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

Good morning, ladies and gentlemen, and welcome to the ENGAGE XR Holdings plc Half Year Results Investor Presentation. [Operator Instructions] Before we begin, I would like to submit the following poll. And as usual, if you could give out your kind attention. I'm sure the company would be most grateful. I'd now like to hand you over to CEO, David Whelan. Good morning, sir.

Hello. Welcome to ENGAGE. My name is David, and I'm the CEO, and I'm joined here today by Séamus, our CFO. And today, we are talking about our interim results for 2022.

Thanks, Dave. Hi, everyone. Good to see you all again. I just want to quickly run through some of our operational and financial highlights for the first 6 months of the year. Once again, we had a period of strong progress with revenue for the group up 41% to GBP 1.76 million. Within that, ENGAGE revenue grew 61% to EUR 1.5 million. We've also seen some excellent new client wins and also client upsells, including Meta, Kia, Kuehne + Nagel and Natixis. Development of our new Engage Link, which is where we're present today, is progressing as planned and is expected to launch in Q4, as previously announced. We've had launch partners already announced publicly, including HTC and Stanford University. And we've also recently had 3 new launch partners confirmed that we have not yet announced. We've increased in engagement with potential customers to with our strongest-ever pipeline at the moment. And we're looking forward with optimism and remain confident into expectations for the year.

So just a bit of a platform overview, what is ENGAGE and what is ENGAGE Link. So ENGAGE has been used primarily for education, business meetings and events and immersive events in the metaverse. So we have some really strong clients, which we'll be talking about later on. And Meta themselves are actually a client of ours. And we also have a lot of security in the back end. We're actually the only metaverse platform with ISO security certification. And we run on a range of different devices. So the metaverse is not just VR, you can run it on a mobile phone, you can run this on a tablet. So it's pretty accessible to everybody. So you might be asking ourselves, what is the metaverse? The metaverse in reality is an evolution of the Internet. So the Internet today is a very 2D flat experience where you're reading web pages and you're looking at video and you're sitting by yourself in your house. So it feels like a very solo experience. And the metaverse is turning the Internet into a treaty shared experience where you're walking around virtual world with other people interacting in a very, very natural way. So it opens up a lot of possibilities for events, remote collaboration work and product launches. And this is where we see ENGAGE very keenly placed. And the possibilities that we're seeing and the use cases that we're seeing at the moment is we're seeing virtual schools in here, virtual events, virtual training, onboarding and those types of use cases are happening every day within the platform, which we'll be talking about later on. So I'm just going to play a short video now just outlining the ENGAGE metaverse offering, which again will be coming out later this year. [Presentation]

Thanks, Dave. So just looking at a little bit more detail of our financial performance for the first half of the year. As I mentioned, revenue has grown to $1.76 million, up 41% on the prior period. Within that, ENGAGE revenue has grown over 60% and it now accounts for than 80% of group revenues highlighting our continued progress within the platform. EUR 1.5 million in ENGAGE revenue has been generated to the end of the first half of the year, and our gross profit margin is on a slight increase to 81%, up from 80% in the prior period. Our cash balance at the end of June was EUR 4.9 million, with our net monthly cash burn running at approximately $450,000 per month but that is declining as revenue continues to grow. Looking at a little bit more detail at the income statement. As I've mentioned, our revenue was up to EUR 1.76 million, and our gross profit is up from just shy of EUR 1 million last year to EUR 1.4 million this year, a 43% increase. Obviously, there has been a big increase in administrative expenses growing from EUR 2.3 million to EUR 4.2 million period-on-period, and that's due to the continued expansion of the team, specifically the expansion of the sales team, which have grown from 2 to 10 since the start of 2022. And that was one of the stated goals of our fund raise in June of last year that we would expand the sales team significantly and which referenced to the very strong pipeline I discussed earlier, this is testament to what the new sales team are putting in place. The increase in the EBITDA loss from just shy of EUR 1 million to EUR 2.5 million is obviously driven by this increase in administrative expenses, but has been offset by the increase in gross profit also. So just briefly looking at our balance sheet. Our fixed and intangible assets fell from EUR 744,000 to EUR 312,000. That's solely driven by the amortization of our intangible assets, which is the ENGAGE platform and also some of our showcase experiences that we developed in years past. Trade and other receivables has grown from 610,000 just shy of EUR 1.1 million. That's driven by increased activity. We've never had any bad debts within the company, and we hope that this -- that trend continues. Cash and cash equivalents fell from EUR 9.2 million at the end of June last year, which was just after the raise, to $4.9 million at the end of June this year. Down in the liability section, we can see that trade and other payables has grown from EUR 300,000 to EUR 600,000 period-on-period, which just reflects increased activity within the group. And our total equity and reserves and total assets is EUR 6.3 million, compared to EUR 10.5 million at the end of last period at the end of June. Just briefly looking at our cash flow situation, just walking through the 2022 figures, moving from our adjusted loss from continuing operations of EUR 2.8 million, we acquired just shy of EUR 40,000 in property, plant and equipment in the first 6 months of the year, which is mainly developer machines for our team. We've had no proceeds, obviously, from issuance of shares this year. We've had a working capital movement of EUR 310,000, bringing this down to a net cash outflow in the period of just shy of EUR 3 million, bringing from our opening cash position at the start of this calendar year of $7.8 million, down to our closing cash position of EUR 4.9 million.

So a question I'm quite often asked is why now? why the metaverse? so we've seen a lot of news in the industry recently. And obviously, with Facebook, changing their company from a social media company to a metaverse company and renaming their business Meta has obviously put a lot of eyes in this area. PwC Just recently released a survey where they interviewed 5,000 U.S. consumers and over 1,000 businesses. And they asked them a lot of different questions about the metaverse. And the results they got back actually were quite surprising where 67% of the businesses they interviewed said they're actively engaged in looking at metaverse services, 20% said they are currently looking into it. And they asked when did they expect it to be used in their everyday business, 44% of those who responded said that within 2 to 3 years they expect that metaverse services will be part of their everyday offering and 38% actually said that they expect it to be in there by next year. So it is a very, very active market, and we're certainly in the right place at the right time.

We performed an exercise to consider what our total addressable market was for the ENGAGE platform and for ENGAGE Link. We consider our total addressable market to be between $10 billion to $25 billion within the overall markets that are shown there, global team collaboration, globally learned and global virtual events. We feel that VR and AR compound annual growth rate has the opportunity to grow far in excess of the standard traditional mediums. As we've already said, we have cross-platform support across desktop, phone, tablet, any sort of hardware [indiscernible] that runs VR and AR. So we expect that 2022, the rest of 2022 and into 2023 will be a formative year, especially with the launch of ENGAGE Link at the end of this year.

Now the way ENGAGE is used today is we would get a client come to us, and they would pay a license fee. So they would say, okay, we want to tell some user accounts that pay us a license fee for that, which is renewed each year and they would use it internally for meetings and events. Sometimes then we do get clients that come to us and they want to hold an immersive event or some kind of product launch and they will pay us a set fee, and then we will help them run that event. So as you can see, our current business model is yearly licenses to the platform for access to all its features and also services revenue coming in for bespoke pieces of content or events. With the release of ENGAGE Link, which is an always-on persistent world, we actually have a lot more possibilities for the monetization of the platform. So we are going to be charging hosting fees for these always-on locations to be available 24 hours a day. There's also going to be a marketplace where with the content tools available inside ENGAGE, users can create very compelling content or training content and sell that to businesses or individuals within the wider metaverse or within the ENGAGE platform. We're also going to have a revenue share for events held on the platform. So users will be able to go in, set up their own private event they can charge a fee to access that event, and we'll take a revenue share from that. We're also going to have a professional services area where professionals within the wider metaverse beta animators, 3D model makers, environment artists or even professional services, metaverse services people, they can go in and sell their time within the ENGAGE platform to businesses and organizations because quite often, the people that we deal with in a lot of these larger corporations do not have the expertise in-house to build out their own meta worlds or locations or services and quite often, they try out or to lean on us or else get a third-party provider to do that. So we're going to have a whole ecosystem within this platform to ensure that it can scale very efficiently instead of relying on ourselves to build out our content team extensively. So this is just some of the client list that we have on the platform, and you can see some really, really strong names there. So Meta themselves actually use us for a lot of their professional events. And they have their own platform, obviously and they're building their metaverse, which is very much aimed at a broad spectrum of a younger audience. So it's a social platform, very much full of kids, whereas we're very much focused on the business applications. You see their Unilever, Kia having a car launch with us, KPMG, PwC, Accenture. These are some of the world's biggest names and biggest accountancy firms using the platform on a daily basis. So just to go into one of these use cases, you can see here a range of different use cases, which you can view on the presentation after this call. But one that I want to make special mention here is 3M. So 3M started with us on a very small contract to host an internal event. And when they came in and we hosted the internal event, we were actually upselling them on user accounts and different services. And they started -- we were asking them about what issues they have from remote working. And one of the real issues they had was when they employed new people remotely, they never felt like they were part of the organization. So they were going on Zoom calls, they train them in and 6 months later, those newer people quite often will go off and find another job, whereas when they were working in a physical office, they felt like they were part of a family because we're making connections in France, and they're staying in the organization longer and they needed a way to help retain staff. And one of the ways was to use virtual reality for their daily stand-ups and onboarding. So this short video actually is -- is actually created by 3M themselves, which gives a high-level overview of what they were doing within the platform, but it did increase their engagement with their employees and it stopped a lot of turnover of new employees. So I'm just going to play that video now. [Presentation]

Okay. Welcome back. So one of the pieces that makes ENGAGE stand out above everything else is the quick and easy way to create content. So with customers like 3M and Meta and other customers, they can go in very quickly, they can record content and produce stuff very, very easily at very little expense. So if you were wanting to create, say, a piece of training content as an example, and you went to another metaverse supplier, you would have to go and pay them to produce something, which could cost like $100,000 to produce something very, very easily, whereas we're providing the tools for these corporations to build their training content. And where we make the money back then, obviously, is in the licensing and the hosting of the content. So this is one of the things that makes ENGAGE standout above all others. Also the security and scalability of the platform. So again, we are the only platform with ISO security certification. We are GDPR compliant as well. And this is why people who you would perceive as, say, competition to us are actually, in fact, clients because they're bringing people into the platform because we're very ahead from that point of view because we didn't start as a video game. We started as an education platform and security was first and foremost in everything that we were doing in creating the platform. You can bring in your own 3D models, you bring in videos, animations, you can bring in documents as I am today with this OneDrive document. It's very easy and intuitive to use. Okay. So I'll pass back over to Séamus for the conclusion.

Thanks, Dave. So just in conclusion, it's been an excellent period of growth for the company where 41% increase in revenue. As Dave has just highlighted and shown us, we're launching Link at end of -- during Q4 of this current financial year. We have our strongest sales pipeline today, which is a testament to our new sales team and we have seen a significant increase in customer engagement. The market is increasingly recognizing the opportunities created by metaverse and our client list is increasing with more and more Fortune 500 companies coming on to our books. The ENGAGE platform now comprises 83% of total group revenue, and our perceived competition use -- or use in our services to provide professional events and meetings within the metaverse. So we think we're in a great position to further capitalize on our successes to date, and thank you for your time. We'll take any questions you might have now.

David, Séamus, that's great. And if I may, just bring back up your cameras. [Operator Instructions]. While the team take a few moments to review those questions that were submitted already I would like to remind you that a recording of this presentation along with the copy of the slides and the published Q&A can be accessed via your investor dashboard. David, Séamus, we did receive a number of pre-submitted questions ahead of today's event as well as, as you can see in the Q&A tab, a number of questions that have been submitted throughout today's presentation. So thank you to all of those on the call for taking the time to submit their questions. And David, Séamus, if I could just hand back to you to run through that Q&A tab and where appropriate to do so, if you could please just read out the questions and give your response, and then I'll pick up from you at the end.

Thanks, Jake. So I'll read out the questions and myself and Dave will answer them. So the first question here, which is a pre-submitted one. In a recent LinkedIn post, David said, ENGAGE has been extensively used today by many Fortune 500 companies. And the question is how many are we actually actively working with? So I actually went through our customer list yesterday, compared to the Fortune 500 companies, and we are currently working with 20 Fortune 500 companies. So in varying capacities, obviously, 3M are well known. There we're work extensive with them. And there's other Fortune 500 companies that we haven't -- aren't allowed to disclose their names but we are working closely with. The next question then is, can you please provide increased clarity on your ENGAGE pipeline and your path to your medium-term revenue targets? So again, I can take this. We have recently, as mentioned in the presentation, significantly increased our sales team. We've gone from 2 at the start of the year to 10 as we stand here today. There's been a huge increase in engagement with the company. The sales team really hit the ground running, and our pipeline is the strongest that's ever been. At the moment, we foresee no change to the forecast targets that are out in the marketplace, which show our path to medium -- our medium-term revenue targets hitting sometime in -- between 2023 and 2024. So the next question then is, this one I'll leave to you, Dave. How many launch partners do you expect to have signed up for ENGAGE Link?

Yes. So we think we're going to have about 10 launch partners. And I think some of the names that you're going to hear about are going to be quite surprising. Now we haven't released these names yet because a lot of these launch partners are waiting for the release of their metaverse and they want to put out all their publicity then. So we're kind of -- our hands are tied behind our back sometimes when we do sign up some of these partners. But it is all coming quite soon before the end of this year.