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

Okay. So what I'm going to show next is a short video presentation of ENGAGE. So hopefully, it will enlighten you a bit more on some of the available features and some of the unique capabilities of the platform that, really, video-based communications just can't do. [Presentation]

Okay. So I hope you enjoyed that short presentation. I'm going to -- I'll go back to the PowerPoint now. Just give me a moment to load this. Okay. So in the video, you would have seen some of the use cases. So you've seen it for simulated training and communication. And just to go through these in a little bit more detail, let me open it up here on screen. So I'm actually bringing in these PowerPoints from OneDrive, so directly from a web source. Okay. So as you can see on the screen here, we have Virtual Campus, Virtual Office and Virtual Events. So with our Virtual Campus, again, we do have persistent locations. So these are always on locations where students can log in at any stage from anywhere in the world, meet up with other students associated with that online university or that online -- and college. And then they can go and attend either pre-recorded classes or they can attend live classes with lecturers from all over the world. And they seem to really enjoy it, a lot more than video-based communication where they have peer support groups inside, and they really feel like they're taking part in a real class, because it really does feel like you're in a real environment. And actually, even though Séamus is probably 100 miles away from me in the real world, I feel like he's only maybe 10 feet away from me here in the virtual world. It's something you just -- you don't get on video. Our Virtual Office is very similar. So you can see it in here. So again, it's a wide open area, and I will be going a little bit more into detail on this later on, where again, employees can go meet, they can have those private conversations at, say, a water cooler as an example, which they've probably been missing using Zoom calls all the time. You can have sales presentations in there as well and corporate events in there, or training events as well, training simulations. And I think you've seen in the video, where we had a guy on an oil rig, that was actually safety training. All of that kind of material can be quite quickly developed inside ENGAGE. And then for Virtual Events, and we're working with some really premium companies in Virtual Events, where obviously the physical events have been canceled all through 2020 and they're looking for alternatives. They have been using video communication, but they found that the engagement is not -- is very, very poor through video events, large-scale video events, and are looking for alternatives, and we have special abilities, which I'll go talk about later on in this presentation. So some of the main things from this year as well is we're available on all major platforms, and we just recently released ENGAGE on mobile phones and tablets and the screens here that we're presenting on, actually, these are Chromium-base screens. So anything that runs on Google Chrome will run inside ENGAGE. We can stream in video, as you just saw, and we can stream in 3D video as well. So if you're in VR, that video could look 3D to you and we can stream in 360 video from any web source. And with the spatial audio, when you're on -- when you're inside ENGAGE, if there were 70 people at this presentation, if somebody is off down the other end of the room, they will sound like they're off to on the other end of the room, they'd sound very quiet, versus people who are closer to you sound closer. You can have these private hallway conversations. You can't do that on video-based medium where the person who is presenting is the person that everybody can hear, whereas if I'm sitting in a virtual presentation, I can whisper to the person next to me without disturbing anybody else. And we can also do a lot of customization. So this is one of our meeting-room environments. But we have all different environments that can be fully customized and branded for the organization themselves. And I'm going to show you one of those environments later on today. Okay. Séamus, you want to do this one?

Yes. So I just want to briefly go through how we get to market with -- and generate revenue from the 3 offerings that we have. So if we look at the top, we have the Virtual Campus, Virtual Office and Virtual Events. And how we get those to market is either through our direct B2B sales organization, or indirect through our channel partners. Our B2B sales organization comprises our business developers who are based in America, in the U.K. and in Asia. And they've generated the vast majority of our revenue to date. But with the onset of HTC coming on board and us delivering the platform to the Greater China region in the back end of 2020, we expect our channel partners to be a more significant portion of our revenue going forward. We also have other channel partners, which include resellers in South Korea and also in the North American markets. That feeds down into software licenses generated on our side through B2B sales and also revenue share coming in from our channel partners. Coupled with our support services and our professional services section, we generate revenue and deliver our product to end-user clients, both enterprise and educational.

Okay. So just to go into a little bit more detail about our Virtual Office, our meeting environments. This is a virtual Menlo Park from Facebook. So Facebook provided us with a digital location which we imported into ENGAGE, and they use this environment for many events and meetings. So you can see here, that's a presenter screen. This is a large area. It's actually based on the real place in Menlo Park. And these buildings around the [ outside ], these have virtual meeting rooms and there's a gallery space down here as well. And again, they use it for Facebook employees logging in all over the world, and they also can invite clients in there as well and talk about Facebook products that are coming up, so it's a really cool environment. And it's -- again, it's always on -- it's a persistent location. Here for Virtual Campus or education. So one of the core drivers of ENGAGE early on has been -- it was an educational training platform, and that's how it was developed. And we worked a lot with educators. And Stanford University are using the platform for medical training; here you can see a baby getting a resus. So not only is ENGAGE really useful for just general meetings and live meetings, it's actually very, very useful for our simulated training. So you can put in these very detailed simulations, where people get a lot of experience where they role play tasks, so they could role play on this virtual baby to resuscitate it, very, very easy. And this is something that you can't do easily in the real-world where you have to have lots of expense of equipment and a baby analog to do whereas we do it all digitally at a fraction of the cost, and then it can be served out globally in one go. And then Virtual Events. So as a lot of you might know, HTC came in last year and they invested in the company, they now are a very large -- a very large shareholder. They have 20% stake in the business. What happened last year back in March is we held the VIVE Ecosystem Conference inside ENGAGE, and it was a huge, huge success. So the actual physical conference was supposed to be held inside China, but because of COVID and the spread of COVID inside China, that was obviously canceled. Normally HTC would invite a couple of thousand developers to a conference, they would talk about all the hardware that they have coming up and all the software that they're working on and get the developers excited. And however, this was obviously canceled. And they came to us a few weeks before and said, look, we've been using ENGAGE, and we're very excited about it, can you guys help? We helped host the event. It was the first time we hosted a major event inside ENGAGE. We had over 1,000 concurrent users in VR, attending from all over the world, a lot of them are actually based in China, and we had over 1.1 million people watching the live stream. Very, very successful event. And as I said, just before the event even finished, I got a call from Alvin Graylin, he's the Chinese President of HTC. He said, "Look, are you guys looking for investment? We're very impressed with the service that you guys have given us and the platform. We'd like to get on board and help you push out the platform in the Greater China region." And we signed up and we signed a commercial deal with HTC last year, and they are starting to roll out ENGAGE services in the Greater China region, and they also have a license as well to resell ENGAGE services all over the world. So what we want to do is we're going to bring you to the VIVE developer conference in our spatial recording. So it's one of the unique features of ENGAGE, where not only did the event happen live, we actually recorded everything. So we recorded all the people inside, all the audio, we recorded the presentations as well, and you can actually go and physically walk around inside the simulation. So it's not like a recorded video, you can actually sit down and enjoy it from any position or you can even interact with these spatial recordings as well. So we're just going to take a short journey there, and then we're going to come back to this location. So hello, again. Welcome to the VIVE EcoSystem Conference that was held last March. This is a spatial recording where we recorded everything that happened within the conference. And standing right next to me, this is Alvin Graylin, the President of HTC China. And behind him, we have a presentation, but this is one of the locations that we use for events on a very regular basis. Now I have this spatial recording paused. I'm going to unpause this, leave it to play for maybe about 30 seconds, so you can see what the conference was like. And then we're going to zip back into our meeting room environment. I'm just going to unpause this now, and then I'm going to move out of the way. [Presentation]

Okay. So I've just paused the presentation there. So this is just to give you an example of what a conference was like in VR, where we have all these different elements floating around the place, and then the audience were put into hazmat suits. What we had instances where we have whales, actually fly overhead. We had a train come through the screen as well. So just to give you a brief example of what a spatial recording is like. So I'm going to meet you back in the conference room. Okay. Welcome back. I hope you enjoyed that little trip to the VIVE Ecosystem Conference. And again, it's a really kind of strange experience when you attend a live conference and you're being recorded, you can actually stand and look at your own avatar presenting. So it's a pretty cool feature of ENGAGE. So here, we can actually see the competitive landscape for ENGAGE. You can see a couple of names listed here. And obviously, some of the big ones here, you have Zoom and Microsoft Teams. Now a lot of places are using Zoom and Microsoft Teams as their preferred online communications platform. And actually, we're presenting this through one of those platforms right now. But you can also see there, we have some virtual reality companies here, VR/AR companies and Glue and Spatial. So on the product list that you can see here, I shall -- I'm just going to move out of the way. As you can see here, we're very competitively priced against video-based communications and we're actually less expensive than some of the VR and AR alternatives as well. We can have over 35 users in a simulation at once, so we can have actually up to 70 people in this particular room. Or we have scaling abilities where you can have millions of people attend a virtual conference if need be. A lot of our competitors actually don't have that. We do support a broad range of VR devices, and we will be supporting AR devices in the future when those wearables become available. We also as well have real face avatars. So this is my real face. I really look like this. I'm probably not as skinny because I made my avatar skinny, I put on a lot of weight over COVID. And that's really what Séamus looks like as well. So you can upload a photograph into ENGAGE and it will build the avatar, there's no need to be tweaking settings. And spatial audio, which is really key for the collaboration aspect of ENGAGE. So of this room with 20 people in it and some of them are down the back. One can lean over to the other and whisper in to their ear without disturbing the person who's given the presentation, that's something that you just kind of do on virtual media. And again, the spatial recording, which is really cool, which what you've just seen with the HTC event, it's one of the killer features on ENGAGE, and it actually makes content creation very easy. And using that as a content creation tool, you can then publish that content on the platform for others to enjoy as well. So we have a lot of capabilities. Some of these platforms have some of the capabilities that we have, but we actually combine them all into one very easy to understand and easy-to-use package. And we're starting again to get a lot of traction in a lot of areas, not just in education, which is what we used to focus on, but also in corporate training, corporate onboarding, and especially events because of COVID concerns. So just some of the kind of key outlines of what we've seen happen over the past 12 months and especially over the past 6 months, is that there's a huge demand for the ENGAGE platform in all our use cases. So we're probably seeing like 30% of our demand in education, 30% in corporations and enterprise and another 30% in event space. So all the areas that we serviced are actually seeing rapid acceleration in demand, and it's working out very, very well for us. There's also a growing demand for a next-generation communications platform to address evolving corporate and institutional leads emerging from the limitations of video-based platforms like Zoom, Microsoft Teams, Webex, et cetera. So especially in these conferences where you have a couple of thousand people log into a videocast, it's not very interactive. You're just watching PowerPoint after PowerPoint or keynote after keynote, there's no real interaction, whereas in a virtual platform like ENGAGE, we have these conference centers, where people can go have private hallway conversations, meet up with salespeople. That's why people go to events. That's where a lot of business is done, is those chance meetings with people who are at the event. And that's something that we can provide online that simply a lot of these video communication platforms can't. Also as well, there's billions of dollars of investment coming in from Facebook, Sony, HTC, Qualcomm, NVIDIA and many others. And very, very soon, Apple will be coming into this space as well. These guys are very heavily invested in making sure that VR and AR, or XR as it's called, is going to be accessed this year or over the next few years. And then we have telecommunications companies really pushing out 5G at the moment, they really have a vested interest in ensuring that this technology becomes very popular and ubiquitous. Reason being is because on 4G, people are very happy -- well, pretty happy with their streaming services, so they can watch YouTube videos or Netflix on our mobile phone using 4G, and they use a certain amount of data. But if VR and AR becomes very successful, the amount of data that's required for simulations, especially if you're simulating on a server somewhere and piping that in, that data consumption is going to increase rapidly. And a lot of these telecommunication companies have spent billions of dollars in getting licenses for 5G services. They really want to upsell customers to 5G and 6G services in the future, where they will really use a lot of data, and they will really make sure that 5G is a worthwhile investment, whereas currently not very many people and really need to upgrade the 4G. Also as well, we have a lot of channel partners coming on stream. So HTC, obviously, our main channel partner reselling ENGAGE services in China, and we're expecting big things to happen from H2 this year. Also, we have channel partners in Korea and also a few coming on stream in the U.S. as well. So it's not just us selling directly because we don't have a huge amount of business developers, we actually have these other companies selling on our behalf and that's a model that we expect will be very successful for us in the future as we roll out to different territories in the future. Also as well, we're seeing a huge, well, very, very strong demand in North America and in Asia as well. So we have very few customers currently in Europe. That's something that we are going to rectify this year. But a lot of the adoption is coming from the U.S. and Asia. Again, Korea and Japan would probably be some of the leaders in the region. And then China has just come on stream. And we released ENGAGE Chinese servers just before the end of last year. And again, HTC are just getting up and running, and we're expecting to see big things coming in the second half -- middle to the second half of this year. Okay. Séamus, you want to do medium-term outlook?

Yes. Well, of course. So the group is really, really excited about the future of ENGAGE and where it's going to go. And as we announced in our trade and update in January, we are expecting to achieve EUR 10 million in ENGAGE revenue with 500 active enterprise customers, which will lead to 100,000 monthly users during the period 2023 to 2025. So how that translates into key performance metrics? We expect to see a growth of ENGAGE revenue, and we want -- we expect to deliver annual average compound annual growth rate from ENGAGE in excess of 100% until that EUR 10 million target is reached. We expect it to be high quality though, recurring ENGAGE revenue to comprise 80% of that figure, with the other 20% comprised of 10% professional services and 10% one-off events. We expect gross margin to be in excess of 80%. We expect that to -- we expect to achieve that level when ENGAGE revenue is between EUR 5 million to EUR 10 million. We expect to see a 10% average month-on-month increase in users to reach that 100,000 mark, reflecting a target of 500 active customers. Customer retention rates, we expect -- and it's only a management estimate at this stage -- to retain at least 80% of our customers. As we've already mentioned, most of our customers came on stream in the second half of 2020, which means renewals haven't become up yet for most of our customers. But those customers that came on stream earlier than that have all renewed. So we're very positive about that figure, and we think it's a prudent figure to be at 80%. And finally, we expect our average contract value to grow to in excess of EUR 20,000. Currently, it stands for 2020 at EUR 14,000, excluding trial customers. And as demand for increased number of licenses grow, we expect that figure to go up. So there's obviously a strong, large global growing market on -- driving the growth in ENGAGE and the growth in VR. So if we see the 3 markets that we're targeting, you can see global team collaboration software, the market was $10 billion at the end of 2020. Global e-learning was $165 billion, and global virtual events was $94 billion. There's also very strong forecast compound annual growth rate across those 3 sectors. We consider our initial target addressable market to be up to 10% of those markets, which gives us a range of between $10 billion to $25 billion of a total addressable market, a very sizable market for us to be addressing. Obviously, the VR market is still quite immature within this. With the availability of hardware accelerating, there's going to be less barriers to adoption. However, ENGAGE development in 2020 sought to overcome this; we're now cross-platform support, desktop, Android and iOS support. So our addressable market is far in excess of what other stand-alone [ just ] virtual platforms offer. And we expect 2021 to be another formative year, especially within the ENGAGE platform and within the -- with the channel partners with HTC in the Greater China region.

Okay. So if we look at the graph here, this is estimated shipping of headsets for 2019. So a lot of these companies actually don't release numbers on how many units that they ship, but this data is something that I got from Statistica online. Now in 2020, there was a real big sea change in VR and AR adoption. So Facebook released the Oculus Quest 2 in a big way, and they released it towards the end of last year. And it's estimated that they sold over 1 million Oculus Quest 2 devices alone in the final quarter of 2020. A lot of that actually towards the Christmas period. They were actually held back. Those numbers were held back because unit numbers, they were very hard to actually purchase in shops; they were always sold out. And we're actually seeing that acceleration really go, really, really grow. And what we did last year is ENGAGE was released for the first time on the Facebook Oculus store. And in the week that we released ENGAGE on the Oculus store, we had 15,000 people sign up for accounts on ENGAGE. Like -- so there's a huge, huge demand for collaborative and social apps on that platform. And we're still seeing an acceleration of people actually joining. There's other headsets going to be coming out in the market later this year as well. So it's just going to be -- even though you have HTC, your Facebook there, you also have PlayStation, but there's going to be other competitors coming into the market quite soon as well. Expect to see some telecoms companies enter this arena as well. And as I said, Apple are fully expected to release some type of wearable VR/AR device. And we feel it's going to be within the next 12 months. It is very, very soon. Really what's [ stunning ] to them now is a lot of the research and development has been done. Qualcomm have a reference design chipset that they could use. But their headsets now are becoming really very -- they're not expensive at all. So you can get an Oculus Quest today for $300, it will soon be $200. And the experience is really, really good. HTC have their own version, which is the VIVE Focus, which is really focused on enterprise and education, really, really good device as well. And I think the experience and the cost really now was coming to a level where this is very commercially viable now and does lots of game developers really jumping on board and the -- especially on the Oculus device. So the execution. So it's not just myself and Séamus in the organization. We've grown quite large, actually, over the past 12 months. So we've grown our team from about 30 staff to about 55, maybe 56 staff at the moment. And we have a very, very strong technical team. So some of these people here, so David Dermot, who you can see here, Head of Studio. He used to work quite a lot for Nintendo in Japan, very senior animator. And he worked on some really premium games like Star Fox and some of the Mario material as well. He's head of our content studio. Really, really strong guy. Mike Armstrong, who you can see here, he was one of the first developers to create a social VR experience in VR back many, many years ago. It was a virtual cinema. And he's actually our lead architect on the platform. And then you can see Eileen here, who's our technical project manager, and she worked from some big organizations, along with Jonathan there as well. They work with very big tech organizations such as Bluefin and Red Hat, here in Waterford. So they really know from an operational point of view of how to get the best from your developers. And even though we've hired so many people, and we've grown so large, actually, especially in the past 6 months, again, look, we're a very, very strong technical team. But you can see here, we have some hires, most of our outstanding hires actually are in sales, business development and marketing. So with a lot of our customer base in the U.S. and in Asia, and we will be opening up small satellite offices. They won't actually be physical offices. There'll be virtual offices, but we'll have people in those locations, dedicated to customers over in that area where they can pick up and do like sales calls, support calls for any events that are happening. Because even though we are a European company, a lot of the requests that are coming in are actually coming in the middle of night for us. So we really need to build up that side of the organization, and also as well the sales and marketing of the business as well. So it's great having a very, very mature platform that works everywhere, but if people can't find you, they're not going to buy into you. And we are seeing a lot of competition coming up, especially in the United States. Their technology is certainly maybe a couple of years behind of where we currently are, but they probably have a little bit more notice in that area. So that's one area that we're certainly going to focus on is the U.S. market. And then HTC this year are really going to push ENGAGE in the Asia market. And then in Europe then as well, there are some really strong ties with some strong companies in the European arena. So just kind of in summary, and really, of why we feel like the ENGAGE platform is a good platform to invest in and why it's worth your time. So last year, we had a record increase in revenue, up by 550% just on the ENGAGE platform, and our user base grew by 700%, and we had 60 commercial deals signed, most of it in the second half of last year. So it's shown really, really strong demand and strong interest in the ENGAGE platform. Also with our collaboration with HTC, HTC coming on board as an investor in the company and a 20% stakeholder in the company, they're really going to use their -- their marketing and their salespeople to really push out ENGAGE services in China. And China is actually the fastest-growing immersive market in the world, and we're expecting to see big things happening again in the second half of this year. ENGAGE has some unique abilities. So we have our recorded projected presence, our spatial recording system is something that none of the other platforms currently have. And we also have the ability to host large-scale events. So some of the platforms can hold smaller events, but we can hold many, many people -- many millions of people actually, inside ENGAGE if need be. We are targeting EUR 10 million ENGAGE revenue and 500 active enterprise customers and over 100,000 monthly users between 2023 and 2025. So that's coming up very, very soon. And our annual revenue, CAGR from ENGAGE to be in excess of 100% to reach the EUR 10 million target. We have a very large addressable market across 3 core sectors. So we have our virtual office, virtual campus and virtual collaboration, and we estimate that our addressable market is between somewhere between $10 billion and $25 billion. We also have a very dedicated and experienced management team, very technically minded, it's very technically able, and we're very, very ambitious. So today, with online communication, when people say, "I'll talk to you online," what they'll say is, "I'll Skype you later or I'll meet you in Microsoft teams." We want the conversation to change very, very soon to, "I'm going to ENGAGE with you later, let's meet and VR, I'm going to ENGAGE with you." That's where we see the ENGAGE platform as the next-generation communications platform, as the next Skype, as the next Microsoft Teams. That's really what we're aiming at, and they're the people that we're looking at as our main competitors. So I hope you enjoyed our presentation. We will be sharing this presentation later on, but myself and Séamus now are going to take off our headsets. And we're actually going to log in to conference and -- sorry, the talk, and we're going to answer any of your questions. I hope you enjoyed it. Thank you.