ENGAGE XR Holdings plc (EXR) Earnings Call Transcript & Summary

Hello, and welcome to the VR Education Holdings Final Results Presentation for the Year Ended 31 December 2019. My name is Séamus Larrissey. I'm the CFO, and I'm joined today by David Whelan, our CEO.

Good morning, everybody. So I'm going to start with quick overview of the company. So there's 2 main components to the company. We have a production team that build showcase experiences. These are edutainment titles which are sold on various different platforms, such as the PlayStation network, the Oculus network and the Steam network. These showcase experiences are designed to attract the best developer talents to the company, and they've been very successful in doing that, but they also generate significant revenue for the company. Some of the titles in the past include Apollo 11 VR, Titanic VR, Shuttle Commander, and we've also done some showcase and work for the BBC. The much bigger component of the company is the ENGAGE platform. So the ENGAGE platform originally has been designed as a distance learning and training tool for corporations and educators. However, we're seeing strong demand and for enterprise clients to use it as an alternative to Zoom communications, especially for larger teams. So I'm going to play a short trailer presentation. [Presentation]

Okay. So that was just a brief outline of the ENGAGE platform. We've seen a lot of traction with the platform, especially over the past 6 months, with a lot of COVID-19 restrictions in place with many organizations and schools having to shut down. And our staff numbers at the moment are 42 staff. However, we are hiring aggressively and to meet this new demand.

Some of the key highlights from 2019 include our revenue grew during the year by 42%, and we broke the EUR 1 million mark for the first time. We entered into a strategic partnership with HTC for the exclusive resale of the ENGAGE platform in the Greater China region and also a nonexclusive resale of the platform in the rest of the world in May 2020. We also entered into a partnership agreement with a content development company based in the USA called VictoryXR for the delivery of immersive educational content throughout U.S. and Canada. Our strategic investment with HTC was finalized in May 2020 for EUR 3 million, and we also held a highly successful VR event for HTC in March 2020. Our financial highlights for 2019 include turnover increasing by 42%, as previously mentioned. Our EBITDA loss was EUR 1.4 million, which was in line with management expectations. Our expenditure run rate is approximately EUR 250,000 per month, and our cash position at the end of December was EUR 1.3 million. And as of today, post the HTC investment, our cash position is EUR 3.4 million. Operationally, we had a number of highlights in 2019, including entering into a number of commercial deals with parties on the ENGAGE platform in Asia and U.S.A. Our business development and marketing is now focused on these markets. Apollo 11 VR was selected to be part of the launch collection for the Oculus Quest, Oculus' new all-in-one VR headset, which has been hugely popular since its launch. We also entered into a commercial agreement with the U.S. Space and Rocket Centre for use of Apollo 11 VR experience throughout the museum. ENGAGE was also selected by Facebook for its Oculus' Independent Software Vendors program. At the back end of 2019, Shuttle Commander was released on Sony PlayStation. Partnership deals entered into during the year include Deutsche Telekom, Qualcomm Technologies and XRSPACE for the launch of a new VR device.

Okay. So the focus that we have to roll out the ENGAGE platform is twofold. So the ENGAGE platform right now, even though it was originally developed as an education and training content development tool, really now we see ENGAGE as a next-generation communications tool. So we're looking to partner with established businesses and established enterprises in different regions to roll out the platform. This has been key with the HTC investment and also commercial deal. Where we want to roll this out in the Chinese region, we need to ensure that we partner with somebody who has strong business development and business sales in that region. Also building the showcase material that we have, all of that content is repurposed inside ENGAGE and redirects people to the ENGAGE platform. So just to give a bit more overview about the ENGAGE platform and the events that we've had. So since COVID-19, most global events have been canceled. So there's been over 800 or 900 events that have been canceled globally. These would be major events like GDC, Mobile World Congress, Oculus Connect. And all of these events would have been physical events. But again, because of travel restrictions around the world, these events cannot take place. A lot of these events are now looking to take these events virtual, and they have been trying to use video-based platforms. However, we are seeing many issues with video-based platforms where when users log in to video-based platforms, all they're watching is a video of the keynote speakers. They're not actually interacting with anybody else in the conference. What is very unique about ENGAGE is that we can provide with a full virtual experience and exhibit hall where users all have avatars, and they can walk around inside the virtual space and meet people and have hallway conversations that they cannot achieve on video-based platforms. It's a hugely immersive experience. Now back in February, I had a conversation with Alvin Graylin, the HTC President of China Region, and they were planning on holding their annual developer conference on Mainland China where they would typically invite 2,000 or 3,000 developers to the conference physically, show them the new technologies that HTC are working on and talk about what's on the road map. However, this was canceled because of COVID-19. Alvin asked me at that stage, would we be able to host this event inside the ENGAGE platform. We said sure, no problem, and we ended up hosting the event in March. We had over 1,000 people logged in concurrently inside the ENGAGE platform. We had keynote speakers from HTC themselves. We have the Chairwoman and founder of HTC, Cher, giving the keynote speech. We have people from Qualcomm, the Vice President of Qualcomm talking inside the platform, and we also had very high-level executives from China Telecom all speaking inside the platform. It was very, very successful. And we had over 5 hours of talks. We had 1.1 million people watching the live stream, the majority of which were actually based in China. And within the platform, a lot of the people who had headed the event itself were actually based in China, and they can interact very naturally with people outside China, getting past the great Chinese firewall. It was a very, very spectacular event. And we had jets fly over and before the keynote talk. And here, you can actually see in the video some of the highlights. Here, we see Cher actually giving a talk. And here's Alvin himself inside the ENGAGE platform, giving a talk about the coronavirus. Because it is virtual reality and not video, we can do some very specialized things. Here, you can see actually some coronavirus popping over his head. And then we put everybody within the experience into kind of a hazmat suit. And one of the really good key features of ENGAGE is that we have a system called Projected Presence, where we would have rooms with 50 people inside the room, but then we clone the speakers into additional rooms. So if you want to maybe have a conference with 1 million people, we can clone your avatar into 1 million separate rooms all at the same time. And all those people feel like they're within touching distance of you. And again, this is something that cannot be achieved on video-based platforms. So just to give you a quick overview of some of the other features that we have on ENGAGE platform. ENGAGE has been designed over the past 4.5 years. It's a very robust and very mature platform compared to most other platforms that we're seeing coming out today. It's very scalable. We use Amazon Web Services, so as servers need to be allocated, they're all running on Amazon, which is a very robust system. Each person who logs into ENGAGE has an avatar. An avatar is a digital person or a digital representation of that person. And if you're wearing VR equipment, as you move around in a real world, your avatar moves around in the virtual world, and it gives a sense of presence of that person. We also have a system where if you take a single selfie image of your face and upload that to ENGAGE, it will actually build the avatar based on your photograph, and it makes an exact likeness of you inside. So people will look like themselves inside ENGAGE. They don't look very cartoony. We also have media streaming services through Chromium browser. So when you're inside ENGAGE, if you're in any of the virtual meeting rooms or conference centers inside a virtual platform, we have video screens where you can stream PowerPoint presentations, you can stream in video from YouTube or Vimeo. You can also connect Google Docs, OneDrive, pretty much any web service that works through Google Chrome will work inside the ENGAGE platform. And it makes it very easy to share documents and media. We also have more than 30 locations. And quite often, enterprise clients, as they come to us, they want their own customization and branding. And we can make that as part of their account inside the ENGAGE platform. We have a web app where users can manage their users. So if an enterprise client comes to us, pretty similar to Office 365, they'll purchase 50, 100, 1,000 accounts, and then they can allocate those accounts out to their users or their staff. We also have a content development section of the platform. So going back to its educational routes, ENGAGE platform was designed originally for educators to create and share content and give live classes. We have a recording system that can record everything you do and say within the platform. It will record all your avatar's movement, and it will record any presentations or any 3D objects that you bring into the environments. And if you're a really competent presenter and you are presenting something for maybe 20 minutes or 40 minutes and you want to share that with everybody, it just takes 40 minutes to produce. Then that can be uploaded to ENGAGE server and shared to everybody. And it's a very quick and easy way to produce content, whereas currently, if you want to produce any virtual content today, you would have to go to a production company. They will charge you maybe $50,000 to $100,000 to get something quick and easy developed. We also have a scheduling system which is very similar to Zoom, our GoToMeeting, where you can go in, you can schedule a class, a meeting or an event. These events can be private as well to your organization. And we also have the ability to upload your own 3D models and content. So it's very robust and it can be used in many different areas. So the opportunity really in the past 9 months, especially, there's been a huge change in this industry and not just from COVID-19. So there's 3 elements that have really propelled our business forward. So in the second half of last year, the Oculus Quest was released and also the Vive Focus Plus headsets. These are stand-alone VR devices that are very, very good quality. Previous to those releases, for you to get any type of good VR experience, you would have had to purchase a laptop or PC. You'd have to purchase a headset as well and connect cable to it. So you're looking at about a $2,000 expense to get a really good VR experience before stand-alone headsets came out. Also as well, there was a lot of choice. So when -- even if you did want -- even if you did have the funds to purchase a headset and a really good high-end PC, there was so much choice out there in the market. It actually confused a lot of the consumer base. Whereas when the stand-alone headsets came out, you literally just purchase a headset in a store, you put it on and you're ready to go. So that was one of the steps that was needed to make sure that VR adoption started to grow rapidly. The second key point that I would outline here is a 5G rollout. So there's many telecommunications companies around the world. They've spent billions of dollars on getting 5G licenses to provide that service. But what they're finding, it's hugely difficult to upgrade current 4G subscribers to 5G accounts. The reason being that people, by and large, are mostly happy with their 4G service, where they can stream in video, they can check their e-mail. There's no real need to have a 5G gigabit connection on your phone. However, for a VR and AR device, it makes a massive difference, where you can stream in high-quality assets and stream in very high-quality 360 video at 16K resolution without any buffering. So it really makes a big, big difference. Also, HTC are working on a system where you can render all the graphics required for a VR experience on a server and then just beam them straight on to the VR device, ensuring that the VR device itself can be a lot smaller, a lot lighter and the battery lasts a lot longer. So as 5G is rolled out, we're going to see more and more services of this nature and becoming available. And actually, we did sign an agreement with Deutsche Telekom and XRSPACE last year for the rollout of their own VR device which is coming next year. And very, very soon, we predict that you will be going into mobile phone operating shops and signing up for 5G accounts. They will give you a very nice mobile handset but they'll also be handing you a VR device to consume VR content. And then finally then, COVID-19 has had a huge effect on the world. Schools and colleges have shut down. Everybody has been forced online. Also, a lot of industries, a lot of workers have also been working online. And actually, we're seeing a lot of these industries like Twitter, as an example, allowing their staff to work from home forever. Now having video-based communications is fantastic, especially if there's only 4 or 5 people on the line and you're just having a conversation. Video works perfectly for that. But let's say, if you have a team of staff 10, 15 or even 30 or 50 people who all need to collaborate, video-based platform is really falling short. And because anybody who's talking on the video, everybody has to pay attention to that person. Also as well, if you're in a larger group, many people just mute their microphone or even turn off their camera and say that they've attended a meeting, but they're not actually very, very attentive. What happens inside the ENGAGE platform is you're in an actual virtual meeting room. If you want to stand up and give a PowerPoint presentation, or if you need to draw on the whiteboard or do a kanban board, that's all possible within a virtual space. And it's a very, very similar experience to what you would see in a real meeting room. Obviously, being in a real meeting room is best, but the next best alternative is virtual reality and using it for collaborative tools. Here, you can see on the graph the huge explosion in Zoom and Skype downloads because of COVID-19 and everybody being forced online. And very, very soon, the ENGAGE platform will be available on mobile handsets and standard tablets as well. And we think this is going to be a game changer to the addressable market that we can serve. Here, we can just see a quick market overview. So these graphs were created before COVID-19 hit. So you can see at the tail end of 2019, there was a huge explosion in demand for VR hardware and software. This has been driven primarily from stand-alone VR devices becoming more and more popular. Now since COVID-19, demand has actually even grown and further, where people are trapped at home, they're looking for better ways to communicate. They're looking for an escape. Especially if you're trapped in an apartment for many, many months, VR is a way to escape. However, a lot of the manufacturing had slowed down in January and February because quite a lot of the components are built in China, but manufacturing has ramped up again. But still, because growth is so strong in this area right now, headsets are very, very hard to come by. It's very hard to get them in the store, and there's a big waiting list to get these headsets. This graph here was also made back in 2019, and it was just a prediction that by 2023, there'd be close to 70 million VR and AR users in the world. Mark Zuckerberg stood on stage recently and said that he wants to get 1 billion people in VR by 2025. I feel that if -- even if he reaches 50% of that goal, it would be quite a significant market over the next 2 to 5 years. And again, just to go back to the 5G subscription, we are working with Deutsche Telekom, who are T-Mobile in the U.S.A. Facebook are heavily invested in their VR technology by purchasing Oculus. Sony have their own device. But also very, very recently, Apple have bought a VR company called NextVR who do video streaming services. Apple are working on their own VR/AR device. It's expected to be announced sometime early next year. So this industry is growing very, very rapidly.

Now I'm just going to take you through a quick finance summary of some of the key figures during 2019. So as previously mentioned, our revenue grew from EUR 716,000 to just over EUR 1 million in 2019, which was driven by -- from the continued success of our showcase experiences and early-stage revenue from ENGAGE. Our gross profit for the year was EUR 623,000 compared to EUR 477,000 in 2018. Our EBITDA was a loss of EUR 1.4 million, which was in line with expectations, slightly ahead of our loss of EUR 1.5 million in 2018. And our adjusted loss from continuing operations was EUR 1.9 million compared to EUR 4.9 million in 2018. The adjusted loss in 2018 included a noncash fair value adjustment arising from the conversion of debt and preference shares prior to our IPO and some extinguishment costs on the same transaction. On the balance sheet, you can see that we're not very asset-heavy. Our property, plant and equipment grew from EUR 59,000 to EUR 116,000 year-on-year. Our intangible assets, which include the software cost for developing Titanic VR, Shuttle Commander and the ENGAGE platform, grew from EUR 956,000 to EUR 1.4 million. Our trade and other receivables fell from EUR 394,000 to EUR 205,000, which is purely related to timing differences. Our cash balance fell from EUR 3.5 million at the end of 2018 to EUR 1.3 million at the end of 2019. And as of today, post the HTC subscription, there's EUR 3.4 million in the bank. The bottom half of the balance sheet doesn't show anything of great significance. Our trade and other payables remain reasonably constant at EUR 193,000. Under new accounting standards, we were required to show our operating lease liabilities separately, and that's EUR 66,000 at the end of the year. The remainder of the balance sheet are just our issued share capital and other reserves. I'll now run through the financial summary of the cash flow. We start in 2019 with an adjusted loss from continuing operations of EUR 1.9 million. We incurred capitalized software development cost of EUR 890,000. We incurred EUR 36,000 in cost of acquiring property, plant and equipment, which primarily relates to VR-capable computers and headsets. We had other cash -- noncash cost of EUR 486,000, and we had a working capital movement of EUR 187,000, meaning our net cash outflow for the period was just shy of EUR 2.2 million, bringing us from an opening cash position of EUR 3.5 million to a closing cash position of EUR 1.3 million. Also worth noting that the company is debt-free. Just giving a quick overview of our showcase experiences during the year. Our Apollo 11 VR experience, which is multi award-winning, has sold 240,000 copies to date and has generated in excess of EUR 1.8 million in revenue since its launch in April 2016. During 2019, it was also selected as a launch title on the Oculus Quest device. Titanic VR, which was launched at the back end of 2018, has sold 60,000 copies to date and generated in excess of EUR 700,000 in revenue. Our new showcase experience, Shuttle Commander, where you get to participate in Hubble Space Telescope missions, was launched in quarter 4 2019 on the PlayStation network. And today, revenue is in line with management expectations, and it is expected to grow during 2020 when it's launched on the stand-alone Oculus Quest device and all major PC-based VR platforms. I'll now hand you back to Dave, who's going to run through our current trading and 2020 outlook.

So we've continued good progress in the first half of 2020 with a number of new agreements for ENGAGE and showcases -- showcase experiences also performing strongly. We had a EUR 3 million subscription of ordinary shares from HTC in May of 2020, and we also have an agreement signed with HTC for the exclusive resale of ENGAGE services in the Greater China region. Our 2020 outlook looks very, very good with significant demand for ENGAGE services on the back of a successful HTC event in March. We will have Shuttle Commander becoming available on various other VR platforms in 2020. And we also have reseller and content partnerships beginning to bear fruit in the second half of 2020, pushing demand further for our ENGAGE products. Finally, I'd like to thank everybody for watching this presentation today. We are really looking forward to what 2020 holds with significant opportunities both from HTC and also from direct queries coming into our inbox for the ENGAGE platform. Thank you, and goodbye.