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

Good morning, and welcome to the Engage XL Holdings plc full year results investor presentation. [Operator Instructions] The company may not be in a position to answer every question received during the meeting itself. However, the company will review all questions submitted and publish responses where it's appropriate to do so. Before we begin, I'd like to submit the following poll. I'd now like to hand over to David Whelan, CEO. Good morning.

Hello, and welcome to the full year results presentation for ENGAGE XR. My name is David, I'm the CEO, and I'm joined here today with Séamus, our CFO.

Hi, everyone.

So what is ENGAGE? ENGAGE as a platform for professional seek and spatial computing AI and metaverse services for use in training events, development and onboarding. You might ask what is spatial computing and mixed reality, these are terms that you hear quite often, especially with the release of headsets from the likes of Apple. Spatial computing is the use of immersive technologies like virtual reality headsets or mixed reality headsets, where you're inside a virtual environment and your interacting with treaty objects. Mixed reality is the ability to see the real world as well as the virtual world overlaid and you can actually see in the video on the presentation on the screen here. You can see that this is a meeting inside ENGAGE where we have people from the U.S. and U.K. interacting actually, that's inside my kitchen. And why would you use this technology? You'd use this technology because it's 4x faster to learn using immersive technology than it is in a traditional classroom. And this is very useful within enterprise and within education where you can save time and money by getting people to learn tasks much, much quicker and retaining that knowledge. This is just a short trader outlining some of the core features and functionality of the ENGAGE. [Presentation]

Okay. Welcome back. So who are the players in this space from a hardware point of view. So we have Apple, Meta, PICO who are a Chinese company, HTC from Taiwan and Lenovo from China. So these are the main players who have headsets out today. The most recent being the Apple headset, which is getting a lot of traction and a lot of notice in press at the moment. They call their device a spatial computing device. But really, it's the same as mixed reality, virtual reality. So it's digital objects in virtual worlds which you can interact with. Meta have the largest installed base currently. It's well over 20 million headsets for the Quest 2 and that's growing significantly. And we've had great partnership with Meta, especially in the education space as well as Lenovo. Later this year, it's expected that Samsung and Google are partnering to release their own headset, which will be a high-end headset focused on enterprise use cases. And Sony did announce at CES that they are also releasing a headset device, which is focused on enterprise, and that's coming to market later this year. So it's a very, very active space with most of the major tech corporations having some kind of play in this space. So with that, I'm just going to pass over to Séamus.

So during 2023, the market shifted somewhat for us with the return to work and the removal of travel restrictions in late 2022 and also tech company layoffs, there was a shift in the landscape in the latter part of 2023 for us. There was a negative impact on our enterprise renewals at the end of 2023 and we changed our focus within the business team through back to K-12 and third level education where revenue opportunities presented themselves. As a result, we expect churn and net revenue retention levels to improve in 2024.

So what are the use cases for ENGAGE. So as Séamus said, we are definitely seeing a lot of growth in education, K-12, universities and colleges, but we're also seeing ENGAGE used in a lot of training and development scenarios, onboarding employees and actually onboarding customers. So we do use it for remote education. It's also a great tool for creating content. We have a lot of use cases for digital twins. You can see in the image here, this is the key allocation where they use it for sales training. People do use us for virtual meetings, exhibits and events. However, that has shrunk slightly over the past year with the return to work policies in many of these corporations. And it's been used quite a lot for team building and collaboration in the past. So with a focus around education, our first offering being released actually in the next couple of weeks is our school of AI initiative. So this is where we bring the famous people of history back from the dead where students can go in and ask them questions about pretty much anything. But obviously, we've trained these AI on a lot of documentation and a lot of historical fact. You go in, you can talk to Nikola Tesla as an example, and ask him all about his inventions and how they've affected the world. These AI avatars, they are powered by ChatGPT and where we have audio clips of the real people. We've trained AI on those audio clips to sound exactly like the real people. So not only do they look like the real people, they also talk like the real people and are trained to answer questions just like the real person would have in the real life. This is just the first stage of our AI rollout with the same features. We're also going to be rolling out an offering in colleges and universities. And later in the second half of this year, we're also using these AI capabilities and rolling them out in professional training for onboarding staff and customer service for enterprise. We're already actually working with a few of the corporations who are clients of ours on AI enhanced capabilities for training and development. So I'm just going to play this short demonstration, which is recorded in real time. [Presentation]

Okay. So one of the key benefits of using ENGAGE for immersive training and development is in drastic cost reductions in the cost of providing service. So one of the areas that cost a huge amount of money for students to progress in is in film school. So when students go to film school, they have to deal with very, very expensive equipment. Red cameras, as an example, can cost tens of thousands of dollars. Students very often wouldn't have access to that type of equipment or LED walls and special effects. All of this stuff can be virtualized and put into a virtual setting. And one of the companies we're working with is called the Metaverse Film School, where they provide students with immersive learning inside the ENGAGE platform where they have access to hundreds and thousands of dollars worth of equipment at a fraction of the cost all in a virtual setting. Okay. I'm going to pass over to Séamus who's going to talk about some of the client wins that we've had last year.

Thanks, Dave. So just on the right-hand side of this slide, you can see some of the client wins that we've had during the year. It includes new clients and also clients that increased their spenders in 2023 or early 2024. Some of the most significant wins during 2023 included successfully onboarding Bank of America and substantially growing their license count with us and the professional services with us. Obviously, recently announced is our first 7-figure deal in conjunction with PricewaterhouseCoopers in the Middle East. We've also had significant wins with HSBC and Bausch & Lomb in the period and significant renewals from the other clients listed there. So just in terms of our growth strategy, we have 5 key areas that we're focused on. From the previous slide, you can see with our existing customers, we're looking to retain and grow and upsell within that customer base. New customers we're focusing on quality, not quantity, the size and the ability -- the budget of the customer is far more important than the quantity that we bring on board. As Dave has already outlined, we're sector-focused. Core focus is on education and training. We're going to have product improvements throughout 2024 primarily around AI-aided immersive education and training. And as we stand here today, we have a very strong pipeline, EUR 5 million in the pipeline at the moment through to the end of 2024, and that pipeline continues to grow week on week. So just looking in the financials in a little bit more detail. Just some of our high-level figures for 2023. Our group revenue was EUR 3.7 million, down from EUR 3.9 million in 2022. As outlined earlier in the deck, there were some challenges around enterprise renewals in the last part of 2023 and also some delays in contracts which pushed into 2024. Our ENGAGE platform revenue as a result remained flat at EUR 3.3 million. We had recurring revenue within that of 66%, which was license revenue. Our gross margin grew to 90% as a result of the mix between ENGAGE and non-ENGAGE services. Our EBITDA loss shortened to EUR 4 million, down from EUR 5.8 million due to strong cost control within the period. And at the year-end, we had cash on the bank of EUR 7.9 million, up from EUR 2.2 million in 2022. That cash balance is obviously derived from the oversubscribed placing in quarter 1 of 2023. So just in terms of our revenue profile. As you can see from the map of the world, there, 60% of our revenue is derived from North America, which is where our primary sales focus is, it was at least during 2023. 15% is from Ireland and the U.K., 14% from Europe, 8% in 2023 is from Asia and Oceania and the rest of the world accounted for 3% that we do expect that profile will change through 2024 and 2025 as the Middle East becomes a far more significant market for us. Looking at revenue by industry, you can see that education was our key focus with 40% of our revenue derived from the education sector. Banking became a bigger player for us in 2023 with Bank of America and HSBC coming on board, comprising 8% of our total revenue, along with other banking clients and the remainder then is made up of motor, telco, food and other industries. Looking at our ENGAGE revenue by type. You can see that our ENGAGE education revenue grew from EUR 800,000 to EUR 1.17 million year-on-year. That highlights what we were discussing earlier in the slide deck about our core focus now being on education. Enterprise waned from EUR 1.5 million to EUR 1 million year-on-year as a result of poor renewals in quarter 4 of the year. Our professional services, which includes custom-engaged studio work for clients and one-off events grew from just shy of EUR 1 million to EUR 1.1 million. That feeds into a recurring revenue of 66% derived from license revenue and 34% derived from professional services. Our total license numbers continue to grow period-on-period. We grew from just over 10,000 at the end of 2022 to 15 -- just shy of 15,000 at the end of 2023. And we're seeing compound semi annual growth rate since inception of 77%. Our average contract value, you can see that 26% of our contracts are in excess of EUR 50,000, 12% are between EUR 25,000 and EUR 50,000 and the balance are less than EUR 25,000. So just to conclude with the trading and outlook slide, we recorded our record revenue in Q1 of 2024 of EUR 2 million, which includes our previously announced our first 7-figure deal in the Middle East. 4 of our largest ever deals have been signed in the last 9 months, primarily in the education and training markets. The school of AI is being released within weeks, which will follow-on offerings for universities and enterprises over the coming months. As mentioned, most, if not all, of our non-renewing enterprise clients have now been cleared out of our pipeline, giving clarity to revenue expectations and also our key focus areas. New hardware that Dave spoke at the start of the presentation on AR and spatial computing services are going to be released over the coming months, which provide new product possibilities for our platform. And finally, our sales pipeline has shown less in quantity but more in quality with EUR 5 million in potential deals at various stages of negotiation. Revenue month-to-month may be lumpy, but we do expect to see more significant wins on a more regular basis.

Thanks very much for watching this presentation, and we're happy to take any questions.

Fantastic. Dave, Séamus. Thank you very much indeed for the presentation. Ladies and gentlemen, do please continue to submit your questions. [Operator Instructions] Just want the team take a few moments to review those questions submitted today. I'd like to remind you the recording of this presentation, along with a copy of the slides and the published Q&A can be accessed via our investor dashboard. Dave, Séamus. You can see I've had a number of questions both presubmitting throughout today's presentation. Thank you to all the investors who have submitted those. Séamus I could just hand over to you just to click on that Q&A tab and where appropriate to do so, just read out the question and give your response I'll pass to David and I will catch up with you at the end.

Perfect. Thanks very much. So I'm just going to go through these in the order they are submitted as might be a bit of jumping around. A couple of questions are duplicated. So we just cover the ones. So Dave, this first one is more likely for yourself, why was ENGAGE not available on the Apple Vision Pro when it was released.

Yes. So the Apple Vision Pro, which is a fantastic device, has challenges in control schemes. So anybody who's used it, you look at what you want to interact with and you tap your fingers. Now ENGAGE is a very interactive virtual reality experience, and it's used primarily for training and development. So that headset has challenges. Now we do have multiple Vision Pro headsets, and we will support it in the future, but it does require a lot of refactoring on the ENGAGE side. Also, if we put a lot of development resources into the Apple Vision Pro, it's a very low installed base currently right now. It's a lot of developers on the headsets. It's not our customers. Like a corporation might only have 2 or 3 of those devices, whereas they have thousands of Oculus Quest devices. So we're more focused on revenue generators for now, but it is something that we will have support for later this year.