Earnings Call Transcript - VTSI Q2 2025

Operator, Operator

Good afternoon, and welcome to VirTra's Second Quarter 2025 Earnings Conference Call. My name is Ryan, and I will be your operator for today's call. Joining us for today's presentation are the company's 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. During this presentation, management may discuss financial projections, information or expectations about the company's products and services or markets or otherwise make statements about the future, which are forward-looking and subject to a number of risks and uncertainties that could cause actual results to differ materially from the statements made. The company does not undertake any obligation to update them as required by law. Finally, I'd like to remind everyone that this call will be made available for replay via a link in the Investor Relations section on the company's website at www.virtra.com. Now I would like to turn the call over to VirTra's CEO, Mr. John Givens. Thank you, and over to you, sir.

John F. Givens, CEO

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 second quarter and six months ended June 30, 2025, along with highlighted business accomplishments. In Q2, VirTra delivered year-over-year growth in both revenue and bookings, maintained profitability and strengthened our cash position. While bookings were lighter sequentially due to the timing of orders and the ongoing funding delays, our operational discipline and customer engagement strategies continue to position us well for the back half of the year and into 2026. We remain confident in the strength of our solutions, our recurring revenue programs and our ability to execute as funding flows improve. The operating environment remains shaped by the federal and international funding delays. Agency procurement cycles are still slower than normal. And in some cases, funding is being held back entirely until the fiscal year budgets reset. We believe these challenges are temporary, but they continue to influence our quarterly order patterns. That said, we are starting to see some movement. The Department of Justice COPS grant program reopened on June 1 and closed for submissions on June 30, a positive step that should help unlock some funding for agencies later in the year. We've been actively engaged in Washington, D.C. to help policymakers understand the value of immersive training and to support funding initiatives that benefit our customers. While the real impact of these programs will take time to flow through, we expect improved order activity in the quarters ahead. To this end, we continue to execute on our sales and marketing initiatives in the second quarter. Our marketing efforts remain a central focus with our redesigned website expected to launch in the coming weeks. We expect the new site to enhance lead capture, funnel visibility and our conversion tracking. Our regional sales model continues to improve accountability and responsiveness across all territories. We have made targeted personnel changes to ensure we have the right people in the right roles, strengthening our customer engagement and follow-through. We also remain positioned to benefit from our reentry into the GSA procurement channel, which will streamline contracting for eligible agencies and shorten delivery timelines once live. Although this is expected to impact Q4 and beyond more meaningfully, it strengthens our long-term go-to-market approach. STEP continues to be a strong selling point, especially in smaller markets. Six customers renewed early in Q2, primarily for the V-180 and the V-300 systems, signaling both STEP's value and the customer satisfaction with our systems' performance. These renewals, combined with the transition to 3-year agreements, improved visibility into future recurring revenue. Interest in our V-XR extended reality platform continues to grow with strong pipeline activity across public safety, academic and health care markets. Customers are recognizing the flexibility and immersive fidelity of the system, and we expect to announce new developments with strategic partners in the coming quarters. Content conversion from our scenario library to the XR platform is progressing well, too. Our robust library of certified content will further expand the appeal and applicability of the platform. Following on the V-XR discussion, our commitment to product quality continues to be a key driver for VirTra's market position. In recent quarters, we have made deliberate investments to enhance our manufacturing processes, expand our reliability testing and implement tighter quality control protocols. These actions, combined with incorporating customer feedback directly into the product enhancements have meaningfully improved hardware durability, reliability and overall performance. These improvements are being noticed in the field. Customers consistently report that our systems not only deliver superior training capabilities, but also withstand years of rigorous real-world use. This validation reinforces our reputation as a trusted long-term training partner and helps drive repeat business and renewals. We are sustaining these quality advancements while operating with efficiency, and this dynamic is allowing us to price our systems competitively without sacrificing performance or reliability. We continue to strengthen our value proposition, ensuring that VirTra remains well positioned to win and retain customers across multiple market segments. Our work on the IVAS program continues to advance. We've completed additional recall kit validations and reliability testing and remain in position for potential production opportunities. The recent novation of the contract from Microsoft to Android was a positive step in clarifying the program's future. We are also tracking broader DoD initiatives that emphasize modular, scalable systems, an area where VirTra's solution is well aligned. Overall, Q2 built on the progress made earlier in the year. We continue to strengthen our operations and maintain positive momentum despite funding delays remaining a near-term challenge. Our strong cash position, stable recurring revenue base and disciplined execution provide a solid foundation for the remainder of 2025. As funding flows improve, we are well positioned to convert opportunities into growth. With that, I'll turn it over to Alanna for a detailed financial review.

Alanna Boudreau, CFO

Thank you, John, and good afternoon, everyone. Now let's review our unaudited financial results for the second quarter and six months ending June 30, 2025. Our total revenue for the second quarter was $7 million compared to $6.1 million in the prior year period. The 15% increase was primarily driven by the higher capital deliveries and stable recurring revenue from STEP and Service contracts. Breaking this down by market, Government revenue for the second quarter was $5.4 million compared to $5.3 million in the prior year period. International revenue for the second quarter was $1.4 million compared to $0.6 million in the prior year period. Our total revenue for the six months was $14.1 million compared to $13.4 million in the prior year period. This 5% increase was driven as well by the higher capital deliveries and stable recurring revenue from STEP and Service contracts. Our gross profit for the second quarter was $4.8 million or 69% of total revenue compared to $5.5 million or 91% of total revenue in the prior year period. Last year's unusually high gross margin reflected capitalized labor on the development of V-XR and the IVAS program and a greater mix of high-margin service and STEP revenue. Our gross profit for the first six months was $10 million or 71% of total revenue compared to $10.2 million or 76% of total revenue in the prior year period. The change in gross margin reflects a higher mix of capital sales in 2025 relative to Service and STEP revenue as well as the absence of the unusually low cost of sales recorded in 2024 due to the capitalized labor on those development projects. Our net operating expense for the second quarter was $3.9 million, an 11% decrease from $4.4 million in the prior year period. Our net operating expense for the first 6 months was $7.7 million, a 9% decrease from the $8.5 million in the prior year period. These decreases reflect the disciplined cost management while maintaining investment in core growth initiatives. Our operating income for the second quarter was $0.9 million compared to $1.1 million for the prior year period, and our operating income for the first 6 months was $2.3 million compared to $1.8 million in the prior year period. Our net income for the second quarter was $0.2 million or $0.01 per diluted share compared to $1.2 million or $0.10 per diluted share in the prior year period. Our net income for the first 6 months was $1.4 million or $0.12 per diluted share compared to $1.7 million or $0.15 per diluted share in the prior year period. Our adjusted EBITDA, a non-GAAP metric, was $0.7 million for the second quarter and $2.4 million for the first 6 months of 2025. As of June 30, cash and cash equivalents totaled $20.7 million compared to $17.6 million at March 31. Our working capital was $33.5 million, and we maintained a debt-light balance sheet. VirTra defines bookings as the total of newly signed contracts, awarded RFPs and purchase orders received in a given period. Bookings for the second quarter totaled $4.6 million, up from $3.6 million in Q2 of 2024, but down from the $6.4 million in Q1 2025. The sequential decline was driven by the timing of awards and customer-related deferrals rather than lost opportunities. VirTra defines our backlog as the accumulation of bookings from signed contracts and purchase orders that are not yet started or have incomplete performance obligations and therefore, cannot be recognized as revenue until delivered in a future period. We segment this backlog into three primary categories: capital, which includes our simulators, accessories, installation, training, custom content and any design work, our Service is primarily our extended warranties and support contracts, and STEP is our long-term subscription-based program. Our backlog at June 30, 2025, stood at $18.8 million. This includes $7.1 million in capital, $5.7 million in service and $6 million in STEP contracts. Additionally, we continue to track renewable STEP contract options, which are not included in the backlog total. Most new capital bookings from the first half are expected to convert to revenue within the current calendar year, though some orders, particularly from international customers, have requested a deferred delivery into early 2026. 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. So in review, our backlog remains solid, and the stability of our recurring revenue base, combined with a strong balance sheet, provides us flexibility as we move into the second half of the year. Looking forward, we believe the combination of our disciplined cost management, enhanced contract structures and ongoing demand recovery will support continued progress. Our updated STEP program with its 3-year commitments and strong 95% renewal trends transform what was once optional renewal potential into high confidence recurring revenue. This not only strengthens our revenue visibility but also reinforces long-term customer relationships and positions VirTra for substantial growth. That concludes my prepared remarks. I'll now turn the call back over to John for his closing comments.

John F. Givens, CEO

Thank you, Alanna. As we move through 2025, our focus remains both agile and disciplined. While many of our customers are still working through funding complexities, their commitment to training and preparedness remains strong. We stand ready to deliver as budgets open up, and we are dedicated to earning trust through reliable execution. The strides we've made in sales, product innovation and operational efficiency strengthen our foundation each quarter, and we're confident in our ability to translate these efforts into growth as the year progresses and into 2026. That concludes my prepared remarks.

Operator, Operator

The first question comes from the line of Jaeson Schmidt from Lake Street Capital Markets.

Jaeson Allen Min Schmidt, Analyst

John, I just want to drill down a bit further on your comments on IVAS. And obviously, with the move from Microsoft to Android and sort of the headset getting reconfigured. I just want to make sure I'm clear that you guys still expect to be involved, or has your position in this program changed at all with the changes going on?

John F. Givens, CEO

Yes, that's a great question. There's some confusion out there. We have completed our R&D effort, and the government has canceled the last of the testing because it performed flawlessly. Our product is ready for production at scale. Currently, regarding IVAS, after the contract was moved from Microsoft to Android, they are still not satisfied with the headset. A new contract has been released under an OTA for one year, focused solely on the headset. They need to produce and demonstrate, which I believe is scheduled for either March or April. We expect that to be finalized, as mentioned in previous calls, by September, after which they will likely issue a production contract that will encompass the entire system or kit. We're still actively involved while they work through the augmented reality and headset goggles. Additionally, Android and Meta have teamed up and will fund most of it as customer-funded. It will be interesting to see how that competition develops. I encourage everyone to keep an eye on it. The competition lasts for one year and is quite competitive. I expect the winners to be announced soon, possibly in August. But VirTra is still approved, and there is no competition for any additional recoil kits.

Jaeson Allen Min Schmidt, Analyst

Okay. That's really helpful. And then just have a question here on recent news on the U.S. Army selecting sort of Bohemia in that virtual battle space. Just curious how that impacts you or what you guys think of that news?

John F. Givens, CEO

I believe the recent developments are beneficial for both Bohemia and BAE, as well as for us. Since my arrival, I've noted that Bohemia's virtual battle space is utilized in approximately 132 countries globally, which presents a valuable distribution network for us. This enhances our future opportunities. However, it's important to note that simply being in this network does not guarantee that customers will purchase our VirTra system. There needs to be a specific demand for a marksmanship trainer. Although we will be competing with others that are also utilizing the virtual battle space, our established product line places us in a strong position. We have successfully integrated VBS into our systems and have received inquiries from various military units interested in this type of system. This allows them to maximize their current investment in the gaming engine, and since it operates on our systems, connectivity is greatly improved, which is a significant advantage for the Department of Defense.

Jaeson Allen Min Schmidt, Analyst

Got you. And then the last one from me, and I'll jump back in the queue. Just curious what you're seeing with the V-XR and kind of customer traction there and customer conversations.

John F. Givens, CEO

I've been a platform instructor in the military for a long time, and the V-XR offers many advantages. However, it's currently not suitable for weapon training as it can lead to negative training effects. Given that VirTra is a leader in certified training courses for law enforcement, there is a strong need for this type of system. We are seeing significant interest across various sectors, including healthcare, due to its portability and ability to provide immersive, certified training with session logging for credit. The market is starting to understand its capabilities. Initially, there was a belief that putting on the headset would replicate real-life weapon usage, but it became clear that this approach fell short of the demands of actual training scenarios. As a result, there has been a shift in perspective, and people are starting to recognize where the V-XR truly excels, and we are positioned to capitalize on that.

Operator, Operator

We take the next question from the line of Richard Baldry from ROTH Capital Partners.

Richard Kenneth Baldry, Analyst

Can you talk about any changes you've seen on STEP renewal rates and maybe changes in the customer preferences between STEP versus sort of your traditional acquisition model?

John F. Givens, CEO

Yes, there are two parts to that. I'll let Alanna provide additional insights after I finish. VirTra has shifted its model from a five-year to a three-year cycle. Initially, there was some resistance because certain STEP programs had already allocated their budgets for a five-year system instead of three. We have successfully worked through that challenge. The STEP and capital funding depend on how and where the clients are securing their funds. We aimed to leverage both operational and capital budgets, and we haven't seen any significant changes regarding that. As we have shared in previous years, at the end of 2024, throughout most of 2025, and into 2026, many five-year renewals will be coming up, and we continue to see a renewal rate of over 95%. We have observed some customers making early conversions, with more than six renewing through the STEP program. Some have transitioned to capital, while others have moved from capital to the STEP program. It varies based on their funding sources and financial circumstances. Overall, there’s been a diverse mix. Great question, Richard. Alanna, do you have any further thoughts?

Alanna Boudreau, CFO

No. I mean you pretty much nailed what I was going to say, which is I know we've been reporting about a 95% renewal rate, and that really hasn't changed. We had a couple of customers towards the beginning of when we started reporting that, that didn't renew mostly because of their own budgets because there are a lot of smaller agencies that need this program. And everything in the last six months, we're just seeing renewals and into those 3-year programs. And when John talks about the six that renewed early, they renewed early because they want some of our new tech, right? So they don't want to wait a whole year. They want to get renewed for that new 3-year contract so they can get the new stuff.

Richard Kenneth Baldry, Analyst

Got it. Does the new accelerated depreciation accounting have any impact, do you think? Or could it have any impact? I'm not sure how applicable that is across government sector versus private sector, but sort of curious your thoughts there.

Alanna Boudreau, CFO

I don't believe it will have a significant impact on us at this time, but I will keep everyone informed if we notice any changes.

Richard Kenneth Baldry, Analyst

And then last for me, where you were closing bookings in the quarter, is there any geographic end market, any other sort of trends inside of that, that are sort of different or emerging?

Alanna Boudreau, CFO

I'm not sure. Can you clarify that last question?

Richard Kenneth Baldry, Analyst

Whether that was federal agencies, municipalities, any sort of variability within the closings, where you saw successes or not?

John F. Givens, CEO

Yes, I understand your question. We haven't observed much activity that required federal funding. However, grants are starting to open up now, and we have several customers who were waiting in line. We created a grant pamphlet and did everything possible to help them self-file, as this is a requirement for applications. We've been closely tracking this process. Additionally, some industries have changed their laws, leading to increased inquiries, particularly in Washington State, where those involved in concealed carry and security now need a certain number of training hours. We're beginning to see new opportunities arise. Although federal activities have been stagnant, grants are the most promising area showing positive developments. We're also noticing some private investments from foundations aiming to support local police departments in need of system upgrades. Internationally, we've seen a significant uptick in activity recently. I hope this addresses your question.

Operator, Operator

Ladies and gentlemen, at this time, this concludes our question-and-answer session. I'd now like to turn the call back over to Mr. Givens for his closing remarks.

John F. Givens, CEO

Yes. 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, our customer success and advance our growth initiatives. We appreciate your trust and look forward to updating you on our continued progress in the quarters to come. God bless all of you, and let's continue to make great strides together.

Operator, Operator

Thank you. Ladies and gentlemen, thank you for joining us today for VirTra's Second Quarter 2025 Conference Call. You may now disconnect your lines.