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

Good morning, ladies and gentlemen, and welcome to the VR Education Holdings plc Interim Results for the 6 Months Ended 30th of June 2021. [Operator Instructions ] The company may not be in a position to answer every question it receives during the meeting itself. However, the company will review all questions submitted today and publish responses where it's appropriate to do so. These will be available via your Investor Meet Company dashboard and they'll be notified once they are ready for your review. I'd also like to remind you that this presentation is being recorded. Before we begin, we'd like to submit the following poll. I'd now like to hand you over to David Whelan, CEO; and Seamus Larrissey, CFO. And if you hear any cracking, that's from a fireplace in the background of the room that you're just about to enter.

Hello, everybody, welcome to this recording of our investor company meeting. I'm David Whelan, the CEO of VR Education Holdings and I'm joined here by Seamus. Say hello, Seamus.

Hi, everyone. Nice to meet you.

So what we're going to start with, obviously, this is going to be a little bit different. We're in the White House. This is our digital recreation of the White House. I thought we do something a little bit different instead of just being in the standard meeting room. So just to give people an overview of ENGAGE, I'm going to play a short trailer first and then we're going to go into the presentation and this is all about our interims that we've just released earlier this week. [Presentation]

Okay, welcome back. So that was just a short overview of how we're starting ENGAGE today, some of the services that we offer our current clients. So I'm going to pass over to Seamus who's going to talk a little bit deeper about some of the numbers.

Thanks, Dave. So just a quick overview of our figures for the first 6 months of the year. I think the key highlight is that ENGAGE revenue has grown in the first 6 months of the year to EUR 900,000. We've also seen significant growth in [Audio Gap] With over 130 commercial customers after using the ENGAGE platform at this stage. Since we launched the platform, we've signed EUR 3 million in contract value and in ENGAGE subscriptions up to the end of August of this year. We're very excited about our relationship with HTC and launch of the new VIVE Focus 3 headset, which bundles ENGAGE on it as a pre-install and also HTC and ourselves partnered with HP to roll out ENGAGE on new HP laptops in China. We hope to see significant traction from that at the back end of this year and into 2022. Some of the key metrics that we measure ourselves on include our total active clients and that's grown 11% month-on-month since the end of 2020 and we've also seen a 49% increase in active licenses in the first half of the year, which I'll discuss now on the next slide. So just looking at some of our key metrics. So we've seen a significant increase in our total license number since the year-end. At the year-end, we were just shy of 3,000 licenses, but as it stands at the end of June, we were 4,500, which is significant growth in the 6 month period. Looking at the nature of our revenue, you can see here that 61% of our revenue we consider to be recurring. That would be license sales to either our Virtual Office or Virtual Campus offerings. 20% would be through our Virtual Events, which is a third strand to ENGAGE at the moment, whereby we run large-scale events for our customers who are looking to offer something far more interactive and far more beneficial than a video meeting. And then the balance would be professional services, where we create custom content or custom location for customers. It's not something we actively seek, but if a key customer needs something created, we do have the in-house capabilities to do this. So then finally, just looking at our annual contract size, 22% of our contracts are in excess of EUR 25,000 and that's growing. Our average contract value at the end of the period was just shy of EUR 23,000.

Okay, so on this slide here, this talks a little bit more about how ENGAGE is sold today. So we're selling ENGAGE as a business-to-business tool in a wide range of different areas. So we have ENGAGE Virtual Campus, which goes back to our roots in education where ENGAGE was originally developed as an online education tool, where it was a digital classroom where students can come in with an avatar kind of like this and they can attend classes with educators from all over the world. So we still have that use case and some of the clients that we're working with are Stanford University and Oxford University. Then we have our Virtual Office. So with the onset of COVID and a lot of the shutdowns over the past 1.5 years to 2 years, all the tools that we've created on ENGAGE over the past few years lend themselves very well into virtual meetings and virtual conferences and this is a type of virtual meeting we're having today where we have like a PowerPoint presentations and we can play videos and we can do all sorts of things, the same as what you would do in a real virtual meeting. And in fact, in my own organization, we use virtual reality ENGAGE every day for our daily stand-ups and our [ compound ] Board meetings. Then the final offering there is Virtual Events. So with Virtual Events, a lot of people, a lot of companies have used Zoom in the past where you have lots of people logged in, all watching video, not very interactive, you're just watching PowerPoint after PowerPoint. The real reason people attend virtual events is that they want to talk to maybe some salespeople at a store or that off-chance meeting with somebody, that hallway conversation and that's something that ENGAGE can offer uniquely that these video platforms like Zoom and Microsoft Teams can't offer. Some of the reference clients we have in Virtual Office would be Facebook, Fidelity Investments and then in events then, we have Huawei and HTC using us as well. So these are some really premium names.

So just looking at how we generate revenue and how we enter the marketplace. So as Dave already outlined, we have 3 distinct offerings, Virtual Campus, Virtual Office, and Virtual Events and we bring those to the market in 2 distinct ways. One is through our direct B2B sales organization. We currently have 7 business developers spread across North America, Europe and Asia and then we also have our indirect method through our channel partners. HTC is obviously our most significant channel partner, but we also have other channel partners focused on North America and the Middle East who are generating good revenue for us at the moment. And that flows down into software license sales from our direct B2B and then revenue share from our indirect channel partner sales.

So talk a little bit about one of our partners, which would be HTC. So HTC were so impressed with the event that we held for them, not this March, but the March previous. They wanted to invest in the company. They took a quite significant stake. They took a 20% stakeholding in the business and they also asked us to sign up commercial terms for the release of ENGAGE inside China. We released ENGAGE inside China at the tail end of last year, start of this year and we've been waiting for HTC to put a big marketing and sales push on it. That's only just beginning there with the release of their new headset, the VIVE Focus 3, which is totally focused on enterprise and education sales, but they also announced quite recently a partnership with HP, where ENGAGE will be a pre-install on HP laptops sold within the China region. So there's a lot of excitement, obviously, and we hope to see revenues building from this partnership at the end of this year and very much early into next year. So just to talk a little bit more about the growth opportunity. So ENGAGE and what we've been selling up to now has been -- again, it's been a tool for businesses to communicate internally or maybe to have some sales training in sight. So it really is within their own corporation where they will buy multiple user accounts and use it internally. What we're talking about next is an evolution of ENGAGE. We're calling it ENGAGE Oasis where we're going to be selling these meta worlds, these always on locations, which businesses can brand to their own needs and use it any way that they see fit. So I'm going to play a short video first and then we'll get more into presentation. [Presentation]

Okay, welcome back. I hope you like that short video presentation. ENGAGE really with this metaverse is going to be a tool for corporations and businesses and brands to have their own version of the metaverse, a meta world is what we're going to be selling. They can control everything that happens inside this meta world. They can sell products directly to their customers. They can sell tickets for events and each time a transaction happens in this ENGAGE Oasis, we will be taking a short commission on all those transactions. So it is now the right time for a metaverse. So you can see -- actually see on this slide here, these are just 4 examples that we've seen. So we've seen a lot of news about metaverse over the past few weeks from Facebook and other companies, but the very top one there, you can see, which Rec Room. That's the first VR software company to get $1 billion valuation. Now they are designed for kids where kids go in and they can go and they can have paintball sessions against each other. They can go and do tasks as well and then the kids inside will go and they'll buy digital items like T-shirts and items that they can use with their avatar. Roblox, you might have heard of that one, listed on the stock exchange over in the U.S. quite recently with a $41 billion valuation. Again, started off as a place for kids to go in and do tasks and go explore and buy small digital items and each of the kids might spend maybe $5 or $10 a year inside. Minecraft, which has been around quite a while. They generate $200 million a year. Again, designed for kids. You can see a team here. And then Fortnite is a shoot 'em up game on many different platforms and the company behind Fortnite, Epic Games, they had $1 billion funding round quite recently. But again, all of these platforms, they're all designed for kids, 7 to 17 years old, going in, having a mess or a play around. So these platforms are to TikTok and the Twitter of the metaverse. We're aiming ENGAGE to be the LinkedIn of the metaverse where we've designed a platform for professionals, for educators, for corporations to come in, for people to do business inside the metaverse, selling services to each other, having training events, having keynote talks. That's what the ENGAGE Oasis is primarily designed for. So how much of this we built already? So as you can tell, we're quite far advanced. We're already inside here. We're having a virtual meeting and we already have a strong client base using the platform for Facebook and HTC and others. We reckon we're about 80% there, maybe a little bit over with all the features that we've built up already, but some of the key things that we're currently working on right now is the development of the marketplace so people can sell their own items inside the platform, a friend system as well and we are going to support NFTs as well. So you've seen a lot of news about NFTs being sold for crazy amounts of money. We are going to support that within the platform where we have some ideas as well where we can really expand the NFT creation base using not just art creations, but actually using digital recordings and animations as well. Then I'm going to pass over to Seamus.

Thanks, Dave. So just looking at our interim results in a little bit more detail. So as you can see, revenue, which I already highlighted, has grown significantly period-on-period. Revenue is EUR 1.25 million to the end of June compared to just shy of EUR 700,000 in the prior year, which is 83% growth year-on-year, but I think the most important point to highlight is the ENGAGE revenue growth. ENGAGE revenue has grown from just over EUR 200,000 to in excess of EUR 900,000 period-on-period, in excess of 300% growth. That's fed down into our gross margin percentage, which has grown from 70% to 80%. We have a higher gross margin on our ENGAGE revenue. Then finally, just our cash and cash equivalents has grown from just over EUR 3 million at this end of June last year to in excess of EUR 9 million at the end of June this year, and that reflects our oversubscribed placing, which happened at the back end of the period. So just looking at the income statement in a little bit more detail. I won't recap on what I've already discussed, but just looking at our operating expenditure. You can see our admin expenses have grown period-on-period, just shy of EUR 2.3 million in the first 6 months of the year. That reflects the continued expansion of the team and the expenses related to that. Our EBITDA loss has [Audio Gap] To just over EUR 950,000 period-on-period and that leaves us with a total loss for the period of [ EUR 1.3 million ] compared to EUR 1.1 million in the prior period. Just looking briefly at the balance sheet. There's nothing hugely exciting [Audio Gap] Cash, labor and asset-intensive company. Our developers only require developer laptop and a headset. So nearly all of our fixed assets are intangible assets in relation to the development of the ENGAGE platform and our [ showcase ] experience previously. The decline in that reflects the amortization of those assets in the period. Trade and other debtors have grown -- have doubled period-on-period, which reflects, obviously, an increase in activity. All of our trade debtors have been fully received post period end and we've actually never to date had a bad debt, which I hope continues. We already touched on cash and on the bottom half of the balance sheet in the equity and liability stage, we can see that trade and other payables have grown from just shy of EUR 200,000 to in excess of EUR 300,000, which just purely reflects increased activity within the company. So then just to wrap up on the finances, just a quick walk through the cash flow statement. The total loss coming forward from the income statement of EUR 1.3 million. As I mentioned, we don't spend a huge amount on fixed assets. So EUR 35,000 of laptop spend and developer headset spend in the period. The net proceeds from our fund raise was EUR 8.5 million. Other non-cash items, which is mainly amortization of the intangible was EUR 333,000 and we have working capital movement of EUR 297,000 in the period, bringing us to a total cash balance at the end of the period of EUR 9.2 million. So that's primarily an overview of the interim results and an overview of the metaverse from Dave. So right now, we'd be happy to take any questions that you may have and we'll go through them in the Zoom platform. Thank you.

That's fantastic. David, Seamus, thank you indeed for the presentation. Ladies and gentlemen, do please continue to submit your questions using the Q&A tab situated on the top right-hand corner of your screen. But just while the company take a few moments to review those questions submitted already, I'd like to remind you that a recording of the presentation along with a copy of the slides will be available in the Investor Meet Company platform. I'd also like to remind you that your feedback is important to the company and immediately after the presentation has ended, you'll be redirected for the opportunity to provide your feedback in order that the team can better understand your views and expectations. David, Seamus, perhaps before we go into the live Q&A, we have a number of pre-submitted questions. If I may just read the first one and it reads as follows. There have been reports that the Chinese Communist Party's move to ban companies from making profits from education. Does this impact directly or indirectly any of the income you anticipate to receive from your partnership with HTC?

It doesn't really. ENGAGE is actually classed as a communications platform and we're very much gone past just the education stage. So everybody knows us as the ENGAGE team. So the majority of our revenues that come in are actually from corporate events, corporate communications and we do have some education revenue coming in, but we haven't had education revenue come in from China, but we have in the rest of the world. So it won't affect us greatly because we haven't had those revenues in the past from China.

Fantastic. Next one reads as follows. There's been quite a bit of reporting on Facebook working to produce a VR metaverse. That presumes you'd be a direct competition to the planned ENGAGE Oasis. Facebook can obviously lay their hands on more resources. Do you feel you can compete against them? Or is this something that's distinctly different?