Can newly-listed VR Education make real returns out of virtual reality as market booms? (VRE)

Virtual reality (VR) business VR Education (LSE:VRE) was launched by chief executive David Whelan three years ago in Ireland with a €1,000 loan from his sister. Today the company stormed onto AIM with a £19.3m valuation. Having raised £6m at 10p, through its oversubscribed IPO via Shard Capital, the company’s stock closed up 17.5% at 11.75p. The firm is looking to increase turnover rapidly in the booming market for educational VR and has secured some pretty significant institutional backing. With such a strong performance on its market debut can it now press on and build on these gains?

VRE’s flagship product is its Engage platform, which is centred around using virtual reality to deliver digital education and corporate training. Unlike many junior tech firms, VRE is already generating revenues from its virtual reality showcase offerings and has partnered with numerous high profile educational and corporate clients such as Oxford University and the BBC.

The company now hopes to benefit from first mover advantage in the rapidly growing, global VR market through the release of Engage.  As with all technology companies, there is certainly risk involved in backing a business at this stage, but if VRE is successful in its plans it could well prove to be a value play.

Brave new world

Engage, which will be released in its test format in H1 2018, is split into education and enterprise arms that allows users to do things like hold lessons, meetings, or presentations in virtual reality in both a live and pre-recorded format.

The funds raised from today’s float will be used to develop Engage further with the aim of positioning it as the go-to platform for digital education and simulated training around the world. Speaking to ValueTheMarkets.com, VRE chief executive David Whelan said the firm hopes to provide an alternative to bricks and mortar educational institutes or expensive onsite simulated training. He told us:

‘There are many examples of where this could be useful. For example, on the educational side students are continually fighting against spiraling fees. Rather than having to attend university and pay the costs of living away from home, a cheaper alternative for students could be studying at home digitally. Currently, impersonal isolated learning environments with low engagement end with less than 15pc of students finishing their courses. Virtual reality can deliver the same information in a much more personalised, engaging way.

‘On the enterprise end of the spectrum, virtual reality can significantly reduce training costs. For example, if you look at an oil company operating in a remote environment, it will be much more convenient and cheaper to train staff back at home in a simulation rather than send them out for training.’

One immediate use of the money raised in today’s IPO will be to open an office in Hammersmith, London. Whelan hopes that VRE’s new listed structure will allow it to incentivise a number of top-quality technical and business development staff. He believes this talent will help VRE distinguish itself as the premium VR brand in the educational and corporate spaces.

He told us: ‘We need to attract the best business developers and talent to the firm, we could have closed the funding round privately months ago, but we thought this was a better option as once you are publicly listed you can incentivise the right people to come and work with you while building up a large profile with potential investors.’

Product roll-out

From its incorporation to 30 September 2017, VRE has generated revenues of €980,000 and raised €1.3m. Now the firm has listed, Whelan plans to step up this revenue generation greatly, with turnover expected to reach €1.7m in 2018 alone.

Prior to listing, VRE was already generating revenues through its standalone virtual reality experiences. These operate independently of Engage and are developed to showcase the platform’s potential. The first – and currently the only- experience widely available to the public is Apollo 11, launched in April 2016. This is an award-winning simulation of the moon landings, where users take on the role of Neil Armstrong.

Last year, the Apollo experience was launched on PlayStation, Oculus, STEAM, and other virtual reality platforms. It has so far sold around 100,000 copies, generating revenues of around $1m. With the experience costing just €100,000 to produce, this represents an impressive ten times return on investment. This is likely to continue as well, with downloadable content providing a good opportunity for recurring revenues.

VRE plans to significantly step up the showcase side of its business this year to generate further recurring revenues as it establishes Engage. For example, in H2 2018, it will launch a simulation of the tragic Titanic expedition. Titanic VR has already received rave test responses and is being tipped to sell more units than Apollo. The firm is also planning a showcase called ‘The History of Space Exploration’ in H2 2018.

Far from being anything close to the sinking ship it simulates, VRE will also continue to aggressively pursue commercial adoption and revenues from Engage this year as it rolls out the platform to the public. For Engage Education, VRE will continue to establish revenue share partnerships with educational institutions to provide content on Engage. VRE will get a 30pc share of all content sales.

Engage Education’s partners already include Oxford University, with whom it created a medical training lesson in October 2016. The company is also planning to release a series of 10 free lectures with Oxford on Engage in H1 2018. Furthermore, in September 2016 it began working with New Haven University to create a cybercrime lesson and started working with the BBC on educational content last month.

To expand Engage Enterprise, VRE will partner with VR and AR hardware manufacturers to package tailor-made solutions for corporate/simulated training such as safety and medical training. An example of existing content in this area is a virtual medical training application released alongside the Royal College of Surgeons.

VRE generates enterprise revenues from user subscriptions for things like meetings and collaborations, one-off charges for the creation of specialised content, private server setups with a monthly charge for storing virtual content, and revenues from white label platforms.

Booming market

Looking more broadly, VRE has an early-mover advantage in the booming virtual reality market. Market research company Statista estimates that revenues from the sale of augmented reality, virtual reality and mixed reality devices will rise from $7.2bn in 2017 to $84.7bn in 2020.

Previously, the main barrier to entry to virtual reality for consumers had been the high hardware costs. But with heavyweight firms like HTC, Facebook, Sony, Apple, and Google all entering the market, prices are coming down, spurring volume growth.

Furthermore, the imminent release of Steven Spielberg’s virtual reality focused movie ‘Ready Player One’ is likely to somewhat enhance sales over the short-term. Indeed, broker Jefferies has already said it believes that the firm will boost sales of virtual reality headsets. Whelan added that VRE’s flotation just weeks before the film’s release has been ‘fortuitous timing’.

It is not just a general uptake in the use of virtual reality that is likely to benefit VRE. The adoption of virtual reality in schools has seen a large increase in Asia, with the rest of the world following suit.

According to technology market research firm Technavio, virtual reality in the global education market is expected to reach a value of $1.7bn by 2021, growing at a compound annual growth rate (CAGR) of 55pc. In 2016, its value stood at just $187.5m.

Technavio also forecasts that the use of virtual reality in the higher education market is growing at a CAGR of 51.7pc, while the value of virtual reality in the North America education market will reach $643m in 2021. In Asia, 90m online students are currently using VR. By 2021, that figure is expected to grow to 160m.

While there are other virtual reality platforms, including those focused on digital education, VRE claims to be the only one that generates its own content and also allows creators to upload their bespoke content and sell it. This makes it well positioned to benefit from growth in the virtual reality and digital education markets alongside the development of its business model and products.

Virtual reality, a real opportunity

Aside from growing VRE from a €1,000 loan into a £19.3m firm over the last three years, Whelan has constructed a highly experienced board to aid and advise the company as it grows.

For example, chairman and non-executive director Richard Cooper was previously group finance director of GVC Holdings. Independent non-executive director Tony Hanway is the chief executive of Virgin Media Ireland.

Both David and chief operating officer Sandra Whelan have 20pc stakes in VRE, ensuring their interests are aligned with those of investors. The organisation is also backed by well-known venture capital trusts Octopus (10.7pc) and Unicorn AIM (8.2pc).

In the nine months ended 30 September 2017, VRE made revenues of €468,478 and a gross profit of €264.702. It also had €424,179 of cash on its books – today’s raise will have increased this greatly.

After administrative expenses and finance costs are taken into account, the business made a loss of €330,047 in that period. Whelan told us VRE is ‘close to profit’, although it is currently difficult to determine exactly when this point will come.

Regardless, he hopes to have a couple of big corporate and educational institutions on the platform in one year’s time. As the image below shows, there is plenty of potentially value-generating newsflow on the horizon.

VRE is a very young company operating in a market that is only really starting to take off. If it engages with consumers in the way it plans to through its platform and showcase products and the virtual reality market grows in line with expectations, then some decent upside could be on the cards.

Taking into account the experience of the board and the company’s pipeline of innovative products, at 11.8p a share, the firm may be a tempting punt.

Author: Daniel Flynn

Disclosure:

The author of this piece does not own shares in the company mentioned

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