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

Good day, and welcome to the 2nd Annual Winter Wonderland Best Ideas Conference. The next presenting company is FLYHT Aerospace Solutions Ltd. [Operator Instructions] I'd now like to turn the floor over to today's host, Alana Forbes, CFO of FLYHT Aerospace Solutions. Ma'am, the floor is yours.

Thank you, and thanks, everyone, for joining us on this call. I'll just give you a short preview of our disclaimer, our forward-looking statement disclaimer and then head right into starting out with a high-level view of some stats that give a bit of an intro to the FLYHT story. Looking at our last 12 months of revenue, we're sitting at about $12 million. Being in the aviation industry, that's decreased somewhat. We were increasing steadily into 2019. At that point, we had a high of $21 million for the year. And you're seeing the impact of COVID on our business at the moment in this $12 million number. Our contracted backlog is current -- as of Q3, which is our last set of published financials, was sitting at about $26 million. Half of that is recurring SaaS revenues, the other half being onetime hardware revenues. And looking again at our last 12 months of revenue, of total -- half of that is recurring revenue. Those recurring revenues carry gross margins of about 65%. Our solutions, which Kent Jacobs, our president, is here to talk about today, with our solutions, they're really sticky. Once we sign a customer, that customer stays with us for a very long time. A 95% retention rate is what we generally see. And the only reason we typically lose our airline customers is as they -- if there's any Chapter 11, any bankruptcies, we don't see our customers leaving for another system. 800% customer ROI is -- this is an exercise that we did with a couple of our launch customers for our Actionable Intelligence program, which Kent will also get into the details of a bit later. And in over 23 years in the commercial aviation space, our products have flown on over 3 million of our customers' flight, which translates to over 4.5 million in hours of voice and data recurring services that we've provided for our customers. Kent?

Thank you, Alana. Welcome, everyone. My name is Kent Jacobs, President of FLYHT Aerospace. On your screen, you can see a quote from Barry Eccleston, the retired CEO of Airbus America. And what drawing attention to here is this revolution in the industry that is taking place regarding the operations of airlines and how they're actually managing their companies. It's a good place for FLYHT to start talking about Actionable Intelligence. This is the approach that FLYHT is taking to address this change in the way that the airlines operate. Actionable Intelligence is words that we use to describe the products that we provide to the airlines have let them change their behavior, change the way that they're operating their airline in a meaningful and in an immediate way. The industry needs more action. Clearly, the industry needs more action, and we've got 3 quotes here from 2 of our customers and 1 airline that would be great to have as a customer. But the quote that I really want to start with is the WestJet one. And you see here that the airline is not looking for another dashboard. They're not looking for more e-mails or reports that tell them about something that happened 3, 6 months ago. What they want to do is get feedback from third parties like FLYHT that lets them change their operation, how can they do something now in their day-to-day operation that will save them money. The Frontier quote talks about APU. And APU is an auxiliary power unit. It's a large gas turbine engine that runs in the back of other aircraft. And when these are running at a gate, they're burning fuel. They're causing environmental problems, and they are a burden to the airline. But airlines don't always know when they're running. So Actionable Intelligence -- a great example of Actionable Intelligence would be FLYHT notifying the right person at Frontier Airlines at the right time that an airplane engage [ that is new ] is running an APU at an inopportune time. The action is to go and turn the APU off. It's not to generate information that can be reported 3 months later. It's to do something in the immediate that will affect the operations of the airline. We often talk about how much data is collected on aircraft. And right now, it's the case where there's too much data and not enough action. FLYHT has 20 years of experience analyzing data on board aircraft. We are expert in that field. We've been looking at the flight data recorders, the black box data on aircraft. We've been drawing conclusions about the stage of the aircraft, the way it's being flown, sending that information to the ground and helping the airline operations that way. But what's needed now, what Barry Eccleston identified is that the operation of an airline needs to change. That data is more valuable than simply reporting what has happened. FLYHT has invested in a data science within our organization as a dedicated data science team. We are implementing machine learning algorithms that are giving us new ways to look at the data and provide information to the airline. The diagram on the right shows an important approach that FLYHT is taking with this information that we provide to airlines. We're not removing the human from the process. right? It's important to understand that what FLYHT is doing is analyzing information, providing guidance, predictions, providing machine learning output to an airline, to a person that can then use that information in a meaningful way. That information could be operations or ideas that weren't even considered before the machine learning approach has kicked in. So FLYHT over the last 18 months is building a platform for the future, I'm going to talk about 5 parts of that platform right now. We've introduced a new product, AFIRS Edge. We've adopted AWS technologies. We're a full AWS development shop. We have a partnership with them that I'll talk about. We have a partnership with SITA. We've added capabilities through the acquisition of a company in Europe, and we purchased a new Water Vapor Sensing System to incorporate and to enhance our weather operations. We'll talk about these now. The AFIRS Edge is the latest generation of our AFIRS product. It's our third-generation product, and it's built primarily to support the SaaS recurring revenue model that FLYHT is moving towards. We're continuing our expertise in the collection of aircraft data. We're not leaving any of that behind, but we're now adding to it. This AFIRS Edge product has got an internal radio with 3G, 4G, 5G capability that will open up a large pipe between the aircraft and ground operations when the aircraft is on the ground. It's got an aircraft interface device function built into it. An aircraft interface device lets the AFIRS Edge take information from the aircraft and present it to the flight deck to systems on the flight deck, not to fly the aircraft, but to things like an electronic flight bag or other devices that needs no information about the aircraft. The Edge is going to be Iridium Certus capable. So the Iridium satellite network updated about 2 years ago with the new set of satellites that is fully operational now. That airborne ability to transmit by Iridium is capable through the AFIRS Edge. The AFIRS Edge also has a Bluetooth radio in it. So if you can imagine, an IoT sensor put somewhere in the aircraft, maybe to monitor overhead bin, maybe to monitor doors somewhere in the cabin of the aircraft, temperatures in the cargo base. This kind of information is not typically collected on an aircraft right now, but we can collect that, transmit the data to the Edge off the aircraft via Bluetooth. Important to remember that all the legacy data sources are fed into the AFIRS Edge as well. There's nothing in our previous product, the AFIRS unit, that is not included in this one. The existing software that was used in the AFIRS 228 and the 220, the previous product, has been incorporated into the AFIRS Edge. This was a significant saving both in time to develop and in the cost to develop the AFIRS Edge product. We brought it up to the speed into a prototype way in a very economical manner. And the prototype build is now actually complete. The board are complete. We have them in hand, and we're actually in the bring-up process right now. So the AFIRS Edge, the boards are being powered up as we speak, brought up in a controlled manner. I've been told so that we don't end up popping -- having any problems with the device. We expect to have it in our hands and operational in the next couple of weeks. Another block of our journey as we're moving forward is our relationship with AWS, with Amazon Web Services. Just recently FLYHT press released that we have attained the AWS Travel and Hospitality Competency partnership. That means that Amazon Web Services has verified the FLYHT use of their technology, of their cloud tool meets the standard that is very high and is acceptable for AWS to regard us as a partner. That's an important distinction because it lets us -- it confirms that we're developing products and tools in a meaningful way in the AWS solution. But it also means that AWS brings us into their family, into the fabric of the AWS family and shares our information and make introductions for FLYHT with other companies in the AWS Travel and Hospitality Group. Those other companies can be airlines. And so we have an opportunity with AWS to get relationships and to foster relationships that just wouldn't be available to the company to us. It would be very difficult for us to obtain on our own. A week ago, we press released our partnership with SITA. SITA is in the air transport communications and information technology business, and they are a giant. They're a $2 billion a year company, 400-plus airline customers, 18,000 aircraft reported. The agreement that FLYHT has with SITA is 2 parts. First, we have the ability to use the Iridium Certus network, that's the Iridium satellite network through SITA, so we can send our data with the Edge over that new network that Iridium has put into orbit. But we can also resell on the SITA's AIRCOM Cockpit product. So there are products that SITA has developed. They're in the industry and creating software products and services for airlines, for airports, for ground operations. We can sell some of their products, and those products are very much related to the AFIRS Edge. So the recruiting revenue model that the Edge brings with us -- brings for us, lets us incorporate with products like into SITA's AIRCOM Services. It's important to note that SITA is not a developer of hardware. They don't build any hardware product, but they do have a need to run their product to onboard aircraft, to run their software, onboard the aircraft. The AFIRS Edge has an important capability, which is that is partitioned in a way that let's third parties, if we allow them, run their software on our Edge. So there's a great opportunity. And even a quote from the CEO of SITA FOR AIRCRAFT there on the screen that talks about FLYHT being a partner furthering the reach of our services from SITA on to different airlines. The fourth and maybe the biggest event that occurred over the last several months is that FLYHT acquired a company in Frankfurt, Germany called CrossConsense. CrossConsense are experts in aircraft maintenance software systems. So they build fast tool around the maintenance software that an airline has to run when they track how an aircraft is maintained. It's a really important part that FLYHT has, until this point, no experience with. So FLYHT Canada, FLYHT -- the existing company before this acquisition, was expert in aircraft data. We specialize in real-time data, providing Actionable Intelligence, SaaS products for the operations. CrossConsense are experts in the maintenance data that is captured as an airline goes through the process of running their airlines. So it's a beautiful bringing together 2 companies with no overlap in expertise, very little -- actually, no overlapping customers. It's a great way for FLYHT to supplement the CrossConsense team with real-time information into their maintenance operations and for CrossConsense to educate and bring FLYHT up to speed with a missing part in our data set, which is that of maintenance information. You can see the customers that CrossConsense has. These are some of them, not all of them, but they have a very impressive set easyJet, Lufthansa, Condor. These are the exact kind of airlines that FLYHT is really keen to get more of our products engaged with. The cross-sell opportunity also exists now. So FLYHT with our existing products has access now to airlines we simply didn't before, and likewise, CrossConsense has opportunities to work with the companies that FLYHT already have. Really quickly, the 6 bullets across the bottom where we're looking at. The 2 -- they were aligning 2 complementary providers, the data set that is now available with real-time information aircraft data and maintenance data is unmatched. We picked up a very, very talented team in Frankfurt, Germany. There's no overlap with the 2 companies, similar cultures, and we think that we've got a great opportunity for enhanced financial profile. It's important to note that CrossConsense is EBITDA positive, and they are net income positive. They're a private company with unaudited financials, but we believe we paid about half of their annual revenue. We're excited because it's expected to be accretive to FLYHT's financial results immediately upon closing. That would be effective January 1 of this year. FLYHT has always tried to be a globally diverse company. But if you look at the numbers for 2021, you see that we were heavily represented in North America and the rest of the world primarily in China and Southeast Asia, not very well represented in Europe. The acquisition of CrossConsense immediately changes that perspective, and we now have operations of fully functional office and technical expertise, sales expertise in Europe. It's a great opportunity for us to actually change the dynamic of the way that we operate in Europe. FLYHT has always identified a large addressable market. Today, we have 3,000 aircraft with product on that we use right now. From the commercial aircraft standpoint, we have lots of room to grow into that space, adding CrossConsense is going to make that much easier and give us opportunities that were just not there before we have them. If we consider the total aviation market, if we consider the corporate and the charger side, we've got a 40,000 aircraft opportunity, and we are now very well positioned around the world to move into that. The final part of the kind of the building blocks that FLYHT is looking at that we've changed over the last 18 months during the COVID pandemic is the addition of a Water Vapor Sensing System. FLYHT has always been in the aircraft-based observations market. Aircraft-based observations are taken when an aircraft climbs, again when it descends. Those observations represent the same parameters that are collected by a weather balloon [ is in effect ]. So FLYHT has had the TAMDAR probe with our acquisition of Panasonic about 6 years ago. That gathered all that aircraft information along with a relative humidity value. Relative humidity is the gold in an aircraft-based observations. The WVSS is another relative humidity sensor. There are only 2 relative humidity sensors on the market for commercial aircraft, right now we own both of them. So for our existing weather business, it's growing, it's profitable. We're working with other major agencies around the world to take our new aircraft-based observations. And with the WVSS, we cornered the market on that relative humidity option. So why should fly beyond your screen, a quick summary of what we've been talking about. The AFIRS Edge, our new AFIRS product calls the 2G, 3G [ op ] license problem with the 5G solution, we've recently attained our AWS Competency partnership. That's a technical confirmation for us, but also an opportunity into new markets directly introduced through AWS. We purchased CrossConsense, expands our capabilities and our European footprint. When we combine the 2 companies together, we have opportunities that will let us bring the data set from airborne data and maintenance data together. Our relationship with SITA get us into the fabric of one of the largest operators or largest companies on the planet in that space. The exclusive airborne weather data capabilities with the 2 relative humidity sensor [ pro ] is key to our growth of the weather data. We're always pursuing organic and inorganic growth, always looking for opportunities. And all of this is letting slight focus on a more SaaS focused approach to our operations. And when we talk about that SaaS to those SaaS-driven operations, these are the kinds of things. So aircraft turns, regular operations, fuel savings, these are examples of SaaS products, the flight is moving and focusing towards where we've had products in these spaces for years, but we're expanding them. We're making them more actionable. We're making them building instead of providing guidance after the fact we're turning the turn product, irregular operations, the fuel product into Actionable Intelligence tools that let us actually guide an airline in real time to meaningful changes that they can make. So with that, I'll pass it back to Alana to wrap up on a couple slides.

Great. So -- and speaking of fuel and our fuel products, looking at how FLYHT interacts with the world and our impact as a corporate citizen, specialty fuel reporting and, of course, your expertise in reporting is one of the areas that we feel that we're able to make the most impact. Real-time weather observations, as Kent was discussing, with the WVSS and the TAMDAR sensors, are also another area and aircraft health monitoring. The more efficient our customers are able to be in their operations, the less impact that they will have on the environment and the better they'll be able to recover post pandemic and FLYHT in lockstep with them. Our revenue profile, the trailing 12 months up to Q3 of 2021, we've got -- during that time period, 50% of our revenues were in the SaaS area, with 36% in hardware and 10% in licensing, a small portion in additional technical services that we're able to offer to our customers. With the addition of CrossConsense, there's many reasons why we're excited about that combination. But on the revenue side, one of them is that a full 80% of their revenues are recurring. And our full -- so that is going to be growing our staff as a portion of our overall total revenue. And our gross margins on SaaS again, is a healthy 65%. So the investment highlights. Our strategic focus throughout the pandemic was to support our airline customers so that they would emerge from the pandemic stronger with better tools that we were able to provide them, and we would emerge as a stronger company also alongside of them. We -- as Kent discussed, we launched the AFIRS Edge, the world's first 5G LTE, WQAR. Our customer relationships -- happily, our customers have survived the pandemic. There were a few that ran into some trouble throughout the -- mainly the end of 2020, and they're back in business and back using FLYHT services, FLYHT products to help them get through and achieve operational excellence. FLYHT ourselves, throughout the pandemic, we realized $2 million of permanent run rate cost savings. Our contracted backlog sits at $26 million, with half of that being recurring. Our balance sheet, we did raise $6.6 million in July of last year. And the only remaining debt on the balance sheet is no interest and low-interest government loans. We strengthened our leadership team, and we've added several key new hires recently and also acquired some really strong leadership in the CrossConsense acquisition. And we initiated and continue to pursue an M&A strategy. So that concludes our prepared remarks. We can look at the questions that the audience has.

Number one, Kent, can you give us an update on activities in China?

Yes. In China, we're working hard on 2 fronts. One is to incorporate more of our ABOs, aircraft-based observations. China is -- for the weather market. China is underserved in that weather data collection from aircraft. And we're continuing to make strides towards putting different sensors on the aircraft there to enhance our weather operations. In addition, the -- there are 2 new aircraft types that are coming out of China right now, the ARJ21 and the C919, the Comac 919. FLYHT is working. We have an SEC in development on the ARJ and a company that is going to be installing the first AFIRS unit on an ARJ, the regional aircraft built directly in China. And on the C919, we are working hard on to get the AFIRS unit installed on the prototype that are used for testing there.

Great. Next up, who would go to AWS for a recommendation to use FLYHT?

Well, I think any -- I don't -- I think the partnership works maybe a slightly different way. People may look to the AWS website to get a recommendation be the FLYHT is there. But it's AWS who is bringing together their partners. So there are -- the AWS has several airlines that use their product. If the opportunity for -- as AWS learns about what FLYHT brings, what FLYHT does, and they're working hard to understand what we do, they're drawing the connections. They're making the connections between FLYHT as a company and other AWS partners and users of AWS services to make those introductions.