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

Welcome to the FLYHT Aerospace Solutions Third Quarter 2022 Results Conference Call. [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.

Thank you very much, and welcome, everybody, to the Q3 conference call. We're very excited about the results in this quarter and the future of the company looks very rosy. We've been working very hard with the staff and our customers and our prospects to make sure that the products we're building, the services that we're putting together, meet the needs of the industry as they recover from the COVID pandemic. We've invested over the last 2 or 3 years in new hardware, additional software, and taking advantage of all of the learnings and software that we've built over the last 20 years. I was talking to an investor the other day and said that FLYHT's a 20-year-old company that spent 17 years learning what the industry didn't want to do, building tools that things the industry wasn't interested in and the last 3 years, taking those tools and those learnings and creating solutions that the industry needs and wants and appreciate. We rolled out a lot of those over the last 6 or 8 months. We've attended 16 shows in '22. We've got about 19 industry-type shows that were booked for in '23, and we now have a sales force of 13 people around the globe to go out and sell these products with relationships with the customers all over the globe. Our recent addition in Europe of the CrossConsense team has opened doors and companies and opportunities over there that were never open to us before because we were a North American company and focused on smaller aircraft. The CrossConsense team is focused on larger aircraft, larger customers, larger airlines, and have experience and expertise in dealing with those companies. We've since beefed up our European sales force with the addition of Murray Skelton in Scotland. We have a part-time person in England that's helping Jacob talk to customers in the Middle East, Africa, and Europe, and we're very excited about the way the pipeline is growing. We're currently sitting at about $26 million in backlog, customers with signed contracts waiting for us to deliver product, and we've got a sales pipeline, near-term sales opportunities but in excess of $75 million. So, we're looking at $100 million of near-term sales opportunities and backlog that we believe are going to very easily fill the base opportunity we had this year in our licensing revenues with new hardware, new services revenue. We've got a full suite of products functional and working. We've done trials with several customers. We're in the process of signing contracts with those customers on our actionable intelligence tools. The databases, the Amazon Web Services opportunities are there, and we're continuing to develop those solutions with new customers and old customers, and I think you'll see a significant ramp in SaaS revenues over the next 12 to 24 months as the industry recovers, our customers get back to flying, and our new products get rolled out across the industry. So, we're very pleased with the results. We think we can sustain that level of opportunity going forward. And it's certainly our intention to have the company continue on the growth cut. A 100% growth year-over-year is significant and the largest revenue quarter in our history. There was one quarter with higher EBITDA, but it was supported by onetime payments on a purchase that bumped or reduce the cost to a point where that became a very profitable quarter. I think that everybody in the industry is seeing what we're doing when we talk to companies at the shows, they look at the products, they look at the legacy of the company, the fact that we've been around for nearly 25 years and continue to develop and build. The staff is really excited to be part of it. We made it through COVID with very few changes to the staff. In fact, we added staff in several areas, and I think we're tooled for success for the future. We have a strong sales team. We have a very experienced and knowledgeable development certification team. Our administrative and customer support teams have been solid throughout the pandemic and 10, 15 years of experience each that is really serving well for our customers. So, I'm very excited about what we're doing and where we're going. And I'd like to turn it over to Alana to make comments on the financial results.

Thanks, Bill. So, I'll just have a look at the balance sheet first, then we'll turn to the income statement. The first thing you'll notice on the balance sheet is a reduction in cash from year-end and then right after an increase in receivables. They're almost exactly offset as a major portion of the cash decrease is reflected in our AR balance at quarter end. Some increases in the AR and AP balances relate to the addition of CrossConsense as of the end of Q1, which carried forward through Q2 and Q3 as they're fully consolidated into our results. Our intangible balance, you'll see a large increase over last year; that again is CrossConsense. Work on the allocation of the purchase price continues. It's a highly technical equation, and we'll have that solidified by year-end. Basically, we're working on an allocation of the overall goodwill amount into allocating it to various intangibles, the brand, customer contracts, and so on. Something new in our balance sheet as compared to last year is the contract liabilities category, and that's the balance of customer amounts that have been billed and haven't been yet delivered as some of the CrossConsense customers are billed annually for recurring monthly services. And now turning to the income statements, we're really pleased with our revenue increase compared to Q3 '21. We showed increases in all categories, except for hardware, which has historically been lumpy and then we showed increases in all categories year-to-date. This quarter included a large licensing portion, and licensing is our highest margin revenue line as we continue to deliver on that large PO we announced that we received in Q2. On the G&A side, we also see increases due to increased scale of our business in adding CrossConsense in Europe to our consolidated results and also increases in distribution and R&D expense as we focus the organization on the completion and the sale of our EDGE product. We're really happy to show a return to profitability, both in EBITDA and net income. It was the result of a lot of hard work by the team and some pandemic recovery that have both gone into producing these kinds of results. And so with that, we'll go to questions from the group.

Just one thing I'd like to add on that one thing I'd like to add on the increased G&A expenses. As everybody knows, we're having an inflation event, and we've gone and given the staff inflation increases to make sure that they continue to be happy and can survive as our economies evolve to come out of COVID, and I think you'll see increases there. We've also changed our customer contracts to include a CPI rider so that we're not locked into long-term contracts, while the global economy goes through the bumps and turns, it's going to go through to recover from the investments in COVID over the last 3 years from government. So, there will be increases to cover the cost of living for our staff and it's global. It's not something that's regional. Every jurisdiction we do work in is going through it so something to keep an eye on and something that we're monitoring and making sure we stay ahead of both from a customer point of view and an employee point of view. So, then we'll take some questions.

[Operator Instructions] Our first question is from Dick Ryan from Oak Ridge Financial.

Great. Bill and Alana, congratulations on a strong quarter. I guess, my first couple of questions' really probably on the segments. You highlighted licensing being strong, driving the gross margin. Can you remind us how much is left on that large order? And will that be delivered by the end of this year? Or will some of that push into next year?

We actually have a bell in our office to celebrate significant events and during our board meeting yesterday when we were approving the financial statements the bell rang and the final part of that order has been shipped. So, when we announced it, we said that all deliveries would be done in this fiscal year and mission accomplished, it's done.

I think the anticipation was there might be a pause in licensing at least through the first half of next year or whatever. What's the outlook for follow-on orders and licensing, -- has that outlook changed at all?

I think if you look at the global distribution of aircraft deliveries and how Airbus is becoming so dominant in those deliveries. That is going to pick up the deliveries in licensing. I felt really obviously was doing a buy to cover supply chain issues with the large order that was placed but I think that they'll consume that much quicker than before, just because of the percentage of deliveries being done by Airbus versus others. We have an agreement with COMAC to factory install our Satcom on the C919. I saw recent articles, I think yesterday, that they have something like 600 aircraft on order. We believe we'll be installed on the majority of those aircraft, which will be booked in license revenue. It will be booked in hardware, but it's an OEM sale. We're working with a couple of other manufacturers, smaller manufacturers that are installing our system for safety services as well that will show up in hardware revenue rather than license revenue, but that's all part of that sales pipeline that I was talking about.

Okay. And maybe looking at hardware, hardware is kind of backed off sequentially in each of the last 2 quarters, but it sounds like there's backlog there. What's the gaining factor? Is it supply chain, not getting components or materials? -- even though I haven't seen your inventory bulge so I'm not sure if it's that or is it more on the government certification side?

We're having a real problem with certification with both the FDA and Transport Canada. Our STC packages and approval packages are not being processed in a timely fashion. And it's not just us, it's everybody in the industry has got a backlog there. So, we've got orders on the dock for a lot of kits for this quarter and probably half of them are waiting for our rubber stamp from either transport Canada to the FDA, so we can ship. Our team is working hard. We have great relationships with those entities, but they're working from home and not doing a lot of work at it, and we've got to get that fixed. The world has got to get back to normal. We've got to get people back in the office, back doing their jobs, and being accountable because the only way the economy is going to recover as if everybody is doing their job.

Just to clarify, I mean, you do have certifications on the 320s and the 737s, but not the neos and the MAX. That's what you're waiting on. So, I mean, it's not like you have to reinvent the wheel, right?

No, it's not. These are additions to existing packages that meet the approvals. They're not new STCs, they're enhancements.

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

Great set of results. I just wanted to clarify, Reuters reported on that COMAC front that the number of orders received at the recent Chinese air show was 330 aircraft. So that was 300 C919s and 30 ARJ21s. What is the driver bill to be installed on those aircraft? Do they have international requirements or is it purely internal Chinese Satcom requirements?

If they're delivered in China, the internal Satcom requirements are what's driving the installation but I haven't seen announcement of international or outside of China carriers buying those aircraft yet, but I know they're working hard in Africa and Southeast Asia. So, in Africa, if they're flying over land that may not be that come on. In Southeast daily, if they're flocking over water, they're going to need Satcom. But I haven't seen a list of non-Chinese airlines that are buying or intend to buy so it's really hard for me to say what percentage will end up with that come on.

Okay. All right. Moving on to AirAsia. So, AirAsia is to report its Q3 later this month and revenues are forecast to increase almost 100% sequentially. So that suggests that AirAsia is starting to see or should be starting to see a recovery -- are you seeing any recovery in AirAsia at this point?

We are seeing some recovery. AirAsia is a very complex company because they have partnerships in 10 different countries. So, Vietnam, I think -- there's 3 of their subsidiaries that they're back flying. And Malaysia itself still has border restrictions on their national flights so it's kind of a mixed bag, and we're working with them almost on a daily basis to make sure that we have the right product and plan as they come back.

Okay. Any update on that U.K. net office contract?

Actually, Kent's going on Sunday to London and has meetings with them on Tuesday. We were going to be doing the installation with Loganair and then Loganair got put up for sale and stopped all those programs. So, we're going to meet with them and figure out a way forward. So standby on that one, it's a work in progress.

Okay. And then just my final question. You said you've met with a number of clients that are looking at the EDGE device perhaps even starting testing on the EDGE device. Is there a particular service that is resonating with clients? Well, they're definitely interested in the 5G wireless QAR as the 3G, 4G networks get shut down. The product has other features. There's an aircraft interface device that runs third-party software in there. You saw in March; we announced a marketing arrangement with MBS out of Great Britain for an avionics data loader. That is a big interest to the airlines because I was talking to a director, one of the European airlines on the weekend last weekend, and he said, we've gone from the fine pen to the fire in running this business. We went through 3 years of COVID not having passengers and trying to keep the company stitch together and then the restrictions get lifted, and we have no trained staff, the fuel prices are going through the roof, and a war in Ukraine. And a lot of the things that we've been working on building that we're rolling out today are to help them reduce the number of people they have to retrain to get back into business. So, things like our ClearPort product helps them utilize resources on the ground; returns better than they could if they were doing it the way they used to do it. We've got a bunch of things with the EDGE that download the data and get the information to the people that need it so they don't have to run out to the aircraft to either pick up data or tell somebody we're ready to load customers. So, the things that we put together were specifically designed to help reduce the bottleneck as the recovery got underway, and we're seeing great interest in those tools.

The next question is from Marc Berger with MKB Associates.