FLYHT Aerospace Solutions Ltd. (FLY) Earnings Call Transcript & Summary

Thank you for standing by. This is the conference operator. Welcome to the FLYHT Aerospace Solutions Fourth Quarter and Year-end 2019 Results Conference Call. [Operator Instructions] And the conference is being recorded. [Operator Instructions] If there are any questions outstanding at the end of the call, the company will be happy to take them by e-mail to investors@flyht.com. I would now like to turn the conference over to Mr. Tom Schmutz, Chief Executive Officer for FLYHT. Please go ahead, Mr. Schmutz.

Thank you, Steve, and good morning to everybody. Thank you for joining us today to review our financial results for the fourth quarter and annually for 2019. But before we get into that, I'd like to extend to everyone my hopes for your health and safety as we navigate through this unprecedented challenge brought about by the worldwide pandemic. I'm currently speaking to you from my home in Littleton, Colorado; and Alana, our CFO, is joining for her -- from her home in Calgary. During this conference call, I'll discuss the highlights of 2019. And Alana Forbes, our CFO, will then discuss the detailed results of the fourth quarter for 2019 and the annual results of 2019 relative to 2018. I'll then discuss some of the expectations the company has for 2020 with an emphasis on how FLYHT is responding to this extremely challenging financial landscape created by the coronavirus outbreak and the corresponding worldwide recession brought on by the reaction to this virus. 2019 was a very encouraging year for FLYHT where we compiled the best financial performance for the year in our company's history, including a record receipt of revenues in 3 of our 4 revenue categories, where we won outstanding positions for our products and where FLYHT successfully completed an equity raise, the timing of which has proven to be extremely fortunate, given the challenging financial conditions brought on by the COVID-19 pandemic in earlier this year. In 2019, FLYHT finished the year with over $1 million in earnings before interest, taxes, depreciation, amortization or EBITDA, with total revenues that exceeded $21 million. This annual revenue exceeded 2018 by 56% and is a record annual revenue for the company. As part of this total revenue, the revenue categories were led by software as a service, or SaaS revenues, which finished the year at a record high of over $10.2 million and represented 48% of all revenues, the highest percentage of SaaS revenues for the company since 2012. The 2019 SaaS revenues exceeded that of 2018 by 85%. The company also has set annual records in the revenue categories of hardware, which finished the year at approximately $6.7 million, and Technical Services, which finished the year at slightly more than $1 million. The final revenue category licensing did not set an annual record, but was up 43% over 2018 at over $3.2 million and demonstrated the first year-over-year increase in that category since 2016. The company is proud of this record-breaking financial year. During 2018, we shipped a total of 133 hardware kits directly to our customers. By comparison in the full year of 2018, we shipped 99. This substantial increase in hardware kits is predominantly a function of booked backlog becoming available to ship. A significant part of this year's shipment was made through China and AirAsia. As of February, we now have shipped approximately 2,800 units through all of our various channels. Of those sales, approximately 900 were shipped directly to airlines and lessors of aircraft. And the other 1,900 were shipped through the L3Harris Airbus channel. FLYHT also produced 2 key wins in 2019 in our sales efforts. The first was the expansion of our licensing agreement with L3Harris to supply the Automated Flight Information Reporting System or AFIRS unit for the Airbus A320 and A330. FLYHT's product was selected to replace another major supplier SATCOM system on the A220, the Airbus Canada Limited partnership aircraft that began its life as the Bombardier C series. As I discussed before, Airbus is very bullish about the future of the -- future success of the A220. The aircraft is expected to be an extremely successful airframe that's well suited for worldwide city to city routes and whose range is being expanded by Airbus to accommodate transoceanic flights, which we think will drive up the need for SATCOM. At the Paris Air Show last year, they indicated that in the next 20 years, there will be demand for 7,000 aircraft with a seat range of 100 to 150 seats. The A220 has a seat range of 110 to 160 seats, depending on its variant and is perfectly suited for this forecast. We expect the success of this airframe to contribute to FLYHT's future growth. The second key win occurred at the end of 2019 when we secured a $6.2 million Future Air Navigation safety services voicing contract for -- with WestJet for their entire Boeing 737 fleet, expected to be approximately 160 aircraft. FLYHT has been working very closely with WestJet, and we're very obviously anxious to begin those deliveries. The COVID-19 challenges to WestJet and the rest of the world may delay the original delivery schedule start. But so far, the guidance that we have been given is that there is still full intention to go forward with the program, and we're anxious to get started. Finally, highlights of 2019 include a $6.7 million equity raise, which we closed in 2 tranches in November of last year. The raise was conducted in a very challenging micro-cap environment. The raise was oversubscribed, and it attracted significant interest from the United States as well as Canada and other locations in the world. This infusion of capital was conducted to increase our working capital reserves because of the significant growth the company -- because of the significant growth we had gone through, we required additional working capital. We wanted to fund some specific and significant development activities to help continue to grow our customer penetration and the resulting revenues. And we wanted to further fund our sales and marketing team activities, both additional salespeople and marketing, with a focus on hiring and driving marketing and advertising. With the incredible changes which have just occurred just months later due to the pandemic and its effort -- and effect on the worldwide economic situation, the timing of this raise could not have been better and helps FLYHT's cash position. Cash is necessary to weather this period of economic uncertainty. I'll be discussing some of the additional activities we are undertaking to protect our business and to preserve cash later on in this call. For now, I'd like to ask Alana Forbes, our Chief Financial Officer, to provide a detailed review of the fourth quarter and the annual 2019 financials. Alana?

Thanks, Tom. Thank you all for joining us on this call, and I hope everyone is well. I'll first review the results from Q4 2019 before visiting 2019 total results and then get into the larger moves on our balance sheet throughout the year. In Q4, revenues from traditional sources increased by 6.1% to $4.3 million in the fourth quarter 2019 from $4 million in the same quarter last year. SaaS revenues increased 20% to $2.7 million from $2.3 million in Q4 2018. The increase in SaaS revenues was primarily due to a higher number of aircrafts producing recurring revenue, combined with existing customers, expanding their usage of the company's value-added services and adding to the services they contracted with the company at the time of the original sale. SaaS revenue accounted for 58% of total revenue in Q4 2019 compared to 78% of total revenue in the same period last year. Hardware revenues decreased 55% to $658,000 in Q4 of this past year relative to $1.5 million in Q4 2018. The decrease here was primarily due to a significantly smaller number of installation kits shipped in the quarter compared to a particularly strong quarter in 2018. We recognized revenues from 13 installation kits during the fourth quarter of 2019 compared to 41 in the same period in 2018. Q4 licensing revenues increased by 209% to $772,000 from $250,000 in Q4 2018, contributing to an annual increase of 43%. This increase in licensing revenue was driven by differences in the number of modems and related license fees that were ordered from FLYHT in 2019 versus 2018. Gross margins in the fourth quarter of 2019 were 63% compared to 56% in Q4 2018. The change in gross margin mainly reflects differences in the mix of revenue sources in Q4 2019 versus 2018 and the significantly higher margins associated with licensing revenue. Operating expenses increased 4.1% from $3.8 million in Q4 2018 to $4.3 million in Q4 2019. This demonstrates the continued focus on controlling our expenses while we work consistently towards increasing revenues to obtain positive net income from scaling our top line. The other income of $641,000 earned in Q4 2019 were payments from Panasonic associated with our acquisition of Panasonic Weather Solutions. Payments are made quarterly on the baseline subsidy of USD 3.3 million. And an additional $1 million may also be accessed depending on whether FLYHT's income related to the PWS assets exceeds or falls short of certain agreed-upon thresholds. Those potential adjustments are also evaluated on a quarterly basis. Our financial statements to date show a total subsidy recognized as of the end of Q4 2019 of USD 3.9 million with 1 subsidy quarter remaining. We expect to see similar levels of subsidy accrued in Q1 2020 compared to what we recognized in Q4. Q4 finance costs increased by $218,000 over the same quarter in 2018, almost entirely due to the movement in the U.S. and Canadian currencies from the beginning to the end of the quarter, contributing to foreign exchange losses in Q4 2019 compared to FX gains in Q4 2018. And now looking at our annual results. Revenue from traditional sources increased by 56% to over $21 million in 2019 from $13.6 million in the prior year. SaaS revenues increased 85% to $10.2 million from $5.5 million last year. The increase in SaaS revenues was in part due to the additional SaaS revenue sources we acquired as part of the Q4 2018 Panasonic Weather Solutions asset acquisition combined with organic growth across all SaaS revenue sources. SaaS revenue accounted for 48% of total revenue in 2019 compared to 41% of total revenue in the prior year. Hardware revenues increased by 20% to $6.7 million in 2019 relative to $5.5 million in the prior year. The increase here was primarily due to a significantly larger number of installation kits shipped in the quarter -- sorry, in the year. We recognized revenues from 133 installation kits during 2019 compared to 99 kits in the prior year. 2019 licensing revenues increased by 43% to $3.2 million from 2018, which is encouraging. As in 2019, we saw the first year-over-year increase in this category since 2016. This increase in licensing revenues was driven by differences in the number of modems and related license fees that were ordered in 2019, aided in part by our winning of the A220 factory position with L3Harris and Airbus. Gross margins overall in 2019 were 63% compared to 56% in 2018. The change in gross margin is driven mainly by a difference in the revenue mix and reflects the higher margins associated with licensing and SaaS revenue relative to total revenue. Our operating expenses increased by 37% from $11.9 million in 2018 to $16.3 million in 2019. This increase is due to the added scale of the business resulting from the acquisition of PWS in Q4 2018. These assets impacted only the fourth quarter of 2018, while the increased costs impacted all 4 quarters in 2019. The other income of CAD 4.1 million earned in 2019 with the recognition of subsidy payments from Panasonic associated with our acquisition of Panasonic Weather Solutions. Those payments have been made quarterly, as discussed earlier. 2018 other income equals CAD 1.9 million, comprised of the initial bargain purchase accounting gain of $650,000, together with the value relating to the subsidy for the first quarter post acquisition. 2019 finance costs increased by $656,000 over 2018, with almost half of that increase resulting from the movement in the Canadian and U.S. currencies from the beginning to the end of the year, contributing to foreign exchange losses in 2019 compared to gains in 2018. Also increasing our costs in this area were increases in interest expense resulting from the adoption of the IFRS 16 leases accounting standards and an increase in loan accretion as we get closer to the contracted repayment dates for our outstanding debenture and as we continue to draw down on our available wind funding, increasing that loan. As we turn towards our balance sheet, the most obvious change is the impact seen from the January 1, 2019, adoption of IFRS 16. As discussed in prior calls, throughout last year, the adoption of that new standard added all leased assets to the balance sheet, which for FLYHT meant that on January 1, 2019, the remaining value of our 2 building leases and 2 photocopiers were added as leased assets in the noncurrent asset section, with a corresponding liability split into the current, as the amount due within the next year, and the noncurrent liability categories. The year-end balances show the depreciated net value of those assets offset by the lease payments remaining in their respective agreements. The increase in trade and other receivables carried at the end of 2019 is mainly attributable to increased year-end balances carried by 5 customers, some of which was captured in the increase in our bad debt reserve and 2/3 of which was collected subsequent to year-end. Inventory increases reflect the impact of the receipt of several larger orders of AFIRS units near the end of 2018, together with larger inventory purchases in 2019 to support the hardware required to fill our contractual shipping requirements for the AirAsia account. Contract liabilities balances at those reporting dates show the value of subsidy payments received in advance from Panasonic that will be recognized in future reporting periods. 2019's private placement was closed in a series of 2 tranches. The first tranche was closed on November 15, 2019, when we issued a total of 4,792,400 units pursuant to the brokered portion of the offering for gross proceeds of just under $6 million. This brokered portion of the offering was led by Canaccord Genuity Corp. and included PI Financial Corp. Lake Street Capital Markets acted as the U.S. selling group member in respect of the brokered offering. On November 25 last year, we closed the final tranche, issuing a total of 542,820 additional units for gross proceeds of approximately $680,000. Each unit consisted of 1 common share of the company and 1/2 of 1 common share purchase warrant. Each full warrant entitles the holder to acquire 1 share at a price of $1.75 per share for a period of 24 months following the closing date of the offering. The private placement increased our cash reserves, with the offsetting entries all shown within the equity section split between the share capital and warrants categories. In all, we were pleased with a positive $1 million in EBITDA results for 2019, and we're happy to head into 2020 with a healthy cash balance, ready to execute on the plans, which we raised the funds last November to support. I'll turn the mic back over to Tom for a discussion on the impact of COVID-19 on FLYHT. Tom?

Thank you, Alana. The commercial environment has changed pretty dramatically for FLYHT and the rest of the commercial aerospace with the onset of the COVID-19 pandemic. I'll use data from April 2, 2020, ICAO presentation entitled, Effects of the Novel Coronavirus on Civil Aviation: Economic Impact Analysis presentation, which is available online. This report includes preliminary estimates, which indicate that the COVID-19 impact on scheduled international passenger traffic during the first half of 2020 compared to originally planned traffic will have the following results, depending upon whether or not the recovery that we expect takes a V-shaped or a U-shaped path. There's going to be an overall reduction of 37% to 48% of seats offered by airlines, an overall reduction of 411 million to 435 million passengers and approximately USD 90 billion to USD 118 billion potential loss of gross operating revenues for airlines. These figures are based upon our current postulation of scenario 1 of V-shaped path, quick recovery from May 2020. And scenario 2, a U-shaped path prolonged contraction through June of 2020. There are many assumptions that feed these potential scenarios, and the presentation is careful to indicate that these are estimates that may not describe what type of recovery that we actually see. From FLYHT's perspective, we continue to ship from orders received from the Airbus backlog. We announced a USD 2.43 million order for AFIRS modems and licenses from L3Harris in January of this year, from which we expect to ship the entire order also within this year. If we do, the licensing revenues from those shipments will exceed those of 2019, which I reported earlier represented the first year-over-year increase in licensing since 2016. The backlog for Airbus Aircraft, according to their website as of February 29, was 6,209 A320 family aircraft, 547 A220s and 328 A330s. With that significant backlog, it is my opinion that significant deliveries will continue to be made through this challenging period and that we have a good chance to deliver the announced order within the year as planned. Secondly, FLYHT continues to receive programmed revenues from the National Mesonet Program, which it recognizes in the SaaS category of revenue. Recall that FLYHT received, as part of the assets of Panasonic Weather Solutions, a residual contract and task order for TAMDAR observations valued at USD 2 million per year, which is paid monthly. The government contracting for the future of this program is underway and should be completed in April. All indications are that the program will continue and that FLYHT will announce the new agreement when it has been reached and approved. FLYHT has made, with approval from the NOAA, the TAMDAR and a set of AMDAR observations temporarily available to the World Meteorological Organization available for free in order to help the World Meteorological Organization access more aircraft weather observations during this pandemic and the resulting significant reduction of flights. As of March 23, the European Center for Medium-Range Weather Forecasting, or ECMWF, reported a 65% reduction in aircraft weather observations. Removing all of the weather -- all of the aircraft-based observations from their data assimilation systems, results in a degradation of short-range temperature in wind forecast at the jet stream level of 15% and surface pressure forecast of 3%. So this is very important valuable data. The integration of FLYHT's data into their models is going quite well, and FLYHT is happy to help the community in this time of great worldwide need for more aircraft-based observations. Our SaaS revenues will be impacting the near to intermediate term as certain customers park a significant number of aircraft, in line with the ICAO observations I discussed earlier. The duration of the impact will largely follow the resumption of normal flight schedules by our customers. The impact has affected the customer base as a wave, with China being impacted first and then others following around the world. Within our data, which is the data we collect on our uptime system, we see China beginning to fly -- to begin to start to fly more after having reached a minimum. So we remain hopeful that this continues and then this succession of flying progresses around the world just as it instigated. Additionally, we see orders for hardware slowing down as some customers have rescheduled hardware deliveries and new contracts and purchase orders to the future when cash flows are more certain for those airlines. We also expect that our accounts receivable will grow as payment terms are exceeded as our customers manage their cash through this unprecedented period. For FLYHT's part, we are also negotiating with suppliers for modified terms during this challenging period. We've taken internal steps to reduce cash burn, and we've temporarily suspended travel to protect our workers and to control expenses. We are pursuing some specific government programs in Canada and the United States that we feel apply to our business and that, if granted, will produce additional funds to help fund the company through this period of uncertainty. These programs include both grants and loans. We will report the success of these applications as is necessary and appropriate. Despite this current macro environment, there are several reasons to -- we remain optimistic about 2020. In May, FLYHT will be moving into a new leased space in Calgary, which will accommodate the continued growth of our company. The contract and the arrangements for this move were finalized last year. We are also making progress developing new and enhancing current hardware platforms as well as improving our SaaS products. We expect to make progress cross-selling to our legacy and acquired customer bases with the complete FLYHT product offerings once normalcy returns to the market. Additionally, we have submitted several significant proposals, which we believe will fuel additional growth for FLYHT in 2020 should those contracts come to fruition. Finally, last year, we began efforts to rebrand the customer, and we will roll out an improved website. We have developed some new advertising materials to highlight the significant changes that have happened at the company, and we will be rolling out the rebranding. So I hope that you enjoy these changes and that they're as pleasing to you as they are to us. With that, I'm going to wrap up my prepared remarks, and we'll turn to some questions that were submitted via e-mail.

The first questions come from [ CL ]. And the questions are, in the news release dated March 25, FLYHT does expect to continue receiving uninterrupted revenues from other sources during this challenging period. Aside from the traditional licensing fees, SaaS, hardware sales and technical services, is FLYHT earning revenue from any partner towards the research and development of new products? So I explained a little bit more on that comment in the passage earlier. However, we are actively engaged with several and by several, I mean more than 2 opportunities to jointly develop products with customers that could bring in additional revenues. None of those have been completed, and there's no guarantees that they will complete, but we are actively pursuing several programs that fall in that category. From the same news release -- this is the second question. From the same news release, the company is discussing with customers the possibility of accelerating installations on aircraft that have been or will be grounded. Did FLYHT have any success when asking clients to accelerate installs for planes that are not presently flying? If so, what was the strategy used? And will it continue as the industry returns to relative normalcy? Well, we don't know if it will be successful yet. I have -- we have reached out to several of our airlines and recommended that this is a great opportunity to do installations. We've received positive feedback. In some cases, we won't know until we get further down the road whether or not the airlines have had the opportunity to take advantage of this. So there's a lot of factors that go into this. The primary strategy that we're using, obviously, is a strategy that, while the aircraft is grounded, it's -- there's no better time to install than when it's grounded. The challenges that the airlines meet is that they are also reducing staff, so they may or may not have staff necessary to perform the installations. And in some countries, the workforce of the airlines that work in maintenance and other areas are literally having difficulty getting to work just because of the government shutdowns and the limitations on the ability to go to work. So it's very dynamic. It will change. And what we hope is that the -- when we get to the end, there will have been progress made on more installations. We just -- we can't say yet whether or not it will have been successful. Another set of questions come from [ MB ]. And the first of these that says, any U.S. or Canadian programs available to help replace lost business? So by this, I mean some of these programs that I referenced earlier, so that answer is a definitive yes. We are aggressively pursuing these programs. We feel like we will be successful. There's no guarantees. And we will release that information as we are required to. Second question says, with China restarting, are you seeing any improvement in SaaS -- in the SaaS business? So China is restarting. There's a very clear evidence of stress from several of our operators there. There have been requests for delayed payments. We're working with our customers on a one-on-one and customized basis to make sure that we're doing everything that we can as a partner to help them through this very difficult time. It's difficult for them. It's difficult for us. It's difficult for our suppliers. And so it's a process, I guess, I would say that. We do see China coming back to live, as I mentioned earlier, and there are -- there continues to be opportunities there that we are pursuing, both in the traditional SaaS business for aircraft data as well as weather, and we're pursuing opportunities in China in both of those areas, multiple opportunities. Third question. Any success with airlines using this time-out to use the period to retrofit the planes? That was covered earlier. Fourth question. Can you give more color as to what and how many bids we have out in the timing of responses? And while I would love to, I don't think that it's appropriate for you to talk about bids. There are bids out that we're excited about and, of course, if we're successful with those, we will report them as required. Another set of questions came from [ KS ]. The first one, with less aircraft in service, I was wondering if there's an opportunity to use the plane downtime during the pandemic to increase the rate of installs. With not needing the planes to be grounded for maintenance, could FLYHT offer a deferred payment plan? To get as many installed as possible, so when the planes return to the sky, they are already equipped. So this is a similar question to what was asked earlier, but there's a little bit of a nuance here, which is about possible deferred payment plans. And we actually have reached out with some key customers to see if there is -- if we changed the payment terms on equipment, if we could get acceleration in installation. That would obviously be positive as the question points out. The negative to this, of course, would be it would further burden our working capital if we were to provide the installation equipment now and be paid for it later. However, if we find success in this area, and we are actively working on this. I mean I will look to see if there's additional means of funding that activity. And that is something that we are considering and, hopefully, we can find both the opportunity and the means of closing on that opportunity. The second question from [ KS ], it says as a follow-up to that, have you heard anything on the deadline and the mandate to have this streaming ability on planes? And so what's being referred to you there are the deadlines associated with the Global Aeronautical Distress and Safety System, or GADSS. And the different functions of that are primarily 3. The first function is aircraft tracking. The second function is what's called autonomous distress tracking, which is the 1-minute tracking when an aircraft is in distress. And then the third function of GADSS is what's formally known as the post-flight localization and recovery. And a portion of that is what we call, and I've talked about, as the timely access to flight recorder data, which FLYHT has intellectual property for streaming over the SATCOM and that we think is a growth opportunity for FLYHT in the future. So the first of these functions aircraft tracking is in the past. So there is -- the 15-minute tracking became active in 2018. The autonomous and stress tracking elements of this, which is the tracking for aircraft in 1-minute intervals, was originally -- had a deadline of 2021. It was delayed until 2023. So there was additional time within the industry to satisfy that requirement. And the third, the post-flight localization and recovery still has a 2021 deadline, the requirement for the aircraft that meets our new type certificates. So that would be new aircraft types certified by certifying bodies. So we still hope that and believe that we have a good opportunity for growth by acquiring our technology and our intellectual property towards that third component. The deadline is still in place. It does require some new aircraft-type certificates. And so that there is still an opportunity that we feel we can exploit. Those are the only questions that I received on the email. So operator, if there's any callers that would like to ask questions, now is a good time.

[Operator Instructions] The first question comes from James Gellman with Richardson GMP.

Just I'll keep it to 3 questions. Can you give us any sense or visibility on what you think a base level of SaaS revenue could look like for this year, given the volatility in the business as it stands right now? Can you also give us an idea of how much specific cost-cutting you've undertaken or will undertake between now and until things normalize to sustain the company's cash position, et cetera? And then can you also give us a sense of what the contribution margin or lack of for TAMDAR will be once the Panasonic subsidies no longer occur after the first quarter?

Okay. Your first question is really hard for me to answer. We continue to -- as I mentioned during the body of my discussion, we continue to receive the full amount of the National Mesonet payments, which amounts to $2 million a year. We're hopeful that, that payment continues through the new contract negotiation in full. So that was roughly 1/5 of last year's overall SaaS revenues. I can't guarantee that it will continue, but we're hopeful. We do know that there has been a significant number of aircraft parked, generally starting in the end of the first quarter and the beginning of the second. Those aircrafts, as they become parked, will not generate the SaaS revenues, but we also don't think that they will remain parked for more than about 1 to 3 months. We don't really know exactly and it's not bullion. So they're not all parked, but there is initially a larger number, and we think that they will release more of those. So we think that the second quarter of revenue, for sure, will be impaired on the aircraft SaaS side, and then generally recover through the rest of the year. So given that and given that I don't have a crystal ball, we would expect to end up somewhere between 50% to 75%, but that is really a gross guess, and please don't hold me to it. The second question was about cost cutting. And while I don't want to get into the details of any actions that we've taken, we have taken very specific actions that we think through the end of the second quarter will save -- and again, this is a rough calculation that I'm doing in real time, about $800,000 to $900,000 when you include the reduced travel. So we've been able to find significant ways to reduce costs. Your third question is a little bit more complicated. Can you repeat it? What was that?

Was that an annual number that you just gave us?

That's through the end of the second quarter. So there'll be additional activities that can be taken in the second half of the year, if necessary. Can you repeat your third question because...

About the TAMDAR and what happens when the Panasonic subsidies disappear?