Virtra Inc.: The Next Phase Of Police Training

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About: VirTra, Inc. (VTSI)
by: Dan Stringer
Summary

Virtra Inc. develops and sells virtual reality training systems, primarily targeted at domestic and international police forces.

The cost/benefit nature of their technology compared to current training methods, combined with a more receptive workforce and cost-challenged infrastructure, provide Virtra with a number of macro tailwinds.

Virtra has built up a moderate cash balance as a margin of safety.

The company has had historically volatile quarter to quarter earnings, though it has reached a good level of profitability in the last twelve months.  They are taking steps to try to smooth out its sales levels.

The company is announcing 2018 fiscal year results on March 28, which may provide a good entry point for investors.

Virtra Inc. (VTSI) is the developer and marketer of virtual reality training simulators, primarily targeted at the law enforcement and defense industries. The company’s primary product is the V-300 Simulator with an example of it below:

Source: Company Presentation

The company has a suite of products, some more specialized than the others, as well as offering software updates and extended warranties on its products.

The benefits of virtual training are several. Like live training, it is more effective than class room learning since the training is put into practice. It is a much lower cost alternative than staging walk-through live action simulations as the costs of hiring actors. It also reduces the costs of live ammunition. Similar to the old Star Trek holodeck, it also allows more variety of scenarios to be gamed and uploaded through its systems. Virtra also has systems to simulate both recoil as well as the experience of being hit by ammunition, without the cost or physical toll.

The Market

Virtra’s market segment is attractive in several ways. The next generation of police officers will be substantially more receptive to virtual and game-type scenarios than older generations will be; they have grown up with drone interface and multi-player games like Fortnite such that this type of learning will be easily adopted. The generally poor financial footing of most public entities, from the federal level to the county level, will eventually put pressure for cost reductions in most budget lines, if it has not already. Virtra’s ability to reduce training costs on an on-going basis, while potentially being more effective (depending on demographics) will make it an attractive investment. Some recent high profile failures, such as the breakdowns in protocol during the Parkland shooting in Florida, will ensure public support for continued investment in police training, even if budgets do become tight.

Virtra has made some commercial in-roads already, with a presence in over 150 of the 6,500 largest U.S. agencies, with a further 32 out of the top 2,000 internationally, totaling 30 different countries including the U.S. Virtra has now been able to become profitable, even with this relatively low penetration rate in its market; they estimate the domestic addressable market at $650m annually. They are also looking at the military market in their January 2019 operational summary as a potential horizontal expansion to its business, with somewhat similar scenarios.

Q3 2016

Q4 2016

Q1 2017

Q2 2017

Q3 2017

Q4 2017

Q1 2018

Q2 2018

Q3 2018

Revenue

$3.0m

$3.1m

$4.2m

$5.3m

$4.7m

$2.4m

$3.2m

$8.7m

$3.5m

EbITDA

($0.0m)

($0.3m)

$0.6m

$1.8m

$0.9m

($1.5m)

($0.0m

$3.2m

$0.2m

Order Book

N/A

N/A

N/A

N/A

N/A

N/A

$8.3m

$5.2m

$6.8m

Order Entry

N/A

N/A

N/A

N/A

N/A

N/A

$8.6m

$5.6m

$5.1m

Cash on Hand

$4.9m

$3.7m

$4.6m

$4.3m

$5.1m

$5.1m

$4.5m

$4.9m

$7.9m

Source: Company Quarterly Disclosures, SEC filings

Virtra is by no means the only player in this market, though their systems are the most robust and, being public, they have scaled up more than others who offer training through VR goggles, such as Apex Officer. They have worked at addressing each component of their growth strategy.

Source: Company Presentation

With a market capitalization of $30.2m and $7.9m cash on hand, Virtra’s Enterprise Value is just $22.3m. The company has revenue of $17.8m of the last twelve months, with an EbITDA of $1.9m, giving it an 11.7x EV/EbITDA multiple and a EV/Sales of 1.25 The company boasts strong gross margins of well over 60%; this leads to very quick profit expansion when the company’s quarterly sales get over $3.0m.

For a very early stage business, Virtra is priced relatively attractively, but there are some reasons for this.

Capital Structure

Virtra has been in existence for 15 years with its CEO Bob Ferris in charge since 2008 following a merger with a gaming company he owns; he owns 5.9% of Virtra’s outstanding shares. The company has done two relatively recent share consolidations, a 10 for 1 in October 2016 and another 2 for one in February 2018. The most recent one was done before it uplisted to the Nasdaq in April 2018. This has left Virtra with just 7.9m shares outstanding. There has been very little institutional buying which has left shares relatively un-discovered as we can see by the Morningstar summary:

Source: Morningstar

With average volume at just 10,000 shares, Virtra is a very illiquid name, which doesn’t help its chance for price discovery. It currently has no debt.

Lumpy Results

In the table above, we can see the company has very lumpy quarterly results; this is the nature of a small company but due to the nature of its products, it is more pronounced at Virtra. Selling large systems means its revenue comes when these systems are ordered, with some maintenance and upgrades after the fact. Although a fact of business, investors like to see more visible and steadier growth. This will also help the company in managing its cash flows. I believe the company’s recent announcement on March 5, 2019 of its STEP partnership program is a good step (no pun intended) towards smoothing its cash flow. This SAAS-type model essentially lets organizations acquire the hardware with less upfront cost, but more costs over time. As Virtra will somewhat be vendor financing these purchases, they will also gain an interest component to their income as well while enabling organizations that are tight on the budget to be able to upgrade their training and access the cost-saving business. I view this as another tool to help with sales; the company’s cash balance of close to $8.0m likely enabled this purchase program to be offered. Some organizations will still want to buy the hardware up front, as it is likely a lower total cost; it also allows Virtra to take advantage if a department budget has room in it at the end of the year. If the STEP program gets good uptake, Virtra’s results should start to smooth out on a quarterly basis, which should make it more attractive to investors while giving it another tool to drive sales.

Virtra has an un-related royalty arrangement with Modern Round LLC that licenses its VR technology in a restaurant, interactive gaming environment. Virtra owns 8.4% of Modern Round’s parent company, TEC. Last year, these royalties generated roughly $500k in revenue.

The Takeaway

I like this investing space and Virtra has moved beyond the startup phase to a true operating company with the possibility to really set itself apart from competitors. I am going to wait for Virtra to announce its full year results before entering at this point. In the company’s operational update in early January, the company said:

The company achieved several important financial milestones during the first nine months of 2018, which included generating record revenue, gross profit, net income and adjusted EBITDA

Given that the announcement was in early January, I felt it odd that they didn’t note (even if it was unaudited) the full year revenue. It could be that they hadn’t finalized its full results so why speak to only one metric, but it could also be that the company had a down quarter; due to the lumpiness of their results it wouldn’t be a surprise. Virtra’s Q4’s have also been weak over the last several years. It may be nothing but given I am going to wait until after their Q4 results, which they have indicated they will release on March 28, 2019, before I decide to invest.

Even with this short term risk, Virtra’s EV of just $22.3m seems to be a very low risk for the upside the company brings. The macro trends surrounding VR training, as well as the cost benefits it can bring to a price-challenged environment make the potential for adoption more likely as Virtra expands its footprint.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in VTSI over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.