Will Growing Demand Help VirTra (VTSI) Outperform In A Potential Bear Market?

By Ben Rabizadeh Founder of Story, Inc. DBA StoryTrading

– Several near-term catalysts possible, including contracts with U.S. and foreign governments 

– Fundamentals well positioned as TTM bookings have grown 39% year-over-year to $30 million; cash position standing at $21.5 million

– The recent delay of the IVAS program with Microsoft MSFT weighed on sentiment causing a sharp correction,  but a wave of other recent deals is improving sentiment

– Technical analysis provided by Rexman who says VTSI must ascend resistances to break, at the 7.40s, 8.70s, and then the 10s breakout.

Despite a sharp correction in the market, force-training simulator provider VirTra Inc. VTSI may outperform its microcap peers due to its strong fundamentals and potential catalysts. 

VTSI is focusing its energy, helping local law enforcement agencies, governments, schools, the military and commercial markets learn the necessary skills to keep people safe in an increasingly challenging environment.

We asked our StoryTrading community whether it’s the right time to take a closer look at VIP Pick VTSI, and guest contributor Kevin Crawford (who can be found here) provided StoryTrading with an update through the lens of our four pillars: Catalysts, Sentiment, Fundamentals, and Technicals.

Overview

VTSI sells virtual reality (VR) de-escalation and use-of-force training equipment to police and militaries throughout the world. The company has been the gold standard in the field of police training for many years, but a game-changer happened in 2019 when VTSI quietly acquired patents related to “recoil kits” that enable integration of the industry’s most realistic weapon systems into their equipment. 

These patent-protected recoil kits accompany VTSI’s already industry-leading training content and have pushed the company even further ahead of its competition. This is beneficial to VTSI for two important and timely reasons:

1. Police training is a hot topic in the wake of recent events with governments across the globe committing to invest significant money in this area. Agencies are demanding realistic training and are more willing to pay for top-of-the-line training tools. VTSI is the sole provider of the most realistic training systems in the world with patents and a content library, preventing significant obstacles for competitors.

2. Militaries across the globe, but especially in the United States, are beginning to adopt VR solutions for training systems. VTSI is now the leader in the recoil kit niche and, if it so chooses, capable of integrating into just about any VR solution. The company has quietly, but significantly expanded its total addressable market (TAM) by adding this advanced recoil kit hardware to its product suite.

Catalysts

It’s more evident that VTSI is now targeting customers that can place large orders for equipment as opposed to single simulator orders that have historically netted only modest growth. In 2021, the U.S. Army finalized a 10-year $22-billion contract with Microsoft to build out its Integrated Visual Augmentation System (IVAS) program.

This program will likely require thousands and thousands of recoil kits that will integrate into their Mixed Reality headset systems, which are based on Microsoft’s HoloLens technology. While the program is classified and VTSI has not explicitly stated that it is part of the program, it is Mr. Crawford’s belief there is a high probability that the company is supplying recoil kits as part of the IVAS program.

Based on Mr. Crawford’s estimation, the recoil kit portion of this program could be worth $15-20 million per year through the duration of a 5-to-10-year IVAS contract. It should be noted that the IVAS program recently faced delays but is aiming for a September 2022 rollout. Since the October delay announcement, there has been commentary at IITSEC and TAK Offsite conferences that gave color on IVAS and it seems that there has been significant progress, pointing to a successful 2022 rollout.

Additionally, reports indicate that the United Kingdom is purchasing equipment for  a Roundless Tactical Engagement Simulation (RTES) program, and again, VTSI could potentially be the supplier of recoil kits. A recent YouTube video posted by a U.K. reseller of VTSI systems demonstrates its vision of what an RTES product could look like. The program’s documents suggest a contract could be valued between £7-£79 million (US$9.5-US$107.1 million) depending on how widely it gets adopted.

Moreover, during the third quarter of 2021, VTSI won three deals each valued at more than $1 million. There were two orders for approximately $1.3 million from two different countries: one in the Middle East and the other in Europe. The other order was part of a new contract award under the five-year, single-awardee indefinite delivery/indefinite quantity (IDIQ) from the U.S. Department of Homeland Security for U.S. Customs and Border Protection (CBP). This contract award had an initial order of approximately $1.4 million, while the IDIQ has a purchase ceiling of $24.5 million for supplies and/or services that may be ordered over the life of the contract.

In December 2021, VTSI announced it received a standing offer from the Government of Canada to supply marksmanship and judgmental use of force simulation technology to various law enforcement, border protection and corrections facilities throughout the country. In the company’s announcement, Jason Mulcahy, general manager of VTSI, said, “We look forward to expanding our presence in Canada as we execute this expected large-scale rollout with multiple Canadian agencies.” While the company did not disclose the potential value of the deal, Mr. Crawford believes VTSI could receive $20 million+ over a three-to-five-year period.

VTSI announced this month that it received two follow-on orders from undisclosed foreign countries totaling $2.7 million: one for $1.6 million and the other for $1.1 million. Both orders are for simulators, software, content and associated training tools.

These recent contracts and growing interest in VTSI’s product line can certainly help grow the company’s earnings. But there are also several other activities that signal the company may be preparing for more growth, including the following:

• In Q3 2021, VTSI reported a record $11 million in bookings and a record $21.7 million in backlog.

• According to an 8-K filed in August 2021, the CEO & COO received increased compensation via higher salary and a bonus structure based on the company’s net profit. Net profit targets for maximum compensation are $7 million for 12 months ending June 30, 2022, $9 million for twelve months ending Aug 31, 2023 (+28%), $11 million for twelve months ending Aug 31, 2024 (+22%). Commentary in the 8-K stated that “while a maximum net profit per year has been set for allocation of the available shares at this time, it is very possible that the Company will exceed these levels during the next 3 years …”

• In August 2021, VTSI purchased a new office/warehouse. Along with this, the press release stated, “as demand for VirTra’s world-class training simulators in the law enforcement and military markets grows, it is critical that we scale our manufacturing and production capacity to meet not only the burgeoning demand today but the potential growth in the future as well. The property gives VTSI a larger and more centralized facility to meet the anticipated growth in training simulator development and production, recoil kit development and production, training content creation and administrative functions. VirTra also expects the new building will provide greater operational efficiencies.”

• Significant growth in inventory, in Mr. Crawford’s estimation, likely due to stocking recoil kits for IVAS. Inventory has grown to nearly $6 million as of the third quarter 2021 from approximately $2 million at the end of 2019.

• Sixty percent increase in machinery and equipment line-item going from $1.1 million to $1.7 million over the most recent two quarters.

• Insider buying from CFO and another member of the board of directors in Q4. While a trivial number of shares were purchased, this is the first time either representative has purchased shares of the company.

• VTSI has increased headcount by more than 33% in just under two years to 118 employees as of October 2021.

• VTSI implemented a new ERP system in Q1’21 indicating they have the need for better supply-chain management.

• In November 2021, VTSI hired new auditor Eide Bailly LLP.

• On a $2 million a year run rate for their recurring revenue, Training-as-a-Service STEP program is growing at a ~100% year-over-year rate with 100% retention.

• Teaming agreement with Action Target adds an additional cross-selling opportunity for live firing range purchases.

As is evident, the opportunities are abundant creating a rich pipeline of potential catalysts which can help drive out-performance. But catalysts are just one of the four pillars. Fundamentals also play a crucial role in price discovery.

Fundamentals

As of writing this article, VTSI had a TTM P/E ratio of 15 and EV/EBIT ratio of 13. At the same time, TTM revenue was up 22% year-over-year in 2021, while TTM EBITDA decreased 11% year-over-year.

VTSI’s TTM bookings have grown 39% year-over-year to $30 million which is supported by the recent quarter’s record setting $11 million in bookings. At the same time, the company’s revenue and backlog has grown 33% year-over-year. Viewed from this angle, the underlying business has clearly started an upward inflection despite not yet showing up in the company’s metrics.

Price (Jan 7)	Market Cap	Cash	Debt	Enterprise  Value	TTM  P/E	TTM EV/EBIT	TTM P/S
6.63	71.5	21.5	8.4	58.4	15	13	3.2

Even though VTSI does not provide guidance, based on the above opportunities, following are a few scenarios Mr. Crawford is using to demonstrate possible 2022 and/or 2023 outcomes. 

Highlighted in green is his base case EPS for 2022, assuming only modest revenue gains from deal flow. Highlighted in yellow is Mr. Crawford’s estimation of EPS if any or multiple of the above deals lead to significant revenue growth.

Sentiment

Sentiment plays an outsized and important role in price discovery. At StoryTrading, the sentiment pillar refers to qualitative aspects of a company’s fundamentals. Factors which impact sentiment could include opinions on management, product-market fit, industry tailwinds or headwinds, and any other qualitative item which could impact the perception of the sustainability of earnings. 
CEO Bob Ferris took over VTSI in 2008, which was a private company at the time. Since then, many investors perceive the company growing revenues too slowly. 

Perhaps the biggest disappointment of late is that the company’s IVAS program faced delays. As discussed previously, VTSI is now aiming for a September 2022 rollout, which will certainly boost sentiment if it comes to fruitiion.

Sentiment is also improving amid recent deals and a revived interest in value companies. Another trait in favor of VTSI: force training is always needed no matter where the economy goes.
If investors reread transcripts or speak with the CEO, that sentiment may shift toward realizing the company has much larger plans than only selling single simulators to budget-strapped and slow-moving law enforcement agencies.

Technicals

Not to be ignored, the technicals pillar at StoryTrading plays an important role. When taken together with catalysts, fundamentals, and sentiment, it can help inform the best entries and exits.
StoryTrading also consults with technical expert Rexman to identify resistance levels and bull targets. Following is his recent chart and analysis on VTSI.

“VTSI long-term inverse supports at the blue lines, at the mid 4s. Currently it is sitting at short term supports at the mid 6s, circled. Ascending resistances to break, at the 7.40s, 8.70s, and then the 10s breakout. The long term break out at the yellow dot can trigger an uptrend. This is a monthly chart, so wld expect slow movements,” Rexman said.

“Hopefully this possible monthly Morning Star reversal triggers around this area,” Rexman also noted. You can find Rexman on Twitter

Summary

The StoryTrading community empowers individuals to make the best-informed trade and investment decisions through a holistic view of stocks based on the four pillars of Catalysts, Fundamentals, Sentiment, and Technicals. Analyzing all four pillars together can also help identify key inflection points.

Despite a sharp correction in the market, force-training simulator provider VirTra Inc. (VTSI) may outperform its microcap peers due to its strong fundamentals and potential catalysts. Recent events throughout the country involving claims of excessive police force and implicit bias put VTSI’s products in the spotlight as a potential solution to help law enforcement, the military and other agencies do one of the hardest jobs in the world: keep people safe.

Looking at catalysts, things may soon inflect for VTSI with several recently announced deals, in addition to the possibility that the U.S. military and other foreign countries are signing long-term deals as customers. It would be helpful if VTSI management disclosed more information about its relationship with the U.S. military, as well as providing more color on its overall growth prospects to improve investor sentiment.

At the same time, the company’s fundamentals appear to be moving in the right direction with TTM bookings growing 39% year-over-year to $30 million and cash standing at $21.5 million.

Technically, VTSI is in a downtrend, but Rexman expects ascending resistances to break, at the 7.40s, 8.70s, and then the 10s breakout.

The big question is whether VTSI will generate significant revenue growth in 2022. That's for you and the rest of the market to determine. We'll be here to tell the story as events unfold!

Disclaimer: Author Holds LONG position on VTSI