VirTra: Short-Term Hiccup Or Long-Term Troubles?
May 15, 2024 2:45 PM ETVirTra, Inc. (VTSI) Stock19 Comments
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Diesel
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Summary
VirTra's quarterly earnings missed estimates, causing VTSI stock to drop 30% overnight.
VirTra's revenues dropped almost 20% year-over-year, with operating expenses increasing, putting pressure on net income. Cash flow rose, but it was due to the company working through its backlog.
Most of the revenue decline actually came from international markets where pipeline is still growing, but contract lead times are longer.
It's too early to tell whether this is a short-term trouble or a sign of something bigger. The next couple of quarters will tell us.
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VirTra Q1 Earnings Results
VirTra, Inc. (NASDAQ:VTSI) announced its quarterly earnings this week, and investors weren't thrilled with the results as the company missed estimates both on the top line and bottom lines. This caused the stock to drop about 30% overnight. Analysts were looking for the company to report 12 cents of net income on revenues of $8.5 million, whereas the company delivered net income of 11 cents per share on revenues of $8.1 million. The stock was having a good run this year before this latest drop, and it's still up more than 100% year-over-year despite this sharp drop.
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I originally covered this stock in an article titled "VirTra: Still Offers Value Despite Recent Rally," and this article serves as an update on that one. In the original article, I argued that the company's growth story was impressive, and its valuation was still attractive despite having had a strong rally up to that point. Since then, the stock became more expensive as it rallied another 80% or so (until today's 30% drop) and the company's growth story seems to have hit a speed bump as it reported a decline of almost 20% in revenues.
The big question is whether this is a short-term trouble or a serious reversal of a long-term trend. If the first is true, it would mean we are looking at a nice panic-driven buying opportunity, but if the second scenario is true, this could be the end of this stock's appeal for the bulls.
One bad quarter rarely breaks a company, but it can also signal that things might be about to change if it shows some signs of long-term trouble. The most troubling part of the latest report is that it shows revenues down almost 20% year over year, while operating expenses are actually higher. The company's total revenues dropped from $10 million to $8.1 million whereas its operating costs rose from $3.48 million to $4.06 million, which put a pressure on net income which dropped by more than half from 27 cents to 11 cents.
The interesting thing was that the company's gross margins barely moved from 69% to 67% even with its revenues dropping so sharply. The company's general and administrative costs rose from 27% of its revenues to 42% of revenues, which is a pretty large increase. This is probably why profits dropped even faster than revenues did, while gross margins actually stayed stable.
Income Statement
Income Statement (VirTra )
VirTra used to enjoy a pretty large backlog before this quarter, which allowed it to have visibility and consistency in its revenue growth path, but the backlog seems to have shrunk during the quarter. As of this quarter, the company's backlog size is down from $20 million to $14 million, which includes $5.4 million in capital, $6.4 million in service and warranties and $2.2 million in other contracts so not all of this backlog is product orders. Some of it actually relates to long-term warranty and service contracts. The company received only $2.9 million of new orders into its backlog during the quarter, which could have been a lot better.
Most of the revenue decline from last year actually came from international markets. The U.S. government market was mostly flat year over year between last year and this year ($6.72 million vs $6.75 million this year) whereas international market revenues were down from $3.2 million to $1.3 million, down about 1.8 million. Considering that the company's total revenues were down by about 2 million, most of this was accounted by international sales. The company actually said that its international pipelines are growing, but it's taking longer to finalize those contracts since sales cycles tend to be longer in international markets, but eventually, growth should return to these markets. Since revenues are not recognized until a product is delivered and signed off on, it makes sense for longer pipeline timelines to impact this company's revenues, but if this trend continues it may signal troubles in the future.
Market Segments
Market Segments (VirTra )
On a positive note, the company's operating cash flow was up significantly from the same quarter a year ago. It was mostly accounted by one line item (Accounts Receivable net) which rose from negative $1.6 million to positive $5.2 million, which gave the company a positive operating cash flow of $5.1 million, up significantly from less than $1 million from a year ago. This is partially because the company has been working through its existing backlog during the quarter. Notice that this amount is very similar to how much the company's backlog dropped during the quarter (close to $6 million).
Cash Flows
Cash Flows (VirTra )
The company seems to be facing some challenges and uncertainty regarding government contracting both in domestic and international markets as many governments around the world are trying to keep their costs under control and having budgeting troubles. The company will have to ramp up its marketing efforts to show its product line's value to its customers so that it can continue to win contracts from both local and international customers.
VirTra is also trying to bring new products to the market such as V-XR which will take a while to generate revenues, but the company appears to be very confident about its long-term trajectory. There seems to be still a lot of interest from law enforcement agencies about obtaining this company's products, but the big question is whether they will be able to get the budget for it. Currently, there is a lot of pressure from local governments to better train their law enforcement agents, so I could imagine them allocating more resources for this eventually, even though there might be short-term headwinds.
Throughout last year, analysts kept upgrading their estimates for this company. A year ago, analysts were expecting the company to generate 21 cents per share in 2024 which was upgraded to 49 cents, 71 cents and 80 cents. This also allowed the stock to rally significantly during this period. It is likely that these estimates will be coming down in the next few weeks and months, but 2025 estimates will also be important.
Analyst Estimates
Analyst Estimates (Seeking Alpha)
I could see this year's estimate to be slashed from 80 cents to 50 cents and next year's from 90 cents to 70 cents in light of the current quarter's results. If this holds up, the current post crash price of $10.80 would indicate a forward P/E of 21 based on 2024 earnings and 15 based on 2025 estimates. The big question is whether the company can return to growth. If it can return to growth, those valuations are not bad, but if revenues and profits continue to shrink, then a lower multiple may be warranted.
It's too early to tell whether this quarter's weak results from VirTra were just a one-off quarter or part of a long-term reversal. During the earnings call, the company's management seemed confident that they will be able to return to growth shortly, but they didn't provide a specific guidance. I believe even the company's management has limited visibility currently since they are at the mercy of government contracts, which can take a long time to negotiate and finalize at times. The company said that it's streamlining its marketing process and changing how it sells products to reduce some of this uncertainty, but I can imagine that the results of these efforts won't be visible for at least a year or so.
Conclusion
What should investors do with this? I think if they are confident that the company's long-term story is intact, they can stay invested and possibly even add on the dip. If they believe that this quarter actually changed the company's long-term growth trajectory entirely, maybe it's time to move on to greener pastures. I can understand both approaches because things are a little more uncertain right now as compared to a few months ago regarding this company. I'd like to be more optimistic than cautious, but I don't blame you if you are not as optimistic
