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 Second Quarter 2022 Results Conference Call. [Operator Instructions] The conference is being recorded. [Operator Instructions] If there are any outstanding questions 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 Bill Tempany, Chief Executive Officer for FLYHT. Please go ahead, Mr. Tempany.

Thanks very much, and thanks, everybody, for joining our call today. We've got some pretty exciting news that came out on the wire a few minutes ago about growth in our executive team and our capabilities globally on the sales front that we're going to talk about in detail a little later on. But I think the important thing for everybody to note is that we're getting attention both in the airline space and in our competitor space with the products we've built over the last 2 years. So I think our Q2 results show that we are getting traction in that area, that our acquisitions, both of CrossConsense and of WVSS are paying dividends to our shareholders and that we're on the growth path that everybody had hoped we'd be for quite some time. I'm going to have Alana go through the financial results, and then I'll talk in more detail about some of the exciting news from this quarter. And then we'll answer questions that anybody may have. So Alana, over to you.

Thanks, Bill. I'll take a run through the balance sheet and then the income statement. So starting with the major areas of change on the balance sheet. Our cash balance is currently running at $2.4 million. We've got that L-3 PO that we started delivering on in Q2. We'll continue to deliver on, and there will be bigger shipments throughout Q3 and Q4. And those, together with our other revenue sources and sources of cash, will supply the cash that we need for the foreseeable future. You'll notice increases in both our accounts receivable and accounts payable balances. There were 2 contributing factors, mainly to those changes, one being the addition of a full quarter of CrossConsense and several large sales at the end of Q2 that were collected after the quarter. You'll notice also an intangible balance. We continue to work through the accounting for the acquisition of the CrossConsense, valuing the assets and the liabilities that we required. That activity continues. It's quite a technical exercise, and we do need it to be audited as well. In the meantime, the amounts that we're not certain of in terms of their accounting valuation remain in that intangibles balance for future assessment and finalization. The contract liabilities balance, it's -- that's also the easy IFRS term for deferred revenue. Those amounts represent amounts out of the CrossConsense books that are billed annually but delivered monthly. So that shows -- that line in the balance sheet shows the balance of those items at any given reporting date. Turning to the income statement. Our revenue increased. This was our first full quarter including all of CrossConsense's results, which we see an increase based on SaaS and then also an increase in our licensing revenues as we see here the impact of the first few licensing shipments on that PO for USD 5.65 million. CrossConsense contribution, we are not segmenting their results, but we can say that their contribution to the quarter was about $1.1 million topline, 70% of which was SaaS, and they also contributed a small profit to the bottom line. All right. Back over to you, Bill.

Okay. Thanks, Alana. There's a couple of things that I'd like to note about, particularly on the revenue side. We ended the quarter just short of $5 million, but in the first week of July, we shipped over $900,000 worth of product that was intended to be shipped in Q2. A lot of that was high-value, high-margin license business, which would have really pushed us very, very close to EBITDA breakeven. It's one of those good news/bad news stories we didn't recognize in Q2, but it's going to make Q3 even that much better. So we've told everybody on all the conferences and seminars we've been to in the last quarter that it is our full intention that we will be EBITDA positive, cash flow positive on the year in 2022. And we continue to maintain that that is the intent and we're on track to do that, barring any unforeseen circumstances. Some of the other things that happened during the quarter. There were again some onetime charges around the Edge, the completion of the design and certification work on the Edge. That is progressing nicely. We sort of have the hardware, the software and the customers all converging towards the end of this quarter for the first implementations of the Edge. Coral Jet has already paid for the Edges. They have people working with us on the STC for the A320, and that installation will hopefully be finished end of this quarter. There was an incident with Coral Jet at one of their MRO facilities, while they're getting their aircraft ready to go into service, where somebody drove a forklift through the belly of the aircraft. That could cause some delays to them going live with this as they effect those repairs to that aircraft. But things are on track with the Edge program. We have a 737 STC in development with a Calgary-based airline that is going to give us access to that 737 market. We got really good news yesterday from UK Met. The installation of the 30 WVSS units that they had announced has been delayed because easyJet is busy trying to get their business stood back up and doesn't have time to work through a new program with us and UK Met. So the UK Met authorities met this week and approved Loganair to do the first 12 or 13 units of the Edge, and that they'll buy the full 30 units this year. We don't have the contract signed yet so we can't press release that. But it's been a long time coming. We bought the WVSS system almost a year ago. And this order for just the hardware for Loganair for the WVSS is about $2.5 million for a business that we spent $500,000 on and it's certainly high margin, both now and in the future as we get paid for the signings from the WVSS units. So very good news on that front. It's going to be exciting to work with Loganair. They fly Embraer regional jets, ERJ145s. And we've got a partner in England to get the STC done. So we will have those systems installed probably end of first quarter -- first part of second quarter next year. And we continue to work with UK Met and other carriers for the other 13 units that they're going to purchase this year. So WVSS is moving very nicely. We've done a fair amount of work with the folks in Frankfurt on getting our products aligned and everybody understanding all of the products that FLYHT has to offer. We actually have Axle from Frankfurt in our office this week working with our team to put together a plan for how we're going to do the training in September for everybody so that we can go out and sell all of our solutions to all of our customers around the globe. That is ongoing work. But right now, things are moving very nicely. With the traditional CrossConsense business, we're making good progress with the customers. The customers are happy. Now we're going to go and expand our footprint in Europe with the resources there and additional resources that we talked about in our press release this morning. So if you saw the press release that came out a few minutes ago, we've hired 3 new salespeople, which makes 5 -- 6 salespeople that we've added in the last 12 months to the crew. A year ago in June, we added Willie Cecil to the mix, and he's helped a lot in the design and development of the Edge product. We've had a couple of more people join us that were colleagues of Willie's for many, many years. Scott and Murray have joined and are going to look after sales in North America, South America, Europe, Middle East, Africa. We hired a person about 6 months ago in Japan that used to work with Willie and these other guys. And we actually had a team go to Japan about 3 weeks ago and present to 16 airlines in Japan and it was extremely well-received. Japan, obviously being a technology leader, is moving to 5G quicker than other parts of the world, and they need a solution for their aircraft, and we've brought the one that works and is ready for market. So after that trip, the guys went down to Indonesia and presented to some airlines in Indonesia. Indonesia, Malaysia, the Philippines have all been more affected by COVID than any other part of the world. And it shows in our revenue, both in our weather and in our SaaS revenue. AirAsia in 2019 was by far our largest SaaS customer, and they're still at a position where they're only flying 10% of their fleet. The same thing is happening to Lion Air and other big carriers in Southeast Asia. The waves of the pandemic continue to disrupt air travel and business as normal down there. But there is light at the end of the tunnel. The governments are opening up and allowing people into the country and they're trying to get their economies restarted. And we will be a big part of that because we have people on the ground in Indonesia as well that are talking to these people and helping them see our Actionable Intelligence solutions as a way to reduce the amount of manpower they need to get back on their feet and get back moving. So overall, Q2 was a solid quarter. We'd hoped for a little better, but if you take the onetime charges and the supply chain issue of not getting $900,000 worth of product until a week late, it would have been a tremendous quarter. It would have been one of the first EBITDA-positive quarters for a long time for the company and gives us great confidence that Q3 is going to hit that mark and upwards and onwards from there. So again, I think key points are that our team is growing with people that are industry experts that don't take a long time to get up to speed. The acquisitions that we made last year are panning out extremely well and adding value to the business on a day-to-day basis. The product is nearing completion and being rolled out. There's probably close to 30 units that have been committed and another 200 to 300 that we're working on contracts for us. So I believe we're in the best position this company has been for many, many years as far as resources, people, the market, the industry and our ability to deliver. So we're very excited about where we're going, and we're looking forward to all of the quarters coming, but the next 2 quarters, particularly and a really aggressive growth path with the addition to our sales force. So with that, we'll get Alana to read some questions that have come in by e-mail and then open up the lines for any other questions.

Okay. So the first one, there's an e-mail here. There are several points. We can go through one by one. The first one is an update on the 30-unit order for WVSS weather sensors from UK Met, which I believe you've addressed previously in your remarks. And then there was -- the second question here is, can you comment on the pipeline, so the sales pipeline, I guess, involving more than 15 prospects of $7 million or greater?

Well, it's actually more than that now and it continues to grow. And I think the pipeline is going to grow even faster with the addition of the new people. So again, very excited about that pipeline.

The next portion is in reference to any new opportunities through partnering with SITA.

That's an ongoing process with SITA. It's what we call dancing with the elephants. You got to watch your toes. SITA is a very large organization, and they're doing their due diligence on our products and all of those things. In the old days, when we did the AFIRS 228, you had to go through a certification process, I think, called ATP and OQP or something with both SITA and ARINC to get your products on the ACARS network, to be able to transmit data through ACARS. A similar process is going on right now with ACARS over IP with the ARINC guys. And summertime, it's very difficult to get anything done in any part of the world, and it's been slowed down by vacations and so on, but on track and there are several opportunities that are being worked with SITA today.

Okay. And I'll combine a couple of them together. There's -- can you comment on China recovery, the effect on our orders and in particular, progress with installations on the COMAC aircraft?

The COMAC aircraft certifications have been disrupted by the lockdowns in China. We actually had 5 AFIRS units sitting on the Shanghai dock when they did the test plate of the C919, that those -- that equipment has now been delivered to the factory and is installed. It was designed in. It was just a matter of logistics, very similar to what happened to us at the end of June with our shipments not being able to get it to the right place at the right time. The ARJ is live. I think we are working right now on orders for 5 more ARJs. And we're continuing to watch China come back from COVID. And China's rules when COVID strikes are different than any other part of the world. When they have a lockdown, it means you stay in your apartment, you don't go outdoors and everything grinds to a halt. And we experienced that over the last few months. It's starting to open up. But let's wait and see if there's another wave in China. Our relationship with the airlines and the regulators in China is very strong. Being a Canadian company has kind of helped us with some of the geopolitical things going on these days. We've been accepted now that we let Ms. Wanzhou out of jail here. China is -- we're back on friendly terms with China as Canadians and have never really had any problem with our commercial relationships the way things are. So China continues to play an important role in what we're doing and where we're going. And we look forward to stronger and better relationships with China in both the AFIRS, AFIRS Edge and the weather business as they look at how they're going to collect better data for their own weather.

Great. Can you comment on AirAsia's recovery, in particular, with a return to weather data revenue high?

I think I talked about that. AirAsia is running about 10% of their fleet today, and recovery is slow. They're talking Q1, Q2 next year. But we do have a good relationship with them, and we're working with them to get through. One of the things that -- deal we made with them a couple of years ago was we'll keep service to your aircraft if you pay your current charges and something against your debt each month, and they have been doing that religiously. We've been getting monthly payments and the bad debt reserve we set up for them is being eaten away on a monthly basis. So I've got really strong faith AirAsia will come back and be a good customer as they were before once they get through the issues that are facing them.

Great. Is there any updates on our efforts to get prior boxes sold through Airbus turned on?

Yes. Next question.

Good answer, Will. And then finally, effects on research coverage?

We're working with a new group out of Minneapolis to get research coverage. I certainly don't have any guarantee that we're going to get it, but we're working on that. I think as prices and volumes increase, we're getting more and more interest from investment banks, both north and south of the border. And I think we've proven to a lot of them that what we did over the pandemic is paying dividends, and we're on the path to more than recovery to accelerated growth. And hopefully, we'll get stronger analyst coverage from all the efforts we've put into the business and the Investor Relations part of the business.

Okay. So on to the next e-mailed questions. The first, when will the Edge be certified on the A320?

When will the forklift holes in the aircraft be repaired? We're -- it will be this year. The work is ongoing. We expect to have all of the STC package done probably by the end of September, maybe the end of October because of access to the aircraft. And then the application is filed. We're having all kinds of fun, like everybody is, with any government agency with the work-from-home policies with the governments. The people that have to sign off on the certification for the aircraft are working from home. If you want a passport, they're working from home. Just wait a year, we'll get right back to you. The disruption in government services for a lot of the things that we're doing globally, we don't know the answer. We don't know when they're going to come back. I was on a call a couple of weeks ago with the President of Conair, the firefighting company out of B.C. and they had done some modifications to a water bomber for the U.S. They put those modifications in for approval to the U.S. government for approval of the STC. It's almost a year later, and it hasn't been approved, and the fires can't be fought because the aircraft can't be flown until the government employees get back from work from home and actually do something. So a lot of things outside of our control as we recover from the pandemic.

Okay. And a follow-on question. Is there a contract to the Edge with Airbus like the AFIRS product has?

No, there isn't today. And we have been working on that. We've been working with a couple of large suppliers to Airbus on some opportunities that could end up there, but nothing at this point.

Okay. And then some backlog questions. First, what is the current order backlog for the Edge product?

The signed backlog, counting UK Met, which the contract isn't signed, but they've told everybody in the world they're buying 30 of them, is in the $3 million to $4 million range. The opportunity pipeline for the Edge is significantly higher than that. We've got several multi-hundred aircraft opportunities that we're working on right now. And we're in the typical aviation chicken and egg thing, where yes, it looks like a great product, show it to me on an aircraft in working, and we've got launch customers for at least 4 aircraft types now. So by the end of the year, we'll be able to help the people from Missouri, the show-me state, that this actually works, and we've got the product that everybody expected to be there. So I think next year is going to be a tremendous year from both a sales and delivery point of view, and we're on track to deliver the show-me state people.

Great. And then overall backlog, and I can answer this also, what is the total order backlog for all products? That's currently sitting at just over $28 million. And has this number been revised up due to the increase in travel in previous quarters, this number was scrubbed down? We scrub it every month, and therefore, every quarter. It's been revised up and revised down as we include backlog from CrossConsense and then increase in travel in North America, decrease in travel in some areas of Asia. It is the scrubbed number. There were some questions from this investor about weather, AirAsia, you came at, I think, all of which have been addressed. How much of the $6.5 million -- or it's actually USD 5.6 million from our OEM partners has been recorded as revenue in this quarter? That was $1.4 million. If you look at the licensing line of revenue on our financials, that is directly related to that relationship. So you can look at the historical. How much -- and then also wondering -- this investor is wondering about the impact of CrossConsense in our financials, which I believe I've addressed. So that's everything that we received by e-mail. Shannon, would you like to take questions from investors who phoned in?

[Operator Instructions] The first question is from Jaeson Schmidt with Lake Street Capital Markets.

I just want to start with the supply chain. Obviously, it had some impact in Q2, and it seems like the push-out into Q3 has already been shipped, but just curious what your expectations are for the second half? Are you expecting any sort of incremental improvement in the backdrop?

Yes, we are. There's several orders that will be delivered in the second half. And on the license revenue, as Alana said, the full $5.6 million will be delivered this year, so there'd be a significant part of it delivered in second quarter -- or in the second half, sorry. The supply chain issue we had was strictly trucking. It wasn't a material shortage of suppliers or anything like that. It was just logistics getting the material from Europe to Canada and into our shop in time to ship. And what we've been doing on maybe even a weekly basis but certainly on a monthly basis is go through our delivery backlog and make sure that we've got all of the components we need and have them in-house at least 30 days prior to shipment to make sure that we don't run into issues with this. The delivery of the licenses required modems from Iridium and their supplier got slow in delivering them. And so we're working really, really hard on supply chain to make sure that it doesn't become an issue to us. And one of the advantages of our increased SaaS revenue and our reliance on revenues for services and SaaS from CrossConsense is that we're not subject to supply chain issues with those revenues. They're installed equipment and SaaS revenue as it grows is exempt from supply chain issues. So we're working hard to increase the percentage of revenues in SaaS and services and making sure that we don't have problems with supply chain in the financials going forward.

Okay, that makes sense. And then I just want to make sure I heard you correctly, Bill. Do you expect to be EBITDA positive in Q3?

Yes.

Okay, perfect. And then just the last one for me, and I'll jump back in the queue. Obviously, the announcement with some new hires. Just curious from a sales infrastructure and personnel standpoint, everything is now in place?

Yes, yes. We've got people in Japan, Indonesia, Europe, North America, South America. We -- our sales force is complete.

The next question is from Bruce Krugel, a private investor.