Q3 2025 VirTra Inc Earnings Call

Speaker #3: Good Good afternoon. And welcome to VirTra's third quarter, 2025 earnings conference call. My name is

Speaker #3: Julian, and I will be your operator for

Speaker #3: today's call.

Speaker #3: CEO John Givens and CFO Alanna Boudreau. Following their remarks, we will open the call for questions. 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.

Speaker #3: CEO John Givens and CFO Alanna Boudreau. Following their remarks, we will open the call for questions. Before we begin the call, I would like to...

Speaker #3: financial projections information forward-looking and subject to a number of

Speaker #3: 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 risk and uncertainties.

Speaker #3: law. Finally, I'd like to remind everyone that this call will be made available for replay via a link

Speaker #3: company's website at www.virtra.com. Now, I'd like to turn the call over to VirTra's CEO, Mr. John Givens. Thank you. You may proceed, sir.

Speaker #2: In Q3, VirTra recognized its achievements, but our backlog grew again during the continued slower federal funding cycle. We are keeping strong engagement with our customers and expanding our reach.

Speaker #2: The timing of federal ward and customer acceptance affected revenue recognition in Q3, but our backlog grew quarter over quarter. We also entered Q4 with a larger pipeline of opportunities tied to grant awards.

Speaker #2: Our operational discipline and focus, along with our continued emphasis on sales and marketing, positions us well as funding flows improve and pent-up demand converts to orders and deliveries.

Speaker #2: The operating marketing, positioning us well as funding flows improve and pent-up demand converts to environment is still being shaped by federal shaped by federal funding delays, agency procurement cycles are funding delays, agency still moving slower than normal as procurement cycles are still moving slower than normal as agencies wait for budget clarity and grant awards.

Speaker #2: While this timing has affected the short-term revenue recognition, agencies' engagement remains strong and we see demand building in the background. Regarding the funding environment, the Department of Justice COPS grants program has already identified the agency's slated to receive funding based on applications that closed on June 30.

Speaker #2: When the government shutdown ends, the grant awards will resume. We expect revenue conversions to improve. We made solid progress in Q3 in how we reach and support customers.

Speaker #2: Our redesigned website launched in September and the early results are encouraging. Visitors are spending more time evaluating products and requesting information and we are generating more qualified leads than ever.

Speaker #2: Meanwhile, our sales model continues to improve accountability and responsiveness across territories. We've made targeted personnel changes to ensure we have the right people in the right roles.

Speaker #2: Our gross profit for the nine months was $13.5 million, or $69% of total revenue, compared to $15.7 million, or $75% of total revenue, in the prior year period.

Speaker #2: The change in gross margin reflects that higher mix of capital sales in 2025 relative to the service and step revenue, as well as the absence of unusual low cost of sales recorded in 2024 due to the capitalized labor on development projects.

Speaker #2: Our net operating expense for the third quarter was $4 million, down 16% from $4.7 million in the prior year period. Our net operating expense for the nine months was $11.7 million, or down 11% from the $13.2 million in the prior year period.

Speaker #2: These decreases reflect our disciplined cost management while maintaining investment in our core growth initiatives. The operating loss for the third quarter was $0.5 million, compared to operating income of $0.8 million in the prior year period.

Speaker #2: Operating income for the nine months was $1.8 million, compared to $3.3 million in the prior year period. Net loss for the third quarter was $0.4 million, or $0.03 per diluted share, compared to net income of $0.6 million, or $0.05 per diluted share, in the prior year period.

Speaker #2: Net income for the nine months was $1.1 million, or $0.09 per diluted share, compared to $2.3 million, or $0.21 per diluted share, in the prior year period.

Speaker #2: Adjusted EBITDA, a non-GAAP metric, was $0.1 million for the third quarter and $2.5 million for the first nine months of 2025. As of September 30th, our cash and cash equivalents totaled $20.8 million compared to $18 million at December 31st, 2024, working capital was $32.9 million, and we maintained a debt-light balance sheet.

Speaker #2: VirTra defines bookings as the total of newly signed contracts, awarded RFPs, and purchase orders received in a given period. Bookings for the third quarter were $8.4 million, up from $4.6 million in Q2.

Speaker #2: VirTra defines backlog as the accumulation of bookings from signed contracts and purchase orders that are not yet started or are incomplete in their performance obligations.

Speaker #2: And therefore, cannot yet be recognized as revenue until delivered in a future period. We segment this backlog into three primary categories: capital, which includes our simulator systems, accessories, installation, training, custom content, and design work; service, which is primarily extended warranties and support contracts; and STEP, our long-term subscription-based program.

Speaker #2: Our backlog, as of September 30th, 2025, stood at $21.9 million, this includes $10.2 million in capital, $5.3 million in service, and $6.4 million in step contracts.

Speaker #2: Additionally, we are continuing to track renewable step contract options, which are not yet included in the backlog total. New capital bookings are largely expected to convert to revenue in the upcoming quarters, due to customers having requested deferred deliveries.

Speaker #2: As always, our ability to convert backlog into revenue remains dependent on customer-driven installation timelines, which can shift based on factors outside of our control.

Speaker #2: So, in review, our backlog recurring revenue base and strong balance sheet provide flexibility as funding will resume. Looking forward, we believe the combination of our disciplined cost management and enhanced contract structures and ongoing demand recovery will support continued progress.

Speaker #2: Our updated step program, with its three-year commitments and strong 95% renewal trends, improves recurring revenue visibility and reinforces long-term customer relationships and positions VirTra for sustainable growth.

Speaker #2: That concludes my prepared remarks and I'll turn the call back over to John for his closing comments. Thank

Speaker #1: John?

Speaker #2: you, Alanna. As we finish out 2025 and look towards 2026, we stand ready to deliver critical training tools to our law enforcement partners, when budgets open back up.

Speaker #2: We have remained focused on improving our sales process, products, and operations to strengthen our foundation. We look forward to re-accelerating our business growth in the quarters ahead.

Speaker #2: That concludes my prepared remarks. Operator?

Speaker #3: Thank you. And with that, we will now be conducting a question and answer session. If you'd like to ask a question, please press star one on your telephone keypad.

Speaker #3: Confirmation tone will indicate that your line is in the queue. You may press star two to remove yourself from the queue. For participants using speaker equipment, it may be necessary to pick up the handset before pressing the star keys.

Speaker #3: One moment while we poll for questions. And our first question comes from the lineup of Richard Baldry with Roth Capital Partners. Please proceed with your question.

Speaker #4: Thanks. Looking at the booking strength in the quarter, you talked a bit about were there any multi-year deals that skewed that result, or is it a fairly typical cadence versus prior?

Speaker #4: And then maybe was a lot of that international versus domestics or a disproportionately?

Speaker #5: Alanna, you want to take that?

Speaker #1: Yeah. Yeah. Actually, at the end of the quarter, was when we received a booking of about $4.8 million. That we anticipate most of becoming revenue in 2026, and it did skew to the international customer.

Speaker #4: Okay. And then how does the shutdown or the funding backdrop impact military and your prospects there versus your typical police agency business?

Speaker #5: Well, it affects both proportionally. Most of the agencies that we're dealing with have they rely a lot on government funding, whether it's full funding for the system under the cops or some of these grant programs.

Speaker #5: Or if it's a matched funding, it affects them pretty significantly. As far as military goes, when it's shut down, we get no funding. The $4.8 million that came in from the Colombian deal that we looked at was from INL, which is the International Narcotics Law Enforcement.

Speaker #5: And there was a window where everything started to open up. They awarded it very quickly, and then we went into the shutdown. So there's a lot of pent-up demand, and there's a lot of folks looking at our systems and wanting to talk.

Speaker #5: The SBT program that we reported on, they continued even during the shutdown asking questions and us providing information. So we're gaining a lot of traction there.

Speaker #5: Unfortunately, that probably moves the slowest, but it's the most rewarding. So we'll see some activity here coming forward as the shutdown ends and the funding continues to open up.

Speaker #5: The other side of that, though, Rich, is that a lot of these agencies that we have been talking to and the ones that have funding, and that we have quotes in or have had deep discussions, a lot of them since the new administration came in last January, haven't had their official directors there, so they've been very hesitant to award or use any of the funds whether they do not have the authority or whether they don't want to take the responsibility.

Speaker #5: So we're seeing that a lot of the directors are now being assigned. With the government opening up and the funding starting to flow, I think that was the trifecta that put us in bad shape. But it's all coming together now, so we should see a lot of positivity moving forward in the next several quarters.

Speaker #4: Okay. And is there a way to think about the backlog in terms of what is actually funded but maybe waiting certain milestones or something deployable on the client side versus what's awaiting funding to try to get a figure for a feel for how much of that you can convert to revenue near term before the bottlenecks hopefully open up?

Speaker #5: Yeah. That's a good question. Remember, several years ago, we decided to break up the backlog. So it gave you a little better idea of what was in the backlog.

Speaker #5: So when you look at those components, the capital is $10.5. Let me scroll back.

Speaker #1: Unfortunately.

Speaker #5: 10.2. 10.2 in capital the only thing that affects the conversion of that and has happened to us on several occasions is the customer purchasing it.

Speaker #5: It's setting on our docs, but for some reason, whether right now some of it's funding or whether the building is ready to take it or whether they have everything lined up that they can take it, sometimes it's as little as 30 days and we've had some there as long as a year.

Speaker #5: So those are the items that we talked about out of the control. The 5.3 in service contracts go we don't break it down of we have warranty of service in there for 2026, 2027, 2028, the three years out.

Speaker #5: We don't break that down, so there's a portion of that which would also be recognized. And the same thing for the STEP program. The STEP program, since we've changed our contracts and it's not an option for the STEP but more of an obligation, we can now recognize out years.

Speaker #5: So again, there's up to three years' worth of step contract in the 6.4. So if you have to look at it, you could do as you look at it, Rich, a good portion of the 10.2 minus things we can't foresee and maybe a third and a third would be something very, very rough for services and step.

Speaker #5: Because of the out years, we do have some remaining on the five-year step, which may be two more years out. That's about as much as I can break down for you.

Speaker #4: Yeah. Got it. So even in a pretty tough quarter, it managed to be slightly positive. I'm sort of curious the balance sheet's well-funded. During this period, would you view acquisitions or something as a way to bolster your offerings waiting for things to move forward or buybacks or you feel like first we want to see the bottlenecks ease up and then we'd start to think about what to do strategically with the balance sheet?

Speaker #5: Yeah. We've thought strategically for several years now. And with our board and other advisors, we've looked at there was too much uncertainty of to make a move into the market.

Speaker #5: So we're just waiting to see as this clears up. But just like any good company, will I, technologies, companies, that would add something that's accretive to the balance sheet, accretive to our product offering, without veering too far off from our main focus?

Speaker #5: So we're always on the look and always for the hunt for those. But I think the step setback slightly and find out where it's going first is probably the safest bet and most protective for the shareholders at this moment.

Speaker #4: Okay. Great. Thanks for answering my questions.

Speaker #5: Thanks, Rich, for your questions.

Speaker #1: Thank you. And our next question comes from the line of Jason Schmidt with Lake Street Capital Markets. Please proceed with your question.

Speaker #4: Yes. Thanks for sharing my questions. Just curious if you could give an update on the VXR and if you're seeing the same sort of headwinds you're seeing in the broader business and this market as well.

Speaker #5: Yeah. The VXR is fully developed when it comes to training using our I would say the library of training scenarios that we have along with our VVictiv.

Speaker #5: That's the certified training courses through the nationally recognized iATLAS program. There's over 105 hours of certified courses that they can get what would be called their equivalent to continuing education.

Speaker #5: We're seeing the same headwinds for funding. It really doesn't matter how much it is, whether it's the funding or directorship or the leadership making those decisions.

Speaker #5: A lot of good market acceptance. It's just released at a time where things were a little tight. But we see a lot of good comments from the sector and from the space.

Speaker #5: And we're looking forward to always opening up and selling more.

Speaker #4: Okay. That makes sense. And then just as a follow-up, I mean, gross margin, understanding the dynamics on the step back in Q3, but how should we be thinking about gross margin going forward?

Speaker #5: Go ahead, Alanna.

Speaker #6: I would anticipate that our gross margins stay similar to what we are seeing in this quarter. And potentially going down a little bit more.

Speaker #6: We've always kind of talked about the fact that we'd like it to be somewhere between 60 and 65 percent. Right? And that's where so anything above that for us is a win.

Speaker #4: Okay. That's helpful.

Speaker #5: Yeah, Jason, the only caveat I would make to that—and I've reported in the past—is that I'm willing to sacrifice a little bit of gross margin to gain market share.

Speaker #5: Especially in our segment as we start offering some of these new products. For our first-to-market in a certain space with our type of content offering, I'd like to just jump in there so we get the first foothold on that market segment.

Speaker #5: With that type of product, especially as new technology comes out.

Speaker #4: Okay. No, that makes a lot of sense. Thanks a lot, guys.

Speaker #5: Thanks, Jason.

Speaker #1: Thank you. With that, at this time, this does conclude today's question and answer session. I'd now like to turn the call back over to Mr. Givens for his closing remarks.

Speaker #5: Thank you for joining us today and for your continued support of VirTra. We've made meaningful progress so far this year. We'll stay focused on execution, customer success, and advancing our growth initiatives.

Speaker #5: We do appreciate your trust and look forward to updating you on our continued progress in the quarters to come. God bless you all. And let's continue to make great strides together.