training.
John F. Givens: <unk> is king.
John F. Givens: Best in class content is a key value that we are able to provide our customers as.
John F. Givens: As we continue to think of ways. We can improve our content. We are actively integrating artificial intelligence into multiple aspects of our products and development practices by continuously analyzing union user interactions and feedback AI algorithms can dynamically identify training deficits digitally.
John F. Givens: And by correlation of multiple data points in near real time, then adjust and fine tune the training experience for the specific training. This adaptive learning capability ensures that our simulators remain relevant engaging and effective for each user maximizing their training outcome.
John F. Givens: Yeah.
John F. Givens: The utilization of AI and purchased content creation and data analytics processes has changed the trajectory of our product roadmaps user inner actions development techniques and timelines for delivering product.
John F. Givens: By harnessing the power of advanced algorithms and machine learning, we are poised to deliver even more immersive and effective training experiences.
John F. Givens: <unk> AI driven data analytics.
John F. Givens: We will gain valuable insight that will guide our decision, making and ensure we remain at the forefront of the industry.
John F. Givens: AI is also speeding up our content creation workflows, allowing us to create more content without adding significantly more work.
John F. Givens: The industry is starting to recognize the value proposition of our technology, our sales reps are no longer selling our product.
They provide an experience.
They no longer sell the product based on cost.
John F. Givens: So value of the experience, creating the need for our solution at any cost our mission remains clear to equip to equip those who serve with the best training tools available helping them become the best trained versions of themselves to make critical decision that saves lives and protects communities.
John F. Givens: <unk>.
John F. Givens: With the improvements we've made to our operations sales methodology.
John F. Givens: And content development, we've laid a strong foundation for success in the coming year.
John F. Givens: While some of these changes specifically in the sales department take longer to gain footing. We believe we are positioned to experience strong growth specifically in the back half of the year when many agencies receive their budgets.
John F. Givens: Our ongoing focus is to fortify our business pipeline across key markets uphold a standard a world class operations and consistently deliver superior quality to our customers as we move throughout 2024, we are confident in our opportunities that lie ahead and expect a strong.
John F. Givens: <unk> pace of growth.
None: And with that we'll open up the call for your questions. Operator, please provide the appropriate instructions.
Thank you ladies and gentlemen at this time, we will be conducting a question and answer session.
None: If you'd like to ask a question you May press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue you.
None: You May press star two if he would like to remove your question from the queue.
None: For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key.
None: Our first question comes from the line of Jason Schmidt with Lake Street. Please proceed with your question.
Jason Schmidt: Hey, guys. Thanks for taking my questions and congrats on a strong finish to the year. John just wanted to start with sort of your comments on government funding just sort of given the government funding impact both your businesses law enforcement and military can you discuss how would the continuing resolution has impacted the business.
John F. Givens: Yeah, Jason Thanks for that question.
Jason Schmidt: Well, we had expected an even stronger fourth quarter.
Jason Schmidt: The way the continuing resolution works is that any.
John F. Givens: Any project or grants or any funding that was currently in place.
John F. Givens: We'll still fun so.
John F. Givens: It kept us from having a poor quarter, but all of those that we have there is some international where the government bonds. There is some military contracts and then theres other grants for police departments that need and rely on federal funding that was held up because of the continuing resolution and then it takes a bit of time for them.
John F. Givens: Once they've solved it to get those funds out so it has impacted us.
John F. Givens: But we've navigated through it and we had enough backlog to be able to have another double digit quarter, but we see that now that it has been fixed.
It will make second quarter and beyond.
Much better.
None: Got it appreciate that color and then wondering if you could discuss some of the initiatives around focusing on the grant program. So it seems like a good opportunity for you guys.
None: Yeah.
None: There's 18000.
None: Police departments in the United States and probably of those you have a handful like New York L. A and Dallas, some bigger ones that have much larger budgets and can fund.
None: At 300, 400, $500000, but then you have a lot of small agencies you know the bulk of it 70% are much lower than required funds in it with all the cuts and all of the funding that's being spent on other items just keeping police on the street cars, moving and munitions for them.
None: Training, usually takes a back seat so they rely heavily on grants.
None: There's quite a few grants out there from multiple different agencies, but again, they're strapped with staffing so.
None: Cops and others have to end up writing the grants so we have.
None: And industry, leading trainer, who is also an educator and in that space. So we're looking at once we've gone through the sales process and fund and they're unable to fund we now have all the requirements and we hope look and identify grants that are out there that they can apply to and kind of do some of that.
None: At matching worked for them what they normally could they still have to apply for the grants and go through the process, but at least they have someone on their team that they can go back to and.
None: Get a little help in and a little bit of research.
Okay that makes sense.
None: And then just the last one from me and I'll jump back into queue. You noted some strong traction with the Bx are just curious if you could talk a little bit about the current customer pipeline and how we should think about the timeline to a more sizable revenue impact.
None: Yeah, So we what.
None: What we did is either a proper product release. So we came out back in October was the first time that we showed the product and that was to gain the interest and start that process of collecting orders.
None: But at that time, we were also collecting requirements. So we put out there a base product and said, okay now Mister customer cut.
None: Customers at large what do you think in a bunch of different areas as well and we've got a lot of feedback and we changed and added some things to it and so our release was always set for Q2.
None: And we're still on that trajectory for Q2.
None: The one people that are most upset at me our sales because I'm not allowing them to do quotes because we've changed things so much in the bill of material.
None: But where we will be releasing within the queue and we do have multiple orders.
None: Customers waiting so that they can purchase.
None: So we're they're thinking about it in the long term I do want to make one thing clear is that because we're not a shoe don't shoot and we're focused more on the training.
None: The soft skills.
None: Not cannibalize our.
None: 300 sales however.
None: As I talked about the much smaller organizations as they're going through their grants. They do have operational funds that they can spend on a headset and virtues in there and they are seeing the impact of the company the product and their training.
None: And training for their missions in different.
Different situations that they're dealing with in their specific areas, while they're waiting on their grant.
None: It keeps the customer warm as we go through this grant process to get them a much larger sim so.
None: We do think the sales will be.
None: Are going to drive it will be a good portion of revenue in the future.
None: Okay got it appreciate the color thanks a lot.
None: Thank you Jason.
There are no further questions in the queue I'd like to hand, the call back to Mr. Gibbons for closing remarks.
Gibbons: Thank you.
Gibbons: Our results show virtuous dedication to our customers and their crucial mission is as strong as ever the passion hard work and dedication of our team.
Cornerstone of our success and Im confident in our ability to provide thought leadership to our customers continuing the innovation at the top of the industry and making a meaningful difference as we move into the rest of 2024 and beyond I'm looking forward to sharing our progress will be back to report Q1.
Gibbons: 2024 results in just a few short weeks. Thank you all for your ongoing support operator.
None: Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation.
None: Disconnect your lines at this time and have a wonderful day.
Okay.