VirTra, Inc. (VTSI) Earnings Call Transcript

Good afternoon and welcome to the VirTra Third Quarter 2026 Earnings Conference Call. My name is Megan 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, Alana Boudreaux. 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 website at www.virtra.com. Now I'd like to turn the call over to VirTra's CEO, Mr. John Givens. Thank you, and you may proceed, sir.

Thank you, Megan, and good afternoon, everyone. Thanks for joining us today to discuss our third quarter 2026 financial results. We delivered a strong quarter with revenue at $7.6 million, bookings of $10.3 million, and net income of $2.2 million, or 19 cents per diluted share. Our revenue increased 42% from the prior year quarter, bookings rose 87% sequentially from the second quarter, and we generated our third consecutive quarter of sequential revenue growth. These results demonstrate continued progress in translating customer demand into revenue, earnings, and shareholder value. The improvement was also evident in our operating performance. Gross margins increased to 70% while disciplined cost management contributed to $2 million of operating income compared to the operating loss in the prior year quarter. We believe these results demonstrate the operating leverage inherent in our business model as revenue conversion improves and we continue to execute efficiently. We also generated $10.3 million in bookings during the quarter and ended September with $27.6 million in backlog. Those metrics provide important visibility into future revenue opportunities and reflect continued demand for VirTra's training solutions in law enforcement, federal, military, and international markets. Our focus remains converting those commitments into deployments while continuing to expand customer relationships and win new business. Turning to our markets, we see encouraging signs in the law enforcement funding environment. After nearly 2 years of limited grant activity, programs are reopening and agencies are actively pursuing funding opportunities. This gives departments additional avenues to invest in training and advance purchasing decisions. While the timing of grant awards, funding distributions, and customer deployments remain a bit difficult to predict, activity levels have improved meaningfully. Our team remains focused on helping customers navigate the funding process and convert that activity into future orders and deployments. We view the continued reopening of these programs as a constructive development for the market. Looking specifically at demand, one example that it remains strong is the response to our Task Force Santa initiative, which provides agencies with an opportunity to compete for simulator systems. To date, we've received applications from 154 departments, demonstrating the ongoing need for high-quality training solutions across law enforcement communities. More importantly, the response highlights the strong demand for advanced training solutions and the extent to which agencies are actively pursuing funding opportunities to support these investments. We look forward to working with these agencies to identify grant opportunities that can help them accelerate system deployments and improve training readiness. In the federal market, our recently announced 5-year sole-source contract with U.S. Customs and Border Protection highlights the long-term value of our customer relationship and the relevance of VirTra's training solution across larger organizations. With a maximum potential value of $14 million, the contract provides CBP with a framework to modernize, maintain, and support its nationwide simulator training network. Importantly, the opportunity extends beyond the initial simulator installations. It reflects a long-standing customer continuing to invest in its training infrastructure and creates opportunities for modernization, upgrades, and support over time. As with all indefinite delivery contracts, the $14 million represents a contract ceiling. The revenue depends on customer ordering activity and our performance under the agreement. Our focus remains on delivering the capabilities and services that strengthen these relationships and position VirTra for additional opportunities. In the military market, our solutions are now available for evaluation through the U.S. Army's marketplace across 3 mission-critical capability areas: weapons skills development, joint fires training, and counter-unmanned aircraft systems. This participation expands awareness of VirTra's technology and provides an opportunity to demonstrate how our training solution can address a broader range of military readiness requirements. While inclusion does not guarantee a procurement award, it increases visibility with potential users and procurement decision-makers across the Army. We also received a $1.5 million sole-source award from the U.S. Army for a V300 training system and related equipment supporting firearm training and force readiness efforts in Tajikistan. This award serves as another example of our ability to support military training requirements both domestically and internationally. Together, these developments continue to expand our opportunities within the military market and reinforce the broad applicability of our training platform. International deliveries were an important contributor to the third quarter revenue performance and demonstrate how awarded business translates into financial results as customer requirements are fulfilled and systems are deployed. We continue to pursue opportunities across international markets while remaining focused on executing against existing commitments and supporting customers throughout the deployment process. As governments and security organizations seek advanced training solutions, we believe VirTra remains well-positioned to address those needs. Innovation also remains a core component of our long-term strategy. Our version 7 software platform is designed to make VirTra systems more intuitive, efficient, and effective for customers. The release incorporates customer feedback, usability enhancements, and workflow improvements intended to improve the overall training experience. We plan to formally introduce this platform at the upcoming InterService Industry Training, Simulation, and Education Conference, November 30 through December 3 in Orlando, Florida, where customers and industry partnership participants will have an opportunity to see these enhancements firsthand. The third quarter demonstrated our ability to turn customer demand into revenue and earnings. We delivered strong bookings, expanded gross margins, generated profitability, and continued developing opportunities across our core markets. Our priorities are clear: convert backlog into deployments, deepen our customer relationships, and pursue growth through disciplined investment and cost management. Supported by a strong balance sheet and a growing pipeline of opportunities, we believe we are well positioned to build on the progress achieved during the quarter. We remain confident in the value of our training solutions provided to customers and focused on translating that value into sustained business performance for our shareholders. With that, I'll turn the call over to Alana to review the financial results.

Thank you, John, and good afternoon, everyone. Now let's review our unaudited financial results for the third quarter and nine months ending September 30, 2026. Our total revenue for the third quarter was $7.6 million compared to $5.3 million in the prior year period. Our revenue increased significantly from $5.8 million in the second quarter to $7.6 million in the third quarter and $3.5 million in the first quarter, reflecting improved revenue conversions and contributions from international deliveries during the quarter. If we break this down by market, government revenue for the third quarter was $5 million compared to $4.1 million in the prior year period. International revenue for the third quarter was $2.4 million compared to $1.2 million in the prior year period. Our total revenue for the first nine months was $16.9 million compared to $19.5 million in the prior year period. This decrease primarily reflects delayed customer funding, procurement timelines, and customer acceptance activities that impacted the timing of revenue recognition mostly in the beginning of the year. Gross profit for the third quarter was $5.3 million, or 70% of total revenue, compared to $3.5 million, or 66% of total revenue, in the prior year period. Gross margin continues to reflect the impact of our operational efficiencies we've put in place that we benefit from as we're able to recognize revenue. Our gross profit for the first nine months was $10.9 million, or 65% of total revenue, compared to $13.5 million, or 69% of total revenue, in the prior year period. The decrease was driven by lower revenue volumes and the continued investment in our strategic content and development initiatives that support our future growth opportunities. Our net operating expenses for the third quarter were $3.3 million compared to $4 million in the prior year period. And our net operating expenses for the first nine months were $10.4 million compared to $11.7 million in the prior year period. This reflects our disciplined expense management while continuing to invest in our growth initiatives. Income from operations for the third quarter was approximately $2 million compared to a loss of $0.5 million in the prior year period. Income from operations for the first nine months was approximately $0.5 million compared to $1.8 million in the prior year period. Net income for the third quarter was $2.2 million, or 19 cents per diluted share, compared to a net loss of $0.4 million, or negative $0.03 per diluted share, in the prior year period. Our net income for the first nine months was approximately $0.6 million, or $0.05 per diluted share, compared to net income of $1.1 million, or $0.09 per diluted share, in the prior year period. Our adjusted EBITDA non-GAAP metric was $2.6 million compared to $0.09 million in the prior year period. For the first nine months of 2026, our adjusted EBITDA was approximately $2.2 million compared to $2.5 million in the prior year period. As of September 30, our cash and cash equivalents totaled $18.4 million compared to $18.6 million at December 31, 2025. During the first nine months of the year, cash usage reflected investments in inventory supporting customer deliveries, including international shipments, as well as the acquisition of our Orlando facility. As we turn to our bookings, 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 totaled $10.3 million compared to $5.5 million in the second quarter and $3.8 million in the first quarter. This increase reflected contributions from STEP agreements, capital system orders, renewed activity from federal customers, and a number of capital systems purchased across our domestic sales territories. VirTra defines our backlog as the accumulation of bookings from signed contracts and purchase orders that are not yet started or are incomplete in their performance obligations, and therefore cannot be recognized as revenue until delivered in a future period. We segment that backlog into 3 primary categories: capital, which includes our simulators, our accessories, installations, training, custom content, and design work; service, which is primarily extended warranty and support contracts; and STEP, which is our long-term subscription-based program. Our backlog at September 30, 2026, stood at $27.6 million, and this included $14.1 million in capital, $3.9 million in service, and $9.6 million in STEP contracts. During the quarter, we converted a portion of our backlog into revenue, including the second phase of our previously awarded international deployment in Colombia. We expect additional backlog conversion during the fourth quarter, although the timing will continue to depend on the procurement process, installation schedules, and acceptance timelines. In summary, we're encouraged by the momentum we saw across the business during the third quarter. Improved revenue conversion, strong booking performance, and adjusted EBITDA growth reflect continued progress against our strategic priorities. While the timing of customer funding and procurement decisions can create variability from quarter to quarter, we believe our backlog, recurring revenue streams, and strong financial position provide a solid foundation for continued execution and growth. That concludes my prepared remarks. I'll turn the call back over to John for his closing comments.

Thank you, Alana. As we reflect on the third quarter, we're pleased with the progress we've made across the business. We delivered our third consecutive quarter of sequential revenue growth, generated bookings of more than $10 million, expanded gross margins to 70%, and grew our backlog, all while continuing to strengthen customer engagement across our law enforcement, federal, military, and international markets. These results provide further evidence that the investments we've made in our products, our customer relationships, and go-to-market initiatives are gaining traction. Looking ahead, we remain encouraged by the underlying demand environment and the level of activity we're seeing across our pipeline. We believe the increasing pace of grant activity, growing federal engagement, healthy backlog, and strong booking performance position us well for continued progress. In closing, we're pleased with the progress we've made during the quarter. As the demand for effective training and readiness solutions continues to evolve, we believe VirTra is well positioned to support customers' mission-critical needs while creating long-term value for shareholders. We look forward to updating you on continued progress in the quarters ahead. That concludes our prepared remarks. Operator, please open the call for questions.

[Operator Instructions] Now, the first question comes from Richard Baldry with Roth Capital. Please proceed.

Thanks, and congrats on a great quarter. Can you talk about the sustainability or extensibility of this level of revenue, maybe thinking about the top of the funnel, given the booking strength? It seems good, but do you think you'll be able to replenish sort of this level of revenue on an ongoing basis? How do we think about this step-up you've had?

Well, great question, Rich. So the environment has been a bit tumultuous over the last 4 or 5 quarters, given the grants and the government funding that we rely on. We've expanded into other areas, so we've actually increased our pipeline. But one thing you can look at is, if you look at the previous quarter, while the revenue may not have been there, we were replenishing that backlog, and we continue to do that. So as you look forward, there are quite a few opportunities that are out there. We have the military growing with the marketplace. We have a lot of other areas within the country, within research, within adjacent markets that are coming online too that have the requirement of looking at either de-escalation or dealing with different levels of issues with people in the public as you look at law enforcement, security forces, and the like. So I believe that it just keeps expanding. And one of the things that we've seen is word about VirTra is getting out there. While we may have been #1 in the law enforcement environment, we were relatively unknown in the federal and the military space. We have some federal customers, but we didn't expand on that in the early days of VirTra. So I think that and what we've done, we've hired a new director of marketing and she's putting the systems together and doing some amazing outreach, which we're seeing a result of in our leads, and our shows are more directed at the need of the time. So we have the theme when we go to the shows and what we're doing and how we react to the industry is much more direct and much more focused on the needs. So we're seeing some effects on the programs and the processes that we're putting in place. So yes, I do believe we're able to backfill the backlog. And to Alana's point, our challenge is that we're able to get the products out quickly, but the customers aren't ready for them, whether it's the construction of a building or where they will put it or who's going to be in charge of it or how they're going to integrate it into their training program. Those are the things that really stand in our way. And those are the things we're trying to help them with by publishing things and helping them in that process. But yes, to your question, yes, we'll be able to fill that pipeline, that backlog.

Maybe another way to think about it, if you look at the successes you've had in shipping slightly, is it a large number of sort of mid to bite-sized deals, or is there some sort of lumpiness in larger deals that would cause a little bit more concern about the sustainability?

I think it's exactly what you said. It's the mix, right? Are we going to have thousands of $50,000 deals, or are we going to have 25 four- or $500,000 deals? Or are we going to sell more STEP for the recurring revenue? Or are we going to maintain capital? That's where the lumpiness comes in. As we stated, what made this quarter is we had an international win; we were able to book more of the international revenue, which has a higher margin, which affected our gross margin. So what we're trying to do is level off those peaks and valleys by making sure that we're focusing on the mix. But like I said, there's usually 3 variables that we can't control. But we are doing things like publishing a paper: How do you take a VirTra system and incorporate it into your training program? Or how do you build a training program around the VirTra system? And also guiding them through the grant process. So we're helping in every way that we can. We've identified the problems that our customer base is having, we're being looked at as the thought leaders in those areas, and that's why you're seeing this big shift as we're moving through. But unfortunately, the lumpiness, as much as we want to control it—we're trying—I just don't know that, I really don't have a good answer for that, Rich. I apologize.

Yes, that's a good answer. Last for me is sort of 2 parts: SG&A was down year-over-year and sequentially. Can you talk about, is this a good run rate level we're sitting at here? Were there some sort of one-time things that made it as good as it was? And then, I think it wouldn't be a sell-side call if someone didn't ask you to expound on the ways you can use AI to make the company stronger, better going forward. So we'll give you your chance to. Thanks.

I'll let Alana address the first part of that and I'll take the AI part.