BlackSky Technology Inc. (BKSY) Earnings Call Transcript & Summary

All right. Good afternoon, everyone. Thank you for joining us. My name is Scott Deuschle, I'm the senior aerospace and defense analyst at Credit Suisse. I'm joined by Henry Dubois, the CFO of BlackSky. Henry, welcome.

Thank you, Scott.

Henry, kind of disclosures like that we might need to go through before we begin? Any disclosures? Yes, I think we're all set.

We're all set.

All right. Henry, maybe you could just walk through your background a little bit before. I think you're new to BlackSky and new to the investment community. So go through that.

Sure. While I'm new to BlackSky as the CFO, but I've actually been in this industry for quite some time. I started in this industry about 20 years ago when I joined DigitalGlobe back as their Chief Financial Officer and Chief Operating Officer. And I became the President of them, so sometime around 2003, give or take. So I was with them for a little bit, and then I moved over to GeoEye where I was the CFO at GeoEye, was with them from about 2005 to about 2012, so about 7 years. they were a public company, et cetera, et cetera. So I've been in this space quite some time.

Okay. That's great. And then maybe you could start us off at a high level, just talk about the business. What is that BlackSky does? What sets you apart from other space companies? What sets you apart from DigitalGlobe and GeoEye, and just [ earth in ] more broadly?

Sure. I think the big thing that differentiates us from others is we call ourselves a dynamic monitoring company. We're providing data and analytics, utilizing our proprietary constellation of 14 satellites to be able to provide insights to customers. I mean we've got our satellites flying at inclined orbit, so that we're constantly coming around the areas between 55 and 55 South latitude such that, that's where about 90% of the GDP is, it's about 90% of the population. So with our inclination and the 14 satellite constellation we have, we're able to see pretty much every spot, any spot on the earth, I should say, about once an hour. So 15 times a day from dusk to dawn, right, or the other way around, dawn to dusk, sorry, and just kind of work it that way. So as I said, we're monitoring and we're giving insights on an hourly basis, whereas DigitalGlobe or I should say, Maxar and the other [indiscernible] mapping companies.

Okay. And so how does that feed through in terms of the business model operationally, financially, what does that mean for incremental margins, things like that?

Well, from this perspective, I mean we're flying over places of interest more often than not. So we're able to kind of be constant, we'll go over Ukraine 15 times a day. So we're able to monetize that across all our satellites pretty regularly. We're more efficient this way. We're not flying over the North Pole and the South Pole where there's very little mapping requirements to be done. So it really is about the location of where the satellites are, where the location of where people have interest, whether it's for defense intelligence purposes, whether it's for supply chain monitoring, whether it's for competitive analysis, et cetera.

Got it. And one thing that sets BlackSky apart in my mind from some other space companies is it's not a science project. It's a real business. You have I think $60 million in annual revenue. You have a $1 billion contract with the DoD over 10 years. So you have revenue now, you have revenue visibility going forward. I guess the question is, maybe just to take a step back, you can just level set us financially where the business was today or where the business was last year, where it is today and then where you kind of expect it to go in the next 12 months based on the backlog you have right now?

Well, the way I would look at it, we're a very different company today than where we were a year ago. Starting with the fact that a year ago, we only had about 6 satellites up. We launched 8 satellites from about mid-November through then, 6 satellites from mid-November and the end of the year, then another 2 in April. So we now have a constellation of 14. So we've got that hourly revisit with 6 satellites, we weren't there. Revenue-wise, we're about $34 million last year. We've been indicating that our guidance currently is 62 to 66, we're thinking we'll be in the upper end of that guidance range for this year. As you pointed out, we've got $1 billion EOCL contract from the NRO, which gives us strong visibility over the next 10 years, how that's playing out. We recently won another $10 million 1-year contract from Ministry of Defense in Asia that has been a customer of ours and will continue to be a customer. So I think we're really starting to get the traction behind getting our value statement out there, so to speak.

Got it. And so you talked about revenue in that answer, maybe you could also just touch quickly on gross margins, the improvement you've seen there, which I think has been pretty significant.

Gross margins really starts getting into the kind of how we start getting the leverage out of the system. And this year, on imagery and analytics revenue, which is a revenue that is really enabled by the fact that we've got the constellation. We grew that from for the first 9 months of this year to about $38 million from the neighborhood of about $17.5 million last year. So we had about a $20.5 million growth, but our cost of sales only went up about $2 million, $2.2 million. So as a result of that, we're getting incremental contribution margins in the 85%, 90% sort of range. And I would look at that, once you hit the revenues to cover your fixed costs, you're really starting to just be able to have strong contribution margins.

Okay. And the way this business grows fundamentally, do you have to be loading up CapEx to drive additional revenue? Or does this point on fixed costs, are those costs actually fixed and...

Well, I mean our satellites are LEO satellites. So they have a lifespan. Our existing Gen 2s have a lifespan about 4 years. Our Gen 3s as we start getting them up, we're expecting those to be about 5 years. So when you just look at it from that perspective, yes, we do have to replace those every now and then every 4 years, 5 years. But our satellites are fairly inexpensive, somewhere in the average about $10 million or so a pop. So if you've got a 16 satellite constellation, let's say, that's $160 million that you have to replace every 5 years. It's about $30 million or so a year that you need to be monitoring.

Okay. And so once you get the satellite constellation where you want it, this is kind of a level-loaded CapEx story, right? Because like what always ailed Maxar was you generated some cash flow a few years, but then you got to go into another CapEx investment phase and then the cash flow... like... So it's just the sign wave, for you guys is it more an inflection story rate than kind of continues to go up?

That's a good way to put it. I mean the way we look at it is, and having been the CFO of those other companies, I mean it is very much a lumpy CapEx spend because they had longer lives, much bigger dollars. I mean ours on the other hand, we look at once you kind of get that steady-state constellation, it's taking a number of satellites, multiply it [indiscernible] divide it by 5.

Okay. I think just kind of going back into the broader kind of demand discussion. The war in Ukraine obviously demonstrated pretty well the strategic and tactical value of satellite imagery. I guess what has the conflict meant for BlackSky specifically in terms of demand that you've seen for your solutions, both within the U.S. and then abroad as well?

I think it's created visibility into who we are and what we're capable of doing. It's one of those things where, as a result of the Ukraine, people on the street understand what it is we're doing, not just even the ministries of defense. I mean we're feeding information into the news agencies. We're feeding information obviously at the various D&I groups. And all the various countries are also looking at from a perspective of, hey, we want to be able to not just rely on the U.S., but we want to be able to have our access to our own data and sources, et cetera. So they're coming to us directly now, too.

So your new customer pipeline, did that fill up after the war started or leading into it or out of it?

I mean we had always been growing, and I think this just kind of expedited its growth and it's continued to grow because as I said, what you're getting, it's not one of those things where it kind of hit a plateau and then it kind of comes off, for example, on something else that like anything that was online or whatnot during COVID. But this is one of those things where you're taking it from the perspective of it people getting the insight of what we can do, what we can provide. We're providing the add value to them. They can do their own analytics or we can provide them analytic information in terms of kind of how many cars, how many trucks, how many whatever planes. And so they're utilizing it directly in their process flows.

Okay. So a big win for BlackSky recently on the EOCL contract, they are shared between you Maxar and Planet. I guess maybe just level set us financially, how much does that contract specifically contribute to 2022 revenue? And then how does the revenue profile in that contract evolve in 2023 and then beyond that?

Sure. I mean, as we've discussed, that contract is worth a little bit over $1 billion over 10 years. And they fully funded about $85 million of it, $72 million for the first 2 years. So we get about $36 million per contract year. The contract year started in June. So call it, roughly $18 million of the EOCL contract a little bit more will be in 2022. With that said, it's not like we were doing work with the NRO before. So it's not completely new contract to us, so we probably would have more than that just from the NRO. So over time, as we get new capabilities on orbit, the Gen 3 satellites on orbit et cetera, we would expect them to pick up additional packages and pick up additional amounts on that contract.

Okay. So it can eventually be $100 million a year contract, potentially a bit higher...

That's a good analysis.

Okay. And then would the ceiling value be able to be stepped up before the end of the 10 years? And what would drive the ceiling value higher?

Well, I think the first thing to think about is this contract with the NRO for $1 billion, it's only for imagery. So any of the analytics work that we do, and we've talked about the EIM, the economic indicating monitoring contract that we have with NGA, another arm of the U.S. government, that's all additive to this NRO contract. That contract was initially a $30 million IDIQ, they stepped it up to $60 million because they've already placed $14 million of orders. So we're in a situation where this other stuff becomes additive to that $1 billion contract. So we do see a lot of growth opportunity here.

Okay. Great. And then there are, as you know, a lot of different types of earth intelligence. So there's just raw imagery, but there's RF intelligence as well as other types of intelligence you can get from satellites. So I guess, as you look at the different parts of the spectrum and ways you can add more value to your customers, do you feel comfortable just sticking with electro-optical imagery for a long time? Or would you potentially see going into other avenues longer term?

We're always looking at what sort of sensors we should be flying. I mean electro-optical is the largest one, we believe, is the largest market. That's one that everyone sees and is comfortable with. There are opportunities to partner with some of the SAR companies. We're doing that now as we work on various projects because of the capabilities there. RF, we could work with RF companies as well. Now would we ever look at putting those sensors directly on our own satellites and fly them ourselves instead of partnering? Every day, we're looking at it from a business perspective, does it make more sense to partner or to buy?

You think you have the capacity on your bus and are already building and launching the bus, if you had [indiscernible] sensor for...

You probably have to have a separate satellite as opposed to on the same satellite. But that's one of those things we're looking at, could we colocate from our satellite?

Got it. And then looking ahead, you've got your Gen 3 satellites launching next year. Maybe you could talk a little bit about what those satellites will do for the business.

Well, to start with, they're going to be at a higher resolution. They'll be at 35-centimeter resolution at nadir. They're going to have square sets rounded as well, which will extend the time a little bit earlier in the morning, a little bit later into the evening. So it provide that sort of capability. So I think the combination of the higher resolution, the extended hours will continue to increase the ability to provide this hourly insight and even start getting more than that.

Got it. And then remind me of the CapEx profile for Gen 3. So I think you've been spending quite a bit of money on those satellites for the past few years. I guess my direct question is, will you see CapEx step up again next year once those satellites begin to launch? Or is it kind of level loaded for...

We haven't started providing guidance for 2023 and beyond at this point. I would look at it from a perspective as we get our satellites up, each satellite costs in the neighborhood of USD 10 million to USD 11 million. And as we kind of go to fill out that constellation, it'll step up with that.

Okay. And then the launch costs don't drive a big change. Switching from just building to also building and launching...

When I say USD 10 million to USD 11 million, I'm including all I think of a satellite, satellite on the ground isn't really all that useful to me. I always think of a satellite cost is what it cost to get it into orbit.

Okay. And then space became a bit crowded in the past few years because cost of capital was so low, a lot of space companies were founded, that drove in some sectors of the space economy, some higher competitive intensity. I think EO maybe is a little bit more competitive intensive than others. Maybe just talk a little bit about the competitive moat you guys feel like you have on the business and how you go about sustaining that moat longer term?

I think the moat comes down to some of the things we've been discussing already in returns of kind of our rapid revisit, and that's also spaced out across the entire day. So you can see something at 9:00, 10:00, 11:00 whatever throughout the day as opposed to those satellites that are more on the polar orbits that will only see around the 10:30 or the 130 in the afternoon. So I think it's the revisit. It's the analytics that we have, all the AI capabilities that we have to automatically identify planes, what type of plane, [indiscernible] planes, et cetera. For example, on this economic indicator project that we have with the U.S. government, we're going through monitoring airfields to be able to count the number of planes that are there at any given point of time.

From my Boeing model.

There we go. And then size the analytics that we have, we're easy to use. I mean we've got customers who have shown you could actually task our satellites from a smartphone. If you have an account with us, you call up the application Spectra AI, type in kind of the coordinates or pick it on a map and then kind of select like you do in Airlines, which satellite when the satellite is coming over, which satellite you want to take the shot.

Got it. I mean, it sounds like the software is really the secret sauce and...

It is. I mean, the company in many respects was kind of what Brian OToole started was the software side. How do we make this stuff easy to use. Brian was a CTO at GeoEye and had a long history in this industry. And it's all about how do I take not only our capability but marry that with information and sources from elsewhere. So it's very user-friendly to go about doing that. And as you know, we have demonstration days every now and then that would be happy to have another one for anyone who's interested.

And then so you talked about where the moat is today. I guess moats aren't static. They always kind of go away over time, I would think in a competitive industry, other companies start to do what you do. I guess how do you deepen and broaden those moats from here?

Well, I think it's exactly, you have to continue to do what you do and continue to do it better and more efficiently. It's continue to develop the software, continue to add the capability to identify do more analytics on an automated basis. continue to make sure that we're getting that next generation of satellites up in the most efficient and cost-efficient manner possible, add capabilities as appropriate. I mean when we do the R&D, and we go through the, which projects we should be adding to it, we're always kind of looking at from a business analysis what makes sense economically.

Got it. And kind of going back to the CapEx question, I guess, just like is there a payback period you target when you spend money on CapEx like based on demand for a given satellite imagery producers, you can get a payback in 2 years, 3 years. Is there anything like any kind of analysis like that that goes into that?

It goes in, but it doesn't go necessarily on a satellite-by-satellite basis. It's on a constellation type basis because it's the full constellation that gives you the revisit that we're looking for. Each satellite contributes to us, so you got to look at it, how does it give you additional diversification? Can it shorten the hourly revisits to a 30-minute revisit? And how do you take those step functions. And that's what we look at is what's the improvement in the overall constellation versus an individual satellite.

Got it. That makes sense. And maybe you can talk a little bit about the international demand you're saying. We mostly have been talking about DoD so far. So let's focus on the international piece. I think you called out there was a big driver of growth for the past few quarters. I think there was a big win you guys got recently. So any kind of broader commentary on international right now?

Well, I mean, as we were discussing earlier, I think what Ukraine has done is it's shown to the formal ministries of defense or whatever you want to call them, the benefits, I should say, of having their own direct access to data and imagery. And that's what we're able to do with that. The pipeline is growing. We're working with a number of various countries on various proposals. So it just continues to get out there. It's value oriented.

Okay. Well, so the question that I have is the DoD takes imagery from the satellites, if you sell internationally, assuming that the international customer would be taking imagery from that same satellite. So does the DoD put any restrictions on you guys, I assume they do, in terms of who you can sell at imagery to. But like how cumbersome is that in terms of your international sales process?

Our imagery coming down is not restricted per se. We do have to check on a night party list. We can't sell to certain countries. I'm sure you can figure out which ones those are. Rather than that, any other country is able to acquire imagery.

So it doesn't come up the sales process, you can move pretty quickly through the pipeline. If an international country is motivated, they can get your imagery with [indiscernible] months.

We're not selling to North Korea because we're just not there...

Okay. Fair enough. Do you think that those international customers that are buying from you now, do you feel like it's a long-term partnership they've developed with you? Or is there any sense you have that it's a stop gap measure. Like any risk that is a stop gap and ultimately, they want to build their own satellite that's proprietary to them that they own and operate.

No, I don't think it's a stop gap measure because we kind of start getting into their system [Technical Difficulty] we get integrated into their functions and their analytics. I mean we always have to make sure that we're providing the best services [Technical Difficulty] abilities and may continue to maintain, so I don't see it as being a stop gap measure per se. I think it's one of the things that it can just continue to expand, which some of these countries potentially look at a satellite or 2 or constellation of their own joint venture where we could actually build satellites...

Okay. And then you have some partnerships with third-party now, I think, Esri and Palantir is also a partner. Maybe talk a little bit about those relationships, why you entered into them and what type of sales volume you're getting from so far?

Sure. When we take a look at those partnerships, I mean, the whole idea behind those platforms is to kind of leverage their sales force and leverage their installed base so that they have access to our satellite set of capabilities and our analytics. And these partnerships have been working pretty well that we're getting some traction with a number of them to get into their customer base. We don't disclose revenues by customer, so I'm not going to get into that, but let's just say we're pleased with how overall those customers are doing.

And with any partnership, you would never play yourself in the position where you're selling imagery to someone else that's selling catalog service, that kind of thing? Like you're not going to commoditize yourself with these partnerships?

We don't want to be commoditized. I mean we believe that we're providing the value of the analytics behind it, and that's something that others can't do. I'm sure they can either do it manually or start developing their own algorithms, but we've been developing Spectra AI since about 2016. So it's pretty far along. As I said, it's quite great. It's really good at kind of identification of things, the ease of use, et cetera.

Okay. And help me understand R&D in this business. I think most of the costs get pushed through. I think you have an engineering services division, right? And so they go through cost of goods sold within that division, the R&D does. I guess, is that right? Maybe can you just talk a little bit more about R&D and how much you guys are spending right now?

Sure. I think there are 2 types of R&D that we have. One is the type that you're talking about is the cost of goods sold and we've discussed on some of our earnings call, where we have a couple of customer funded programs that are basically not necessarily funded 100% of the program. That's why it looks like we're losing money on it. But we're really not because it's R&D, we would have to do anyway. from an accounting...

[indiscernible] R&D.

Yes. From an accounting perspective, we have to push it through the cost of goods sold line. So that's for a lot of these customer-funded programs. There are some other R&D work that we're doing on with Spectra AI that's more internally based, and that kind of gets flown through our CapEx lines. We don't break that out per se of as to which ones exactly which one is which, but we're targeting this year to be about USD 52 million to USD 56 million total CapEx.

Okay. Got it. And then just kind of moving to margins. Henry, when I first started looking at BlackSky, I think it was in Q4 of 2021. Inventory gross margins were 11%. I think in the last quarter, they were 54%, so 43 point improvement. That's excluding D&A, which I guess, I could argue, should be included in that, but it's still pretty impressive. So maybe just talk a little bit more about what's driving the gross margin improvement from here? Or so far, what drives it going forward, then including D&A, what's kind of your outlook for gross margins longer term or kind of a longer-term target we can...

Sure. I guess when I look at our gross margins, and yes, we could debate whether you put depreciation and amortization into, the reason we keep it out is that's a different decision point. We make that investment decision upfront. So what we want to be able to show is how we're doing on our current period type basis. And so when you take a look at our contribution margin from the imagery and analytics as we were discussing earlier, we are getting some very strong incremental contribution margins because once you cover your base level of cost, you've got your operating ground stations in there. You've got some staffing in there, et cetera, et cetera. Once you get that covered, there's not that much additional cost, maybe some data processing and whatnot. So it's pretty simple. And so that's what is going to drive us to that 89% incremental gross margin. So I mean you can do the math, it's kind of where you might think would be coming out in terms of end up at gross margins, but they're pretty attractive.

Okay. And then one thing that's, you're talking about this is kind of a bit of a software company in some sense. And one thing that I think investors are finally waking up to is software looks great from a gross margin perspective, but then to grow the business while maintaining those margins, you have to dump a lot of money in SG&A. And so when you do that, the actual EBIT drop-through is going to be very little. So I guess I'll just ask you. I mean you're focused mostly on one customer, DoD and the NRO.

One customer base.

One customer base. Like so does that mean SG&A intensity should be very low, and so there's a lot of leverage in SG&A as well?

We do believe there's a lot of leverage in SG&A for that very reason. I mean, especially given the concentration of our revenues in the defense and intelligence community, we win contracts in large numbers. So your sales force can be pretty skinny and very pointed as to where they're going after. So we don't really see a significant growth in our SG&A over time. Will it be some? Sure. But it will not grow nearly as fast as our revenue grows.

So you have a lot of leverage in gross margins. You have a lot of leverage in SG&A.

Great business.

What's not to like? What's the...

We have to... I mean, as you pointed out, we do have to kind of think through and make sure we've got our maintenance CapEx covered. But over time, that becomes a fairly manageable number when you're growing the way we are. So...

Right. So let's say, this is a $1 billion a year revenue business. How much do you think you need to spend on CapEx to maintain that?

$1 billion year revenue, you might be at that point, neighborhood of 24, 30 satellites, maybe a little bit more, but not shouldn't be that much more. So you're probably in the neighborhood of about $60 million or so a year.

Okay. Got it. And then maybe just going further on CapEx, you can talk through that a little bit more. So within GEO constellations, CapEx is very cyclical. I think we've already talked about this a little bit, but they'll have these big investment cycles. Maybe given the focus on LEO orbits, would CapEx be very level loaded? Or would there be any cyclicality to that?

I think once we get our constellation baseline up, it just becomes what I'm calling maintenance CapEx, you kind of get into that cycle of you want to kind of time so that you don't have to replace the full constellation at any one point, just kind of constantly refreshing. And the other benefit of that is you're constantly getting new technology up there. It's not one of these things where you get the big bang of, hey, we've got the whizbang technology now. But 10 years later, it's pretty old by the time you get the next one, we're constantly refreshing that with new technology.

Okay. And just going to the balance sheet now, something that often goes wrong with space businesses is their capital structure. So it can often be a capital-intensive business, you have to pay for that CapEx upfront before you have the revenue to show for it. And so to fund that, you have to bring on debt. And then that sets you up. In some cases, the set companies up to fail. I mean maybe you can just talk a little bit about your approach to the balance sheet, how you expect to manage it, how you're dealing with respect to cash and liquidity now. What do you ever need to put the company in that position do you think?

Well, I mean, where we are right now, we take a look at our balance sheet, it's a pretty clean balance sheet. We just raised through coming out of the spec, we raised shy of $300 million to help us fund our next generation. We kind of see that being able to carry us all the way through. We have a small debt of $75 million on our balance sheet. That is with a partner. So do we need to add more debt or are any significant? I would want to make sure we're properly leveraged, but I don't think we'd ever have to be in a position we're overleveraged.

Okay. And remind me how much capital or liquidity do you have on the balance sheet right now? And how much runway does that correspond to?

As of September [ 31 ], we had $91 million of cash on the balance sheet, and that gives us sufficient cash for the foreseeable future.

Okay. And then maybe as a closing question, if you could have an investor walk away from this conversation understanding, just 1 or 2 things about the business and its story, what would those be?

I think the thing I would want people to understand as they go away is we're getting real traction with real customers who pay their bills very fast, and they're in a position where we are getting woven into their thought process. So it's the customer base that we're building, the ease of use that we have and also the fact that we've got this constant revisit that no one else has at the moment.

Got it. Great. Well, thanks so much, And I appreciate your time.

My pleasure, Scott.

Thank you.