Description

This idea may only be suitable for PA accounts, considering the low trading volume and market cap.

Background

Virtra is a provider of force and firearm training simulators, with a leading position in the law enforcement market and a growing presence in the military market.  The core simulators are designed to put trainees through realistic simulations, where officers can interact with victims and witnesses just as they might in a real-world scenario.  For context, a picture of Virtra’s V-300 system (the most advanced) and some videos that involve the device can be found below:

Video Links:  https://www.youtube.com/watch?v=ixmmStx0Ds0&t=680s

https://www.youtube.com/watch?v=9GDItEqUKXg

For most law enforcement departments, training is a critical consideration.  On one hand, it has been one element of police practice that has gained a significant amount of attention in recent years, particularly because of the George Floyd incident in 2020, and even Frank Tyson’s death more recently in 2024.  See the charts below to illustrate the trends in public confidence in police training – noticeably, it has declined even further than September 2020, in the aftermath of the George Floyd protests.

Horrific acts like these have been attributed in part to a lack of empathy training.  Furthermore, the decision processes involved in law enforcement are much more difficult than one might expect.  Decisive action may be required in high-stress, high-adrenaline situations.  Furthermore, every decision made by an officer may be subject to intense scrutiny and documentation.  But while one wrong decision can cost an officer their career, it can also cost them their life.  Officers need to be trained repeatedly with their weapons, in hyper-realistic environments that bring them as close to reality as possible. 

This is where Virtra’s system excels.  With over 300 hours of training scenarios, the Virtra suite of solutions is the most comprehensive training simulation software available to police officers today.  Virtra’s founders also prioritized immersion and realism by acknowledging every detail of a live fire situation.  For one thing, the most advanced version of the system places an officer in a 300-degree simulation, so new inputs are flooding the senses from every direction.  Because of Virtra’s patented ammunition systems, officers can use the same equipment they are using in the field and develop a feel for their weapons.  The simulations are interactive with an average of 85 branching options per scenario, controlled by a trainer in the background.  Finally, the simulator is equipped to offer in-depth analytics on performance, which is dissected in post by the team.

Over the past twenty years, Virtra has become the leading simulation solution for U.S. law enforcement departments.  It has also made great inroads internationally.  The history behind Virtra is fascinating, and we will speak to this briefly, but it only gives a sense of the bigger picture.  Between VR, military, and healthcare, we believe there is an abundance of white space that Virtra, and its excellent management, are positioned to capture.

History

While it may not be worth covering Virtra’s history in depth, the podcast linked below has a good summary of the company’s progression in the past and priorities for the future.

Link:  https://www.youtube.com/watch?v=T_659nEdUY4

Products

Below, we outline a list of products and components developed by Virtra to illustrate just how intricate the system is. 

V-300/V-180/V-100 Simulators:  The image and videos above should provide a good overview of Virtra’s simulators.  Playing on the screens is an interactive scenario.  The scenario has multiple branching options (like an interactive game or a movie film) that are controlled by a trainer in the back.  Older scenarios were filmed in real-life settings with actors responding to different conditions.  More recent scenarios are developed in Virtra’s excellent volumetric studio and can place new characters in almost any environment.  For instance, the movements of an actor are tracked in a studio, and can be placed in an exact, filmed version of a local library or a hospital.  In doing so, departments can simulate potential threats in familiar areas, and officers can map out hiding spots and critical zones.  The simulations are also highly accurate, with pinpoint accuracy for weapons up to 2.5 kilometers away.

Each unit can cost up to $500,000, depending on the specifications (note that the simplest version of a simulator, a single screen V-100, costs significantly less).  Units are funded through the grant system, and Virtra estimates that 6,500 of the 18,000 police departments in the U.S. have budgets large enough to fund a unit.  In order to alleviate the financial burden on departments and create a recurring revenue stream, Virtra has also implemented a STEP program to recognize revenues over time rather than all at once.  Between STEP revenues and their warranty programs, 25% of Virtra’s revenue currently is recurring in nature.

V-VICTA:  V-VICTA is a pre-created de-escalation curriculum that provides around 60 hours of certified coursework.  It is easy to use, and sufficient to help officers pass their curriculum certifications across 36 states.

V-Author:  Beyond V-VICTA, Virtra’s V-Author software enables the creation of unlimited training scenarios by police departments.  To do so, V-Author accepts panoramic images of important county location and drops characters filmed beforehand into those images.  Because the characters are filmed in Virta’s state-of-the-art volumetric studio, their features (down to facial ticks, clothing, and shadows) are all hyper-realistic.  The software than allows the trainer to modify the way these characters act and respond in various situations.  This provides the trainers a high degree of control in creating new scenarios.  Furthermore, with recent advances in AI, Virtra is experimenting with automated content creation that can help users create intricate new scenarios in minutes.

Return Fire:  With its patented Threat-Fire shoot-back system, Virtra can simulate enemy return fire with an electric impulse, which reinforces performance under pressure.

Simulated Recoil Devices:  Virtra also develops gas-powered ammunition custom-built to fit cleanly into existing weapons.  The technology has been accepted in military contracts as well.

Thesis

Virtra benefits from a revamped management team that has so far executed on all counts, and then some.

Ever since starting the company in 1993, Bob Ferris held the reins of Virtra has CEO.  Through the long and arduous journey, he executed well on several fronts:  focusing on the technology long before the virtual reality industry amounted to anything, selling to state and local law enforcement departments, and pivoting into new markets at all the right points.  In doing so, Ferris was able to build a company that became one of the key standards for police training today.  

Ferris is an innovator by blood.  His skillset is broad, with emphasis on one-on-one customer interactions and technology improvements.  This helped in the earlier stages of Virtra when contract sizes were small and the opportunity was large.  (Under Ferris’s leadership, revenues increased from Yet, with larger organizations comes deeper problems, and as a result, much of Virtra’s history has been a case of “two steps forward, and one step back.”  One example:  Virtra attempted to implement a new ERP system in 2021.  In doing so, however, they missed multiple deadlines on their filings, culminating in the filing of the 10-K and the first quarter’s 10-Q in August – almost five months late on the former and two months late on the latter.  The company also had multiple delays on product deliveries from 2018 to 2021 (although in part driven by the pandemic).  If it was not for the company’s inherent product strength, Virtra’s ability to scale might have been at risk a long time ago.

In November 2021, John Givens was hired to the board of Virtra.  Then, in May 2022, he took on the role of co-CEO alongside Bob Ferris.  At the time of the co-CEO appointment, this was Ferris’s statement:

“John is that rare talent who can only be described as a force of nature and I’m honored to share the CEO duties with him. From operational excellence to record-setting business development successes, John has an unmatched and proven track record in the military simulation marketplace. His experience scaling successful business operations similar to VirTra in the U.S. and internationally should greatly help us capitalize on the significant opportunities for VirTra in the law enforcement and military markets.”

“A force of nature” – these words describe John Givens perfectly.

The unmatched track record that Ferris speaks of precedes any of Givens’ business successes.  After graduating from the Florida Institute of Technology, Givens received an honorable discharge from the U.S. Army.  He then specialized in managing IT and security data centers from both a software and a hardware perspective.  These experiences helped him as he gained his first footholds in the military simulation field, by tackling Live, Virtual, and Constructive integration problems.

Givens created the first-ever LVC/gaming simulation at the I/ITSEC in 2004, by identifying six separate technologies from five different companies and integrating them into one single trainer system.  This system became the basis for the first U.S. Army desktop convoy training simulator, which used gaming technology to augment live exercise management.

In 2010, Givens established the U.S. division of Bohemia Interactive Simulations (BISim).  He began gaining widespread recognition as a pioneer of military simulation training, particularly through the development of the Virtual Battlespace (VBS) simulation software, a computer-based tool that helps soldiers visualize the battlefield in 3D from multiple vantage points on the terrain or in the air.  In essence, Givens’ work was an extension of the first technology he had introduced to I/ITSEC.  He was using gaming software in the context of military training.  Today, VBS3 and its successor VBS4 are the standards for military strategy and training, and they have been deployed across a broad variety of use cases across all branches of the U.S. and allied military forces. 

The challenge involved in implementation of VBS was significant, with legacy systems deeply embedded across different departments of the army.  One example was development of the close-combat tactical trainer (CCTT), which used a V-300-like simulator for training soldiers to operate military tanks and Humvees.  To accommodate these legacy trainers with extremely sophisticated imagery, BISim came up with a high-fidelity image generator called VBS Blue IG.  In doing so, BISim effectively had two core products – the VBS3 simulation software, and VBS IG software development kit. 

By the end of his tenure, Givens had one of the leading divisions in the BISim with over 60 employees.  In the process, Givens received the simulation industry’s “Pioneer Award” for outstanding contributions to the training and effectiveness of U.S. overseas troops.  He was also appointed onto the National Center for Simulation’s (NCS) board of directors, wearing multiple hats as secretary, treasurer, and co-Chair.  Recently, he was appointed executive chair of the NCS for a two-year term.  Ultimately, BISim ultimately was acquired by BAE Systems in November 2021 for $200 million. 

Givens joined the board of Virtra in November 2020, upon the passing of one Virtra’s board members.  Shortly after the sale of BISim, Givens assumed the role of co-CEO alongside Bob Ferris.  Almost immediately, his influence was felt.  We are attaching a quote from Givens’ Q4-2022 earnings call, to give a sense of his leadership capabilities.

“Sorry, Bob, I'm going to kind of go up script here. I don't want to read this anymore. So now that I'm approaching a year at the company, I'd like to reflect on my findings and our corrective actions regarding the company's performance expectations and the focus that we brought to the table. The company has made some huge mistakes, including the ERP implementation. I don't know, but that was so harmful to the company at all levels. It was quite daunting. Inexperienced staff in key leadership positions, lack of processes, lack of timely financial reporting, this all added to problems.

But despite the major business setbacks, the company has managed to show some modest growth -- there are 2 reasons for that modest success, in my opinion, a superior product that's second to none and a line staff dedicated to those they serve. There's quite comradery between the company and those individuals that we're serving. Unfortunately, for me, change doesn't happen quickly enough and as often as I wanted it to. Keep in mind, we weren't able to really start working on significant change until our filings were completed, we removed the red flags. And after the reorganization in August of 2022, and we still have a lot of work to improve sales, supply line, inventory management and finalizing our capital improvements.

And Bob said we are almost done. The last item that we need to move over is our machine shop. It's a little bit more coordination to do that and timing so that we don't interrupt our production and our delivery. We've been hard working to re-implement the ERP, and we've replaced those key leader positions with strong proven talent. We've implemented processes to contain cost, and we've provided real-time matrix to improve our communication and finally filed a timely Q3 -- 2022 Q3 and a 10-K report.

This company has incredible potential, and we intend to build a market share and expand our offering which you'll hear about later. But for the record, we're not happy with our performance yet. And we will continue to build that pipeline, close more deals, drive cost down and deliver products faster, make sure we provide superior customer experience and protect shareholder value. So thank you for your patience and your investment in VirTra.”

Ever since his appointment as a co-CEO almost two years ago, Givens has accomplished the following:

• At the time of John Givens’ appointment in Q2-2022, gross margins were at 55%.  Gross margins have increased to all-time highs of 70% in FY-2023 and 83% in Q4-2023 (although some of this was due to design and prototyping revenues which have no significant operating costs).  Separately, Givens immediately prioritized optimization by reorganizing the organizational charts and eliminating 10% of Virtra’s workforce.
• Entering 2023, the backlog was at $27.7mm.  Today, the backlog is at $19mm. The company under Givens’ leadership has prioritized delivering product within days instead of months or years under previous management.
• Recurring revenue (between STEP revenues and warranty revenues) has increased from 8% of total revenue in Q2-2022, to 25% of total revenue currently.  Virtra’s goal is to increase recurring revenue to 30% in the near-term.
• Virtra’s ERP implementation, as explained above, was mishandled by the prior management team.  Givens made this a high priority early on, and it has helped the team gain greater visibility into sales opportunities and efforts.
• Virtra is now using a grassroots approach to help law enforcement departments find grants that would help them buy simulators and headsets.
• Finally, the sales strategy has been completely overhauled.  Givens has dedicated a lot of time to establishing a federal sales strategy, increasing visibility across customer accounts, revising sales incentives, and revamping international sales.

The points and quotes above are all recent examples of Virtra’s transformation.  Givens’s method is understandable:  get the current organization to operate consistently, before focusing on the various growth drivers.  The final point above – Virtra’s recent emphasis on sales strategies – is the first step to this end.  With the shades of “visionary” dotted throughout John Givens’s (and even Bob Ferris’s) history, however, we expect there is more to come.  Some of this potential has already started to bear fruit.

Given the amount and sophistication of the content that Virtra has available, V-XR seems like low-hanging fruit that can add near-term revenue for the company.

The V-XR is a virtual reality headset that is being developed by Virtra.  In some ways, this effort takes Virtra back to its roots:  the company originally tried to develop VR headsets more than two decades ago but eventually learned from the customer interactions that virtual simulators were the best solutions for law enforcement departments considering the technology available at the time.  Today’s technology has evolved significantly, and several use cases have evolved for a VR headset.  The primary use case is a de-escalation training.  Police officers are evaluated critically for their ability to manage emotional situations, with an emphasis on avoiding violent confrontation where possible.  Unlike most companies chasing VR, Virtra maintains that the V-XR headset likely will be less oriented toward shooter situations.  However, current VR systems restrict the use of officers’ owned weapons – a major plus for the simulators.  The headset also does not require a trainer, and the price point is significantly lower.

Out of the 18,000 police departments in the U.S., 11,500 neither have the budget to support a Virtra simulator, nor the requisite recoil kits.  There is a need for a low-cost solution, and the V-XR fits that need well.  Furthermore, for law enforcement departments that have purchased but have not yet received a simulator, V-XR can keep those customers warm while they wait.

Beyond the law enforcement sector, Virtra also will be targeting hospital security personnel.  Given the range of mental health patients that healthcare workers deal with daily, their security largely comes from security guards’ abilities to handle emotional situations.  One large contract that Virtra signed recently was with the Ascension St. John Hospital in Tulsa for $419,000 – Virtra installed a V-180 system earlier this year.  So, the unmet need for a simulation tool is somewhat validated. 

This will not be the company’s first foray away from its core competency; Virtra has experimented with several markets over its lifetime, from entertainment to restaurants.  However, if Virtra can expand its TAM steadily outside of law enforcement, and into more breeds of private security, then it could create new revenue streams for very little incremental cost.  And with the V-XR, Virtra can eventually target smaller institutions, whether it is local security companies, malls, or small clinics.

While there are several competing products to the V-XR, none of them have Virtra’s foothold on the market or mature content.  The one competitor we consider to be a true threat is Axon, who have made significant inroads in the law enforcement market with their sales of TASERs, body cameras, police fleet sensors, evidence software, and drones.   Indeed, Axon appears to be cornering the law enforcement market, and it poses a significant risk to Virtra’s entire business.  That said, we remain confident that Axon’s content is nowhere near as powerful as Virtra’s.  Axon is only tackling the training issue through VR.  Their headsets are currently primarily compatible with their TASERs, and the CGI-content is several years behind.  The company has not spoken at length about their VR solutions, even though development for these solutions began several years ago.  Rather, they have shifted the focus to its other products historically.  The company is likely to release several training modules this year.  The content is largely animated target training or live filmed scenarios, but the offerings are still scant.  Of course, a company like Axon with a growing ecosystem inside law enforcement divisions poses an existential threat.  But considering the recent emphasis on police training and trainers’ fluency with the Virtra simulators, we believe Virtra has more significant barriers to entry than Axon thinks.  Axon, in our view, is better off acquiring Virtra than to recreate all that Virtra has accomplished so far, instead of losing their current focus that has helped gain the leadership position in the law enforcement.  In the worst scenario, Virtra will diversify its business significantly over the coming years.

Virtra is making significant investments in its military business, which is being led by John Givens and may grow to the size of the law enforcement business over time.

Beyond V-XR, Virtra’s other product push will be in the military segment.  Over time, we believe the military will amount to half of Virtra’s business, if not more, largely because of the broad applicability of Virtra’s simulators.  There is very little being revealed about the military segment currently.  This may be attributed to the fact that the military sector is highly secretive, and that contracts are not always publicly available.  Furthermore, the sales cycle to win military contracts is long and arduous, while remaining highly competitive.   Historically, a handful of leading players have dominated the game for contracts.

Virtra’s military efforts have sputtered for years, with various levels of involvement over its history.  However, that Givens was able to identify an opportunity here and move quickly to seize it, is promising from our perspective.  Almost immediately, Givens set up a second headquarters in Orlando, which he touted as critical in competing for military contracts.  Givens details this, and the broader opportunity, in his quote from the August 2021 conference call below:

“So I've been in the Orlando market for multiple decades. And the reason why you have to have presence there is that is the acquisition epicenter of the planet for the military, all branches. So it's the visibility. So we recently actually opened up an office, where we'll be placing simulators there, so that all those acquisition officers and everybody that's buying anything in the simulation environment comes to Orlando, they'll come into our office, and be able to look at, review and actually get their hands on our products. The technology that VirTra has today, some of it is as the industry has, but much of it is what the industry doesn't have. So the only group that has really benefited from this technology and the innovative items that have been put together is the law enforcement. And this is what's going to drive that what I might call it's just an untapped market for this type of quality product.”

While progress has been slower than expected, there are signs that the business may be gaining steam.  One of the main angles Virtra has been exploring is marksmanship training, given the pinpoint accuracy of the simulator technology.  They are also creating recoil kits for military-grade weapons (more on this later).  As a result of these and other efforts, on their 3Q-2023 update, Virtra had already collected $4 million in military contracts, year-to-date.  In the fourth quarter of 2023, Virtra disclosed they had received a $3 million kickoff milestone payment in connection with a contract for custom work, with no significant costs.  Likely, this was a military contract kicking into gear.  Finally, Virtra disclosed a $5.9 million prototype contract with the U.S. Army’s Integrated Visual Augmentation System (IVAS) program.  The IVAS program is a revolutionary program being conducted by the military to equip soldiers with mixed reality goggles, which will help with live tactical planning, networked information sharing, and an augmented-reality Synthetic Training Environment.  Within this training environment, the military is investing in prototypes of Virtra’s carbon-dioxide based recoil equipment – specifically bolt kits and magazines and high-pressure air-fill stations – and their integration into existing weaponry.  Most of the contract should be recognized during 2024.  Virtra may be beginning its penetration into the military market with the low-hanging fruit, which are the recoil kits.  And over time, as the simulators continue to mature and develop, this penetration should only deepen.

On top of everything above, perhaps the biggest update on the military side so far has been the integration of Virtra’s simulators with VBS.  The integration brings together the best of both worlds for military simulation and creates a complex environment that can be generated and used quickly.  Over time, this technology may become a mainstay for military small arms training, which is shifting to “a more realistic and mission-specific scenario integrated with AI-assisted training and evaluation.”  If positioned well, Virtra should capitalize on a significant portion of this market.

Valuation

Virtra’s stock has enjoyed a significant run up since late last year.  This is largely due to increasing recognition of its high-margin, fast-growth business.  The current multiple is 22x P/E, and roughly 4.6x on an EV / sales ratio.  Meanwhile, the company recorded $38 million last year in sales, up +34% year-over-year, and EPS is up to $0.77 from $0.18 on a diluted basis.  Historically, measures of profitability for Virtra have been somewhat lumpy.   However, as the military segment gains steam in the medium-term, it should provide a more consistent source of revenue and earnings over time.  

A breakdown of Virtra’s revenue is provided above.  We believe the new “Design and Prototyping” segment refers to the government sector specifically, which we base off the 10-K’s description (“Recognized at the completion of each agreed upon milestone”).  Furthermore, according to the 10-K, there are elements of the military customer embedded in some the “Commercial” segment as well.  Therefore, the military customer today likely accounts for just under 20% of revenue.

Givens’ leadership, experience, and recent hires leads us to believe that the company’s products are relevant to the military and are presently underpenetrated. Over time, we believe the military segment will grow to become just as large as the law enforcement segment, if not larger.  We are already seeing some signs of this growth in the $5.9 million contract signed in the first quarter which should all be booked in the current year.  Furthermore, sales of the V-XR headset are limited currently and are likely to expand over the next five years.  If we allow a four-year time horizon for the military segment to grow to the size of the law enforcement segment today, and if we assume no growth for the law enforcement segment, we arrive at total sales of $62 million by 2028.  More likely though, the law enforcement should grow at a low-double-digit rate, driven by expansion internationally.  Building a 10% growth rate in for the law enforcement segment, we arrive at $76mm in sales by 2028.  Assuming the sales multiple remains the same, this arrives at a per-share price of between $33 and $40 per share in 2028 (assumptions on profitability may vary).  This is conservative – military contracts can be a large and consistent source of revenue when attained, and we are treating V-XR as additional upside.  But it illustrates the point that Virtra could have a large market.  While we could do a rigorous valuation with assumptions around number of deals and deal sizes, we believe it might take the focus off the bigger picture:  Virtra is a company with multiple value drivers in multiple directions, and it might end up looking like a very different company in five years’ time.

Virtra is reporting its 1Q-2024 quarterly results today.  Considering the stock’s run over the past six months and the historical volatility present post-earning, we believe longer-term investors may be presented with an attractive entry point in the coming weeks.

Catalyst

Military segment rollout.

Virtual reality headset launch.

Ramping international growth.